Salamander Energy PLC Annual Report Energising Asia SALAMANDER ENERGY PURE ASIAN ENERGY

Transcription

1 Energising Asia SALAMANDER ENERGY PURE ASIAN ENERGY

2 Salamander Energy is an Asia-focused independent oil and gas exploration and production company. Group at a glance: page 10 Overview Highlights of the year p1 Key events from the last 12 months p2 Understanding the local operating environment p4 Understanding the local markets p6 Understanding the regional geology p8 Group at a glance p10 Where we operate p11 Business review Chairman s and Chief Executive s review p14 Our business model p17 Key performance indicators p18 Operational review p19 Statement of proved and probable reserves p25 Financial review p26 Risk management p31 Corporate responsibility p34 Board of Directors and advisers p42 Senior management p44 Corporate governance Directors report p45 Corporate governance statement p51 Remuneration report p59 Directors responsibilities statement p70 Financial statements Independent Auditor s Report to the members of Salamander Energy PLC p71 Statement of accounting policies and general information p73 Consolidated statement of comprehensive income p84 Consolidated balance sheet p85 Consolidated statement of changes in equity p86 Consolidated cash flow statement p87 Notes to the consolidated financial statements p88 Parent company balance sheet p113 Parent company statement of change in equity p114 Parent company cash flow statement p115 Notes to the Parent Company financial statements p116 Glossary p120 Corporate directory IBC Our offices IBC Website salamander-energy.com Online interactive annual report salamander-energy-annual-report-2012.production.investis.com

3 Highlights of the year Operations Financial MMboe of 2P reserves MMboe of prospective resource in top 15 prospects $MM of revenue $/boe of post-tax operating cash flow Bualuang Bravo platform successfully installed on time and budget, cost saving initiative on schedule 16 well development drilling campaign on-going, current field production 11,500 Over 30 targets identified from 3D in G4/50, first 9 matured to drill ready status with 3 high graded for H drilling North Kutei exploration campaign yields oil and gas discovery in first well, second prospect currently drilling Strategic partner secured for Greater Kerendan area, field development on track Average daily production of 10,800 boepd (2011: 18,600), down year on year following the sale of non-core assets in 2H 2011 Revenue of $368.0 million (2011: $408.0 million) Profit before tax of $10.8 million (2011: $112.6 million) Pre-tax operating cash flow of $255.7 million (2011: $296.0 million) Post-tax operating cash flow per boe of $40.22/boe (2011: $28.56/boe ) $212 million rights issue completed to fund accelerated work programme Completed $350 million debt refinancing, reflecting reserve upgrades during 2011 Year-end net debt of $194.6 million (2011: $210.1 million) Year-end cash and fund balances of $208.8 million (2011: $85.8 million) Outlook 2013 average Group daily production rate forecast to be 12,500-15,500 boepd G4/50 exploration drilling planned for 2Q 2013, Atwood Mako on contract until 3Q 2014 Further North Kutei drilling Bedug well to follow North Kendang Kerendan exploration drilling to commence in 2Q 2013 Kerendan field on-stream mid-2014 New acreage award in Greater Kerendan anticipated 1H Overview

4 Key events from the last 12 months In 2012 we successfully prepared the technical and operational ground for 2013, as well as raising new debt and equity that has enabled us to accelerate our work programmes. Bualuang Bravo platform In the fourth quarter the Bravo platform was successfully installed at the Bualuang oil field. With the platform in place development drilling commenced that will drive production from the field up by at least 50% in Operational review: page 21 Kerendan development drilling In August 2012 the DrillCo-1 land rig arrived on location at the Kerendan field and commenced a four well development drilling programme. These wells are expected to be completed by the end of April 2013 and test at rates in excess of that required to deliver the current GSA, opening up the possibility of commercialising further volumes in Operational review: page 22 2 Overview

5 North Kutei exploration kicks off Exploration drilling in the North Kutei kicked off when the South Kecapi-1 exploration well spudded in December This well resulted in an oil and gas discovery that flowed oil at a constrained rate of 6,000 bopd when tested. Operational review: page 23 Balance sheet strengthened Year end cash balances $ MM $209 The Group strengthened its balance sheet with the completion of a $212 MM Rights Issue in the first half of 2012 and the refinancing of its debt with a new $350 MM facility put in place in 4Q This has provided the necessary funds to accelerate the planned work programmes in the three core areas. $115.1 $99.2 $85.8 $ Financial review: page 29 G4/50 prospect inventory matured G4/50 prospects and leads G4/50-1 Ayutthaya B7/32-1 Buriram /1X Rayong A 3,000 sq km 3D seismic survey was completed in 1Q 2012 and the Group has now worked up over 60 leads from this data and has 9 drill ready prospects with mean prospective resource estimates in the MMbo range with chances of success in the 15 30% range. Exploration drilling on this licence will commence in 2013 and continue into Western Basin Intra N50 N40 Basal N40 N30 P20 Ratburi B8/38-2 B8/38-8 B8/38-7 Yala Bualuang Sukhothai Hua Hin B8/38-4 G4/50-3 G4/50-3 Operational review: page 21 Kra Basin N60 N50 N40 N30 P20 30 km 3 Overview

6 Understanding the local operating environment Having operated in both Thailand and Indonesia for a number of years, Salamander has a well-developed understanding of the operating environment in both countries. Each area of operation has its own distinct challenges and developing the ability to navigate through these with the minimum of delays to ensure that we can deliver work programmes to our required schedule is a key skillset. Indonesia and Thailand both present very different challenges to E&P Operations: Thailand 66 Indonesia 66 A key to being able to deliver our work programmes to plan is our ability to obtain environmental permits in a timely fashion. Building support among local communities can ease this process. We have been dedicating increased amounts of time and resource to strengthening our relationships with communities close to our operations and their understanding of our objectives and commitment to health, safety and the environment. Graham Balchin General Manager, Thailand To be successful in Indonesia you need to be able to overcome the bureaucracy. We have people with longstanding relationships with their counteparts at SKMigas, the industry regulator, who understand how to navigate a relatively trouble free path through processes for approvals, procurement etc and this makes a real difference to our ability to deliver. Craig Stewart General Manager, Indonesia Environmental Impact Assessment ( EIA ) process EIA approvals are required in Thailand ahead of any significant operation including seismic acquisition, drilling or platform installation. An EIA submission must include a detailed description of the project and include discussion and analysis of the impact of the project on a variety of areas including: Sea water Geology Climate Noise Marine ecology Tourism Fishery Socio-economic conditions Public health The process involves at least two public participation meetings, held a minimum of 30 days apart, where the project is discussed with members of the local community. Once the EIA submission has been completed it is filed with the Office of Natural Kerendan gas field development In December 2010, Salamander acquired an operated interest in the Bangkanai PSC, in Central Kalimantan, which included the Kerendan gas field. The 300 Bcf field had been discovered in the early 1980 s but due to its remote location commercialisation at that time was not possible. The location also makes operational and development activities challenging. Salamander was able to partner with PLN, the state power enterprise and create an integrated gas to power project in which Salamander is responsible for the gas field development, gas processing facility, and 3 km delivery pipeline. PLN is responsible for building the power plant and 220 km of transmission lines to tie the project into PLN s developing Kalimantan electrical grid. A gas sales agreement to commercialise 120 Bcf of the gas reserves and anchor the project was signed by mid This secured the 4 Overview

7 Resources and Environmental Policy and Planning (ONEP, a part of the Ministry of Natural Resources and Environment) and discussed by a panel of experts, at which a consensus must be reached to allow approval of the EIA. The experts panel, known as the Technical Review Committee ( TRC ), can approve, approve with conditions, or not approve. However, the TRC will provide feedback on the EIA submission which could range from clarification on a few minor matters to major concerns on crucial issues. The time required to respond will vary depending upon the questions raised. In 2012 Salamander successfully applied for EIA approval for the installation of the Bravo platform and received this in a timely manner enabling the platform to be installed to schedule, once construction was completed. The knowledge and understanding of this process is now being applied in order to secure EIA approval PSC and allowed Salamander and PLN to start development activities. The Kerendan field is located in a forested area and prior to all activities it is necessary to secure forestry permits and to acquire land. These processes are complex and can be lengthy with overlapping land claims being common. Despite these challenges construction of infrastructure, including a river base on the banks of the Barito River, a road network and the drilling pad, was completed in mid A drilling rig was contracted and upgraded to cope with the high reservoir pressures in the Kerendan field and was transported by barge from Batam island near Singapore to Banjarmasin in southern Kalimantan, then 520 km up the Barito River to the river base where it was transferred to trucks and moved a further 45 km by purpose built road to the Kerendan cluster well pad. Development drilling started in mid-2012 and will for 18 exploration drilling locations in the G4/50 block. The EIAs are expected to be approved in the second half of Drill cuttings being removed from the rig ahead of being incinerated on-land 2 Overseeing operations in the Bualuang field 3 The heavy lift vessel installing the Bravo Platform be completed by Q Engineering and procurement of the gas processing facility is well underway. The PLN transmission system linking the power plant to the Kalimantan grid is under construction and the PLN power plant contract will be awarded soon. The integrated project is scheduled for start-up mid Despite the complexity of the project and the challenging operating environment, the Kerendan gas to power project was able to be created and implemented within a fast track project schedule. This project has created the infrastructure to allow for rapid commercialisation of additional reserves and future discoveries. 4 Access road to the Kerendan drilling site 5 Helicopter arriving at Kerendan well site 6 The DrillCo-1 operating at the Kerendan Cluster Site Overview

8 Understanding the local markets Pricing Indonesian gas markets have undergone significant demand and price growth in recent years. This transformation means that some fallow discoveries made over 20 years ago are now commercially viable projects and most new discoveries have a clear route to monetisation. Average domestic gas prices have risen significantly in Indonesia from a price of $2.8 per mmbtu in 2006 to $8 per mmbtu in The domestic price growth in Indonesia is being driven by a combination of socio-economic factors. * Source: Wood Mackenzie Average domestic gas prices $ s/mmbtu The major drivers are: Forecast GDP growth of over 6% per annum in near term driving demand for new power projects* Removal of petroleum subsidies Rising F&D cost for gas Increasing export prices drag domestic price up Rising cost of competing fuel drive substitution into gas Source: Indonesian Directorate General of Oil and Gas East Kalimantan gas market The key gas market for Salamander in Indonesia is around East Kalimantan. This is the market into which we would look to commercialise any gas discoveries in the North Kutei area and the target market for any significant future discoveries in the Greater Kerendan area. The gas market in East Kalimantan is centred round the Bontang LNG plant. The presence of the LNG plant has given rise to several petrochemical plants and industrial complexes which all demand gas. Beyond that there is a large extractive industry (mainly coal) which adds to the demand for local power. Bontang LNG The Bontang LNG plant has been in operation since It is operated by PT Badak and is an 8 train facility with 3 loading piers. It has a production capacity of 22.5 million tonnes/year and its peak production was in 2001 when it produced 21,383,543 tonnes. East Kalimantan gas pricing $ s/mmbtu Local Industry Petro- Domestic Export power chemicals LNG LNG Source: ISIS/Wood Mackenzie 6 Overview

