Faroe Petroleum plc Annual Report and Accounts 2014

Transcription

1 Faroe Petroleum plc Annual Report and Accounts

2 delivered excellent progress with sustained production and significant exploration success. Our Norwegian position is now one of the most significant of any UK independent E&P company and, despite a challenging market, the Company is set for 2015 to be another year of growth. Our continued success is driven by: Discovery p14 Growth p16 More information is available online at Opportunity p18

3 Faroe Petroleum is an independent oil and gas company focusing principally on exploration, appraisal and production opportunities in Norway and the UK Contents Strategic report 02 Overview Highlights 02 At a glance 04 Chairman s and Chief Executive s statement 06 Market overview 10 Strategy Our business 12 Discovery 14 Growth 16 Opportunity 18 Strategic report Performance Operations review 20 Exploration 21 Production and pre-development 24 Financial review 26 Risk management process 31 Principal risks and uncertainties 32 Governance 34 Chairman s introduction 34 Board of Directors 36 Directors report 38 Statement of Directors responsibilities 40 Corporate governance report 41 Directors Remuneration Committee report 44 Directors remuneration policy 45 Annual report on remuneration 51 Audit Committee report 59 Accounts 62 Independent auditors report 62 Group income statement 66 Statements of other comprehensive income 67 Balance sheets 68 Cash flow statements 70 Statements of changes in equity 72 Notes to the accounts 74 Other information 114 Officers and professional advisers 114 Glossary 115 The Company s Norwegian discoveries Bue and Pil translate to bow and arrow in English, the chosen theme for this publication. Faroe Petroleum plc Annual Report and Accounts 01

4 Strategic report: Overview Highlights Operationally, the year delivered excellent results for the business with significant exploration success with the Pil and Bue wells, production coming in at the upper end of expectations with Njord and Hyme back on production, and the acquisition of the Schooner and Ketch UK gas fields. Exploration Successful year with significant Pil & Bue discoveries Pil & Bue Significant Pil oil discovery in Norwegian Sea substantially larger than pre-drill expectations, followed by further successful discovery with the Bue side-track (estimated combined mmboe net to Faroe s 25% equity) Novus & Solberg An oil and gas discovery, not expected to be commercial on a stand-alone basis, made on Novus (close to producing Heidrun field) and a condensate discovery on Solberg Butch Butch East and Butch South West exploration wells unsuccessful following the 2011 Butch Main oil discovery, which is now being planned for development Licences Continued success in exploration licence rounds including awards of five new exploration licences (under the Norwegian APA Licence Round, announced in January 2015), three of which are in the Pil area Production & Reserves Strong production and increased reserves and contingent resources Average Economic Production 1 at 9,106 boepd (: 6,059 boepd) towards the upper end of guidance, with Njord and Hyme back on production Schooner & Ketch Acquisition of operated interests in Schooner & Ketch gas fields (Faroe 60%) in the UK, boosting gas production and improving tax efficiency Reserves increased by 13% to 30.6 mmboe (: 27.2 mmboe) Contingent resources increased by 49% to 109 mmboe (: 73 mmboe) 1 Economic Production in includes production from the acquired Schooner (53.1%) and Ketch (60%) fields from 1 January (the effective date). Accounting Production excludes production between the effective date and date of completion on 9 October. Accounting production in was 6,579 boepd (: 5,871 boepd). 02 Faroe Petroleum plc Annual Report and Accounts

5 Strategic report Financial Strong balance sheet and positive cashflows despite impairments Cash Cash and net cash of 92.6 million and 69.6 million respectively at 31 December (31 December : 40.6 million cash and net cash) Credit facilities Exploration Finance Facility renewed and up-scaled to approx. 130 million (NOK1.5 billion) in September million drawn against the 160 million ($250 million) Reserve Based Lending facility Revenue Revenue million (: million) and EBITDAX 59.1 million (: 80.1 million) reduction in EBITDAX principally due to lower realised price per boe at $71 (: $105) Result after tax Loss after tax 55.0 million (: profit of 14.1 million) after pretax impairment charges of 38.5 million (: 2.1 million) and exploration write-offs of million (: 15.4 million) Capex Pre-tax exploration and appraisal capex of 87.2 million ( 23.0 million post-tax) (: 73.0 million pre-tax, 24.9 million post-tax) and development and production investments (including acquisitions) of 48.3 million (: 48.5 million) Share placing Successful share placing in June raised 65 million (gross) providing finance to accelerate exploration, appraisal and development activities and target further production acquisition opportunities Outlook Fully funded exploration programme and well positioned for acquisitions Fully funded Forward exploration and appraisal programme fully funded with four high impact exploration wells planned for 2015, including two follow up wells on the Pil discovery Investments 2015 exploration and appraisal capex is estimated to be approximately 100 million pre-tax ( 26 million post-tax) and development and 2015 production capex is estimated to be approximately 17 million Production guidance Production guidance for 2015 of 8,000-10,000 boepd, split 58% liquids (oil and condensate) and 42% gas Hedged production 58% of 2015 Post-tax Production hedged average floor at $89 per barrel for oil and 50p per therm for gas. At the mid-point of our 2015 production guidance, Faroe aims to be cash-neutral in 2015 at an average Brent oil price of $60/bbl and gas price of 0.45 per therm with an expected average opex of approximately $30/boe Acquisitions In strong position to capitalise on market conditions with the aim of building value through further selective value-enhancing production acquisitions Faroe Petroleum plc Annual Report and Accounts 03

6 Strategic report: Overview At a glance Through successive licence applications and acquisitions, the Company has built a substantial, diversified portfolio of exploration, appraisal, development and production assets. Exploration programme A throughput of new prospects is continuously worked up and matured to deliver a sustainable and active programme of high impact wells across a range of exciting and diverse exploration plays. The following wells have been committed: 1 Shango (Faroe 20%) Potential fast-track Skirne tie-back. Drilling scheduled in March Bister (Faroe 7.5%) Building on Snilehorn discovery. Drilling scheduled in summer , 4 Boomerang & Blink (Faroe 25%) Follow up wells to Pil discovery. Drilling scheduled in 2H Kvalross (Faroe 40%) Frontier Barents Sea well. Drilling scheduled in Q Dazzler (Faroe 20%) Frontier Barents Sea well. Drilling scheduled in Q Producing assets Faroe has built a strong production profile generating tax efficient cash flow to underpin the funding of our exploration and appraisal programme. The main producing assets are: 1 Blane (Faroe 18%) UK oil field Operated by Talisman. Low operating costs, stable production. 2, 3 Schooner & Ketch (Faroe 60%) UK gas fields Operated by Faroe. Unmanned platforms, subsea tie-back to Caister Murdoch. 4 Brage (Faroe 14.26%) Norway oil field Operated by Wintershall. Two infill wells scheduled for Ringhorne East (Faroe 7.8%) Norway oil field Operated by ExxonMobil. Low operating cost, stable production. 6, 7 Njord & Hyme (Faroe 7.5%) Norway oil and gas fields Operated by Statoil. Further tie back potential. Exploration portfolio See p21 Production and pre-development See p24 04 Faroe Petroleum plc Annual Report and Accounts

7 Faroe Petroleum s focus is on exploration, appraisal and production opportunities in Norway and the UK where the Company has built a substantial portfolio over many years. 6 5 Barents Sea Strategic report Scheduled exploration wells Producing assets Total average economic production for was approximately 9,106 boepd Norwegian Sea 3, Atlantic Margin North Sea Faroe Petroleum plc Annual Report and Accounts 05

8 Strategic report: Overview Chairman s and Chief Executive s statement We are pleased to announce the audited results for the year ended 31 December. During the year we made the significant Pil and Bue discoveries in Norway, acquired interests in, and became operators of, the Schooner and Ketch gas fields in the UK, and raised 65 million through a share placing in June. Production rates and cash flow from our diverse asset base were strong with economic production at 9,106 boepd. Market conditions are challenging with current low oil prices but Faroe s exploration-led/production-backed strategy remains unchanged. With a robust balance sheet, significant credit facility headroom and a diversified high-quality portfolio. Faroe is well positioned amongst its peers to make strong progress in the coming period. Market conditions The difficult market conditions caused by low oil prices have been extensively covered in the media. Brent started the year at $111 per barrel and remained above $100 for the first eight months of the year. In September it slipped below the $100-level and finally ended the year at $57, a five and a half year low, and a 50% fall from the June peak of $115. The consequences of the low oil price for the E&P sector have been severe and are likely to continue well into Across the board, investment plans have been slashed and cost-saving measures implemented. An unfortunate consequence is significant job losses across the E&P and service sectors. AIM-listed E&P stocks endured a difficult time in on the back of the falling oil price, with the AIM Oil & Gas Index falling by 47%. Highlyleveraged companies will be in the spotlight in 2015 as banks are expected to reduce the commodity price decks that underpin borrowing facilities. As a result of this and other factors, consolidation is widely expected to take place in the sector. European gas prices also declined during the course of the year, although not nearly to the same extent as oil, starting the year at 66p per therm and finishing at 49p per therm. The price initially fell throughout the first half of, reaching a low Faroe was one of the most active and successful explorers in the Norwegian sector in of 35p per therm in the summer. A combination of tight supply, largely because of colder weather, and concerns over Russia impacting Ukrainian gas supplies to Europe, led to a partial recovery in the second half of. One of the positives to emerge from the collapsing oil price for the E&P sector is clear signs of reduction in costs associated with the drilling of wells, developments and operations of producing fields. Governments have also taken action to boost the industry and Faroe welcomes the Budget announcements made by the UK Chancellor on 18 March 2015, particularly the introduction of the investment allowance and the reduction of the supplementary tax charge from 32% to 20%. Prudent financial management Faroe has always maintained a prudent approach to financial management, and was no exception. Whilst delivering an active and successful exploration programme as well as acquiring production assets, the Company has ensured at all times that its balance sheet remains strong. This has been achieved through a combination of raising equity, monetising 06 Faroe Petroleum plc Annual Report and Accounts

9 Board of Directors See p36 Strategic report discoveries, optimising tax efficiencies, low gearing, modest commitments to development expenditure and spreading risk through a portfolio approach. In order to maintain the exploration and growth momentum which has been built over recent years, the Company raised new equity finance in June. Strong support was received from existing and new investors with 65 million (gross) raised in an oversubscribed share placing. The proceeds ensure that Faroe is funded to accelerate exploration and appraisal activities and target further potentially attractive production acquisition opportunities. In November Faroe announced the sale of its 10% interest in the undeveloped Glenlivet gas field, west of Shetland, in return for a gross consideration of 10 million ( 3 million of which is deferred and contingent upon field performance). The Glenlivet sale eliminated Faroe s exposure to the significant capital expenditure of this substantial field development, scheduled for commencement in 2015, and realised a cash sum for reinvestment. Faroe continues to benefit from the substantial tax incentive provided for exploration activity in Norway whereby the Company is able to reclaim 78% of exploration expenditure annually. In the UK, Faroe benefits from its carried forward tax losses ( 67.5 million at December ), further improving the cash flow from production. With the acquisition of majority stakes in Schooner and Ketch in October, the Company expects to utilise fully its UK carried forward tax losses over the next few years. The Company finished the year with a cash balance of 92.6 million compared to 40.6 million at the previous year end. In light of the current low oil prices, the Company has reviewed its investment plans and overheads. Cost savings have been identified and measures implemented to preserve cash. At prices averaging $60 per barrel for oil and 45p per therm for gas, the Company aims to run a cash-neutral budget in Due to an effective hedging programme and the inherent tax offset mechanism in Norway, the Company s projected 2015 cash balance is not overly sensitive to commodity price levels below these. Faroe s fundamental financial and commercial discipline has allowed it to build a strong business delivering one of the most attractive and highpotential exploration programmes in the sector. Consistent strategy Faroe s strategy is to grow reserves and resources through exploration and appraisal drilling. This consistent strategy and business model, focused on exploration and monetisation, underpinned by good quality production, a strong balance sheet and financial discipline, has again delivered excellent results in the year. The Pil and Bue discoveries in Norway add an estimated 20 to 50 mmboe net to the Company s contingent resources. With two additional follow up wells scheduled for 2015, this is potentially Faroe s greatest exploration success to date, and offers real scope for further considerable growth. During the year, Faroe s contingent resources increased by 49% from 73 mmboe to 109 mmboe, largely due to the Pil and Bue discoveries. The Company achieved a reserves increase of 13%, with reserves standing at 30.6 mmboe at 1 January 2015 (1 January : 27.2 mmboe) with 86% of reserves attributable to fields already on production. This growth in reserves and resources substantiates Faroe s consistent strategy of growth through exploration and appraisal drilling. High-potential exploration programme The year began with Faroe being awarded ten new exploration licences from the APA licensing round in Norway in strong competition with other companies. This was the Company s most successful licensing round to date and the largest number of licences awarded in the APA round, equal in number with Statoil and Centrica. During the year Faroe Petroleum plc Annual Report and Accounts 07

