T R A N S P A R E N C Y R E P O R T

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1 TRANSPARENCY REPORT 2017

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3 Transparency Report 2017 OVERVIEW Oil Search works in an environment with varying cultural norms and ethical standards, including some jurisdictions that are perceived as having high levels of bribery and corruption risk. Wherever we operate, we apply a consistent approach to integrity and transparency issues. We do this by requiring employees and business partners to adopt ethical business practices, contributing to public policy debate, advocating for change and promoting greater transparency. Corruption and social inequality are closely related. Corruption leads to an unequal distribution of power in society which then translates into an unequal distribution of wealth and opportunity. Over two-thirds of the countries and territories in Transparency International s Corruption Perceptions Index 2017 fall below the average on a scale of 0 (highly corrupt) to 100 (very clean). Papua New Guinea (PNG), where most of Oil Search s assets are located, scores 29, indicating the need for improved transparency and accountability to address corruption perceptions. Oil Search has been a participating Company in the Extractive Industry Transparency Initiative (EITI) since 2013, and is an active participant in the PNG Multi-Stakeholder Group (MSG). Unequal distribution of power and wealth has the potential to undermine stability in our operating environment, and so our support of EITI and our commitment to transparency plays an important role in the success of our business strategy. The Oil Search 2017 Transparency Report brings together information on our approach to tax transparency, our socio-economic contributions and payments the Company has made to governments in the countries where we had a presence during It is designed to improve transparency and accountability and address corruption perceptions in these countries. CONTENTS 01 Overview 03 Message from Managing Director Peter Botten 04 Approach to Transparency 05 Tax Strategy 06 Payments to Governments 10 Supporting effective benefits distribution 11 Basis of Preparation 14 Independent Auditor s Report

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5 MESSAGE FROM OIL SEARCH S MANAGING DIRECTOR Message From Oil Search s Managing Director Oil Search has long supported increased revenue transparency in the countries where we operate. By publishing what we pay to governments and landowners, we provide essential information that empowers policy-makers and citizens. This helps citizens to better hold their governments to account for using the wealth generated by extractive industries to fund economic and sustainable development, which underpins future national and community prosperity. Payments transparency plays a particularly important role in Papua New Guinea (PNG), where the Government s distribution of industry-generated benefits to the host communities is an ongoing issue. Outstanding benefits payments are behind societal tensions and this escalated in Often, people s frustration is partly caused by lack of transparency about what is happening to government revenues from our industry, which have increased since the PNG LNG Project commenced production. Community unrest and disruption are a tangible threat to Oil Search s strategic objective of maintaining a stable operating environment and we believe increasing revenue transparency is an effective way to help mitigate this risk. As well as providing stakeholders with the information they need to be proactive, it is an effective means to tackle corruption, which undermines development at a country level. As a signatory to the United Nations Global Compact and a proactive EITI Supporting Company, Oil Search is committed to preventing corruption in all its forms. As in previous years, our EITI participation during 2017 was instrumental in our efforts to improve openness and accountability, and we expect this to continue. As the largest Papua New Guinean company, Oil Search again made a significant contribution to the economy in 2017 that formed a large proportion of the country s total private sector income. Our total socio-economic contribution to PNG for the year was US$384 million, which consists of payments made to the Government, to our communities, to local suppliers, our employees and shareholders. In line with our commitment to openness, this Report will be published on the Oil Search website. We welcome any feedback, which should be addressed to socialresponsibility@oilsearch.com. Peter Botten MANAGING DIRECTOR March,

6 APPROACH TO TRANSPARENCY Oil Search pays millions of dollars every year in royalties, taxes, dividends, levies and other fees and charges to governments. As the largest Papua New Guinean company, these payments represent a meaningful proportion of the country s private sector income and are our most significant socio-economic contribution. We support and advocate for improved transparency of payments made to governments by extractive companies, and demonstrate this by voluntarily disclosing payments. Our commitment to transparency is underpinned by the principles of our Social Responsibility Policy, our commitment to the United Nations Global Compact (UNGC) and our support for the implementation of the EITI in PNG. We have been an EITI Supporting Company since 2013 and are active participants in PNG s EITI Multi-Stakeholder Group. We demonstrate this commitment through transparent corporate governance practices; enabling governments, citizens and other associations to access information; and maintaining accountability. 4