9 Domestic LNG The major demand centres for gas in Indonesia are Java and Sumatra in the west of the country. The majority of the natural resources are located in the eastern side of Indonesia and there is no infrastructure to link the two. The near term solution is to construct regasification terminals in the west and take gas from the LNG export facilities in the east, such as Bontang, to the new regasification terminals in the west. The first cargoes were shipped during 2012 at a price of $11 per mmbtu. This is an interesting new market that Salamander is well positioned to access in the event of major gas discoveries in Kalimantan. The longer term solution will be for pipelines to connect the islands which would also open up new demand centres for Kalimantan gas. Bontang LNG plant LNG Re-gasification terminals Aceh + operated by Pertamina + expected start up mid capacity 400 MMscfd + MoU for 110 MMscfd Lampung + Operated by PGN + Expected start up Capacity 400 MMscfd + MoU for 200 MMscfd West Java + operated by Nusantara Regas + received first cargoes in capacity 400 MMscfd + contracted 200 MMscfd Central Java (planned) + Operated by Pertamina + Capacity 400 MMscfd + Expected start up Overview

10 Understanding the regional geology As a rock-led company Salamander places great emphasis on its understanding of the sub-surface. Shaun Richardson, Regional Geoscience Director, talks about the role of Salamander s technical team. 66 The ultimate role of the G&G team in a small independent E&P company such as Salamander Energy is to acquire exploration licences, create a portfolio of prospects and leads and to deliver drilling opportunities. Shaun Richardson Regional Geoscience Director What do you do as Regional Geoscience Director? I am responsible for all technical work undertaken by the geologists, geophysicists and petrophysicists within the organisation. This covers everything from regional evaluations, business development work and exploration and development activities across the region. What is the main role of the G&G department? Much of what the Company does is underpinned by the work of technical staff who specialise in geology and geophysics ( G&G ). The ultimate role of the G&G team in a small independent E&P company such as Salamander Energy is to acquire exploration licences, create a portfolio of prospects and leads and to deliver drilling opportunities. In the event of a discovery, the G&G team will work with engineers to optimise development options through to planning and delivering production wells. How does Salamander s approach differ from other companies? I have worked across the sector for both majors and independents and where I think Salamander differentiates itself is: Pure regional focus allows the company to build up a real expertise for the basins and plays in S.E. Asia Relative to our size we are very active and drill a large number of wells (both exploration and development) each year Being relatively small we are able to make decisions quickly which can be an advantage when pursuing new business opportunitites What is the background of most of the team members? We employ around 40 geoscientists spread across our offices in Bangkok, Jakarta and Singapore. They all have slightly different backgrounds, with a mixture of experience spanning the Majors, Independents and National Oil Companies, as well as some graduates. The majority have prior working knowledge of S.E. Asian basins. 8 Overview

11 Describe the internal process from a G&G perspective from a licence round evaluation through prospect maturation to the point where you are ready to drill? It is a natural workflow from maturing an opportunity from its earliest conception through to the point when a company is prepared to spend millions of dollars to drill a well, based on the technical work presented to its executive management. In simple terms, the following internal process is applied in Salamander Energy from a G&G perspective: 1 Licence rounds The G&G team evaluate available data and hopefully identify prospects and leads within the area of interest. If the risk/reward looks attractive and the economics are positive then we would present the technical work for peer review and technical scrutiny and then decide whether to bid. 2 The exploration phase The G&G team will work in small teams of geologists and geophysicists to plan, acquire, process and interpret the seismic data, conduct geological studies to de-risk the play parameters and calculate resource volumes and risks during the prospect evaluation stage based on seismic mapping studies. A number of technical reviews are conducted at key decision-making stages during this process, in order to ensure quality control and also to prioritise effort where it can make the most impact. Typically, additional prospect reviews are conducted to high-grade and select the most appropriate drilling candidates based on the technical work and supported by robust economics. 3 Post-well evaluation On completion of wells we complete a post-mortem analysis to check the results against pre-well expectations and see where we got things right/wrong, what implications there are for other future wells in the vicinity and how we need to alter the geological model. Do specific members of the team focus on certain basins or do people work across the whole portfolio? The Company has two main focus countries Indonesia and Thailand and other business development projects throughout S.E. Asia. The organisation of the G&G function reflects this with a dedicated G&G team based in Indonesia and also in Thailand and managed locally by an Exploration Manager. The country G&G teams undertake all BD evaluations, exploration and development work within their licensed blocks and surrounding basins, leveraging their existing local knowledge and expertise. The Singapore G&G team tend to comprise experienced staff with wide global experience, so they fulfil a roving BD role looking at new countries in the region but will also help the local teams during peak workloads. The 2013 exploration programme is clearly a very active one how do you envisage things shaping up in 2014? 2013 is probably a unique year in terms of the unprecedented level of drilling activity across all three core areas which has resulted in high levels of G&G effort. We will have tested new plays and a range of prospects by the end of 2013 and in the event of success, an appraisal programme will be conducted to better define the discoveries and reduce the uncertainty on reserves, leading to submission of development plans and an expansion of the G&G function. Angklung-1 South Kecapi-1 Bedug-1 South Bedug Prospect Saron Leads Parichat Wainuson, Geologist, Thailand, analysing seismic in Greater Bualuang area 2 A FAR-RMS Amplitude Extraction of the gas sand fairway in Bontang PSC 3 Hartoyo Sudiro, Geologist, Thailand, geomodelling T2 reservoir in the Bualuang field 9 Overview

12 Group at a glance Thailand 2012 Production (Net WI) Liquids Gas Total (bopd) (mcfd) (boepd) Sinphuhorm 45 8,869 1,523 Bualuang 7,207 7,207 Total 7,252 8,869 8,730 2P Reserves MMboe P reserves Liquids (MMbbls) Gas (Bcf) Total (MMboe) Revenue Liquids ($MM) Gas ($MM) Total ($MM) Production boepd 20,300 18,600 Indonesia 13,600 9,600 10, Production (Net WI) Liquids Gas Total (bopd) (mcfd) (boepd) Kambuna 460 7,775 2,080 Total 460 7,775 2,080 Revenue $million P reserves Liquids (MMbbls) Gas (Bcf) Total (MMboe) Revenue Liquids ($MM) Gas ($MM) Total ($MM) Post-tax operating cash flow $million Areas of operation 1 Greater Bualuang 2 Greater Kerendan 3 North Kutei A B Areas of focus Other assets Offices A Bangkok B Singapore C Jakarta C Overview

13 Where we operate Greater Bualuang Licences B8/38 (100%, Operator) & G4/50 (100%*, Operator) Activities Key facts * Moeco retains a 50% back in right Oil production, development & exploration 33.7 MMbo 2P Reserves (Bualuang oil field) 2013 Production forecast 11,000 14,000 bopd 6 exploration wells in 2013 targeting prospects c.175 MMboe of net mean prospective resource 1 The Bualuang oil field is the Group s flagship production asset. We are currently in the middle of an investment programme that saw the Bravo platform installed in 2012 and the arrival of the Atwood Mako rig for a 16 well development drilling campaign that will drive average daily production in 2013 up by a minimum of 50%. The next phase of the project involves driving operating costs down and to this end power and processing modules are being constructed in 2013 for installation on the Bravo platform early in This will then facilitate the replacement of the FPSO that is currently on location with a FSO (FSO day rates are approximately 50% lower than for FPSO). The Group has signed a LOI with Teekay for an FSO that is scheduled to be on location in mid Once the FSO is installed it will realise operating cost savings of c. $25 per annum. In G4/50, we have matured 30 leads on the 3D seismic and now have nine drill ready prospects with more leads expected to be converted to prospects as the year progresses. We plan to commence exploration drilling in 2Q As we are stepping away from the Bualuang field the geological risks are relatively low and we can use the upgraded Bualuang infrastructure to enhance the value of any barrels discovered The newly installed Bravo platform and bridge linking it to the Alpha platform 2 Looking back at the FPSO from the Bualuang Bravo platform 3 First Aid classes being run for local community, Chumphon Province, Gulf of Thailand 11 Overview

14 Where we operate continued Greater Kerendan Licences Activities Key facts Bangkanai PSC (85%, Operator) & NE Bangkanai/West Bangkanai JSA s (100%) Gas development & exploration 20.5 MMbo 2P Reserves (Kerendan field) 20 MMscfd starting up in exploration wells in 2013 targeting 106 MMboe of net mean prospective resource 1 The Kerendan field development started to gather pace in 2H of 2012 and 1Q 2013 with the drilling of four development wells in the Kerendan field. The first two of these wells flowed at a combined rate of 20 MMscfd. With two more to test the reservoir will deliver in excess of the 20 MMscfd the Group is contracted to deliver under the current gas sales agreement and will enable discussions to start later in 2013 over a further GSA to commercialise some of the 160 Bcf of contingent resource in the field. Stepping away from the Kerendan field there are a number of prospects within the licence area that could prove up a considerable resource upside. The first two of these prospects, West Kerendan and Sungai Lahei, will be drilled in 2Q These wells are significant as they have the potential to open up access to the more lucrative East Kalimantan gas market. Volumes in excess of 500 Bcf are required to provide economic justification for the construction of a pipeline to the east coast. Between them West Kerendan and Sungai Lahei are targeting 900 Bcf of gas. In 1H 2013 the Group was awarded two new licences, Northeast Bangkanai and West Bangkanai, that contain potential extensions of the play and provide further running room. 2 1 The DrillCo-1 land rig operating at the Kerendan field 2 Rig workers involved in the drilling operations 3 3 Testing the Kerendan-7 development well 12 Overview

15 North Kutei Licences Activities Key facts Bontang PSC (100%, Operator) & SE Sangatta (75%) Oil & gas exploration Over 28 mapped leads and prospects South Kecapi oil and gas discovery in 1Q 2013, flowed 6,000 bopd Angklung gas discovery 4Q 2010, flowed 25 MMscfd 1 The Group made the play opening Angklung gas discovery in Since then we have matured over 28 leads and prospects on a 3D seismic data. The gas is high value due to the proximity to the Bontang LNG plant which is short of feedstock and only c. 45 km from our prospects. During 2012 we entered into a consortium for the use of Ocean General semi-submersible rig for a minimum three well programme in 2013 with the potential to drill up to five further wells. The first of these wells resulted in the South Kecapi oil and gas discovery which flow tested oil at a (constrained) rate of 6,000 bopd. 2 1 Flow testing the South Kecapi-1 well 3 2/3 Drilling equipment on-board the Ocean General 13 Overview

16 Chairman s and Chief Executive s review 2013 is set to be a big year for the exploration drill bit as we plan to drill prospects in all three core areas. Strategy Salamander s balanced portfolio of assets offers investors a secure and growing production and development base, as well as exposure to material upside opportunities through exploration. Our core asset portfolio is made up of three hub positions, each with discovered hydrocarbons, step out exploration potential, and new acreage opportunities within the same basin. This focused approach provides us with a greater technical understanding of the basins in which we are exploring, improved access to better quality rigs and support services, and fiscal incentives to invest. We are pleased to note that Salamander has established a well-respected operating capability, having successfully developed oil and gas fields and managed production operations onshore and offshore across S.E. Asia. This gives us a clear advantage relative to other small to mid-sized independents when looking to develop new business in the region. Business environment In 2012, the global macroeconomic agenda continued to be dominated by the fallout from the credit crisis and, in particular, the instability of the Eurozone. However, while developed, western economies have struggled to return to growth, Asian economies largely continued on their established growth trajectory. The IMF is forecasting GDP growth of around 6% in 2013 in both Thailand and Indonesia, the Group s main countries of operation. This healthy level of domestic growth has fuelled increased demand for power, supporting gas prices in our end user markets. In Indonesia, gas prices have more than doubled over the past five years, with demand seen from power generation, petrochemicals as well as LNG both for export and domestic use. The oil price has remained relatively stable at over $100 per barrel for the majority of the last two years, which has shaped our long term investment decision making, such as the construction and installation of the Bualuang Bravo platform. As production from the Bualuang oil field increases through 2013, robust oil prices should deliver strong cash flow growth. Charles Jamieson Chairman James Menzies Chief Executive Officer 14 Business review