10 Strategic report: Overview Chairman s and Chief Executive s statement continued the Company was also awarded three licence options in the Celtic Sea in Ireland and two North Sea licences in the UK 28th Round. Since the year end, Faroe has been awarded a further five licences in the Norway APA Round, three of which are in the now much sought after area surrounding the large Pil discovery. The organic route of applying for and winning exploration licences through licensing rounds has proven to be very cost effective for the Company. High-grading of exploration prospects in our portfolio is a continuous process, consistently providing feedstock for a sustained drilling programme, which has averaged five exploration wells per year over the last three years. This same selective process also resulted in 14 licences being relinquished or sold, and relinquishment decisions made on a number of others. Faroe was one of the most active and successful explorers in the Norwegian sector in. Following the Snilehorn discovery announced in November the Company has drilled six exploration wells, all in Norway. Of these wells, Pil, Bue and Solberg were discoveries with combined estimated contingent resources of between 21 and 54 mmboe net to Faroe. The operated Novus well was a small discovery, not expected to be commercial on a stand-alone basis, while Butch East and Butch South West (Faroe 15%) did not add further volumes to the 2011 Butch Main oil discovery. Faroe s Norwegian position is now one of the most significant of any UK independent E&P company and includes four wells scheduled to be drilled in Norway in Two of the wells are follow-up wells to the Pil and Bue discoveries while the other two wells are the Total-operated Shango (Skirne East) well near the producing Skirne field and the Statoil-operated Bister well in the Greater Njord Area. The Shango well, the first of our four wells in 2015, spudded on 13 March Good quality production portfolio The Company s diverse and good quality production portfolio remains core to our strategy. Cash flow from production is the principal source of funding for the Group s ongoing exploration investment programme. Our latest production acquisition was announced in April when Faroe entered into an agreement to acquire a 60% operated interest in the Ketch Field and a 53.1% operated interest in the Schooner Field (Faroe already owned a 6.9% interest in Schooner), both normally unmanned platforms, in the UK Southern North Sea. The consideration was an initial sum of 35 million, which was reduced to 24.6m after taking into account net revenue from the fields from the transaction effective date of 1 January. This acquisition, which was completed in October, established Faroe as an operator of producing assets in the UK North Sea and provides the opportunity to add value to these fields over time, as both assets offer considerable technical upside. Following structural reinforcement work, the Njord and Hyme fields were brought back on stream on schedule in July, which further boosted production. Including the Schooner and Ketch production from the effective date, Faroe had net average economic production of 9,106 boepd in. Accounting production (which includes Schooner and Ketch production from the date of completion) was 6,579 boepd. The average realised price per boe was $71.4 and average opex per boe was $33.5, generating EBITDA per boe of $37.9. Faroe s production is spread across a balanced and high quality portfolio of assets with an even split between Norway and UK and between oil and gas/ condensate. With forecast average opex per barrel in 2015 of $30 and 58% of post-tax production hedged predominantly with $90 per barrel and 50p per therm put options for oil and gas respectively, as well as carried forward UK tax losses, Faroe s The Company is well positioned for significant growth despite the headwinds currently facing our industry and, together with our team, we look forward to the period ahead with excitement as Faroe pursues its active programme. 08 Faroe Petroleum plc Annual Report and Accounts

11 Strategic report production is expected to continue to provide substantial cash flow for the Company, even if the current low oil prices continue throughout Board, broker changes and listing On 1 September Ms Jorunn Saetre was appointed to the Board as an Independent Non- Executive Director. Jorunn is Norwegian and a chemical engineer by background. She progressed to senior positions with Halliburton in Norway, Europe and the USA, over a 30 year period, including the role of Head of Halliburton s overall Scandinavian operations. She is currently a board director of global oil and gas service company AGR Group ASA, Rig Team Leader and Head of AGR s Stavanger office. Her knowledge of the sector and operational experience are first rate and we welcome her to the Board. Hanne Harlem stepped down from the Board after serving for four years with Faroe, in order to meet the demands of her full time role with the City of Oslo. We are very grateful to Hanne for her diligence, hard work and significant contribution during her time with the Company. On 15 September it was announced that RBC Capital Markets were appointed as joint broker and Oriel Securities Limited, the Company s existing joint broker, became the Company s Nominated Adviser ( Nomad ). Panmure Gordon (UK) Limited concurrently stepped down as the Company s joint broker and Nomad having provided eight years of first class advice and broking services and we thank them for all of their support and guidance. On 2 March 2015 it was announced that, following an internal reorganisation, Stifel Nicolaus Europe Limited had taken over as NOMAD from Oriel Securities Limited. Outlook The recent exploration successes combined with the ongoing high-grading of exploration prospects in our wider portfolio have generated a strong programme of four high-potential wells scheduled to be drilled in The wells will target considerable resource potential with a spread of risk and cost exposure, all to be fully funded from our existing cash, production cash flow and our Norwegian exploration finance facility, in order to benefit from Norway s 78% tax incentive for exploration. In the period ahead, we aim to make good progress in adding further contingent resources and in converting existing contingent resources to proven reserves. With our strong balance sheet, hedged and low-opex production, and with no material development commitments in 2015, we are also well placed to continue building our producing portfolio through a combination of potential acquisitions and asset swaps. Faroe Petroleum has an outstanding team of professionals, committed to creating value and achieving success for stakeholders. We are very grateful for their commitment and outstanding achievements and we intend to take full advantage of our solid technical and commercial expertise going forward. The Company is well positioned for significant growth despite the headwinds currently facing our industry and together with our team, we look forward to the period ahead with excitement as Faroe pursues its active programme. As the business matures, and as and when markets improve, the Directors believe it would be appropriate for the Company to move to the Main Market of the London Stock Exchange. John Bentley Non-Executive Chairman Graham Stewart Chief Executive Faroe Petroleum plc Annual Report and Accounts 09

12 Strategic report: Overview Market overview An insight into the market in which we operate Economic/political review and outlook The global economy in is likely to be remembered for the Russian/Ukrainian crisis, the continued growth of US shale oil output, and the second half collapse in the oil price. The combination of western sanctions against Russia and the fall in oil prices led to a material devaluation of the Russian rouble, virtually halving from its July peak to the year-end against the US dollar, prompting an economic slowdown in Russia. Chinese economic growth also appears to be slowing, with the state announcing that the economy grew at 7.4% in, its lowest rate in 25 years. Commodity prices Brent started the year at $111 per barrel and remained above $100 for the first eight months of the year. However, in September it slipped below this historically significant level and continued to slide for the remainder of, ending the year at $57, a five and a half year low. This represented a 50% fall from the peak of $115 reached in June (realised oil price for Faroe in was $90.6 per barrel). A combination of oversupply and slowing demand growth for oil led to the dramatic fall, with the IEA reporting global supply for oil of 93.2 million barrels per day exceeding demand of 92.4 million barrels per day. In November supply was boosted by OPEC s refusal to cut output despite the apparent global glut caused by expanding US shale output. This was OPEC signalling to the market that it would no longer bear the burden of market adjustment alone and Saudi Arabia, in particular, relinquishing its role as swing producer. On the demand side the situation was exacerbated by diminished demand growth in China. In general, the global economy is still struggling to cope with the legacies of the global financial crisis, with debt overhang, high unemployment, and country-specific issues, e.g. Greece. UK gas prices also declined throughout the course of the year, although not to the same extent as oil. The UK National Balancing Point (NBP) spot price fell from 66p per therm at the start of the year to 49p per therm at year end. The price initially fell throughout H1, bottoming out at 35p per therm in the summer, mainly for demand-driven seasonal reasons. By September however a combination of tight supply (largely because of colder weather) and concerns over Russia interfering with Ukrainian gas supplies into Europe, led to a partial recovery. Brent oil price and UK gas price US$/bbl Jan Feb Mar Apr May Crude Oil-Brent Cur. Month FOB U$/BBL Jun Jul Aug Sept Oct Nov London Natural Gas Index P/Therm Price Index Gas P/ Therm Dec 30 OECD oil inventories grew throughout, a trend that looks set to continue into Oil stocks held by countries in the OECD may come close to the all-time high of 2.83 billion barrels by the middle of 2015 according to the IEA. The big stock-build was largely due to the continued growth of US shale production, which has increased from 1.3 million barrels a day in 2010 to close to 3.5 million barrels a day in. Recent events & Outlook Since the end of oil prices have slid further with Brent reaching a low of $45 per barrel in January. This has precipitated a significant number of major oil companies and National Oil Companies (NOCs) to cut capital expenditure programmes in This is likely to have a material short-term impact on many upstream developments, in particular the continued growth of US shale oil production, with marginal developments being either delayed or cancelled entirely. OPEC so far shows no signs of reversing its policy of keeping output at current levels, although there is mounting pressure within OPEC on Saudi Arabia and the United Arab Emirates to intervene. This is being driven by other OPEC member states requiring high oil prices to balance their respective budgets and these member states not having the benefit of the US$ treasury reserves that the Saudi Arabian Monetary Agency has at its disposal. With all these factors leading to a continued tightening of the supply of oil, and lower energy prices leading to a possible increase in demand for oil and gas, the conditions appear to be in place for a recovery in oil prices during the course of 2015 and However, the scale and speed of any such recovery is extremely difficult to forecast. 10 Faroe Petroleum plc Annual Report and Accounts

13 Strategic report Equity markets and E&P performance AIM-listed E&P stocks endured a torrid time in on the back of the falling oil price, with the AIM Oil & Gas Index (AXOIG) falling by 47% throughout the course of the year. This compared to a slight fall in the AIM All Share Index (AXX) of only 18%. As a result, Oil & Gas was the worst performing sector in the market last year see chart below. Investment & production forecast Norway Source: NPD US$billions Performance of AIM All Share sectors Onstream Under Development Deliverables Healthcare Financial Services Industrial goods & services Utilities Construction & Materials All Share Technology Telecommunication Basic Resources Oil & Gas Aside from the fall in oil and gas prices throughout, additional reasons for the underperformance of the Oil & Gas sector were disappointing exploration results, a low level of M&A activity, concerns about the financial viability of some E&P companies, and a number of negative corporate governance issues. The UK equity market in general continued to rotate out of Resources stocks, with the Mining sector also enduring a miserable year. There were very few primary oil and gas issues on UK equity markets, a theme which shows little sign of reversing in the early part of Investment, costs and activity levels One of the few positives to emerge from the collapsing oil price in and into 2015, is a reduction in costs associated with the drilling of wells, developments and operations of producing fields. Whilst this is undoubtedly positive news for the upstream oil and gas companies, it has been something of a negative for the Oil Services companies, and this has been reflected in their recent poor share price performances. It is also notable that drilling activity levels have already fallen sharply, with the Baker Hughes index in the US showing a 35% fall in the US rig count from its peak last year. This drop in activity is manifesting itself in lower daily rig rates. US$billions Liquids Production Gas Production Norwegian drilling showed no signs of slowing down last year, with 59 E&A wells drilled, equalling the previous year, which in itself was the second highest on record. However, it would be surprising if this trend continued into 2015, and there are signs of near-term capex reductions on Norwegian exploration drilling, not least from Statoil. As with, last year saw a continuing slowdown in activity in the UK. The same reasons for this decline prevailed, with high rig rates and an increase in minimum economic field sizes accounting for the slowdown. This was exacerbated by the fall in oil prices, putting many exploration and development wells at risk. The impact of falling rig rates was not felt until later in the year. Following on from the Wood Report which was published in February, the UK government is in the process of setting up the Oil and Gas Authority (OGA). The formation of the new authority was one of the key recommendations of the report, and in November last year it was announced that a CEO had been appointed to run the authority. The new group is tasked with implementing the recommendations of the report, with the ultimate aim of maximising the economic recovery of the UK s oil and gas resources. Considering that the oil price was still in excess of $100 per barrel when the report came out, it will be even more imperative within the context of lower oil prices that the proposed changes are enacted. Faroe Petroleum plc Annual Report and Accounts 11

14 Strategic report: Strategy Our business A robust business model We have built solid foundations in the three main elements of our business model: Exploration Application, licence awards, prospect maturation, discovery; Monetisation Appraisal, sale, swap/trade into production; Financing Cash reserves, cash flow, debt facilities and tax efficiency. Each of these areas commands substantial attention and resource for the business cycle to perform optimally. As demonstrated over the years, we focus on monetising our discoveries in the near term wherever we can in order to realise value, generate cash flow, and maintain a good portfolio balance, without excessive financial exposure to a single asset. A strategic vision Through the expansion of our asset portfolio, we aim to become the leading independent exploration and production oil and gas company which is a trusted partner and employer of choice. Our strategic drivers 1 Win licences Leverage our technical expertise Replenish exploration prospects Secure material equity stakes Exploration 2 Drill and discover Drill up to five material wells per year Spread risk and cost optimally Partner with strong aligned companies per year: near field and frontier Target up to five material high impact wells Leverage competitive edge 3 Monetise assets Exploit drilling success Trade assets across value cycle Maximise trade value Financing reserves, production and cash flow Consolidate value, grow Prudent financial management Realise value of exploration discoveries Exploit M& A skills and experience Monetisation 4 Generate revenue and create value for stakeholders Fund wells from cash flow Continue to build balanced production portfolio Achieve tax efficiency 12 Faroe Petroleum plc Annual Report and Accounts

15 Key Performance Indicators Strategic report Lost Time Injury Frequency Rate (LTI) Zero Total Shareholder Return (TSR %) Explanation A lost-time injury is defined as an occurrence that resulted in a fatality, permanent disability or time lost from work of one day/ shift or more The total return of a stock to an investor (capital gain plus dividends) Performance Strategic drivers No time has been lost on operations 2 The share price decreased from p on 1 January to 60.5p on 31 December Reserves and resources (mmboe) Reserves 30.6 Resources 109 Growth in reserves and resources Reserves grew by 13% over the period to 30.6 mmboe and contingent resources grew by 49% to 109 mmboe 2 1 Reserves 27.2 Resources 73 Economic production (boepd) Growth in production Economic production increased from 6,059 boepd in to 9,106 9,106 boepd in 3 4 6, , ,100 EBITDAX (in ) 59,088 80,147 Earnings before interest, tax, depreciation, amortisation and exploration expenditure (EBITDAX) EBITDAX decreased from 80.1m in to 59.1m in , ,882 Wells drilled per year Delivery of active and successful exploration drilling programme Target up to four to five exploration wells per annum. Spudded four wells in the period (four in ) with three successful discoveries (one in ) Faroe Petroleum plc Annual Report and Accounts 13

16 Strategic report: Strategy Successful year with significant Pil & Bue discoveries mmboe net Significant Pil oil discovery in Norwegian Sea announced in March, substantially larger than pre-drill expectations, followed by further successful discovery with the Bue side-track (combined estimate of mmboe net to Faroe s 25% equity) 14 Faroe Petroleum plc Annual Report and Accounts