7 Tax Strategy TAX STRATEGY As a socially responsible operator, we pay taxes in full compliance with the intent of the law and do not engage in aggressive tax minimisation strategies. This approach is consistent with the Oil Search Code of Conduct and our Company values. Our tax strategy is supported by our principled tax management approach, which has been reviewed and endorsed by the Financial Audit and Risk Committee of the Board. We maintain a long-term, open, transparent and constructive dialogue with governments and tax authorities in countries where we operate. This includes direct engagement with governments on tax reform, tax administration and our EITI commitments. In December 2016, PNG published a roadmap highlighting the need to include beneficial ownership disclosure in the Government s national priorities. We support this initiative as it makes a positive contribution to transparency and accountability in a manner that is consistent with EITI objectives. SUBSIDIARIES The Oil Search Group includes seven subsidiaries incorporated in the British Virgin Islands, six of which are incorporated to hold exploration interests in the Middle East. Any income from these investments is subject to tax in accordance with the tax laws of the jurisdiction where the exploration licences are located. This structure provides stability and flexibility in relation to potential future divestment or equity raising in each jurisdiction and has minimal effect on our tax obligations in all relevant jurisdictions. The seventh subsidiary is an in-house finance company in the British Virgin Islands with no material profits. The Oil Search Group also maintains a former exploration subsidiary in the Cayman Islands. This subsidiary is a dormant legacy company. These holding companies have provided no tax benefits to the Group during 2017, nor were they established with that purpose. After incurring substantial exploration costs that are non-deductible for tax in any jurisdiction, Oil Search is in the process of withdrawing from exploration activities in the Middle East and currently have no operations in the area. EFFECTIVE TAX RATE The Company seeks to achieve a stable, fair and sustainable effective tax rate. Our effective tax rate in 2017 was 31.5% (slightly above the PNG statutory tax rate of 30% for oil and gas), compared to 51.5% in The 2016 tax rate was impacted by a one-off, non-cash restatement of deferred tax balances following PNG legislative changes in late 2016, which reduced the oil field tax rate from 50% to 30%, effective from 1 January INCOME TAX Our income tax expense for the year ended 31 December 2017 was US$139 million. The balances of deferred tax assets and deferred tax liabilities at 31 December 2017 were US$678 million and US$914 million respectively. 5

8 PAYMENTS TO GOVERNMENTS We have actively encouraged revenue transparency and are long-time supporters of PNG s journey towards EITI compliance. We publish our payments annually in our Social Responsibility Report and on the Company website. In 2017, our government payments amounted to US$ 90 million. The Basis of Preparation section of this document contains information about the types of payments included and the principles we have applied in its preparation. PAPUA NEW GUINEA Extractive industries make a major contribution to the PNG economy, with the petroleum and mining sectors contributing to over one-third of the PNG Government s tax revenue 1. The Government earns revenue through taxes, royalties and levies raised from resource development. The three main types of taxes and fees levied by the PNG Government are mining and petroleum tax (corporate income tax), group taxes and royalties. These sectors also contribute significant amounts in salary and wages tax; duties and levies; dividends to provincial governments and landowners; and to infrastructure projects through the Infrastructure Tax Credit Scheme (ITCS) 2. The Internal Revenue Commission is the main body responsible for collecting taxes. From an oil and gas perspective, this process is governed by the Income Tax Act (1959). The Mineral Resources Authority, Department of Mineral Policy and Geo-hazards Management, the Department of Petroleum and the Conservation and Environment Protection Authority are responsible for overseeing the regulation of extractive industries. PNG has been an EITI member since Oil Search has actively PAYMENTS TO THE PNG GOVERNMENT (US$ 000) Total paid to the Independent State of PNG Royalties 8,360 8,403 10,988 Development levies 2,461 2,371 5,838 Total paid to Kumul Petroleum Holdings Limited Oil Search share dividend 5,976 7,470 26,890 Total paid to PNG Internal Revenue Commission Oil Search Directors tax Petroleum Tax 1,191 11,829 1,389 Salary & Wages Tax 28,108 26,860 34,296 Other Govt. taxes 14,654 9,900 17,559 Other Payments to the PNG Police Other Govt. fees & charges Total paid to the PNG Government 62,728 68,279 97, PNG Chamber of Mines and Petroleum. 2. The ITCS is a voluntary PNG National Government scheme under which an agreed percentage of gross assessable income is made available to fund approved infrastructure projects delivered by Oil Search is the first year that payments made to police have been reported. 6