17 In summary, we are operating in areas that are experiencing strong economic growth, which is driving oil and gas demand higher. In Indonesia, we are also exposed to some of the most dynamic gas markets in the world, where there is established infrastructure and a shortage of supply. This is an excellent market backdrop against which to deliver on the Group s strategy. Operational summary 2012 was a year in which we placed operational emphasis on our three core areas of Greater Bualuang (offshore Gulf of Thailand), Greater Kerendan (onshore Kalimantan, Indonesia) and the North Kutei (offshore East Kalimantan, Indonesia). All three areas offer opportunities for material value appreciation and the Board agreed that it was appropriate to raise additional equity in order to fund an accelerated work programme, thereby providing shareholders with earlier exposure to the potential upside. We successfully completed a $212 million rights issue in the first half of 2012 and were delighted to receive strong support from both new and existing shareholders. As a balanced exploration and production Company, we believe it is important to ensure that we fund the business appropriately and during the fourth quarter we completed a re-structuring of our debt. With the continued support of our core relationship banks we were able to secure financing which now provides the Group with an expanded facility with greater flexibility, at a lower cost of borrowing. In particular, we were pleased to secure debt financing for the Kerendan field development. Development activity progressed during the year on the Bualuang and Kerendan fields and we undertook extensive geological and geophysical work on our exploration acreage surrounding the Bualuang field (offshore Thailand) and in the North Kutei Basin (offshore Indonesia). With adequate funding in place, the Group was in a position for the first time to commit to long-term drilling contracts. We secured the Atwood Mako jack up rig for development and exploration drilling offshore Thailand for a two year period and committed to a number of drilling slots with the Ocean General semi-submersible rig for exploration drilling offshore East Kalimantan. It is important that we continue to invest in growing our production base and we were delighted that the Bualuang Bravo platform was completed, on schedule and on budget, and was successfully installed in the second half of We are in the middle of a 16 well development drilling programme that we anticipate will increase production in 2013 by at least 50% to 11,000 14,000 bopd. Work has started on construction of the power and processing modules that will be loaded onto the platform in These new modules will enable us to drive operating costs down by switching out the floating production, storage and offtake (FPSO) unit for a floating storage and offtake (FSO) vessel for which we have now signed a letter of intent. We also plan to reduce costs further through the use of our own crude, rather than third-party diesel, for power generation on the Bualuang platform. Elsewhere in our portfolio, we continued to drive down costs associated with the Kambuna field operations and completed the successful appraisal of the Dong Mun gas field, onshore North East Thailand, for which a Commercial Area has been awarded by the Thai regulatory authorities. Financial summary The stability of the oil price over the period was reflected in oil realisations of $ per barrel, broadly in line with realisations in the previous year (2011: $104.45). Gas realisations, however, increased significantly to $7.17 per Mcf (2011: $5.47 per Mcf) reflecting the sale of our low priced gas assets in the second half of The focus on higher margin assets is reflected in the fact that, despite production falling by 42% year on year (due to portfolio rationalisation), revenue only fell by 10% to $368.0 million (2011: $408.0 million). The Group reported a profit before tax of $10.8 million (2011: $112.6 million) following exploration expenses of $51.1 million (2011: $57.8 million) and impairment charges totalling $23.2 million (2011: nil). 15 Business review

18 Chairman s and Chief Executive s review continued Financial summary continued Despite production 42% below 2011, pre-tax operating cash flow fell by only 14% to $255.6 million (2011: $296.0 million); this figure cushioned by a continuing trend of cash margin growth, unit post-tax operating cash flow expanding by 40% to $40.22 per barrel (2011: $28.56). At year-end 2012 cash and funds balance was $208.8 ($85.8 million). Governance and Board 2013 is set to be a big year for the exploration drill bit as we plan to drill prospects in all three core areas. Encouraging drilling results are starting to come through from the North Kutei basin and we have plans to test large gas prospects onshore Kalimantan as well as oil prospects in the acreage surrounding our Bualuang oil field (offshore Thailand). We would like to thank our employees for all their hard work in getting us to this position and we are looking forward to an exciting and successful year ahead for both staff and shareholders alike. Charles Jamieson Chairman James Menzies Chief Executive Officer 13 March March 2013 Jim Coleman stepped down from the Board at the Group s AGM in June On behalf of the Board, we would like to thank Jim for his contribution over the last four years. We were delighted to appoint Dr Carol Bell to the Board as a non-executive director in January Carol has a longstanding involvement in the oil and gas industry and has already proven to be a valuable addition to the Board. Outlook 2013 has got off to a good start, with drilling rigs operating in each of our three core areas and a forecast for a sharp rise in Group average daily production, from 10,800 boepd in 2012 to 12,500 15,500 boepd for the year. This is driven primarily by production growth from the Bualuang oil field, where we expect to see a rise from 7,200 bopd in 2012 to between 11,000 14,000 bopd in As a result of high-grading our portfolio, Bualuang production now represents not only our highest margin barrels, but also the greatest single contributor to Group production. As a result, we are in turn forecasting a substantial rise in Group cash flow in We are continuing to manage our portfolio actively, as demonstrated by the recent swap out of non-core assets in the Tarakan basin, and introduction of a strategic partner to the Bangkanai PSC (in our core Greater Kerendan area). In addition, we anticipate the award of new acreage in the onshore Kalimantan area, that surrounds our Kerendan gas field, in the current Indonesian licensing round. 16 Business review

19 Our business model Salamander aims to create sustainable shareholder value through building and exploiting its portfolio of upstream oil and gas assets. The Company seeks to do this through the following: Business model + Maintain a balanced exposure to both exploration & production + Exploit a growing development and production portfolio, providing a core asset value and rising cash flows + Re-invest cash flows in exploration and appraisal opportunities that offer transformational core asset value upside The Company implements this business model through executing the following: Strategy + South East Asian regional focus + Maintain a well-respected operating capability + Hold large equity stakes, operatorship and control of a limited number of hub positions + Each hub characterised by discovered hydrocarbons in an anchor asset, with: i further value creation potential; ii step out exploration opportunities; and iii neighbouring acreage for business development options + Exploit technical, operational and financial synergies across each hub + Ensure appropriate financing is in place for the Company s planned operations 17 Business review

20 Key performance indicators KPI Working interest production Comment Lower year-on-year production following the sale of interests in the ONWJ and SES PSC s during 2H 2011 Outlook Production in 2013 is expected to average 12,500 15,500 boepd with further growth in 2014 when the Kerendan field comes on stream The Group is looking to add reserves close to infrastructure through development/ exploration activity in a number of core areas Opex per bbl is expected trend downwards as volume from Bualuang rises in 2013 and then cost reduction initiatives are completed in 2014 Production growth from Bualuang and increased exploitation of fiscal efficiencies should grow cash flow on a unit basis The Group is looking to add reserves close to infrastructure through development/ exploration activity in a number of core areas 2012: 10,800 boepd 2011: 18,600 boepd Finding, development and acquisition cost per barrel 3 year average 2012: $28.32 per boe 2011: $20.22 per boe 2012 in line with longer term average below average due to high level of reserve upgrades during the year Operating costs 2012: $18.26 per boe 2011: $15.46 per boe Opex per bbl increased due to a fall in production at Bualuang which has a large fixed cost base Post-tax operating cash flow 2012: $40.22 per boe 2011: $28.56 per boe Increase reflects strategic repositioning of portfolio to focus on higher margin assets Reserves replacement 3 year average 2012: 148% 2011: 140% Broadly flat year on year as Group replaced nearly all barrels produced during the year Lost time injury frequency Per million man hours 2012: : 0.85 Three LTI s were reported in 2012, LTIFR is above OGP average The Group targets zero Lost Time Injuries every year and has an active HSE plan to help try to achieve this 18 Business review

21 Operational review The work programme is well balanced between development activity in Bualuang and Kerendan that will grow the core value assets and increase cash flow, and exploration activity in the Greater Bualuang, Greater Kerendan and North Kutei areas that seek to deliver material resources growth. Highlights Operational activity in 2012 largely focused on our three core areas Greater Bualuang (offshore Gulf of Thailand), Greater Kerendan (onshore Kalimantan, Indonesia) and the North Kutei (offshore Kalimantan, Indonesia). Rigs arrived on location in all of these areas during the second half of 2012 and have been active throughout the first part of The main operational achievement during the year was the completion and installation of the Bualuang Bravo platform. Construction was completed both on time and on budget and over 1.3 million man hours were completed on the project without any lost time incidents. The Bravo platform was successfully installed in November 2012 and will allow the drilling of 16 new wells on the field to drain the reserves efficiently. It also provides space for crude fired power generation and oil processing modules to be installed as part of an initiative that will drive down operating costs and increase the cash margin on a produced barrel. Outside of the Bualuang area, the DrillCo-1 land rig arrived on location at the Kerendan gas field in Central Kalimantan to begin development drilling. This will lead to production growth from 2014, further diversifying the Group s production basis. In the North Kutei, the Group s high impact exploration drilling programme commenced in the fourth quarter of This campaign got off to an encouraging start and we announced in February 2013 that the South Kecapi-1 well was an oil and gas discovery which flowed 6,000 bopd on test. The North Kendang-1 well is currently drilling, and on completion the rig will move to drill the Bedug prospect. Production Production for the year averaged 10,800 boepd and in 2013 the Group expects daily production to average between 12,500 and 15,500 boepd. Production in 2012 was down year on year following the decision to sell the Offshore Northwest Java and Southeast Sumatra PSC s in the second half of 2011 and to re-invest the capital into growing production from fields that produce higher value barrels. Mike Buck Chief Operating Officer Production growth in 2013 will be driven by an anticipated increase of at least 50% in production at the Bualuang oil field, the field which has the highest cash margin per barrel metrics within the Group s portfolio. 19 Business review