17 Strategic report Strategic drivers See p12 Drill and discover Monetise assets Generate revenue and create value for stakeholders Faroe Petroleum plc Annual Report and Accounts 15

18 Strategic report: Strategy Strong production performance, and increase in reserves and contingent resources. 9,106 boepd Average Economic Production 9,106 boepd (: 6,059 boepd) towards the upper end of guidance, with Njord and Hyme back on production, on schedule, and performing better than forecast 16 Faroe Petroleum plc Annual Report and Accounts

19 Strategic report Strategic drivers See p12 Drill and discover Monetise assets Generate revenue and create value for stakeholders Faroe Petroleum plc Annual Report and Accounts 17

20 Strategic report: Strategy Active, fully funded exploration programme and well positioned for further acquisitions 65 million Successful share placing in June raised 65 million (gross) providing finance to accelerate exploration, appraisal and development activities and target further production acquisition opportunities 18 Faroe Petroleum plc Annual Report and Accounts

21 Strategic report Strategic drivers See p12 Drill and discover Monetise assets Generate revenue and create value for stakeholders Faroe Petroleum plc Annual Report and Accounts 19

22 Strategic report: Performance Operations review Faroe Petroleum s focus is on exploration, appraisal and production opportunities in Norway and the UK. The Company has built a substantial portfolio over many years. In we saw significant exploration success and production levels towards the higher end of expectations. Helge Hammer Chief Operating Officer 15 new licences awarded in. An additional five licences were awarded in January exciting discoveries from six well results announcements 9,106 boepd Economic Production 4 wells scheduled to be drilled in 2015: Shango, Bister, Blink and Boomerang 30.6 mmboe reflecting 13% growth in 2P reserves 109 mmboe reflecting 49% growth in 2C contingent resources 20 Faroe Petroleum plc Annual Report and Accounts

23 Exploration Portfolio overview The Company continues to be among the most successful independents in winning prime quality Norwegian exploration acreage. Strategic report During, the Company was awarded a total of 15 new licences of which ten were in Norway, two in the UK and three in Ireland. At year end, the exploration portfolio consisted of a total of 50 exploration and appraisal assets following a continuous programme of active management, relinquishments and highgrading. In January 2015, an additional five new licences were awarded in Norway in the Awards in Predefined Area (APA) licensing round. was a very active year of drilling with a record six wells completed in the year. Four exploration wells are scheduled for drilling in 2015, all in Norway. The Company s principal exploration focus in was Norway, which offers very significant resource potential backed by substantial tax incentives whereby 78% of exploration expenditure can be reclaimed annually. Faroe s Norwegian portfolio contains a diverse range of risk/reward profiles and maturity and extends from the shallower water region in the southern part of the Norwegian North Sea, across the Norwegian Sea and into the Arctic region with our Barents Sea licences. At the year end Faroe held 17 exploration and appraisal licence areas in the Norwegian North Sea, 13 in the Norwegian Sea and three in the Barents Sea. Exploration in the UK Atlantic Margin is no longer a principal focus area for the Company notwithstanding six exploration wells drilled since 2009 of which two were discoveries. Given the relatively low regional success record in recent years and the high costs associated with drilling in deep water, we believe that only a small proportion of the Company s resources should be utilised in this area. At the year end Faroe held seven licence areas in the UK Atlantic Margin which have since been reduced to three. In the UK Central North Sea the Company held five exploration licences at the year end and is focussing on areas around the undeveloped Perth-Dolphin- Lowlander fields and other opportunities close to existing infrastructure. In October the Company was awarded three new licence options in Ireland located in the southern margin of the North Celtic Sea basin, targeting the substantially un-explored Triassic Play. The objective in this area is to exploit low-cost reprocessing technology to de-risk prospects ahead of making any significant further cost commitments. The cost of any wells which Faroe may eventually drill here would be farmed out to third parties Faroe currently holds 100% of the licence equity. During Faroe was awarded 15 new licences, 10 of which were in Norway. Faroe Petroleum plc Annual Report and Accounts 21

24 Strategic report: Performance Operations review continued Drilling operations During Faroe drilled one operated and five non-operated wells in Norway, three of which were successes. Strategic drivers See p12 2 Drill and discover The Norwegian Sea Pil discovery (Faroe 25%), first announced in March, is located 33 kilometres south west of the Njord production facility (Faroe 7.5%). Exploration well 6406/12-3S encountered a gross hydrocarbon-bearing reservoir section of approximately 135 metres of oil and 91 metres of gas in the Jurassic reservoir of the Rogn Formation. The well was tested and flowed at a stable rate of 6,710 bopd of 37 API oil from a 56/64 choke providing clear evidence of a prolific reservoir. This formation has proved to be a very effective reservoir at the Shell-operated Draugen oil field, located 60 kilometres to the north east. The range of recoverable resources for the Pil discovery has been estimated by the operator, VNG Norge AS, to be between 72 and 172 mmboe (18 to 43 mmboe net to Faroe). A successful side-track to prove the lateral extent of the Pil discovery was announced in May followed by a successful side-track into the neighbouring Bue oil and gas prospect announced in July. The operator estimates that the separate Bue accumulation contains between 6 and 25 mmboe bringing the combined gross estimate of resources for Pil and Bue to between approximately 80 and 200 mmboe (20 to 50 mmboe net to Faroe), of which around 80% is estimated to be oil and condensate. The Novus exploration well 6507/10-2S (Faroe 30%), operated successfully by Faroe, located nine kilometres from the producing Statoil-operated Heidrun field, targeted the Jurassic reservoirs of the Garn, Ile, and Tilje formations. The main well bore targeting the Novus West horst block encountered a 12 metre net gas column and a 12.5 metre net oil column in a high quality, thicker than expected Garn formation. The Ile and Tilje formations were encountered in line with expectations but were found to be water wet. Extensive data gathering was undertaken including pressure and fluid samples from the main reservoir zones, and the preliminary volumetric estimate of the size of the discovery was between 6 and 15 mmboe recoverable gross (1.8 to 4.5 mmboe net to Faroe) which is unlikely to be commercial on a stand alone basis. The Solberg well 6407/1-7 (Faroe 20%) commenced in February to assess the lateral extent and size of the Lower Cretaceous Rodriguez discovery announced by Faroe in January. The well encountered a 12 metre net pay interval of similar fluids to those encountered in the Rodriguez well, in two sandstone intervals and in better reservoir quality than expected. The gross interval encountered was 16 metres. The subsequent down-dip side-track 6407/1-7A was drilled to the north east to a total depth of 3,311 metres below sea level, and encountered two sandstone intervals with total net vertical thickness of seven metres in a gross reservoir section of 13 metres. The Solberg well has confirmed the play model and that 3D seismic amplitude can be used to identify pay in lower Cretaceous sands in this area. Analysis is continuing in order to assess the commercial potential of the discovery prior to committing to any further appraisal drilling. Based on the significant discovery of light crude oil encountered in the 2011 Butch Main discovery (Faroe 15%) the joint venture committed to drill the adjacent Butch East and Butch South West prospects, prior to proceeding towards field development. The two wells were drilled back-to-back, commencing in December, and tested the eastern and south western sides of the large central Butch salt structure. In July, it was clear that both wells had failed to encounter hydrocarbons. The Butch operator (Centrica) is currently working on a development plan for the Butch Main field, with concept selection expected in 2015 and field development plan submission planned for Faroe Petroleum plc Annual Report and Accounts

25 Strategic report Licence rounds In January Faroe was awarded ten new exploration licences, including two operatorships, under the Norwegian APA Licence Round. The ten licences equated to the largest number awarded in the APA round, equal only with Centrica and Statoil. In addition to the three licences awarded in the Irish Celtic Sea, in November Faroe was awarded two new licences in the UK 28th Licensing Round. These are located in the Central North Sea, extending the acreage position around the strategically important Perth-Dolphin-Lowlander area. In January 2015 Faroe announced that it had been awarded a further five new prospective exploration licences in Norway, including one operatorship, under the APA Licence Round. These awards included three new licences in the now much sought after area surrounding the Company s Pil and Bue discoveries, with Shell, Statoil and Centrica each operating one licence, and two licences in the North Sea as extensions to existing exploration licences. Work has also started on the Norwegian 23rd licensing round which will focus on the Barents Sea, where the Company has identified several prospective opportunities. Expected drilling programme Our active exploration drilling programme continues with drilling on the Bister prospect, a follow on well to the Snilenorn discovery in the Greater Njord area, scheduled to begin in May The Pil follow-up wells, Blink and Boomerang, are scheduled for the second half of the year Prospect Equity Q1 Q2 Q3 Q4 Q1 Q2 Shango (Skirne East)* 20.0% Bister** 7.5% Boomerang (Pil follow up well)** 25.0% Blink (Pil follow up well)** 25.0% Kvalross** 40.0% Dazzler** 20.0% *spudded 16/03/15 **committed Faroe Petroleum plc Annual Report and Accounts 23

26 Strategic report: Performance Operations review continued Production and pre-development Production During, Faroe generated net average accounting production of 6,579 boepd (: 5,871 boepd) with net average economic production of 9,106 boepd (: 6,059 boepd) following the acquisition of the Schooner and Ketch interests, announced in April and completed in October. The Njord and Hyme fields were brought back on stream in July and Group production is now generated from a well balanced portfolio of oil and gas assets in the UK and Norway (58% liquids and 42% gas in ) with the principal fields being Njord, Hyme, Brage and Ringhorne East in Norway and Schooner, Ketch and Blane in the UK. In April Faroe acquired a 60% operated interest in the Ketch Field and a 53.1% operated interest in the Schooner Field in the UK Southern North Sea gas basin (Faroe already owned a 6.9% interest in Schooner). Schooner and Ketch are established gas fields each with potential to increase production, grow reserves and extend field life. This acquisition establishes Faroe as an operator of producing assets in the UK North Sea and provides the opportunity to add value to these fields. In July the Njord and adjacent Hyme fields were shut in for repair and maintenance. The deck structure of the Njord A floating facility was reinforced and in July, as planned, the Njord and Hyme fields were successfully brought back onto production. Production is expected to continue from the fields until mid-2016, whereafter further more extensive modifications to the facility are expected to be undertaken to extend facility life and capability. The cost of the modifications and the length of time they will take to complete are still to be determined. In the meantime, as a result of continued weight restrictions, Njord A will not be used to drill further development wells until the long-term structural modifications have been completed. The Njord partnership is currently evaluating a number of scenarios for the long-term further development of the Greater Njord Area with the potential to extend Njord s life by many years and to generate maximum reserves exploitation and value. Considerable resources remain in the Greater Njord Area (currently encompassing Njord, Hyme and Snilehorn). The area also contains significant exploration potential including the Blink and Boomerang exploration wells in the Pil licence and the Bister exploration well in the Hyme licence, all planned for drilling by Faroe this year. Following a full scenario evaluation and incorporating exploration and appraisal results, the partnership will decide on the final development concept for the Greater Njord Area and commence the front-end engineering and design studies. Pre-development In line with our strategy to monetise discoveries, Faroe s stake in the Glenlivet gas field (Faroe 10%) was sold to the field operator Total for a combined consideration of 10 million, part deferred with 3 million of the total consideration contingent on future performance. This west of Shetland gas development represents one of the most significant new pieces of infrastructure in UK waters, with a requirement for considerable capital investment which, in the current environment, would not have benefitted the Company. On Butch, the operator is working to complete field development studies and host platform studies to make a concept selection decision for the Butch Main discovery in Three concepts are being studied: subsea tie-back to the Ula field, subsea tie-back to the Gyda field and a standalone development with a lease contract of a jack-up rig. The plan is to submit the FDP in On Fogelberg the current focus is on refining the development concept while awaiting the availability of sufficient free gas export capacity in the Åsgard transportation system before making a final commitment in the licence and starting preparations for an FDP submission. A joint future development of the Perth (Faroe 34.26%), Dolphin (Faroe 34.62%,) and Lowlander (Faroe 100%) fields ( PDL ) took a significant forward step when the partners recently entered into a heads of agreement which addresses ownership alignment, a joint work programme and joint financing activity. The plan is for the PDL fields to share the same dedicated production facilities creating economies of scale to allow a development to proceed, whilst providing a long-term hub for future projects in the area. These fully appraised fields have a combined total of 11 wells drilled and are estimated to contain approximately 80 mmbbls of recoverable oil. 24 Faroe Petroleum plc Annual Report and Accounts

27 Reserves and Resources The Company s internal estimate of Proven and Probable (2P) Reserves at 1 January , is 30.6 mmboe (1 January : 27.2 mmboe) increasing reserves by 13% over the year. Strategic report The increase in 2P Reserves results from new reserves booked for the Snilehorn discovery, the Schooner and Ketch acquisition and technical revisions to existing assets, which more than compensate for the reduction in reserves as a result of the sale of Faroe s interest in the Glenlivet field and production over the year of 2.4 mmboe. At 1 January 2015, 2C Resources were estimated to be 109 mmboe representing an increase of 49% over the year (73 million boe at 1 January ). New 2C Resources booked for the Pil and Bue discoveries and positive revisions of the Perth, Dolphin and Lowlander assets are the main reasons for the increase, partly offset by the conversion of part of the Snilehorn Contingent Resources to 2P Proved Reserves. The Butch field (Faroe 15%) which is scheduled for FDP submission in 2016 has been retained in Contingent Resources despite its mature technical definition. 2P Reserves Gas (bcf) Liquids (mmbbls) Total (mmboe) Norway UK Group Norway UK Group Group 1 January Revisions 9.5 (2.7) (0.2) Acquisitions Disposals (29.0) (29.0) (0.3) (0.3) (5.2) Production (2.3) (1.8) (4.1) (1.4) (0.3) (1.7) (2.4) 1 January C Contingent Resources Gas (bcf) Liquids (mmbbls) Total (mmboe) Norway UK Group Norway UK Group Group 1 January Discoveries Revisions (1.4) (1.4) Transfer to Reserves (4.3) (4.3) (3.5) (3.5) (4.2) 1 January Prepared in accordance with the Petroleum Resource Management System guidelines endorsed by the Society of Petroleum Engineers. Faroe Petroleum plc Annual Report and Accounts 25