22 Operational review continued Reserves and resources The Group entered 2012 with 75.3 MMboe of proved and probable ( 2P ) reserves. During the year production totalled 3.9 MMboe and there were downward reserves revisions totalling 1.4 MMboe against the Kambuna field. Set against this was an upgrade of 2.1 MMbo at the Bualuang field. These additional reserves are associated with the T2 and T5 reservoir horizons. As a result of these movements the Group s 2P reserves as at 31 December 2012 were 73.3 MMboe. 1 HSE During the year, the man hours worked on operated projects across the Group fell to 2.2 million (2011: 3.5 million) reflecting the concentration of effort on the Group s three core areas. Following a review of HSE procedures and practice in late 2011, the Group achieved a period of nine consecutive months without any recordable incidents. However, three lost time incidents were recorded on operations in Kalimantan in the second half of the year. Whilst none of these incidents resulted in serious injury, the occurrence underlines the need for continued vigilance and improvement. 2 Thailand The Group s operations in Thailand are focused on the Greater Bualuang area, offshore in the Gulf of Thailand. The Group also participates in a nonoperated capacity onshore Thailand in the Khorat Plateau basin. Greater Bualuang The Greater Bualuang area consists of the B8/38 Production Licence which contains the Bualuang oil field and the G4/50 Exploration Concession that surrounds B8/38. The emphasis on B8/38 is very much on the development of the Bualuang field. In G4/50, the focus is on exploration and the technical teams were busy in 2012 maturing leads and prospects to drill ready status for exploration activity in Installation of the Bravo platform, November Bualuang Bravo platform, bridge linked to Alpha platform 3 Overseeing production operations at the Bualuang oil field 3 20 Business review

23 Thailand continued B8/38 Bualuang field development Development drilling during the period was conducted initially using the Ensco-53 jack up rig, while later in the year the Atwood Mako jack up rig was secured on a long term contract. The rig arrived on location in September 2012, initially on a one year contract, which has subsequently been extended to September This removes the risk of slippage on our planned programme due to difficulties securing rigs in a tight market and provides us with the flexibility to drill development, exploration and appraisal wells at our own discretion. The Atwood Mako started development drilling on the Bravo platform in November 2012 as soon as installation of the platform was complete. The first well started producing in December. Sixteen development wells are planned as part of the current phase of development drilling; eleven of these wells will be drilled into the main part of the Bualuang field and five wells will be drilled into the East Terrace. The wells drilled into the East Terrace will be the first production wells in that part of the field; this has been brought on stream less than two years after discovery. In addition to the development of the East Terrace, in the second quarter of 2013 a slant well is to be drilled into the T2 reservoir, underlying the main reservoir, which is known to be oil-bearing and has the potential to add further reserves to the field. Production from the Bualuang field averaged 7,200 bopd in 2012 and is expected to average between 11,000 and 14,000 bopd in 2013, representing a minimum production increase of 50% year on year. Facilities investment Funds raised as part of the rights issue will be used for investment in power modules and processing facilities to be installed on the Bravo platform, which will lead to substantial cost savings. Construction of these facilities was sanctioned in mid-2012, and they are progressing to schedule with delivery to the field expected in Q The power generators, being supplied by Caterpillar, have been designed to run using Bualuang crude as fuel. Burning a few hundred barrels a day of crude will power both the Alpha and Bravo platforms and all the electrical submersible pumps and will lead to substantial reductions in operating costs. The processing facilities, under construction at the same Thai Nippon Steel fabrication yard in Thailand where the Bravo platform was built, will enable us to switch out the Rubicon Vantage FPSO which is currently used to process and store Bualuang crude for an FSO, that is only required to store and offload the crude. FSOs are considerably cheaper than FPSOs and this change will significantly reduce Bualuang operating costs. After an extensive tender process, a letter of intent has been signed for the Navion Clipper with Teekay Nordic Holdings Inc. with the Clipper scheduled to be delivered to the Bualuang field in mid-2014, detailed engineering studies for the vessel s refit are well advanced, with yard space reserved in China, and long-lead items on order. Power generators and processing modules are scheduled to be installed on the Bravo platform in the first quarter of Then, in the second quarter, the FSO is scheduled to arrive and the FPSO will go off contract at the end of August. The savings realised are forecast to reduce field operating costs by approximately 25% per annum from mid Exploration During 2012, we also completed two exploration wells in B8/38, on the Far East and North West Terrace prospects. Whilst both wells found excellent quality reservoirs, the main targets were water bearing. Despite the disappointing results, the wells have provided useful data points in helping to refine the understanding of reservoir development, trapping mechanisms and the regional oil migration system. Salamander can directly apply the knowledge gained to refine our model ahead of exploratory drilling on G4/50 in G4/50 The G4/50 licence covers 5,000 sq km and surrounds the B8/38 licence in the Gulf of Thailand. Having entered the licence in the second half of 2011, a comprehensive 3D seismic survey was completed in the first quarter of The new data has now been processed and integrated with the existing 3D seismic so that there is now more than 5,000 sq km of 3D data on and around the block. The data quality is extremely good and the extensive drilling on B8/38 provides an excellent calibration of the seismic to the geology. The four sub-basins identified in G4/50 have a very high density of structures of various styles and, since mid-2012, work has been focused on maturing some 30 identified leads to drillable prospect status. 21 Business review

24 Operational review continued Thailand continued G4/50 continued G4/50 represents an excellent exploration opportunity, with proven oil, direct analogue discoveries and fields. We have identified over 30 targets on the 3D data. Nine prospects have been matured to drill ready status, with mean prospective resource estimates in the range MMbo, and chances of success in the range 15 30%. The Group plans to drill at least six wells here in Environmental permits To proceed with E&P activities requires the completion of an Environmental Impact Assessment ( EIA ). This must be prepared to meet detailed guidelines, and involves the participation of communities that may be affected by the activity. Once these steps are complete, the EIA application must then be submitted to the Office of Natural Resources Environmental Policies & Planning ( ONEP ), a part of the Ministry of Environment. The EIA must be approved by ONEP before any activity can start. Salamander is fully supportive of the EIA process and committed to ensure that all of its activities are conducted to minimise any adverse environmental impact. Salamander is putting extensive resources to work in preparing and submitting EIAs that meet the highest industry standards, and we continue to work with both the Department of Minerals & Fuels ( DMF ) and ONEP to secure approvals as smoothly and efficiently as possible. Salamander currently has EIAs approved for six exploration drilling locations in the north of G4/50 and is awaiting approval for the re-location of a further two EIAs in the central area of the block. In addition, the Company is now in the process of finalising the submission of EIAs to cover 18 drilling locations in the southern area of the license; the associated Public Participation meetings currently being completed. We expect to submit the applications during Q2 2013, and to receive approval in Q With the Atwood Mako rig on a long term contract, we have the rig capacity and flexibility to commence drilling as soon as we choose, once we receive the EIA approvals. Onshore non-core Production from the Sinphuhorm gas field was in line with expectation in 2012 averaging 1,500 boepd. During 2013, it is forecast to produce between 1,400 1,600 boepd (net to Salamander). The Group also successfully appraised the Dong Mun discovery during 2012 with the Dong Mun 3ST well testing at 10 MMscfd on a long term test. The Dong Mun field has now been granted commercial field status by the Thai authorities and a plan of development has been submitted. Options for the marketing of Dong Mun gas are under consideration. In December 2012 the Group relinquished its interest in the L26/50 licence, onshore Thailand. In January 2013 it also relinquished its interest in the neighbouring L15/50 licence. Indonesia The Group s activities in Indonesia focused on the operated Greater Kerendan and North Kutei areas. There is further production from the operated Kambuna field, offshore North Sumatra, and development projects associated with the non-operated Bengara and Simenggaris licence areas. The Group also has non-operated interests in the Kutai and South Sokang PSCs. Greater Kerendan Activity on the Bangkanai PSC has increased during 2012 with the DrillCo-1 land rig completing a four month mobilisation to the Kerendan gas field in August. The rig immediately commenced the batch drilling of four development wells on the Kerendan field. These wells are expected to comfortably deliver the 20 MMscfd that is the daily contract quantity ( DCQ ) in the Gas Sales Agreement with PLN (the gas off-taker), that has commercialised 122 Bcf of gas. The two wells flow tested to date produced at a combined rate of 20 MMscfd. Once all four wells are completed the Company will seek to start discussions with the Indonesian authorities to commercialise some of the additional gas resources in the field. Gas from the Kerendan field will be used to fire a power plant to be constructed at the field location by PLN. PLN is expected to award the contract for construction of the power plant at the end of the first quarter of 2013, with first gas deliveries anticipated in July The power plant will have a total capacity of up to 320 Mega Watts and will be able to accept up to approximately 60 MMscfd before it reaches capacity, three times the volume currently contracted. There is no other potential supplier in the local vicinity of the plant. 22 Business review

25 The Kerendan field development is the anchor project for the Greater Kerendan region and the development drilling programme is improving our understanding of the sub-surface in the area. Using the knowledge gained, the exploration drilling programme will start during the second quarter of 2013 with the drilling of the West Kerendan and Sungai Lahei prospects. The drill-pad is at an advanced stage of preparation for the exploration drilling. The West Kerendan and Sungai Lahei prospects contain a combined mean prospective resource of 900 Bcf. In the event of success, the Group will look to commercialise the discovered volume through construction of a pipeline from Greater Kerendan to the gas markets in East Kalimantan. 1 Beyond these two prospects, there are further prospects contained in the Bangkanai PSC, including the large Jupoi surface anticline. The Group also anticipates being awarded two new licences adjacent to the Bangkanai PSC providing further growth opportunities in the basin. North Kutei 1 Drilling operations at the Kerendan cluster site 2 Flow testing the Kerendan-6 well 3 The DrillCo-1 drilling Kerendan development wells 2 3 During 2012, preparations were completed for the North Kutei exploration drilling campaign. The Ocean General semi-submersible rig was contracted as part of a four company consortium and drilling started on the Bontang PSC in December 2012 with the South Kecapi-1 exploration well and has continued through the first quarter of The South Kecapi-1 well encountered over 40 metres of net oil and gas pay in high quality stacked Pliocene channel sandstones. The shallower BT18-BT25 channels contained 29 metres of net gas pay in thick channel sandstones, although the volume encountered is not thought to be commercial on a stand-alone basis. In the deeper BT45 Pliocene channels, 11 metres of net oil pay was encountered and flowed light oil at a constrained rate of 6,000 bopd when tested. It is thought the well would have flowed at over 14,000 bopd on an unconstrained basis. The reserve potential of the BT45 is between 13 MMbbls and 133 MMbbls, the wide range reflecting the uncertainty in the extent of the channel sandstone reservoir. The North Kendang-1 well was spudded in the Southeast Sangatta PSC in February It is located some 18 km to the northeast of the South Kecapi well location. On completion of the North Kendang well, the Ocean General will move back to the Bontang PSC 23 Business review

26 Operational review continued Indonesia continued North Kutei continued to drill the Bedug prospect. Bedug is targeting oil and gas in multiple stacked Pliocene and Miocene channel sandstones. The targets include the BT45 horizon which was found to be oil bearing downdip in the South Kecapi-1 well. Also on the Bontang PSC the Group successfully appraised the Tutung structure, with the Tutung Alpha-3 well, and is currently working on a plan of development for this gas condensate field for submission to the Indonesian authorities. 1 Other non-core The Kambuna gas-condensate field (50%, operator), offshore North Sumatra averaged 15,500 MMscfd and 900 bcpd during The field will reach the end of its commercial life in 2013 and it is expected that the infrastructure will be handed over to Pertamina. In the Kutai PSC, the operator is planning to drill the Tayum exploration well in the second quarter of In the South Sokang PSC acquisition of a 3D seismic survey will complete the committed work programme for the block and interpretation of the data will determine if drilling will follow. 2 Vietnam Following unsuccessful exploration drilling in 2010 and 2011, the Group relinquished its Vietnamese licences during 2012 and has subsequently closed its operations in the country. Summary 2012 saw the start of intensive drilling programmes on all three of the Company s core areas. The continuation of these programmes, along with exploration and development projects, will make 2013 by far the busiest operational year in the Group s history. The work programme is well balanced between development activity in Bualuang and Kerendan that will grow the core value of the assets and increase cash flow, and exploration activity in the Greater Bualuang, Greater Kerendan and North Kutei areas that seek to deliver material resources growth. Our focus is on safely delivering these work programmes on schedule and within budget. Mike Buck Chief Operating Officer 13 March Business review 1 The South Kecapi-1 well flowed 6,000 bopd on test 2 Ocean General semi-submersible rig on South Kecapi location 3 Overseeing drilling operations in the North Kutei on the Ocean General rig 3

27 Statement of proved and probable reserves (working interest basis) The Group s proven and probable commercial working interest reserves at 31 December 2012 were as follows: Thailand Indonesia 2 Total Oil Gas Oil Gas Oil Gas MMbo Bcf MMbo Bcf MMbo Bcf MMboe 1 At 1 Jan Additions Disposals Revisions 2.1 (0.3) (0.3) (5.5) 1.8 (5.8) 0.6 Production (2.6) (3.2) (0.2) (2.8) (2.8) (6.0) (3.9) At 31 Dec All gas reserves are converted at 6.0 Bcf/MMbo except Kambuna which is converted at 4.8 Bcf/MMbo and Kerendan which is converted at 5.5 Bcf/MMbo. 2 Indonesia includes 2.4 MMboe in respect of Simenggaris which was held for sale on the Balance Sheet at 31 December Proved and probable commercial reserves are based on reports produced by the Group s independent engineer, RPS Energy, and supplemented by the Group where necessary with additional and more recent information. The Group provides for amortisation on its oil and gas properties on a net entitlements basis, which reflects the share of future production estimated to be attributable to the Group under the terms of the PSCs related to each field. Total proved and probable entitlement reserves were 61.9 MMboe at 31 December 2012 (31 December 2011: 66.0 MMboe). The 2012 reserves replacement ratio was 49% (2011: 235%). On a three year rolling average, reserves replacement ratio was 148% (2011: 140%). 25 Business review

28 Financial review Looking beyond 2012, alongside a step-change in production, the Group expects to see a continuation of the trend of margin growth via a combination of greater fiscal efficiency and reduced operating costs. Having crystallised production-based value through the sale of low-margin assets late in 2011, capital in 2012 was refocused to drive growth from higher margin oil barrels within the Greater Bualuang Area (Thailand), to develop strategically important gas reserves in the Greater Kerendan Area (Indonesia), and to explore for material oil and gas resource in North Kutei (Indonesia). Although this repositioning lowered the Group s production and 2012 profits, it has delivered cashmargin growth. Unit post-tax operating cash flow increased to $40.22/boe, a 40% rise on 2011 ($28.56/boe). Looking beyond 2012, alongside a step-change in production, the Group expects to see a continuation of the trend of margin growth via. a combination of greater fiscal efficiency and reduced operating costs. Ahead of a busy 2012/2013 programme of activity, Salamander strengthened its finances further through the successful completion of a $212 million rights issue (May 2012), and the refinancing of its debt (completed in December 2012, with syndication of the facility completed in March 2013). Through the refinance, the Group has improved the efficiency of its capital structure by more appropriately leveraging its portfolio of production and development assets. Having strengthened the balance sheet, the Group has been able to accelerate both its programme of exploration drilling and its planned investment across its core development and producing assets. At end 2012, cash and funds totalled $208.8 million (2011: $85.8 million), with total net debt approximately flat on 2011 (2012: $194.6 million; 2011: $210.1 million). Statement of Comprehensive Income Revenue, realisations and production Dr Jonathan Copus Chief Financial Officer Following Salamander s disposal in late 2011 of its operations in Offshore Northwest Java and Southeast Sumatra, along with the continued decline in production from the Kambuna field, 2012 production fell to 10,800 boepd (2011: 18,600 boepd). However, this strategic repositioning focused capital toward areas of significantly higher-margin production within Thailand; oil in 2012 accounted for 71% of Group output (2011: 63%), and gas sales became more heavily weighted toward Sinphuhorm, the highest margin gas production in the portfolio. With crude prices flat year-on-year, and a continuing tight Brent-Dubai spread, 2012 oil realisations (post hedging) averaged $103.95/bbl (2011: $104.45/bbl). 26 Business review

29 Statement of Comprehensive Income continued Revenue, realisations and production continued Key financial indicators Units Income statement: Realised prices: Oil and liquids $/bbl Gas $/Mscf Revenue $ millions Operating costs per boe $/boe Profit/(loss) before taxation $ million (113.7) (3.0) Taxation $ million Balance sheet: Capital expenditures: Acquisitions $ millions Exploration and appraisal $ millions Development and production $ millions Net disposal proceeds $ millions 45.7 Net debt 1 $ millions Gearing 2 % Cash flow statement: Cash generated from operations $ millions Taxation payment $ millions Net cash from operations per boe $/boe See note 22 to the consolidated Financial Statements for further details 2 Gearing is defined as debt divided by debt plus book net equity For gas, Group average realisations rose in 2012 to $7.17/Mscf (2011: $5.47/Mscf); with prices at Sinphuhorm, that are indexed to high sulphur fuel oil, rising to an average $9.10/Mscf across the year (2011: $8.93 Mscf). This focus on more cash generative barrels meant that whilst production year on year was down by 42%, headline revenue fell by a more modest 10% (2012: $368.0 million, versus 2011 $408.0 million); this widening to 25% when adjusted for inventory movements (2012: $331.6 million, versus 2011: $442.6 million). By geography, 90% of 2012 Group revenue (adjusted for inventory movements) was generated in Thailand, the balance in Indonesia. Cost of sales Cost of sales of $245.2 million in 2012 was up on 2011 ($205.5 million). Within this figure, direct operating costs fell to $74.8 million (2011: $104.9 million), although unit operating costs rose to $18.36/boe (2011: $15.46/boe). This rise in unit costs principally reflected the greater weighting of Bualuang production within the mix; the field s fixed operating cost base, and lower total production impacting unit metrics. However, with Bualuang output expected to grow by a minimum of 50% in 2013, unit costs are expected to fall considerably. Salamander is also well advanced with the construction of processing and power generation units the installation of which targets a further material reduction of operating costs from mid Driven by the phasing of liftings, royalties rose year-on-year to $30.6 million (2011: $26.1 million). Amortisation of oil and gas properties declined to $96.7 million, but on a unit basis rose to $20.70/boe (2011: $109.0 million, and $16.10/boe respectively). With Kambuna approaching the end of its productive life, the Group decided to downgrade the field s recoverable reserves. As a result, 2012 cost of sales includes a $6.7 million Kambuna impairment, as well as $21.2 million resulting from an increase in unit amortisation charges. Finally, a $34.6 million inventory of crude oil, held within Bualuang s tanks at end 2011, was sold in 2012 generating a corresponding $36.3 million negative inventory movement. Netting revenue with cost of sales, gross profit in 2012 declined to $122.8 million (2011: $202.5million). 27 Business review

30 Financial review continued Statement of Comprehensive Income continued Exploration expenses Exploration costs expensed through the income statement totalled $51.1 million (2011: $57.8 million); $28.9 million of which was reported in H Of the full year figure, $6.7 million related to prelicence expense (2011: $7.5 million), $1.6 million originated in Vietnam resulting from closure of its operations, and $1.3 million related to activities within Indonesia. The remainder, $41.5 million, was incurred within Thailand. Of this Thai total, relinquishment of block L26/50 and L15/50 crystallised a $9.0 million charge; however, the economic benefit of these sunk costs will be preserved as an offset against future years tax. The remaining balance of $32.4 million captures costs associated with the unsuccessful B8/38 Far East-1 and North West-1 wells, as well as a revision to exploration value that had been held on the Balance Sheet since the time of the acquisition of GFI Oil and Gas in Disposal of assets and assets held for sale Having disposed of the Group s Offshore Northwest Java and Southeast Sumatra positions in 2011 (Indonesia; a $6.8 million profit reported), Salamander did not make any further asset disposals in However, during 2012, the Group agreed to swap its Simenggaris JOB and Bengara PSC (both assets in Indonesia) for a further 15% interest in the Bangkanai PSC, Indonesia. These assets are held for sale on the Balance Sheet at 31 December 2012 at a value of $18.0 million. The transaction was signed in March 2013 and is expected to complete in May Since the year end the Group has signed a farm-out agreement with PT. Saka Energi Indonesia to farm out a 30% interest in the Bangkanai PSC. Administrative expense Following implementation of a cost management review, administrative expenses for full year 2012 fell versus the prior period to $10.8 million (2011: $14.6 million). Finance revenue and expense During Q4 2012, Salamander refinanced its reserve based lending facility, improving the efficiency of the Group s capital structure by more fully accessing borrowing capacity associated with the significant organic reserve growth of its primary assets that had been delivered in the previous 12 months (net of disposals and production, at end P reserves rising by 36%, 2P reserves rising by 14%). As a consequence of this, finance costs in 2012 rose to $27.4 million (2011: $22.2 million) due largely to a one off write-off of unamortised arrangement fees relating to previous reserves based lending facilities (see note 7 to the consolidated Financial Statements). Stripping these fees out, Salamander s underlying finance costs totalled $18.1 million, this being approximately flat year-on-year (2011: $18.3 million). With a lower cost of borrowing accessed through the Group s refinanced reserves based lending facility, finance costs should fall in Other financial losses of $6.3 million (2011: $2.1 million loss) principally reflect the mark-tomarket accounting of the Group s commodity price hedging and currency exchange losses (see note 8 to the consolidated Financial Statements). Year-to-year, Salamander undertakes a limited oil price hedging programme, the aim of which is to protect the cash flows that fund the Group s future capital expenditure programme. For 2012, the Group hedged 1,800 bpd at an average swap price of $103/bbl, and 1,800 bpd put options at a strike price of $70/bbl. For 2013, the Group has hedged 2,600 bpd at an average swap price of $103/bbl; and for 2014, 1,300 bpd at an average swap price of $99/bbl. In 2012, Salamander reported a pre-tax profit of $10.8 million (2011: $112.6 million). Taxation Taxation charges, as reported on the income statement, fell to $73.1 million (2011: $158.1 million). Breaking this into its component parts, current taxation charges fell to $78.9 million (2011: $121.4 million); the Group s deferred taxation falling to a credit of $5.8 million (2011: charge of $36.7 million). A reconciliation of the Group s tax charge to profit before tax is set out in note 9 to the consolidated Financial Statements. As in previous years, the income statement tax charge is distorted by a number of items that cannot be taken as allowances against tax. 28 Business review