28 Strategic report: Performance Financial review The Group generated cash flow from operations (not including the Norway tax rebate) during the year of 48.9 million (: 74.7 million), which, together with the Norwegian exploration financing facility, funded all exploration and development capital expenditure. Overview The share placing in June raised 65.0 million, before expenses. In the year the Company acquired operated interests in the Schooner and Ketch fields for net consideration of 24.6 million paid on completion. The Group continued its considerable exploration activity, with a record six exploration wells drilled in. The Group ended the year in a strong cash position with 92.6 million of unrestricted cash (: 40.6 million). At the year end 23.0 million of debt was drawn under the reserve based lending facility (: nil). Net cash at the year end was 69.6 million (: 40.6 million). 69.6m Net cash position at year end (: 40.6m) 160m Reserve based lending facility, of which 23m drawn 52% The proportion of hedged posttax production in 2015, mainly with $90/bbl (oil) and 50p/therm (gas) put options 45.8m Norway tax receivable at year end (: 23.9m) 65.0m Share placement in June raising 65m in gross proceeds 117m Forecast pre tax capital expenditure in Faroe Petroleum plc Annual Report and Accounts

29 Accounts See p62 Strategic report Revenue averaged $71.4 per boe (: $105 per boe) after taking account of 18.4 million of overlift that is included in revenue. This fall in revenue on a boe basis, compared to, was predominantly explained by the rapid fall in commodity prices during H2. Operating costs fell from $42.2 per boe to $33.5 per boe and DD&A per boe fell $2.9 per boe to $21.1 boe (: $24 boe) mainly as a result of higher production in. Income statement Revenue for the year was million (: million). Cost of sales, including depreciation of producing assets, but before impairment charges, was million (: 76.5 million). Pre-tax impairment charges of 38.5 million (post-tax 29.2 million) (: 2.1 million and 0.5 million pre- and post-tax respectively) were incurred, primarily on Brage, East Foinaven and Schooner and Ketch. With regard to the impairment on Schooner and Ketch, a significant portion of the consideration had been allocated to UK tax synergies. Under IAS 36 these tax synergies cannot be taken into account in the calculation of the recoverable value of the asset which is the main reason for the impairment charge. The other impairments were triggered by the significant decline in the oil price in 2H and also field performance. The large impairment charges resulted in a gross loss for the year of 12.1 million (: 50.9 million gross profit). EBITDAX for the year decreased 26% to 59.1 million (: 80.1 million). Pre-tax exploration and evaluation expenses for the year were million (post-tax: 47.2 million) (: 22.2 million and 7.8 million pre- and post-tax respectively). This includes pre-award exploration expenses of 7.7 million and write-offs of licence-specific exploration and evaluation expenditure on previously capitalised licences where active exploration has now ceased ( million). The exploration costs which were written off during the year related to relinquished licences and unsuccessful or uncommercial well costs on PL477 (Cooper), PL006C (SE Tor), PL645 (Novus), PL531 (Darwin), PL405 Butch and P1192 (North Uist) along with other exploration costs on a number of licences. The Group s reported loss before tax was million (: 10.0 million profit). Loss after tax was 55.0 million (: 14.1 million profit). The loss before and after tax year-on-year is due primarily to the higher exploration write-offs and impairment charges on producing assets in the year ended 31 December. The Group ended the year in a strong cash position with 92.6 million of unrestricted cash. Faroe Petroleum plc Annual Report and Accounts 27

30 Strategic report: Performance Financial review continued Hedging In line with Group policy approximately 62% of oil and gas sales (on a post-tax production basis) in were hedged, with realised hedging gains of 1.4 million (: 0.1 million). The cost incurred for the hedges was 1.0 million (: 1.2 million). At December, the Group had entered into hedging arrangements covering approximately 52% of 2015 and 24% of 1H 2016 total expected oil and gas production (on a post-tax production basis). The hedging arrangements are predominantly put options with floors at US$90 per barrel for oil and 50p per therm for gas. Unrealised hedging gains for these open hedge contracts at December were 6.1 million (: nil) based on mark-to-market calculations and are recognised as derivative financial assets. These hedging gains are shown as Other Income in the Income Statement, net of hedging costs of 1.5 million. Further hedging has been carried out after the year end for both oil and gas where the Company has bought swaps for relatively low volumes during recent price spikes. The Company continues to monitor the commodity market and aims to extend the current hedging programme at opportune moments, taking a layered approach to its hedging strategy. Taxation In Norway, the Company benefits from a 78% exploration and appraisal cost rebate, meaning that for every 1 spent the Norwegian Government will return 78p of eligible expenditure in the form of a rebate at the end of the following year, to the extent it is not offset against current year profits from producing assets. The Company can also borrow under its Norwegian exploration financing facility 96% of the 78p per 1 rebate, thereby maximising equity leverage in Norwegian exploration wells and minimising the need to farm down to third parties. The Norwegian tax system therefore ensures a very cost-effective fiscal environment in which to explore for hydrocarbons, and also cushions the cash impact of falling oil prices, as lower profits from production result in an increased tax rebate. At December the Group had unrelieved tax losses in the UK of 67.5 million (: 77.9 million). The unrelieved tax losses are available indefinitely for offset against future taxable profits, with the potential to materially enhance the Group s net results going forward. Following the acquisition of Schooner and Ketch in, it is now likely that the UK tax losses will be utilised in the coming years and consequently a deferred tax asset of 30.0 million relating to the carried forward tax losses in the UK has been recognised in. At 31 December the Group had unrelieved tax losses in the UK of 67.5 million. The unrelieved tax losses are available indefinitely for offset against future taxable profits, with the potential to materially enhance the Group s net results going forward 28 Faroe Petroleum plc Annual Report and Accounts

31 Strategic report The amount of tax receivable at 31 December was 45.8 million (: 23.9 million) which is the tax refund on exploration expenditure in Norway net of taxable profits generated by the Norwegian producing assets. The refund will be received in December The tax credit in the Income Statement was million (: 4.1 million) being the tax receivable which together with a prior year adjustment totalled 46.3 million, the recognition of the deferred tax asset in the UK of 30.0 million, an increase in deferred tax liabilities and prior year adjustments in Norway of 27.3 million and exchange differences relating to the movement of NOK in relation to GBP of 7.2 million. On 18 March 2015 the UK Chancellor announced a new investment allowance (IA) as well as reductions in the supplementary tax charge to 20% (previously 32%) and the PRT rate to 35% (previously 50%). Faroe welcomes these measures. Details of what expenditure is eligible for the IA are still to be released but initial impressions of this tax uplift introduced are very positive. The reduction of SCT is likely to reduce the recognised deferred tax asset in the UK by 5.0 million. The rate cut improves the economics of Faroe s portfolio and may result in further investments being made to develop discovered resources or extend the life of existing fields. Balance sheet Development and production investments of 48.3 million (: 48.5 million) were made in the year, including 24.6 million for the acquisition of Schooner and Ketch. Further consideration of up to 10 million will be due to Tullow if up to 10 Bcf gross (6 Bcf net to Faroe) of incremental gas is produced from a specific reservoir compartment on the Schooner SA11 well. In addition, Faroe has identified several potential areas for investment in these assets, certain of which are subject to contingent royalties, up to a maximum of 92.2 million. For such royalties to be paid in full, approximately 35 mmboe net to Faroe would have to be produced from new reservoirs (compared to the acquired 5.9 mmboe of 2P reserves). Exploration and evaluation investments of 87.2 million (post-tax: 23.0 million) (: 73.0 million pre-tax, 24.9 million post-tax) were made in the year. These mainly related to drilling the Butch and Pil wells in Norway. After exploration write-offs in the year of million (: 15.4 million), the intangible assets decreased by 57.5 million to million (: million). Net assets increased during the year to million (: million). Faroe Petroleum plc Annual Report and Accounts 29

32 Strategic report: Performance Financial review continued Cash flow Closing cash was 92.6 million (: 40.6 million). Net cash at the year end was 69.6 million (: 40.6 million). The increase is due largely to the share placing in June, which resulted in gross proceeds of 65.0 million, production cash flows and cash flows from the exploration financing facility (EFF) and reserve based lending facility ( 23 million drawn for the Schooner and Ketch acquisition), offset by funding of the exploration programme, investment in development and production assets, acquisitions and finance costs. Faroe Petroleum benefits significantly from a revolving credit facility of NOK 1,500 million for provision of 75% (as described above) of its eligible net exploration costs in Norway on a cash flow basis, such that only 25% of this expenditure is funded from Company equity. The borrowings under the EFF are repaid when the tax rebate is received in December of the year following the related expenditure. In December the Company received the tax rebate for of 22.5 million, most of which was used to repay the utilisations of the EFF. The Group also has a secured US$250 million (approximately million) reserve based lending facility which is substantially available, for both debt and issuance of letters of credit. At the year end there was an amount drawn down of 23.0 million under this facility (: 0 million). With a combination of the current cash in the business, cash flow from producing assets and available headroom in the Group s bank facilities, the Group will be able to fund currently committed capital expenditure (exploration and development/ production). The pre-tax capital expenditure for 2015 is forecast to be up to 100 million. Jonathan Cooper Chief Financial Officer 30 Faroe Petroleum plc Annual Report and Accounts

33 Risk management and internal controls Strategic report The Board is responsible for establishing and maintaining the system of internal controls implemented through the Faroe Business Management System, which has been in place throughout. The system of internal controls is vital in managing the risks that face the Group and safeguarding shareholders interests. The Group s internal controls are designed to manage rather than eliminate risk as an element of risk is central to the activities of an oil and gas company. The Business Management System provides established acceptance criteria to ensure compliance with a balanced exposure to financial and operational risks. It is the Board s objective to be aware of the risks, and using implemented processes; to mitigate them where possible, to insure against them where appropriate and to manage the residual risk in accordance with the stated objectives of the Group. The Audit Committee undertook a review in December of internal control issues and, more specifically, financial, operational and compliance controls and risk management. The process involved the review of written procedures and amendment thereto as necessary and discussion with key personnel as to the implementation of such control procedures. The Audit Committee reported to the Board that following such review, it considered the internal controls in respect of the key risks that face the Group to be appropriate. Board Ongoing review and control Ongoing review of both the Audit Committee risk reviews and all operational and other risks and mitigating controls Audit Committee Review and confirmation Ongoing review of all financial, accounting and commercial risks and mitigating controls and reporting to the Board of directors Executive Committee Process Risks and mitigation validated and presented to Audit Committee and Board of Directors for review Management Identify Senior management identify the key risks and develop mitigation actions Identify Local management create a register of their principal risks and mitigation actions Faroe Petroleum plc Annual Report and Accounts 31

34 Strategic report: Performance Principal risks and uncertainties Aside from the generic risks that face all businesses, the Group s business, financial condition or results of operations could be materially and adversely affected by any of the risks described below. These risks should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties nor are they listed in order of magnitude or probability. Additional risks and uncertainties that are not presently known to the Directors, or which they currently deem immaterial, may also have an adverse effect on the Group s operating results, financial condition and prospects. Area Description Mitigation Exploration, development & production risk Cash flow and financing risk The Group operates in a harsh environment that may result in increased risk, greater cost pressures and schedule delays. The risks that face the Group are common to all of the Group s offshore oil and gas activities, but are more severe in the Atlantic margin and Arctic region. The Group s activities may also be curtailed, delayed or cancelled not only as a result of weather conditions but also as a result of a shortage or delays in the delivery of drilling rigs and other equipment which are in short supply. Unscheduled temporary shutdowns of production and drilling operations are frequent and should not have a material impact on the Group s business. However, long-term unscheduled or scheduled shutdowns of production may have a material impact on the business, as the Group will lose production income whilst also bearing its share of any associated remedial or repair works which may be unquantifiable at outset and/or subject to cost overruns. Given the Group s focus on growth, its projects may require the construction and/or commissioning of production facilities and other forms of infrastructure for the Group to realise their full potential. Delays in the construction and commissioning of these projects and/or other technical difficulties may result in the Group s current or future projected target dates for the delivery of development projects and for production being delayed or further capital expenditure being required. If the Group fails to meet its work and/or expenditure obligations, the rights granted under its licences/ agreements with the host government and partners may be forfeited. There is no assurance that the Group s exploration activities will be successful and statistically a relatively small number of properties that are explored are ultimately developed into producing hydrocarbon fields. The ability to finance firm commitments and develop the Group s business depends upon: (i) cash flow from the Group s producing assets: with the majority of production derived from non-operated production, cash flow is dependent upon a combination of factors including field performance, (both reservoir and facilities) commodity prices, fiscal regime and operating costs, all of which are substantially out of the control of the Group. (ii) finance from the capital markets, debt finance, tax rebates (in Norway), farm downs and other means: there is no assurance that the Group will be successful in obtaining the required financing or attracting farminees in the medium term. If the Group is unable to obtain additional financing as needed, some interests may be relinquished, sold at an undervalue and/or the scope of operations reduced or results in the group being overexposed to a particular project. In the event that sufficient funds are not available to finance the business it would have a material adverse effect on the Group s financial condition and its ability to conduct operations. The Group is seeking to balance these risks by building a portfolio of prospects that carry a range of differing technical and commercial risks, and limiting the amount invested in any one project. The Group has and continues to monetise projects as and when market conditions allow. The Group seeks to mitigate these risks by: a) Maintaining a portfolio of oil and gas producing interests in both the UK and Norway; b) Strong financial discipline and maintaining a strong balance sheet; c) The Board reviews and approves the financial strategy of the Group; d) Short-term and longer-term cash flow forecasts are reported to senior management and the Board on a regular basis; and e) The Group seeks to maintain strong relations with its banking syndicate and its shareholders. 32 Faroe Petroleum plc Annual Report and Accounts