31 Taxation continued Principal amongst these in 2012 were: UK losses ($21.4 million, 2011: $15.1 million); Thailand special remuneratory benefit charges ($28.8 million, 2011: $37.5 million); and other items (net of $17.0 million, 2011: $52.6 million). The year-on-year reduction in other items reflects the implementation of greater tax efficiency in respect of Salamander s producing assets, and includes: the benefit arising from the restructuring of the Group s Thai portfolio; a reduced level of non-allowable exploration expenses; and the impact of accelerated depreciation. The Thailand special remuneratory benefit charge is deductible against income tax and therefore the impact of the charge is reduced by the effective tax rate. With an on-going programme of significant investment within the Greater Bualuang area, the Group remains focused on its strategy to maximise fiscal efficiency across its Thai operations. As part of this programme, Salamander commenced a restructuring of its Thai assets in 2012, which will be completed in Salamander s net loss for 2012 totalled $62.3 million; equivalent to a 32 cents loss per share (2011: net loss of $45.5 million; 29 cents loss per share). Balance Sheet Capital expenditure Reflecting an expansion in activity across all three of Salamander s core areas of operational focus,accrued capital expenditure in 2012 rose to $328.9 million (2011: $191.1 million). Production and development capital expenditure totalled $200.4 million, 68% of which was incurred within Thailand, with the balance almost exclusively in Indonesia. Exploration and appraisal expenditure totalled $128.6 million, which was split 37%:63% between Thailand and Indonesia respectively. Within these figures, there is also a modest component of acquisition costs. Salamander acquired an additional 11% of the Bangkanai PSC (Greater Kerendan Area) in 2011 at a cost of $7.5 million. In 2012 the Group acquired a further 5% of the Bangkanai PSC at a cost of $5.6 million. Exploration and appraisal, and production and development expenditures capitalised and carried forward on the Balance Sheet at 31 December 2012 totalled $897.5 million (2011: $749.6 million). 29 Business review Cash and net debt On 17 May 2012, Salamander completed a $212 million ($198.6 million post expenses) rights issue through the issue of million new ordinary shares. The issue was priced at a 37% discount to the theoretical ex-rights price ( TERP ), and acceptances totalled approximately 98%. Proceeds from this equity issuance are being used to accelerate and expand activity both within the Greater Bualuang Area (Thailand) and North Kutei (Indonesia). Subsequent to this, with the drilling on Bualuang and Kerendan moving as yet unleveraged reserves closer to cash flow, it was decided in H to launch a refinancing of Salamander s existing $325 million ($250 million senior, $75 million junior) reserve based lending facilities. On 20 December 2012, the Group announced the signature of two new borrowing facilities: a $300 million seven-year senior reserve based lending facility, secured against expected cash flow from Salamander s producing assets; and a $50 million two-year facility, which will be used to debt fund the development of the Kerendan gas field. Together, these facilities extend the maturity of the Group s financing, simplify Salamander s borrowing structure, and lower its cost of debt. As development of the Kerendan field proceeds, it is envisaged that the shorter-term borrowings will be folded into the new reserve based lending facility, which will then expand to $350 million. With pre-commitments from BNP Paribas, Standard Chartered and the International Finance Corporation, the balance of the new facility was underwritten by BNP Paribas and Standard Chartered allowing Salamander to repay its previous facilities, and drawdown new funds before end Syndication of Salamander s new reserves based lending facility was successfully completed in March At 31 December 2012, Salamander s total gross debt equalled $403.4 million (YE 2011 $295.8 million). Of this figure, bank borrowings totalled $303.4 million (YE 2011: $195.8 million); with the balance being a five-year $100 million convertible bond (issued March 2010). Against this position, cash and funds totalled $208.8 million; just $1.5 million of which lay in restricted bank deposits (2011: $85.8 million; with $25.4 million in restricted bank deposits). Taken together, Salamander s end-2012 total net debt equalled $194.6 million (2011: $210.1 million), the Group s gearing was broadly unchanged at 43% (end 2011: 42%), and net assets expanded to $520.3 million (2011: $379.0 million).

32 Financial review continued Cash flow statement Operating cash flow Against a disposal-driven 42% decline in headline production, and broadly flat oil prices, a greater weighting of high-margin Bualuang barrels has cushioned the resulting fall in Group cash generation; 2012 pre-tax cash from operations totalling $213.0 million (2011: $293.6 million). This effect is best illustrated on a unit basis, where cash flow prior to working capital expanded in 2012 by 25% to $54.1/boe (2011: $43.3/boe). Operating cash flow also benefited from a $42.7 million positive movement in working capital. Driven by changes to inventories, this lifted unit cash generation to $72.40/boe (2011: $43.60/boe) cash taxation totalled $97.2 million (2011: $102.1 million). This tax payment consisted of a $54.2 million payment relating to special remuneratory benefit (2011: $65.2 million) in Thailand, and $43.0 million relating to income tax (2011: $7.0 million). Post tax and movements in working capital, operating cash flow for 2012 totalled $158.4 million, 18% below that reported in 2011 ($193.9 million). On a unit of production basis, post-tax operating cash flow expanded by 40% to $40.22/boe versus $28.56/boe in With the majority of any single year s cash tax payment relating to Thai activity in the prior-year period, elevated levels of investment in 2012 will in turn shelter Salamander from cash taxation payments in Further guidance is given in the outlook section of this review. Investing cash flow Against guidance of $275 million, net cash used in investing activities rose year-on-year to $285.8 million (2011: $203.3 million). Within this figure, production and development activities totalled $174.0 million (2011: $108.2 million); the investment distributed between Thailand $117.7 million (2011: $51.8 million) and Indonesia $56.3 million (2011: $54.4 million). Exploration and appraisal activities conducted in 2012 resulted in a $113.1 million outflow of cash (2011: $108.2 million). Exploration in Thailand totalled $41.3 million (2011: $38.8 million); this principally accounted for by activity on B8/38, where the unsuccessful Far East-1 and North West-1 exploration wells and the successful Dong Mun-3ST well were drilled. In Indonesia exploration capex totalled $71.2 million (2011: $60.8 million). The key focus of this spend has been on the Bontang licence, where both the Tutung Alpha-3 appraisal well and South Kecapi-1 exploration well delivered success. Financing cash flow Net cash flows provided by financing activities expanded to $277.1 million (2011: $19.5 million outflow). Broken into its constituent parts, net proceeds from the Group s H rights issue totalled $198.6 million, with new borrowing facilities delivering a further net $92.7 million inflow of funds. Across 2012, Salamander s operations led to a $149.9 million inflow of cash, which compares to a $28.9 million cash outflow during Financial outlook With strong production growth expected in 2013, this will boost Group operating cash generation at a time that coincides with delivery of the fiscal benefits that result from Salamander s increased levels of investment within the Greater Bualuang Area. As a result, against a baseline of significantly expanded Group cash flow, cash taxation charges in 2013 are forecast to remain broadly flat on New processing and power generation modules remain on track for installation on Bualuang Bravo during Q1 2014, and an FSO is under heads of agreement and currently undergoing conversion. Salamander is making solid progress toward its target to significantly reduce operating costs on the Bualuang field. With the Group maintaining high rates of activity in all three focus areas, capital expenditure for 2013 is forecast to be between $325 million and $375 million. We anticipate that the total Group s capital expenditure for 2013 will be approximately evenly split between exploration and appraisal, and production and development. By country, Thailand will account for 55% of the total, and 85% of the Group s production and development spend. The balance of capital expenditure will be in Indonesia. Dr Jonathan Copus Chief Financial Officer 13 March Business review

33 Risk management The identification and mitigation of risks are of critical importance to the Group as it continues to expand and operate the majority of its activities. Effective risk management is essential if the Group is to deliver its strategic and operational objectives whilst maintaining its excellent HSE record. The Group s Executive Directors monitor the Group s key risks and receive regular reports on financial, operational and HSE performance. The Group s Executive Directors then report to the Audit Committee and provide more frequent updates on any particular risks as required. The Audit Committee provides oversight whilst ultimate authority remains with the Board of Directors. The Group operates internationally and is affected by a wide range of risks. Some of these risks, such as political stability in the countries in which we operate, the ability to attract and retain the best employees and changes in local laws are faced by all companies. A summary of the key risks faced by the Group, as currently identified, together with the measures taken to mitigate against these risks, is provided below. Strategic risks Description Specific areas of risk Key performance indicators Mitigants An inappropriate or poorly executed strategy may lead to a failure to create shareholder value or meet shareholders expectations for value accretion Unbalanced portfolio mix Poor allocation of capital Lack of suitable organic or acquisition opportunities Deteriorating macro-economic conditions Loss of investor confidence leading to a reduction in the share price which can reduce Group s ability to access finance Finding, development and acquisition cost per barrel Reserves replacement S.E. Asia is forecast by the IMF to remain a high growth region in The Board monitors regional economic, political and energy market trends and forecasts and takes account of these when reviewing/planning the Group s forward strategy The Group undertakes an Annual Business Plan and Strategy Review. The Group strategy is focused on the delivery of its development projects within its three focus areas along with a balanced exploration programme. The Directors believe technical risks are lowered due to the management s knowledge of the geology and petroleum systems All M&A activity is subject to Board approval and measured against consistent investment and strategic criteria. Assets are only acquired which are expected to materially add value and/or improve the quality of the asset base 31 Business review

34 Risk management continued Operational risks Description Specific areas of risk Key performance indicators Mitigants An issue that has an impact on Group operations in that it affects operational delivery, corporate reputation and/or revenue Drilling operations Oil/liquids spill Local community issues Rig availability Asset performance Sustained exploration failure Insurable risk Working interest production Finding, development and acquisition cost per barrel Operating costs Operating cash flow Reserves replacement The Group has definitive operating procedures to be followed at all times. Regular training and monitoring is conducted to ensure these procedures are both followed and understood Full community engagement occurs through all phases of a project life The Group has a diversified portfolio of production, development and exploration that reduces exposure to failure of any one asset/project/well To ensure that all exploration and appraisal wells are consistently analysed, ranked, and risked a robust technical peer review process is in place before projects are recommended for Board approval Projects are closely monitored to ensure the project delivers according to plan. Production operations are closely monitored to ensure minimum of unplanned downtime and actual production is tracked against daily production forecast on a daily basis The Board has appointed an independent Technical Advisory Committee to review, on a quarterly basis, the Group s technical work in its three core areas and report its findings back to the Board The Group is insured against physical risk to assets in line with industry practice. In addition certain operational interruption insurances are put in place HSE risks Description Specific areas of risk Key performance indicators Mitigants Either an external event such as natural disaster, social unrest or pandemics, or an event from drilling or production operations that impacts staff, contractors, communities or the environment Injured personnel Leaks/spillage causing environmental incident Destruction of facilities and disruption to business activities Lost time injury frequency A comprehensive HSE management system is in place across the Group and monitored at Board level through performance reporting. Procedures are compliant with the Equator Principles and are regularly monitored by the IFC/World Bank HSE specialists. All policies and procedures are available to all employees through the Group Intranet site and regularly reinforced by senior management Full community engagement occurs through all phases of a project life cycle Spill recovery and crisis management protocols in place and drills carried out to test procedures and reinforce them Full monitoring of the local ecosystem (e.g. reefs, water quality etc) to ensure there is no impact as a result of Group operation 32 Business review

35 Financial risks Description Specific areas of risk Key performance indicators Mitigants The Group is unable to meet its financial commitments through either asset underperformance and/ or financial constraints. In extreme circumstances this may impact on the Group s ability to continue as a going concern or causes a breach of bank covenants Liquidity risk Oil and gas price volatility Capital and operating costs FX exposure Credit and counterparty risk Interest rate risk Debt levels and capital structure Operating costs Operating cash flow Budgets are set annually and the Group s financial performance is reported to and monitored by senior management and the Board on a monthly basis with variance from budget highlighted. All key financial and operating metrics are measured and monitored in this manner. Appropriate capital allocation processes Investment programmes ensure that our capital investment programmes are robust to downside sensitivity scenarios The Group believes it prudent to maintain a conservative approach to leverage and actively manages its balance sheet to ensure an efficient capital structure The diverse nature of the Group s asset base, including fixed price gas and oil production under PSC regime, partially hedges oil price volatility. The Group also hedges against oil price falls on occasion to minimise downside risk to cash flow and the current programme is detailed in the financial review External risks Description Specific areas of risk Key performance indicators Mitigants Market, industry or political risks that may impact on Group operations and/or cash flows Fiscal Regime Investor Sentiment Corporate Governance Legal, Regulatory and Litigation Operating cash flow The Group seeks to foster and maintain strong links with all external stakeholders. Regular interaction occurs with host country governments, regulators, industry partners, shareholders and local community representatives The Group sets out the principles by which it operates in the Group Code of Conduct that can be found on the website ( In summary the Group is committed to complying with various laws and regulations it is subject to around the world as well as the Combined Code The Group has rolled out a programme to brief and train employees on their responsibility to comply with the UK Bribery Act A confidential whistle-blowing hotline has been established to enable concerns about impropriety to be reported without fear of reprisal Audit Committee is in place to review governance and internal controls Appropriately trained and experienced staff are employed who can appropriately identify, assess and respond to external risks Additional detail on certain financial risks is set out in note 25 to the consolidated Financial Statements 33 Business review

36 Corporate responsibility Our approach We recognise that maintaining a well-respected operating capability is fundamental to our strategy and business model. Our approach to Corporate Responsibility (CR) is an important aspect of this overall goal. Our main areas of CR impact and opportunity comprise environmental matters, health and safety issues, our employees, our local communities and our approach to business conduct. The achievement of our overall business aim is clearly linked to our ability to manage all of these areas effectively. We appreciate, and take seriously, our responsibilities to conduct our operations safely and in full co-operation with the communities in which we operate. We ensure that the health and safety of our employees is protected; that our impact on the environment is minimised; and that we can be sensitive to the needs of, and provide long-term sustainable benefits for, the communities in which we operate. We conduct all of our business in a fair manner and comply fully with the relevant legal, regulatory and international accord requirements which apply to our businesses. These include the UK Bribery Act, the International Labour Organisation Declaration on Fundamental Principles and Rights at Work, the UN Universal Declaration on Human Rights, the OECD Guidelines for Multinational Enterprises, the International Finance Corporation Environmental and Social Performance Standards and the Equator Principles. The Group benchmarks its HSE performance against the statistics for the industry compiled by the International Oil and Gas Producers ( OGP ) average. During 2012 we completed an internal restructuring of the Group Corporate Social Responsibility Steering Committee, streamlining the membership to make it a more efficient and focused group that can oversee our CSR activities and relationships with local stakeholders. Performance highlights CO2 emissions reduced by 9.5% year on year GHG emissions 13.2% below OGP average Flaring and venting reduced by 77.8% and 98.6% below OGP average Tonnes of oil to environment per unit of production reduced by 74.5% and well below the OGP average Oil in produced water per unit of production increased by 25.7%, but below the OGP average Completed restructuring of CSR Committee Management systems Salamander adopts a rigorous, top down approach to Corporate Responsibility. During 2011 we completed a restructuring of the organisational structure. In 2012 the focus moved on to strengthening various functions within the management and operating units. This process saw 3 new people promoted to the Senior Management Team and a number of new recruits bolstering our capabilities in the legal, company secretarial, corporate affairs, community relations and health and safety departments. 1 1/2 Celebrations at the handover ceremony and scholarship contribution following renovations of Ban Had Paradonpap School, Chumphon Province, Thailand 2 34 Business review

37 Management systems continued Group organisational structure James Menzies Chief Executive Officer Dr John Bell Mike Buck Dr Jonathan Copus Group Technical Director Chief Operating Officer Chief Financial Officer G&G Res./Prod Eng. Assets: HSE Legal Finance BD Services Drilling GM Indonesia CP&L Commercial Accts. Facilities GM Thailand HR Tax IT Audit The Senior Management Team meets quarterly to discuss management level issues and Health, Safety and Environment are always key agenda items. The Group HSE Adviser reports directly to the Group COO and each of our operated assets has a dedicated HSE and CSR team to monitor activity and ensure Group guidelines are being followed. The CSR Steering Committee was restructured during 2012 to improve the delivery of community relations programmes. It is still chaired by the Chief Executive Officer, and meets bi-annually to discuss the investment in community based projects. The committee monitors project performance against agreed objectives. CSR Committees are also convened in the countries where we operate and report to the Group Steering Committee. The Group completes a stakeholder mapping exercise on entering a new licence. The results of this are used by our local community development officers to determine with whom to engage. The engagement programme will typically include local recruitment, communication of the Group s planned activity, meeting local officials and conducting town hall style meetings. This process helps to identify community development projects that meet the needs of stakeholders. During 2012 we also completed our first perception analysis among local communities, conducted in the coastal communities close to where we operate in the Gulf of Thailand. We plan to repeat this activity at regular intervals so that we can monitor and respond to local stakeholder perceptions of the Company. During 2012 further policies and procedures in support of the Group s anti-bribery and corruption programme were developed and implemented. The Group also instigated the first series of compliance audits of processes already in place. These, together with the annual anti-bribery and corruption risk assessment carried out towards the end of the year, enabled the Group to gain a comprehensive understanding of the corruption risks facing the business and the robustness of its processes. The Company has embedded whistle-blowing procedures that permit employees and contractors to report any concerns they may have in confidence to senior management or, if desired, to an external whistle-blowing service. Health and safety Policy highlights Salamander Energy will operate in accordance with the following principles: We will promote a culture within the Company in which all employees share a commitment to a healthy and safe workplace We will comply with applicable laws and regulations and apply recognised international standards where laws and regulations are not in place We will ensure that employees and contractors are properly trained and aware of the importance of health and safety matters Performance The Group has a rigorous set of HSE standards, procedures and guidelines that are made available to all employees via the Group s Intranet. It is made clear to all employees and contractors that they are expected to adhere to these standards when engaging in any business related activity on behalf of the company. The Executive Directors reinforce this message during management visits that are conducted at least annually and their findings are reported back to the Board of Directors. The number of man hours operated fell in 2012, reflecting the concentration of operations in three core areas. Following a review in the second half of 2011, there was a marked improvement in HSE performance during the first half of 2012 with no lost time injuries recorded. Unfortunately when drilling commenced onshore Indonesia in the second half of 2012 there were three LTI s. The Group has completed an investigation into each incident and management has reiterated its commitment to Health and Safety and the importance of adhering to policy to all employees and contractors involved with the project. 35 Business review

38 Corporate responsibility continued Performance Group health and safety KPIs Group-wide Comment Lost Time Injury (LTI) 3 3 There were no fatalities recorded. All incidents relate to onshore drilling in Indonesia. Investigations carried out on all incidents. HSE supervision increased Lost Time Injury Frequency (LTIF) Above OGP average of 0.70 Total Recordable Injury (TRI) 6 12 Three LTI s and three other recordable incidents Total Recordable Injury Rate (TRIR) Investigation completed into spike in TRIR during the first three quarters of 2011 since when zero TRIs have been recorded Hours worked (millions) Reduced as operations were focused around three main assets Group environmental KPIs Group-wide Comment CO2 emissions (tonnes) 75,200 83,079 Reduction a result of less flaring at Kambuna field CO2 emissions (tonnes per Increased on a unit basis as production was lower and used thousand tonnes production) more diesel as a result of extensive drilling operations. Below OGP average of 133 GHG emissions (tonnes per See above. Below OGP average of 159 thousand tonnes production) Flaring and venting (MMscf) Reduction in production at Kambuna Flaring and venting (tonnes per Below OGP average of thousand tonnes of production) Oil and chemical spills 5 15 Leaks were small scale from a corroded condensate line which had been replaced Oil and chemical spills See above total spilt (tonnes) Oil and chemical spills released to See above the environment (tonnes) Tonnes of oil to the environment per Below OGP average of 7.94 million tonnes of production Produced water discharged (tonnes) 11,612 19,900 Oil in produced water discharged (tonnes) Oil in produced water Below OGP average of 6.74 (tonnes per million tonnes production) 36 Business review

39 Health and safety continued Performance continued The construction of the Bualuang Bravo Platform was completed following 1.3 million man hours of work and achieved zero LTI s, the achievement of which all employees and contractors involved with the project can rightly be very proud. Following the commitment made in 2011 to improve the HSE culture within the organisation, the number of management visits and presentations at operational sites increased in The Group suffered 3 LTI s in 2012 (as it did in 2011) and due to the lower number of man-hours worked the LTIFR increased to 1.31, which is above the OGP average for S.E. Asian drilling focused operations of However, Total Recordable Incidents fell by 50% in 2012 and the TRIFR was 2.62, below the OGP average of 2.8. Targets for 2013 Zero fatalities Zero LTI s TRIR 20% below OGP average Environment Policy highlights Salamander Energy operates in accordance with the following principles: We are committed to protecting and conserving the environment in which we work We will adhere to the International Finance Corporation s Performance Standards on Social and Environmental Sustainability We strive to meet the challenges presented to the oil and gas industry by climate change matters We strive for viable ways to minimise the environmental impact of our operations, reduce waste generation, conserve resources and respect biodiversity We will comply with applicable laws and regulations and apply recognised international standards where laws and regulations are not in place Performance As a result of a reduction in flaring at the Kambuna field, total CO2 emissions fell during the year. However, as a consequence of the reduction in the Group s production, and with drilling campaigns in Thailand and Indonesia that resulted in increased diesel usage, emissions increased on a unit basis but were still well below the OGP average. With production expected to grow materially in 2013 the unit metrics should improve during the year. As we look further ahead to 2014, with the installation of crude fired power generators on the Bualuang field, the diesel requirement should be significantly reduced further improving the metrics. All produced water at Bualuang is already re-injected into the reservoir so there is no surface disposal of produced water. Cuttings generated during drilling operations are recovered and sent ashore for incineration. With these measures in place and the use of produced gas planned our target is for Bualuang to be a minimal emissions installation in The Group s performance on flaring and venting, oil spilt to the environment and oil in produced water is well within the Group s goal of being under the OGP averages. The Group is committed to minimising the environmental impact of its operations. We obtain all the relevant environmental permits prior to commencement of our operations and procedures are in place to monitor on-going operations. Examples include monitoring sea water quality at our sites in the Gulf of Thailand and soil quality and mineral levels in our onshore locations in Indonesia. Targets for 2013 Keep CO2 and GHG emissions below OGP average Continue to seek ways of pollution prevention, emission reduction and improving the environmental performance of our operations Continue to work towards making our operations at Bualuang minimal emission in Business review