35 Area Description Mitigation Commodity prices and fiscal regimes As has been demonstrated over the last few months, the market price of hydrocarbon products is volatile. When the price of hydrocarbon products drops significantly for an extended period, or the fiscal regime changes materially for the worse, the economic prospects of the projects in which the Group has an interest can be significantly reduced or rendered uneconomic, which in turn may lead to early abandonment. There is a particular risk when committing to long-term development contracts based on assumed future hydrocarbon prices. Where and when appropriate the Group will continue to put in place suitable hedging arrangements, in accordance with its hedging policy, to mitigate the risk of a fall in commodity prices but such arrangements will only cover the relatively short term, leaving the Group exposed to any longer-term decline in commodity prices, and in addition some of the hedging arrangements entered into by the Group also carry inherent delivery risks. Strategic report Competition risk and cost inflation Health, Safety, Environment and Security risks Dependence upon executive management and technical staff Negative stakeholder reactions to operations and the Group s strategy Notwithstanding the decline in commodity prices, there remains strong competition within the petroleum industry for the identification and acquisition of properties considered to have hydrocarbon potential. The Group competes with other exploration and production companies, many of which have greater financial resources than the Group, for the acquisition of properties, licences and other interests as well as for the recruitment and retention of skilled personnel. The challenge to management is to secure assets and recruit and retain key staff without having to pay excessive premiums. Over recent years competition for drilling rigs, support vessels and services has led to a sharp increase in all operating costs from site surveys through to decommissioning which can have a major impact on both the cash outlay and economic viability of a project. In particular the cost estimates for decommissioning have increased significantly and may continue to do so. There is also competition for access to pipelines and other infrastructure which may delay the development of a field and thereby impact its economic value. The effective management of HSES risk exposure is the number one priority for the Board of Directors and executive and management teams. As a participant in offshore exploration, development and production the Group is exposed to material risk in the event of there being a major process safety incident or operational accident, natural disasters, failure to comply with approved policies, and pandemics. The consequences of such risks materialising can be injuries, loss of life, environmental harm, disruption to business, activities and financial loss. Depending upon the cause and severity, the materialisation of such risks may have a material adverse effect on the Group s business. The Group is dependent upon its executive management and technical staff. There is a risk that the unexpected loss of services of any such member of staff could have a material adverse effect on the Group. The Group does not have any key person insurance in effect for management. Attracting and retaining additional skilled personnel may be required to ensure development of the Group s business. The Group faces significant competition for skilled key personnel in the oil and gas sector. There is no assurance that the Group will successfully attract new personnel or retain existing key personnel required to continue to develop its business and to execute and implement its business strategy. The Group s operational activities and its reputation could be significantly impacted if relationships with its stakeholders are not effectively managed. The Group places a high priority on managing these relationships. In formulating bids to acquire assets, the Company utilises experienced senior professionals within the Group to ensure that any bids are submitted at a competitive price that reflects the potential risked asset value and can generate appropriate returns for the Company s shareholders. Prior to any asset being evaluated, senior management review the target to ensure it fits within the parameters set at the commencement of each year. These HSES risks are managed by the Group through its dedicated line managers and HSES personnel, and a comprehensive Business Management Systems (BMS). The BMS enables continued improvement by implementing learnings from Faroe operated activity, third parties and other operators the Group partners with. The Group maintains a programme of insurance to cover such exposure up to recognised industry limits but should an incident occur of a magnitude in excess of such limits, the Group would be fully exposed to the financial consequences. In order to mitigate this risk the Group has to offer competitive remuneration and retention package including bonus and long-term incentive plans to incentivise loyalty and good performance from the existing highly skilled workforce. This risk is mitigated through proactive engagement with investors, regulators, governments, lenders and communities where the Group has its activities. The Strategic Report, as set out on pages 2 to 33, has been approved by the Board. On behalf of the Board Graham Stewart Chief Executive 23 March 2015 Faroe Petroleum plc Annual Report and Accounts 33

36 Governance Chairman s introduction The Group s commitment to strong corporate governance and risk management will remain central to the business during The Group is committed to maintaining high standards of corporate governance to ensure that it is managed with openness, honesty and transparency. The Group s governance framework, which includes our Business Ethics Policy, is key to the way we work both internally and externally (the Group s Business Ethics Policy can be found on the website The Board approves the Group s governance framework and the Audit Committee reviews its risk management and internal control processes. Whilst the Group is not bound to comply with the September 2012 edition of the UK Corporate Governance Code (the Code ) or Schedule 8 of The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations (the Regulations ), in relation to Directors remuneration, the Group has elected to comply with the Code and the main principles of the Regulations. The Group s commitment to strong corporate governance and risk management will remain central to the business during 2015 and on. John Bentley Non-Executive Chairman 34 Faroe Petroleum plc Annual Report and Accounts

37 Governance Our governance structure The Group s governance structure with the Board and four committees is designed to maintain the highest standards of personal and professional conduct standards throughout the organisation. The structure is in line with best practice and with the principles of the UK Corporate Governance Code. Faroe Petroleum plc Board Remuneration Committee See p44 Audit Committee Nominations Committee Remuneration Committee Executive Committee Audit Committee See p59 Board diversity Faroe Petroleum is an equal opportunities employer and we recognise that Directors and managers with diverse backgrounds, capabilities and experience gained from different sectors enhance the Group and strengthen governance. Board Gender Board Nationality Board Experience Female (1) Male (6) Norwegian (2) British (5) Financial (4) Oil & Gas (6) Natural Resources (1) Chemical Engineering (1) Faroe Petroleum plc Annual Report and Accounts 35

38 Governance Board of Directors John Bentley Non-Executive Chairman Graham Stewart Chief Executive Helge Hammer Chief Operating Officer Biography John Bentley has 40 years experience in the natural resources sector. He holds a degree in Metallurgy from Brunel University, and was appointed to the Board in September Graham was instrumental in founding the Company in 1998, where he has been Chief Executive since December He holds an honours degree in Offshore Engineering from Heriot-Watt University and an MBA from Edinburgh University. Helge joined the Company in 2006, where he is Chief Operating Officer. He holds a degree in Petroleum Engineering from NTH University of Trondheim and in Economics from Institut Francais du Pétrole in Paris. Year appointed Main Board meetings attended 4/4 4/4 4/4 Special purpose meetings attended Experience Committee membership 4/6 5/6 4/6 John served in a number of senior management positions in the Gencor Group in South Africa, the USA, UK and Brazil. In 1996 he was instrumental in floating Energy Africa Ltd on the Johannesburg Stock Exchange and was Chief Executive for the following five years. More recently he was Executive Chairman of FirstAfrica Oil plc and served on the boards of Rift Oil plc and Adastra Minerals Ltd. He currently serves on the board of a number of resource companies including as Deputy Chairman of Wentworth Resources Ltd, non-executive director of Caracal Energy Inc, non-executive director of Kea Petroleum plc and Chairman of Scotgold Resources Ltd. Audit Committee Nominations Committee Remuneration Committee Graham has over 20 years experience in oil and gas technical and commercial affairs. He was previously Finance and Commercial Director at Dana Petroleum and Commercial Director of the Petroleum Science and Technology Institute. Nominations Committee Prior to joining Faroe Petroleum he was Asset Manager and deputy Managing Director at Paladin Resources. In addition, he worked for Shell for 13 years as a Reservoir Engineer, Team Leader and Business Manager in Norway, Oman, Australia and The Netherlands. Independent Yes Executive Committee Executive Committee 36 Faroe Petroleum plc Annual Report and Accounts

39 Governance Jonathan Cooper Chief Financial Officer Jon is a chartered accountant by training having qualified with KPMG before joining Dresdner Kleinwort Benson (later Wasserstein) in their Oil & Gas Corporate Finance and Advisory Team. Jon is a Fellow of the ICAEW and also has a PhD in Mechanical Engineering from the University of Leeds. Tim Read Senior Independent Non-Executive Director Tim was appointed to the Board as Non-Executive Director in March He is currently a director of Metminco Limited and Capital Drilling Limited, has a BA (Economics) from the University of Strathclyde in Glasgow and was made a Fellow of the Chartered Institute for Securities and Investment in Roger Witts Independent Non-Executive Director Roger has over 30 years experience in the oil and gas industry and is a qualified Chartered Accountant. He was appointed to the Board in May 2007 as part time finance director and became a Non- Executive Director in May /4 4/4 4/4 1/4 5/6 3/6 2/6 0/6 Jorunn Saetre Independent Non-Executive Director Jorunn is a chemical engineer by background who progressed to senior positions with Halliburton, in Norway, Europe and the USA, over a 30 year period. In 2006 Jon was appointed as an Executive Director of Gulf Keystone Petroleum, followed by Sterling Energy plc in 2008, where he was Finance Director. He subsequently joined Lamprell plc as Chief Financial Officer in Jon was appointed to the Board of Directors on 1 July. He has over 40 years experience in the natural resource sector as an investment analyst, investment banker and corporate executive and director. He has extensive experience of all aspects of corporate finance, particularly M&A and equity markets. Between 1999 and 2006 he was the Chief Executive of Adastra Minerals Inc, and since then has acted as non-executive director for several natural resource companies, including Cumerio SA (acquired in 2008) and Nevoro Inc (acquired in 2009). Audit Committee Nominations Committee Remuneration Committee Roger has broad senior management experience in the upstream industry with specific expertise in financial and tax planning, economic appraisal, debt finance and risk management. He qualified as a Chartered Accountant in 1970 with Coopers & Lybrand and moved to The British Land Company in 1972 as financial controller of two quoted subsidiaries. His oil industry experience started with Petrofina in 1976 where he held a number of senior positions including Managing Director of a combustion engineering subsidiary and Finance Director of Fina Exploration Company. He was Finance Director of Thomson North Sea from 1984 to 1989 and of Seafield Resources from 1990 to Audit Committee Nominations Committee Remuneration Committee Executive Committee Yes Yes Yes Jorunn was appointed to the Board as an Independent Non-Executive Director in September. Her roles included serving as Director of Halliburton s European Research Centre, Head of Halliburton s overall Scandinavian operations and responsibility for global Production Enhancement activities. In 2008, she was the first to be awarded the title of Oil Woman of the Year by the Stavanger Society of Petroleum Engineers. Audit Committee Nominations Committee Remuneration Committee Faroe Petroleum plc Annual Report and Accounts 37

40 Governance Directors report Performance of the business and future developments The information on the performance of the business and future developments can be found in the Strategic Report. Dividends The directors do not recommend the payment of a dividend for the year. Directors The names and biographies of the directors during the year are disclosed on pages 36 to 37. Events since the balance sheet date Details of significant post balance sheet events are set out in Note 29 in the Group financial statements. Share capital and share options Details of the share capital of the Company and options over shares of the Company are set out in Note 21 to the Group financial statements. Over the period the Company had three share incentive schemes by which directors and employees may; (i) be granted options under a long-term incentive scheme to subscribe for nil cost shares in the Company; (ii) be issued shares under a co-investment plan, and (iii) be issued shares under a share incentive plan. The maximum aggregate number of new shares which may be issued in respect of these schemes is limited to 10% of the issued share capital. Composition of Group Details concerning the subsidiary undertakings are given in Note 15 to the Group financial statements. Substantial shareholdings The Company has analysed its share register at 13 March 2015; the results of which indicate the following shareholders held 3% or more in the issued share capital of the Company: Shareholder Ordinary Shares % Dana Petroleum Ltd* 48,055, Black Rock Investment Management 30,312, Fidelity Worldwide Investment 23,510, Aviva Investors 18,370, Scottish & Southern Energy plc 9,215, Threadneedle Investments 9,074, Schroder Investment Management 8,755, AXA Framlington Investment Managers 8,266, NFU Mutual 8,198, Directors interests in share capital The directors interests in the share capital of the Company at 20 March 2015 was as follows: Ordinary Shares 20 March December Options and Matching Shares Ordinary Shares Options and Matching Shares John W S Bentley 100, ,842 Graham D Stewart* 838,337 4,126, ,164 3,690,005 Helge A Hammer 423,535 2,352, ,460 1,847,472 Jonathan R Cooper 98,278 1,289,424 97, ,141 Timothy P Read 110, ,000 Roger C Witts 83,331 43,168 83,331 43,168 Jorunn J Saetre * Does not include 84,547 LTIPs Health, safety, the environment and the community The Group has a formal Health, Safety and Environmental Policy which requires all operations within the Group to pursue economic development whilst protecting the environment. The directors aim not to damage the environment of the areas in which the Group operates, to meet all relevant regulatory and legislative requirements and to apply responsible standards of its own where relevant laws and regulations do not exist. It is the policy of the Group to consider the health and welfare of employees by maintaining a safe place and system of work as required by legislation in each of the countries where the Group operates. Auditors and their independence A resolution to appoint auditors for the year to 31 December 2015 as approved by the Audit Committee will be proposed at the Annual General Meeting. The Company has a policy for approval of non-audit services by the auditor, to preserve independence. Disclosure of information to auditors The directors who held office at the date of approval of this Directors report confirm that, so far as they are each aware, there is no relevant audit information of which the Company s auditors are unaware; and each director has taken all the steps that he ought to have taken as a director to make himself aware of any relevant audit information and to establish that the Company s auditors are aware of that information. * Wholly owned subsidiary of The Korean National Oil Corporation 38 Faroe Petroleum plc Annual Report and Accounts

41 Governance Going concern The Group s business activities, together with the factors likely to affect the future development, performance and position are set out in the Strategic Report. The financial position of the Group, its cash flows and liquidity position and borrowing facilities are described in the Finance Review section in the Strategic Report and in Note 19. Further information on the Group s exposure to financial risks and the management thereof is provided in Note 22. The Board s review of the accounts, budgets and financial plan lead the directors to believe that the Group has sufficient resources to continue in operation for the foreseeable future. The financial statements are therefore prepared on a going concern basis. Directors liabilities The Company has granted an indemnity to one or more of its directors against liability in respect of proceedings brought by third parties, subject to the conditions set out in the Companies Act Such qualifying third party indemnity provision remains in force as at the date of approving the Directors report. Interests in contracts There have been no contracts or arrangements during the financial year in which a director of the Company was materially interested and which were significant in relation to the Group s business. Treasury policy The objective of the Group s treasury policy is to manage the Group s financial risk and to minimise the adverse effects of fluctuations in the financial markets on the value of the Group s financial assets and liabilities, on reported profitability and on the cash flows of the Group. Note 22 sets out the particular risks to which the Group is exposed, and how these are managed. Board of Directors and Committees Audit Committee Nominations Committee Remuneration Committee Executive Committee John Bentley Non-Executive Chairman Jonathan Cooper Chief Financial Officer Tim Read Senior Independent Non-Executive Director Jorunn Saetre Non-Executive Director Graham Stewart Chief Executive Helge Hammer Chief Operating Officer Roger Witts FCA Independent Non-Executive Director Julian Riddick Company Secretary Faroe Petroleum plc Annual Report and Accounts 39

42 Governance Statement of Directors responsibilities in respect of the financial statements The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable United Kingdom law and those International Financial Reporting Standards as adopted by the European Union. Under Company Law the directors must not approve the Group and Company financial statements unless they are satisfied that they present fairly the financial position, financial performance and cash flows of the Group and Company for that period. In preparing these Group and Company financial statements the directors are required to: select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently; present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group s and Company s financial position and financial performance; state that the Group and Company have complied with IFRSs, subject to any material departures disclosed and explained in the financial statements; and make judgements and estimates that are reasonable. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group s and Company 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 financial statements comply with the Companies Act 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. Directors statement under the UK Corporate Governance Code The directors consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the company s performance, business model and strategy. Graham Stewart Chief Executive 23 March Faroe Petroleum plc Annual Report and Accounts

43 Corporate governance report Governance Corporate governance and the UK Corporate Governance Code The directors support high standards of corporate governance and whilst the Company is not required to comply with the Code, it has nevertheless elected to comply with it, and the Board considers that the Company has been in compliance throughout the period. The Board is responsible for establishing and maintaining the system of internal controls which has been in place throughout. The effectiveness of the Group s system of internal control has been reviewed by the Audit Committee on behalf of the Board, as referred to in the Audit Committee Report: The workings of the Board and its committees The Board At 31 December the Board included four non-executive directors, one of whom is the Chairman, and three executive directors. The Board is responsible to the shareholders for the proper management of the Group. It meets regularly, as set down in the table on page 42, to review trading performance, set and monitor strategy, examine acquisition and divestment possibilities, approve major capital expenditure projects, monitor changes to the business environment and the risks the Group faces, and other significant financing matters and report to shareholders. The Board delegates authority to the management for the day-to-day business under a set of delegated authorities which cover: routine operational matters, purchasing procedures, financial authority limits, contract approval procedures and the hiring of full time and temporary staff and consultants. Matters reserved for the Board are communicated in advance of formal meetings. All of the directors are subject to election by shareholders at the first AGM after their appointment to the Board and to re-election by shareholders at least once every three years. In addition, as required under the Code, any non-executive director who has served on the Board for more than nine years will be subject to annual re-election. At the year end the Board comprised three independent non-executive directors; Tim Read (senior independent director), Jorunn Saetre and Roger Witts. Mr Witts was an executive director of the Company until May 2009 which is more than the five year period set down by the Code as a measure of independence. The Board has nevertheless evaluated Mr Witts judgement, character and performance since that date, and continues to be satisfied that he acts as an independent director and in the best interests of the Company and its shareholders and so continues to deem him to be independent. The Chairman and non-executive directors have other third party commitments including directorships of other companies as disclosed in the directors biographies. The Company is satisfied that these associated commitments have no measurable impact on their ability to discharge their responsibilities effectively. New directors receive an induction on their appointment to the Board which covers the activities of the Group and its key business and financial risks, the terms of reference of the Board, and its committees, and the latest financial information about the Group. All directors have access to the advice and services of the Company Secretary who is responsible to the Board for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. In addition, the Company Secretary will ensure that the directors receive appropriate training as necessary. The appointment and removal of the Company Secretary is a matter for the Board as a whole. All directors are supplied with information in a timely manner in a form, and of a quality, appropriate to enable them to discharge their duties. Faroe Petroleum plc Annual Report and Accounts 41

44 Governance Corporate governance report continued Board performance In accordance with Code provisions, the Company has a formal process of annual performance evaluation for the Board, its committees and individual directors. The performance evaluation of the Board and the Board committees is primarily based upon answers to a detailed questionnaire. The areas covered in the questionnaire included the effectiveness of the Board and its committees, performance against objectives, preparation for and performance at meetings and corporate governance matters. Once a questionnaire had been completed by each member of the Board, the Chairman then reports the results of the process to the Board. The Board and its committees are satisfied that they are operating effectively. A performance evaluation of the Board, the Board committees and individual directors will continue to be conducted annually and the method for such review will continue to be reviewed by the Board in order to optimise the process. The performance of the executive directors is reviewed by the Remuneration Committee and the bonuses payable to the executive directors are linked directly to the results of these reviews. During, certain directors who were not committee members attended meetings of the Audit Committee and Remuneration Committee by invitation. These details have not been included in the table. Where a director is unable to attend meetings of the Board or of Board committees, such director is invited to review the relevant papers for the meetings and provide his or her comments to the Board or the Board committees in advance of such meetings. The following committees deal with specified aspects of the Group s affairs. Audit Committee The make-up and workings of the Audit Committee are set out in the separate Audit Committee Report. Remuneration Committee The make-up and workings of the Remuneration Committee, together with details of the directors remuneration, interest in options, together with information on service contracts, are set out in the Report on Directors Remuneration. No director is involved in the decision of his or her own remuneration. The Company has directors and officers liability insurance in place. The following is a table of Board and Committee meetings during the year: Quarterly Board Special Purpose Board 2 Audit Committee Nominations Committee Remuneration Committee Meetings held during Number of meetings attended by Executive Directors Graham D Stewart 4 5 Not applicable 3 Not applicable Jonathan R Cooper 4 5 Not applicable Not applicable Not applicable Helge A Hammer 4 4 Not applicable Not applicable Not applicable Non-executive Directors John W S Bentley Timothy P Read Roger C Witts Hanne Harlem Jorunn Saetre Jorunn Saetre was appointed to the Board on 1 September and Hanne Harlem stepped down from the Board on 31 August. 2 These meetings typically involve the specific approval of transactions or matters that have the prior general approval of the full Board. 42 Faroe Petroleum plc Annual Report and Accounts

45 Governance Nominations Committee The Nominations Committee comprises John Bentley (committee chairman), Tim Read, Jorunn Saetre, Roger Witts and Graham Stewart. The Nominations Committee, which has Terms of Reference agreed by the Board, will meet as and when required to: consider, at the request of the Board, the making of any appointment or reappointment, to the Board; and provide advice and recommendations to the Board on any such appointment or re-appointment. The Nomination Committee does use the services of independent consultants from time to time to assist in the identification of candidates for non-executive directors and/or to benchmark candidates already identified by the committee against possible candidates identified by consultants. The committee recommended the appointment of Jorunn Saetre as a Non-Executive Director following an executive search programme undertaken by third party consultants, Preng & Associates, which has no other connection with the Group. The Company s policy is to attract and develop a highly qualified and diverse workforce; to ensure that all selection decisions are based on merit and that all recruitment activities are fair and non-discriminatory. We continue to focus on encouraging diversity of business skills and experience, recognising that directors and managers with diverse skills sets, capabilities and experience gained from different backgrounds enhance the Group. Notwithstanding that the resources sector has historically been male dominated, at 31 December, 40% of the Group s employees were female. In order to ensure that the members of the Board develop an understanding of the views and concerns of major shareholders there is regular dialogue with institutional shareholders including meetings after the announcement of the Company s annual and interim results. In addition, the Chairman and the senior independent non-executive director ( SID ) have held face-toface meetings or spoken on the telephone with a number of the Company s major shareholders on a range of matters including strategy, executive remuneration, long-term incentive schemes and corporate governance issues. The SID is available to attend meetings with major shareholders without the executive directors present, if requested by shareholders. The Board uses the Annual General Meeting to communicate with private and institutional investors and welcomes their participation. Signed on behalf of the Board by: John Bentley Non-Executive Chairman 23 March 2015 Relations with shareholders Communication with shareholders is given high priority by the Board and is undertaken through press releases, general presentations at the time of the release of the annual and interim results and face-to-face meetings. The Group issues its results promptly to individual shareholders and also publishes the same on the Company s website ( Regular updates to record news in relation to the Company and operational reports are also published on the website. Faroe Petroleum plc Annual Report and Accounts 43

46 Governance Directors Remuneration Committee report Annual statement continued success in exploration licence rounds with awards of five new exploration licences, including one operatorship, under the Norwegian APA Licence Round; Remuneration Committee Name Meetings attended Tim Read (Chairman) 3/3 John Bentley 2/3 Roger Witts 3/3 Hanne Harlem 1/1 Jorunn Saetre 1/1 Introduction The Directors Remuneration Report for the year ended 31 December has been prepared by the Remuneration Committee and approved by the Board. The Committee are committed to transparent and quality disclosure. Our report for covers the following matters: the Company s intended Executive Remuneration Policy for 2015 and beyond (the Directors Remuneration Policy Report); and how the Policy has been implemented in the year ended 31 December (the Annual Remuneration Report). Performance of the Company in The market for Exploration & Production stocks worsened over the period exacerbated by the sharp fall in oil price towards the end of the year. However, at an operational level, delivered excellent progress for the business with sustained production coming in towards the upper end of expectations/ guidance, significant exploration success and the expansion of the production base: Pil oil discovery in Norwegian Sea announced in March, was significantly larger than pre-drill expectations, followed by the successful discovery with the Bue side-track (combined estimate of mmboe net to Faroe) prudent financial management, the raising of new capital and cash conservation as demonstrated by year-end cash position of 92.6 million with limited debt drawn against the Reserve Based Lending facility (net cash of 69.6 million); a significant reduction in capital expenditure due to the disposal of the Glenlivet development asset; and total average economic production for the full year towards the upper end of guidance at approximately 9,100 boepd assisted by the acquisition of operated interests in Schooner & Ketch fields which increased the bias towards gas production and improves tax efficiency by utilising losses Key pay outcomes in Base salaries for the Executive Directors and the majority of other employees increased by 3.00% with effect from 1 January Annual bonuses are based on a scorecard of key performance indicators including corporate, operational (including HSE and growth in reserves and resources), financial and executive team performance measures. The scorecard outcome reflected the Company s excellent operating performance over the year and the Committee determined that an overall bonus payments of 73% of salary be awarded for the Executive Directors of which approximately 55% (equal to 40% of salary) was deferred under the bonus deferral scheme. Changes to the Remuneration policy During, the Committee made no changes to the remuneration policy for Shareholder feedback The Board is committed to maintaining an open and transparent dialogue with shareholders. The objective of this report is to communicate clearly how much the Executive Directors are earning and how this is strongly linked to performance. Tim Read Remuneration Committee Chairman 23 March Faroe Petroleum plc Annual Report and Accounts

47 Directors remuneration policy Governance The Remuneration Committee has established the policy on the remuneration of the Executive Directors and the Chairman and the Board has established a policy on the remuneration of the other Non-Executive Directors. What is our remuneration policy? Executive Directors The policy on Directors remuneration is that the overall remuneration package should be sufficiently competitive to attract and retain individuals of a quality capable of achieving the Company s objectives. Remuneration policy is designed such that individuals are remunerated on a basis that is appropriate to their position, experience and value to the Company. The main components of the remuneration policy for the year ending 31 December 2015 and how they are linked to and support the Company s business strategy are summarised below: Objective and link to strategy Operation Maximum opportunity Performance assessment Base salary Core element of remuneration, set at a level which is sufficiently competitive to recruit and retain individuals of the appropriate calibre and experience. Salaries are normally reviewed annually, and any changes are effective from 1 January each year. When determining salaries for the Executives the Committee takes into consideration: Company performance; the performance of the individual Executive Director; the individual Executive Director s experience and responsibilities; pay and conditions throughout the Company. Salaries are benchmarked periodically against comparable roles at companies of a similar size, complexity and in the Exploration & Production sector. Following a review of the Executive Directors salary levels, the Committee determined that a 3.00% increase was appropriate for the year commencing 1 January The salaries for 2015 are set out below: Graham Stewart: 376,000 Helge Hammer 1 : 230,000 Jonathan Cooper: 253,900 In reviewing the salaries of the Executive Directors, the Committee has also taken account of the employment conditions and salary increases awarded to employees throughout the Company, which were made at the same base level of 3.00% with a few larger increases to ensure our employees are appropriately positioned against the market place. The average increase in salaries for the Group was 3.50%. Any salary increases in future years will be determined by the Committee. 1 Mr Hammer s salary is paid in NOK. The GBP:NOK exchange rate used for his 2015 salary is which was the rate at 31 December. The GBP:NOK rate used for the remuneration numbers is which was the average GBP:NOK rate in. Salary increases will be determined in accordance with the rationale set out under Operation (see Column 2). Other benefits Support individuals in carrying out their roles. Reviewed periodically to ensure benefits remain market competitive. Benefits typically comprise life assurance cover, private health care arrangements and permanent health insurance and in Norway cash allowances in lieu of company car. Benefit values vary year on year depending on premiums and the maximum potential value is the cost of the provision of these benefits. Not applicable. Faroe Petroleum plc Annual Report and Accounts 45