40 Corporate responsibility continued Business conduct Policy highlights Salamander Energy operates in accordance with the following principles: 1 We aim to treat all our stakeholders fairly and with integrity We will not tolerate any form of bribery and corruption within our business activities or within business activities of those who perform services on our behalf We will comply with applicable laws and regulations (in particular the UK Bribery Act) and apply recognised international standards where laws and regulations are not in place Performance During 2012, employees received briefings and training on the Code of Business Conduct and expected standards of behaviour, encompassing compliance with the Bribery Act. All employees have undertaken a bespoke online training programme to deal with fraud and corruption risks and received face-to-face briefings as required in each office. The training and briefings will be repeated in 2013 and will continue to be repeated annually as part of an on-going Group compliance programme. In addition, towards the end of the year an annual ABC risk assessment was undertaken throughout the business. 2 Employees Policy highlights Salamander Energy is committed to upholding the principles outlined in the International Labour Organisation Declaration on Fundamental Principles and Rights at Work. These include the four fundamental principles and rights at work which are outlined below: Freedom of association and the effective recognition of the right to collective bargaining Elimination of all forms of forced or compulsory labour Effective abolition of child labour Elimination of discrimination in respect to employment and occupation 3 1 Kerendan field is a remote area and Salamander works closely with the IFC to uphold the highest HSE standards 2 Monkeys near the Kerendan field. Working in a manner sensitive to the local environment is essential to Salamander 3/4 Students at Ban Had Paradonpap School, Chumphon Province, Thailand enjoying the benefits of Salamander co-ordinated school renovation 4 38 Business review

41 Employees continued Policy highlights continued The Group is an equal opportunity employer and is committed to achieving and maintaining a workforce that represents the population as a whole and is compliant with applicable local laws and contractual obligations. The Company seeks to employ individuals who are qualified on the basis of merit and ability to fill its work positions regardless of gender, ethnic origin, colour, disability, marital status, race, religion, nationality, age, responsibility for dependants or sexual orientation. Each employee, consultant and contractor is expected to abide by the Company s Equal Opportunities Policy at all stages of employment. All employees and consultants are recruited and promoted fairly on the basis of their ability for the job. The Company is mindful of the encouragement that UK listed companies are receiving to demonstrate greater diversity amongst its employees at a senior level and intends to adopt the related reporting requirements indicated by the revised UK Corporate Governance Code within our next annual report. Performance At year-end 2012 the Group directly employed 210 employees. Of these employees 35.5% were female and 89.5% of the workforce comprised staff from the host countries of our operations. Local communities Policy highlights Salamander Energy is committed to operation in accordance with the following principles: We will uphold the principles outlined in the UN Universal Declaration on Human Rights We will behave responsibly and with sensitivity towards the local communities in the areas in which we operate We will provide sustainable benefits and avoid the creation of a dependency culture Performance Building strong relationships with local communities is critical to the Group in maintaining its operating credibility. The Group adopts a pro-active approach to its community relations, seeking to engage with local stakeholders early in the operational planning stage and recognising any concerns/issues. The Group employs a number of specialist government liaison and community liaison officers, usually people who are from the area of our operations and have a detailed understanding of the local, national and regional environmental and social sensitivities. During 2012 we further strengthened our CSR teams in Thailand and Indonesia and restructured the Group Steering Committee, streamlining the membership to improve its focus and effectiveness. In Thailand, Salamander successfully completed an Environmental Impact Assessment ( EIA ) for the Bualuang Bravo Platform which was approved by the Office of the Natural Resources and Environmental Policy and Planning in August As part of this process the Group completes a series of public participation meetings, environmental risk assessments and details its mitigation processes. Details of the EIA can be found on the Group s website ( As Salamander is committed to its operations in the Gulf of Thailand for the foreseeable future, the Group increased the intensity of its community engagement operations in the Gulf of Thailand and the Happy Community with Salamander initiative was formally launched in January This focuses investment into projects that deliver sustainable benefits to the community in three areas: education, environment preservation and community well-being. As part of this initiative we also completed a benchmarking survey in the local community to assess current perceptions towards Salamander and help us to monitor them over time. Examples of our community projects can be found in the CSR section of the Group s website and one example is provided overleaf: 39 Business review

42 Corporate responsibility continued Waste Recovery Project, Pak Nam Chumphon, Thailand In early 2012 meetings with representatives of the local community initiatives in Pak Nam, the closest fishing port to the Bualuang field, highlighted that there was a proliferation of waste in the town, especially plastics. Salamander committed to helping to educate the local community to improve waste management practices. The Environmental Preservation Group and Salamander subsequently agreed a proposal to address this issue. The proposal had several phases: In June 2012 on World Environment Day Salamander commenced Waste Identification and Categorisation Training. Over two days 260 local children/students received training. There was also an event involving 80 local residents who completed a walk through the local area to raise awareness of the Keep Pak Nam Chumphon Clean campaign and cleaned community areas. The efforts of Salamander and Save Pak Nam Chumphon Group inspired both the Ban Pak Nam School to extend a Garbage Bank Project; and the Pak Nam Chumphon Municipality to engage more in waste categorisation. The municipality now transports 50 kg of waste (food, vegetable, fruit and branch) every two or three days to a branch crushing machine provided by Salamander Energy. Salamander also provided: + plastic Crushing Machine to the Save Pak Nam Chumphon Group + 30 bins to Ban Pak Nam School to extend its Garbage Bank Project bins to Pak Nam Chumphon Municipality to replace old bins around the Pak Nam Chumphon area The project also involved water quality improvement. The community were consulted on ways to improve water quality and their input led to the use of a liquid micro-organism additive being added to the drains to improve water quality. Salamander supports 10 tanks that release EM liquid into the drains and Salamander employees, along with local residents, refill the liquid every two weeks. The Marine and Coastal Resources Research Centre (Central Gulf of Thailand), have agreed to a water monitoring programme taking samples to monitor the results of the initiative. The first water sample taken after the start of the initiative showed an improvement in quality with an increase in dissolved oxygen and a reduction in total suspended solids which it is hoped will continue. The project has succeeded in bringing various elements of the community, Salamander Energy, Save Pak Nam Chumphon Group and the local residents closer together in the successful implementation of the waste management project that has delivered sustainable benefits to the local community. In Indonesia, the Group continued its well established community relations programmes in the Kambuna and North Kutei areas. These have been running for several years and the Group s presence has resulted in increased employment opportunities for local people and improved infrastructure through investment into projects to support and foster local development. The Group also supports local cultural festivals which has helped integrate it into the local community and generates support for its operational activities saw a marked increase in the Group s operating activity onshore in the Greater Kerendan area. The initial programmes that were completed in 2011 such as the opening of a rubber nursery in Kerendan village established the company in a positive light with the local villagers. In 2012 we expanded our activity and were able to bring significant socio-economic benefits to the local communities when we built a new road connecting Kerendan and Muara Pari villages to the local town. The journey previously had to be undertaken by river and could take up to seven hours. The journey time has been reduced to less than an hour. We also continued to support local celebrations such as Independence Day. Details of our projects can be found on the CSR section of the Group website and the following case study provides an example: Public Sport Facilities Renovation and Construction in four villages and Salamander Cup Project, Haragandang, Kerendan, Luwe Hulu and Muara Pari, Indonesia In December 2012, Salamander Energy commenced the renovation and construction of sports facilities in Haragandang, Kerendan, Luwe Hulu and Muara Pari, the villages closest to Salamander s operations in the Bangkanai PSC. After a series of consultations with local communities it was agreed Salamander would construct volleyball, badminton and football facilities for each of the villages. As well as being the most popular sports within the area, they also offer the opportunity for the communities to gather together, an important element of Indonesian culture. Although supervised and facilitated by Salamander, the local community actively participated in the planning and implementation of the project. The villagers elected five representatives to take charge and oversee the completion of the new facilities. This committee took control in assigning local villagers roles within the project. Priority was given to those members of the community who were either unemployed or without permanent work. The local economy has greatly benefitted from the project. For example, local greengrocers gained economic benefit by providing ingredients for meals for the villagers employed by the project. In addition, Salamander ensured all materials such as cement, sand, gravel and construction equipment were sourced from surrounding villages. Where this was not possible, in the case of heavy duty construction tools, those already used within Salamander s construction and drilling programmes were provided. Salamander Cup Project To ensure the sports facilities continue to bring communities together a committee, facilitated by Salamander, has been formed to oversee the Salamander Cup. Starting in January 2013, the event will allow 12 surrounding villages to compete against each other using each of the facilities. It is hoped the Salamander Cup will become an annual event, strengthening the relationship of Salamander and the communities in the neighbouring villages. 40 Business review

43 Summary 1 The Group continues to focus on delivering excellence in HSE and CR matters and the Board takes a keen interest in monitoring performance in these areas. Whilst we can be proud of our performance to date, we are never complacent and there is always room for improvement. With a new Group HSE Manager starting in 1Q 2013 there will be a fresh drive towards meeting our target of no lost time incidents and a reduction in emissions. With that in mind we are on target for our principal producing asset, the Bualuang oil field, to be a minimal emissions facility in We have strengthened our teams working with local stakeholders in both Indonesia and Thailand and put in place more specific criteria for projects we will support. We will continue to monitor the success of these initiatives with local benchmarking surveys and through our ability to secure environmental approvals for our operational activities. 2 Finally, we strive to be a good employer and corporate citizen and adhere to the International Finance Corporation Environmental and Social Performance Standards and other globally recognised standards of corporate conduct. 3 1 Children enjoying a Salamander sponsored community day, Chumphon Province, Thailand 2 Locals participating in sports activities at a Salamander sponsored Independence Day event, Greater Kerendan area, Indonesia 3 Salamander led a project to build sports facilities, including four volleyball courts, to promote inter-community sporting events in the Kerendan area, Indonesia 41 Business review

44 Board of Directors and advisers Charles Jamieson Chairman (N) Charles Jamieson is Salamander s Chairman and a founder of Salamander. He holds an MBA from INSEAD and is a chartered accountant. Prior to joining Salamander, he spent over 25 years with Premier Oil plc where he held a number of posts, including Finance Director and Chief Executive Officer. He is currently also Chairman of Vostok Energy plc. James Menzies Chief Executive Officer James Menzies is a founder of Salamander and its Chief Executive Officer. He holds a BSc (Hons) in Geology and an MSc in Geophysics and Planetary Physics. After a period as a geophysicist at Schlumberger and ERC, he spent eleven years at LASMO plc holding a variety of posts including senior geophysicist in Vietnam, chief geophysicist in Indonesia, head of corporate development and head of strategy and corporate affairs. He spent four years as a senior partner at Lambert Energy Advisory prior to the founding of Salamander. Charles Jamieson Chairman James Menzies Chief Executive Officer Mike Buck Chief Operating Officer Mike Buck Chief Operating Officer Mike Buck is Salamander s Chief Operating Officer. He holds a BSc (Hons) in Geology with Geophysics and an MSc in Petroleum Geology (dist.). He spent twenty years with LASMO plc as a geophysicist in Indonesia and the UK Continental Shelf, chief geophysicist in Colombia, exploration manager in Vietnam and exploration and general manager in Libya. He then spent four years with ENI as managing director in Pakistan and managing director in Iran. Overall he has 33 years of international exploration and production experience. Dr Jonathan Copus Chief Financial Officer Robert Cathery Non-executive Director Struan Robertson Senior Independent Non-executive Director John Crowle Non-executive Director Dr Carol Bell Non-executive Director Michael Pavia Non-executive Director 42 Business review