48 Governance Directors remuneration policy continued Objective and link to strategy Operation Maximum opportunity Performance assessment Annual bonus Incentivises the achievement of a range of short-term performance targets that are key to the success of the Company. Executive Directors participate in an annual performance related bonus scheme. Bonus scheme awards are awarded annually at the year end. Performance period is one financial year with pay-out determined by the Committee following the year end. Maximum bonus potential: 100% of salary. At threshold performance 20% of the maximum bonus can be earned. There is no contractual obligation to pay bonuses. A performance scorecard is used as a guide for the Committee, which reserves the right to override the formulaic outturn based on a broader assessment of overall Company performance. Performance targets are based on a range of corporate, operational, financial and executive team performance measures. Long-term incentives Incentivises the achievement of long-term financial performance and sustainable returns to shareholders in a way that aligns the interests of Executives and shareholders. A proportion of any bonus paid will be deferred into shares, for a minimum of one year. Depending on the size of the bonus award in any given year between 20% and 60% (calculated based on a sliding scale) will be deferred into shares. Faroe Petroleum Co-Investment Plan (CIP): Under the CIP key employees can purchase shares in the Company (Investment Shares) using bonus deferral or other funds. Investment Shares will be matched (Matching Shares) by the Company provided participants still hold the shares and other certain performance criteria at the end of a three year period. Faroe Petroleum Incentive Plan (FPIP): Under the FPIP, approved by shareholders in by separate resolution, the Committee may award annual grants of Nil-Cost Options, Conditional Share Awards or Phantom Shares. The first award under the FPIP was made in. It is anticipated that after three years, the operation of the plan will be reviewed. Employees can invest up to 100% of base salary in any financial year to purchase Investment Shares. The maximum match is 3:1 (i.e. three shares for every Investment Share) (on a grossed up basis). At threshold performance 30% of the maximum match will be released. On the grant of annual awards, the Committee will determine the maximum face value of the awards that can be granted to a participant in any calendar year. The maximum face value of the annual awards that can be granted is 250% of salary. A performance multiplier of up to 1.5 times may be applied to these awards providing outstanding levels of performance are achieved. At threshold performance 25% of an award will be released. The precise allocation between measures (as well as the weightings within these measures) will be determined by the Committee at the start of each year. The vesting of Matching Shares will be subject to continued employment with the Company, satisfaction of the performance targets and any other terms or conditions determined at the grant stage. Performance will be measured at the end of a three year performance period against absolute Total Shareholder Return ( TSR ) targets and a relative TSR underpin. The vesting of awards will be subject to continued employment with the Company, satisfaction of the performance targets and any other terms or conditions determined at the grant stage. Performance for the Executive Directors and Senior Executives will be measured at the end of a three year performance period against three equally weighted performance conditions, namely 1/3 absolute TSR, 1/3 relative TSR and 1/3 a measurement of (in per share terms) reserves replacement and resources growth targets. These measures have been selected as a transparent assessment of the successful execution of the business strategy and are conditions which shareholders recognise as being key metrics. Any awards granted to the Executive Directors and Senior Executives will be required to be held for an additional two year holding period after the three year performance period before they vest. The Committee may, at the time of vesting or at any time before, reduce the vesting level of awards in special circumstances and general malus principles will be applicable upon the discovery of deficient performance. 46 Faroe Petroleum plc Annual Report and Accounts

49 Governance Objective and link to strategy Operation Maximum opportunity Performance assessment Faroe Petroleum Share Incentive Plan (SIP): Employees can invest annually in shares of the Company and receive a match for every share purchased. This is a HMRC all employee approved plan. Employees can invest up to an annual maximum of 1,500. The maximum match will be 2:1 (i.e. two shares for every Investment Share). The vesting of Matching Shares will be subject to continued employment with the Company and any other terms or conditions determined at the grant stage at the end of a three year period. Pension To provide competitive levels of retirement benefit. In the UK the Company does not operate a pension scheme, but does, at the Directors option, contribute to the personal pension plans of each Executive Director, or pays cash in lieu of such contributions. In the UK where such contributions reach the maximum Annual Allowance or an Executive Director has accumulated an amount equivalent to the Lifetime Allowance, such excess contributions are paid as cash. In Norway the Company operates a defined benefit and defined contribution arrangements. Provisions of previous policy that will continue to apply Outstanding awards Share Option Scheme awards under the previous longterm incentive plans will Prior to the introduction of the FPIP, continue to form part of the Remuneration Committee granted the remuneration policy eligible employees share options. until vesting. The Share Option Scheme expired in and no further awards have been made under this plan. UK Executive Directors receive a contribution to a personal pension scheme or cash allowance in lieu of pension benefits up to 20% of salary. In Norway, for Helge Hammer, the defined benefit scheme is designed to provide a pension equivalent to 66% of base salary up to a limit of approximately 101,000 (approximately NOK 1 million, being a limit adjusted annually by the Norwegian Government). In addition the Company operates a defined contributions scheme for all Norwegian staff where the Company contributes 10% of base salary between approximately 101,000 and 143,000 to a pension scheme on behalf of the employee. For Helge Hammer and certain other senior managers the Company also makes defined contributions equivalent to a further 20% of base salary above 143,000 (approximately NOK 1.5 million). Not applicable. Not applicable. The vesting of awards is subject to continued employment with the Company, satisfaction of the performance targets and any other terms or conditions determined at the grant stage. Performance for the Executive Directors and Senior Executives will be measured at the end of the performance period against certain absolute TSR targets. 40% of awards granted will be exercisable if the absolute TSR growth exceeds the Retail Price Index (RPI) growth plus 4% per annum. 100% will be exercisable if the absolute TSR growth exceeds RPI growth plus 10% per annum. The performance test will occur three years after the date of grant. If the performance conditions are not achieved on the third anniversary they will be retested on the fourth anniversary of grant. (N.B. No awards have been made under this scheme since 2012). Faroe Petroleum plc Annual Report and Accounts 47

50 Governance Directors remuneration policy continued Objective and link to strategy Operation Maximum opportunity Performance assessment Share Option Scheme awards converted into nil-cost option awards. In addressing shareholder concerns regarding the outstanding levels of dilution, a dilution reduction exercise was undertaken in. All option holders were offered the opportunity to exchange awards granted under the Share Option Scheme into a smaller number of nil-cost options under the new FPIP or a cash payment the latter for those below the Senior Executive level. Not applicable. Awards that were granted in exchange for unvested Share Option Scheme awards will vest subject to the original absolute TSR targets (see performance conditions summary above). All new nil-cost options, granted in exchange for unvested and vested Share Option Scheme awards, feature new holding periods to ensure that there is no immediate transfer of value and that the executives are appropriately retained. Eligible Executive Directors, Graham Stewart and Helge Hammer, participated in the option exchange. Shareholding requirement To align Executives interests with those of shareholders through build up and retention of a personal shareholding. Executives have five years to accumulate the required shareholding. Shares held that are no longer subject to performance conditions will count towards the requirement. Executives are required to hold shares with a value equivalent to one times base salary. Not applicable. Non-Executive Directors The table below sets out the key elements of the policy for Non-Executive Directors: Objective and link to strategy Operation Maximum opportunity Performance assessment Fees Core element of remuneration, set at a level sufficient to attract individuals with appropriate knowledge and experience. Fee levels reflect market conditions and are sufficient to attract individuals with appropriate knowledge and experience. NEDs are paid a base fee and additional fees for chairmanship of Committees. Fees may also be paid for additional time spent on the Company s business outside of the normal duties. Fees are reviewed annually with changes effective from 1 January each year. Following a review of the fees the Board determined that fee increases were appropriate for the year ending 31 December NED fee component 1 Jan. 1 Jan. % change 2015 Chairman Fee 118, , % Average Basic Fee 47,265 49, % Additional 11,000 11, % fee for Senior Independent Director role Additional fee for 8,000 8, % Chairmanship of the Remuneration Committee Additional fee for Chairmanship of the Audit Committee 8,000 19,500 n/a* Fees will be determined in accordance with the rationale set out under Operation. * this significant increase reflects the materially enhanced role of the Audit Committee under the changes to the Code effective 1 January 2015 NEDs do not participate in any variable remuneration element or any other benefits arrangements. 48 Faroe Petroleum plc Annual Report and Accounts

51 Governance New appointments The same principles as described above will be applied in setting the remuneration of a new non-executive director. Remuneration will comprise fees only, to be paid at the prevailing rates of the Company s existing non-executive directors. Service contracts and exit payment policy The service and employment contracts of the Executive Directors are not of a fixed duration and therefore have no unexpired terms, but continuation in office as a Director, is subject to re-election by shareholders as required under the Company s Articles of Association and in accordance with the provisions of the Code. The Company s policy is for Executive Directors to have service and employment contracts with provision for termination of no longer than 12 months notice. The Non-Executive Directors do not have service contracts. Letters of Appointment provide for termination of the appointment with three months notice by either party. Director Date of latest contract/ letter of appointment Notice period by Company or Director Executive Directors Graham Stewart 9 July months Helge Hammer 8 March months Jonathan Cooper 28 May 12 months Non-Executive Directors John Bentley 1 September 3 months Timothy Read 1 March months Roger Witts 1 May months Jorunn Saetre 13 August 3 months When determining any loss of office payment for a departing individual the Committee will always seek to minimise cost to the Company whilst seeking to reflect the circumstances in place at the time. The Committee retains overriding discretion to make loss of office payments appropriate to the circumstances and applying the overriding principle that there should be no element of reward for failure. Under the Executive Directors service contracts, if notice is served by either party, the Executive Directors can continue to receive their full salary and other contractual benefits for the duration of their notice period during which time the Company may require them to continue to fulfil their normal duties or may assign a period of garden leave. All service contracts and letters of appointment are available for viewing at the Faroe registered office. Where an Executive Director s employment is terminated after the end of a performance year but before an annual bonus payment is made, the executive will remain eligible for an annual bonus award for that performance year subject to an assessment based on performance achieved over the period. No award will be made in the event of gross misconduct. Where an Executive Director s employment is terminated during a performance year, a pro-rata annual bonus for the period worked in that performance year may be payable subject to an assessment based on performance achieved over the period. Under the Rules of the Company s long-term incentive arrangements (CIP, Share Option Scheme and FPIP) all unvested awards will lapse on cessation of employment unless the Committee determines an Executive is deemed to be a good leaver. In determining whether an Executive Director should be treated as a good leaver and the extent to which awards may vest, the Committee will take into account the circumstances of the individual s departure. At any time within three months of any Change of Control of the Company, an Executive Director having completed a minimum of 12 months service may give notice to the Company to terminate his employment with three months notice and be entitled to receive a sum equivalent to 12 months salary and benefits (including pension) and 65% of the total bonus paid (if any) in the previous calendar year. Faroe Petroleum plc Annual Report and Accounts 49

52 Governance Directors remuneration policy continued Consideration of employment conditions elsewhere in the Company in developing policy In setting the remuneration policy for Directors, the pay and conditions of other Faroe employees are taken into account. The Committee is provided with data on the remuneration structure for senior members of staff below the Executive Director level and uses this information to ensure consistency of approach throughout the Company. The Company has not formally consulted with employees when drawing up the directors remuneration policy. However, the Company considers any informal feedback received from employees. Consideration of shareholder views The Committee takes the views of the shareholders very seriously and these views have been influential in shaping remuneration policy and practice. Shareholder views are considered when evaluating and setting on going remuneration strategy and the Committee commits to consulting with shareholders prior to any significant changes to its remuneration policy. 50 Faroe Petroleum plc Annual Report and Accounts

53 Annual report on remuneration Governance This section of the remuneration report contains details of how the Company s remuneration policy for Directors was implemented during the financial year ending on 31 December. Single total figure of remuneration Executive Directors The remuneration of Executive Directors showing the breakdown between elements and comparative figures is shown below. Executive Director () Salary Taxable benefits Annual bonus 3 incentives SIP Pension Total Long-term Graham Stewart Helge Hammer Jonathan Cooper Mr Hammer s remuneration is paid in NOK. As NOK has devalued against GBP in, the GBP equivalent has decreased from to despite an increase of 2.75% of NOK salary 2 Commenced as a Director on 1 July 3 55% of payment has to be deferred into Faroe shares Non-Executive Directors The remuneration of Non-Executive Directors showing the breakdown between elements and comparative figures are shown below. Executive Director () Basic Fees Additional Fees Other Total Fees John Bentley Timothy Read Roger Witts Jorunn Saetre Hanne Harlem Additional fees paid for Chairmanship of the Nomination Committee 2 Additional fees paid for Senior Non-Executive Directorship Chairmanship of the Remuneration Committee. Other fees paid for additional time over and above that required under the letter of engagement 3 Additional fees paid for Chairmanship of the Audit Committee. Other fees paid for addition time over and above that required under the letter of the engagement 4 Commenced as a Director on 1 September 5 Ceased to be a director on 31 August 6 The Non-Executive Director Remuneration comparative figures have been restated to reflect the contracts in place Faroe Petroleum plc Annual Report and Accounts 51

54 Governance Annual report on remuneration continued Additional details in respect of single total figure table Taxable benefits Benefits typically comprise life assurance cover, private health care arrangements and permanent health insurance and in Norway a cash allowance in lieu of company car The Company provided Executive Directors with the following benefits during the year: Executive Director () Graham Stewart Helge Hammer Jonathan Cooper Life assurance cover, private health care Company car or cash allowance arrangements and permanent health insurance Annual bonus scheme For the Executive Directors, the maximum annual bonus for was 100% of salary. At the end of the financial year, performance was carefully reviewed by the Committee against a performance scorecard comprising of corporate, operational (including HSE and growth in reserves and resources), financial and executive team performance measures. Based on this scorecard outcome and a review of the Company s underlying performance, as described at the commencement of this report, the Committee determined an overall bonus payment of 73% of salary. A proportion equal to approximately 55% of bonuses paid for (equal to 40% of salary) have to be deferred into the Company s shares for a minimum of one year. Executive Director () Bonus payment Bonus payment % of base salary Graham Stewart Helge Hammer Jonathan Cooper % of the bonuses paid to Executive Directors for (equal to 40% of salary) have been deferred into shares and will qualify as Investment Shares under the CIP and be subject to a three year holding period. 2 bonus pro-rated for time from the date of appointment being 1 July Long-term incentives Awards granted under the Co-Investment Plan on 11 April 2011 and 22 December 2011 did not meet the performance conditions (i.e. the satisfaction of the relative TSR underpin or the satisfaction of the absolute TSR targets) at the end of the three year performance period. These awards lapsed and therefore no values are shown in the single figure table for Graham Stewart or Helge Hammer. Awards granted under the Share Option Scheme on 13 April 2011, and subsequently converted into FPIP awards for the Executive Directors and others that participated in the option exchange (see policy table), did not meet the performance conditions (i.e. the satisfaction of the absolute TSR targets) at the end of the three year performance period. Under the rules of the plan the performance conditions will be retested after a further 12 months in Awards granted under the Share Option Scheme on 6 May 2010, and subsequently converted into FPIP awards for the Executive Directors and others that participated in the option exchange (see policy table), did not meet the performance conditions (i.e. the satisfaction of the absolute TSR targets) at the end of the further 12 month period after the primary three year performance period, and have lapsed. The first tranche of awards granted under the FPIP, derived from the exchange of vested awards granted under the Share Option Scheme, were released on 24 July. 52 Faroe Petroleum plc Annual Report and Accounts

55 Governance Total pension entitlements The Company does not operate a pension scheme for the UK based Executive Directors, but does, at the Directors option, contribute to the personal pension plans of each Executive Director, or pays cash in lieu of such contributions. UK Executive Directors receive a contribution to a personal pension scheme or cash allowance in lieu of pension benefits up to 20% of salary. The Company operates a defined benefit scheme in Norway for all staff including the Norwegian based Executive Director Helge Hammer. The defined benefit scheme is designed to provide a pension, from 67 years of age, equivalent to 66% of base salary up to a limit of approximately 101,000 (approximately NOK 1 million, being a limit adjusted annually by the Norwegian Government). In addition, the Company operates a defined contributions scheme for all Norwegian staff where the Company contributes 10% of base salary between approximately 101,000 and 143,000 to a pension scheme on behalf of the employee. For Helge Hammer and certain other senior managers the Company also makes defined contributions equivalent to a further 20% of base salary above 143,000 (approximately NOK 1.5 million). Defined contributions above the limit of NOK 1 million (as set for ) are a taxable benefit to the employee, and the Company meets the associated taxation on behalf of Helge Hammer and the relevant Senior Managers. Scheme interests awarded in financial year The tables below set out the details of the long-term incentive awards granted in the financial year where vesting will be determined according to the achievement of performance conditions that will be tested in future reporting periods. No Non- Executive Directors received scheme interests during the financial year. Co-Investment Plan On 17 June the Committee granted the following Matching Awards following the purchase of Investment Shares by the Executive Directors: Executive Director Graham Stewart Helge Hammer Jonathan Cooper Type of interest awarded Conditional share Conditional share Conditional share Date of award Number of Investment Shares purchased Face value of Matching Share award made 1 Number of Matching Shares granted Percentage of award receivable for threshold performance End of performance period Exercise price 17/06/14 37, , ,077 30% 17/06/ /06/14 22, , ,399 30% 17/06/ /06/14 15, ,428 82,689 30% 17/06/ Calculated as number of matching shares multiplied by the closing share price preceding the date of grant of Under the CIP, these Matching Share awards will vest dependent upon the following performance criteria: (i) the satisfaction of a TSR underpin whereby no Matching Share awards will be released unless the TSR performance of the Company exceeds the return of the FTSE AIM Index over the three year performance period; (ii) the satisfaction of absolute TSR targets over a three year performance period from the date of grant whereby 30% of the Matching Shares will be released for share price growth of 50% over the performance period and 100% will be released for share price growth of 100% over the performance period. Faroe Petroleum plc Annual Report and Accounts 53

56 Governance Annual report on remuneration continued Faroe Petroleum Incentive Plan On 17 June the Committee granted the following awards under the FPIP: Type of interest awarded Percentage of award receivable for threshold performance End of performance period 2 Executive Basis of Face value of Number Director award award made 1 of awards Graham Stewart Nil-Cost Option 250% of salary 912, ,686 25% 17/06/ Exercise price Helge Hammer Nil-Cost Option 200% of salary 505, ,781 25% 17/06/ Jonathan Cooper Nil-Cost Option 200% of salary 493, ,667 25% 17/06/ Performance conditions See table below. 1 Calculated as number of awards granted multiplied by the closing share price preceding the date of grant of Any awards that vest at the end of the performance period for Executive Directors will be required to be held for an additional two year holding period after the three year performance period before they vest. Performance for the Executive Directors and Senior Executives will be measured against three equally weighted performance conditions, as set out in the following table. Vesting level (% of maximum opportunity at grant) 1 Relative TSR 2 (1/3 weighting) Reserves and resources 3 (1/3 weighting) Performance level Absolute TSR (1/3 weighting) Reserve Replacement (proven and probable) Threshold 25% 50th percentile 10% growth p.a. 100% 70% Good 55% 60th percentile 15% growth p.a. 105% 85% Strong 100% 75th percentile 20% growth p.a. 130% 115% Outstanding 150% 90th percentile 25% growth p.a. 150% 200% Resources Growth (contingent unrisked) 1 Vesting will be calculated on a straight line basis between each vesting level. 2 Performance relative to a bespoke comparator group of international exploration & production companies, both onshore and offshore, with a range of market capitalisation. 3 Reserve replacement and resources growth, on a per share basis, will be determined by reference to the reserves and contingent risked resources as assessed by an independent engineer on 1 January and at the end of the performance period. These two figures will be weighted equally. 54 Faroe Petroleum plc Annual Report and Accounts

57 Governance Statement of Directors shareholding and share interests Directors share interests at 31 December are set out below: CIP Share Option Scheme FPIP LTIP SIP Total number Total number Number of Total of Matching Total of Matching Total beneficially number of Shares Interests Exercised Interests number of Shares interests owned Investment subject to subject to Vested but during the subject to Vested and Vested but Partnership subject to held at Director shares 1 Shares conditions conditions unexercised year conditions 2 unexercised unexercised Shares conditions 31 Dec Executive G. Stewart 345, , ,015 2,907, ,017 84,547 3,128 6,256 4,338,716 H. Hammer 202, , ,216 1,467,086 76,172 2,999 5,998 2,202,932 J. Cooper 8,165 87, , ,459 1,885 3, ,807 Non-exec. J. Bentley 100, ,842 T. Read 110, ,000 R. Witts 83,331 43, ,499 J. Saetre 1 Beneficial interests include shares held directly or indirectly by connected persons. 2 Including those of Nil-Cost Option interests granted under the FPIP in exchange for unvested and vested Share Option Scheme awards. Details of scheme interests not set out elsewhere in the report LTIP awards: On 4 October 2005, Graham Stewart received an LTIP award as an option to acquire 247,386 shares in the Company, from which a total of 74,216 shares in the Company vested (adjusted to an option over 84,547 shares following the Rights Issue of April 2010). This award was exercised on 20 January Faroe Petroleum plc Annual Report and Accounts 55

58 Governance Annual report on remuneration continued Performance graphs and Chief Executive Officer remuneration The chart below shows the Company s performance compared with the performance of the FTSE AIM All Share Index, FTSE All Share Oil & Gas Producers Index and the FTSE AIM SS Oil & Gas Index FTSE AIM SS Oil & Gas FTSE AIM All Share FTSE All Share Oil & Gas Producers Faroe Petroleum The chart below shows the Company s performance in respect of growth in Proven and Probable (2P) Reserves and unrisked (2C) Resources as prepared by Senergy 1. 2P Reserves (%) C Resources (%) C Resources 2P Reserves 1 Since 2012 the Company has reported its internal estimate of Proven plus Probable (2P) reserves which are made according to the Petroleum Resource Management System guidelines endorsed by the Society of Petroleum Engineers. For and the Company has also reported its internal estimate of Unrisked Contingent Resources (Unrisked 2C). Whilst these internal estimates are broadly in line with the estimates generated by Senergy, as the Group s appointed independent engineer, the Remuneration Committee uses Senergy s estimates to assess performance to ensure independence. 56 Faroe Petroleum plc Annual Report and Accounts

59 Governance The table below shows the percentage change in the Chief Executive Officer s remuneration package over the past five years: Year Name Single figure of total remuneration () Bonus pay-out (as % maximum opportunity) Long-term incentive vesting rates (as % maximum opportunity) % % 2012 Graham Stewart % % % Percentage change Chief Executive Officer s remuneration The table below compares the percentage increase in the Chief Executive Officer s pay (including salary and fees, taxable benefits and annual bonus) with the wider employee population. The Company considers the full-time employees to be an appropriate comparator group. Year on year change (%) Chief Executive Officer Average Employee pay Base salary 3% 3.5% Taxable benefits 60% 10% Bonus 115% 74% Consideration by the Directors of matters relating to Directors remuneration Members of the Committee Director Number of meetings held Number of meetings attended John Bentley 3 3 Timothy Read Roger Witts 3 3 Hanne Harlem Jorunn Saetre Chairman of the Remuneration Committee. 2 Hanne Harlem stepped down from the Board on 31 August and Jorunn Saetre was appointed to the Committee in December. The members of the Committee have no personal financial interest other than as shareholders in matters to be decided, no potential conflicts of interest arising from cross Directorships and no day-to-day involvement in running the business. Faroe Petroleum plc Annual Report and Accounts 57

60 Governance Annual report on remuneration continued Role of the Committee and activities The Committee is responsible for recommending to the Board the remuneration policy for Executive Directors and the senior management and for setting the remuneration packages for each Executive Director. The Committee also has oversight of the remuneration policy and packages for other senior members of staff. The written Terms of Reference of the Committee are available on the Company s website and from the Company on request. The role of the Committee includes: Determining and agreeing with the Board the remuneration policy for all the Executive Directors; Ensuring that remuneration packages are competitive and determining individual remuneration packages for each Director; Determining whether the Directors should be eligible for annual bonuses and benefits under long-term incentive schemes; Considering any new long-term incentive schemes and associated performance criteria; Determining payouts or grants under all incentive schemes; Considering the pension contributions to the Directors and associated costs to the Company of basic salary increases and other changes in remuneration, especially for Directors close to retirement; Determining what compensation commitments exist under the Directors service contracts; Determining notice or contract periods under the Directors service contracts. Advisers to the Committee During the year the Committee sought independent advice from PricewaterhouseCoopers LLP (PwC). PwC is a member of the Remuneration Consultants Group and, as such, voluntarily operates under the code of conduct in relation to executive remuneration consulting in the UK. The Committee also sought the views of Graham Stewart during the year and Julian Riddick (Company Secretary). The Chief Executive and Company Secretary are given notice of all meetings and, at the request of the Chairman of the Committee, attend the meetings. In normal circumstances, the Chief Executive and the Company Secretary will be consulted on general policy matters and matters concerning the other Executives and employees. Neither the Chief Executive Officer nor the Company Secretary participates in discussions in relation to their own remuneration arrangements. Statement of voting at general meeting The table below shows the advisory vote on the Directors Remuneration Report: Resolution 2 Votes For Votes Against Votes Withheld Number of votes % Number of shareholders Number of votes % Number of shareholders Number of votes Number of shareholders Directors Remuneration Report 192,634, % 131 1,093, % 16 50, Faroe Petroleum plc Annual Report and Accounts

61 Audit Committee report Governance Audit Committee Name Meetings attended Roger Witts (Chairman) 3/3 John Bentley 3/3 Tim Read 3/3 Hanne Harlem 1/1 Jorunn Saetre 1/1 Summary of the role of the Audit Committee The Audit Committee acknowledges and embraces its role of protecting the interests of shareholders in relation to the published financial information by the Company and the effectiveness of the audit thereof. The Audit Committee also plays a key role in ensuring that the report and accounts are fair, balanced and understandable and contain sufficient information on the Company s performance, business model and strategy. The Audit Committee is governed by Terms of Reference, which are agreed by the Board and subject to annual review, the last being in December, and include the following responsibilities: consideration of the appointment, re-appointment or removal of the external auditor; to initiate and supervise a competitive tender process for the selection of the auditor; the negotiation of the audit fee; agreeing the nature and scope of the Company s annual financial audit; monitoring the integrity of the financial statements and considering and reporting on any significant issues in relation to the financial statements; reviewing the cost effectiveness of the audit and the independence and objectivity of the external auditor; reviewing the half-year and annual financial statements, and any audited accounts, before submission to the Board, and confirming to the Board of directors their opinion that the report and accounts are fair, balanced and understandable and contain sufficient information on the Company s performance, business model and strategy; discussing with the Group s auditors any issues and reservations arising from the interim review and year end audit; reviewing, on behalf of the Board, the Group s system of internal control and making recommendations to the Board; reviewing the requirement for an internal audit; and reviewing the Group s whistle-blowing procedures. Composition of the Audit Committee and meetings The Audit Committee comprises Roger Witts (committee chairman), Tim Read, Jorunn Saetre and John Bentley and their summary biographies can be found on pages 36 and 37. Roger Witts and Tim Read are deemed to be members with recent and relevant financial experience. The Audit Committee met three times in and will meet a minimum of four times a year for Meetings are attended by the Chief Executive and the Chief Financial Officer by invitation. At least once a year the Committee meets in private session with the external auditors. A record of directors attendance at meetings of the Audit Committee held during is given in the Corporate Governance Report on page 42. Faroe Petroleum plc Annual Report and Accounts 59