9 Transparency Report 2017 Payments to Governments encouraged and demonstrated more transparency in support of PNG s journey towards EITI compliance by: Participating in PNG s EITI Multi-Stakeholder Group (MSG). Publicly disclosing payments we make to the PNG Government and providing data for inclusion in country reports. Working with the PNG Government, civil society and our industry peers to advocate the formal adoption and implementation of EITI in PNG. SOCIO-ECONOMIC CONTRIBUTION TO PNG While payments made to the PNG Government is a significant portion of our contribution to the economy, Oil Search makes broader socio- economic contributions by providing employment and development opportunities for employees and contractors, enabling local content by procuring goods and services from local suppliers and managing the impact of our operations on communities through strategic community investment. By playing a vital role in the economic and social development of PNG, our sustainable development programmes help maintain operating stability while improving development outcomes for the people of PNG. More information on our socio-economic contribution to PNG can be found in our 2017 Social Responsibility Report. SOCIO-ECONOMIC CONTRIBUTION IN PNG (US$ 000) Total paid to suppliers and contractors 208, , ,264 Total paid to employees 23,048 21,110 27,724 Total paid to shareholders 6,836 7,604 29,588 Total paid to community 88,828 46,143 90,634 Total paid to government 4 56,752 60,808 70,953 TOTAL SOCIO-ECONOMIC CONTRIBUTION TO PNG 383, , , Government payments in include all payments made to the Government except for dividends, which are included in the shareholder figure. 7

10 Transparency Report 2017 OTHER COUNTRIES Australia Oil Search has no extractive-based operations in Australia; our presence is in the form of an administrative office. The Australian Taxation Office (ATO) is a non-corporate Commonwealth entity that governs and administers the Tax Law and has an added focus on tax governance and transparency. The ATO also administers the Tax Transparency Code (TTC) 5. The Australian Government has been a supporter of the EITI since Yemen The EITI Board suspended Yemen in February 2015 due to political instability. With our operations in a state of force majeure 6, we are working with the Yemeni Government to complete the transaction that will see Oil Search fully exit Yemen. Kurdistan Region of Iraq Iraq has been an EITI compliant country since We relinquished our interest in the Taza licence in 2016 and are working with the Kurdistan Regional Government on a relinquishment agreement. Tunisia We relinquished our interest in the Tajerouine licence in United States (Alaska) Whilst the United States is no longer an EITI participating country, it is our intention to report payments to the US from 2019, after we formally take over operatorship of the North Slope licences. PAYMENTS TO OTHER GOVERNMENTS (US$ 000) Total paid to the Australian Government 26,826 25,343 34,988 Total paid to the Yemeni Government Total paid to the Kurdistan Government ,077 Total paid to the Tunisian Government Total paid to other governments 26,838 25,523 36, The TTC is a set of principles and minimum standards to guide medium and large businesses on public disclosure of tax information. 6. A clause in contracts releasing all parties from liabilities in instances of unavoidable events beyond their control, including wars and natural disasters. 7. Refer to the Basis of Preparation section of this document for more information on what is included in these payments. 8

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12 SUPPORTING EFFECTIVE BENEFITS DISTRIBUTION The PNG Government is obliged to distribute the financial benefits it derives from oil and gas to project area communities and to do so in a timely manner. This helps ensure the ongoing stability of Oil Search s operating environment, so as a priority, we actively assist the Government in meeting this obligation. For PNG LNG, the benefits to landowners, local governments and provincial governments from PNG LNG revenue streams are outlined in the Oil and Gas Act and the PNG LNG Project Umbrella Benefits Sharing Agreement (UBSA). The UBSA is supported by Licence-Based Benefits Sharing Agreements, which define the distribution of benefits at the licence area level. Landowner benefits comprise different types of payments, including royalties, equity, development levies, infrastructure development grants and business development grants. Negotiations between the PNG Government and landowners for the PNG LNG Project resulted in a number of additional commitments from the Government to various beneficiaries, in the form of cash payments and project funds. During 2017, landowners from PNG LNG Project host communities called on the PNG Government to progress delivery of these commitments. Historically, there have been delays in payments, due to issues that include landowner identification, Government budget and resource constraints, and inter-clan and inter-generational disputes over landowner control and/ or legitimacy. Benefits payments have commenced along the gas pipeline route, around the LNG Plant site and for the Oil field project area; however, at the time of publication, certain benefits owed to landowners remain outstanding. Oil Search operations at Hides and North West Moran experienced disruption that resulted from community unrest related to the nonpayment of Government commitments during In January 2018, outside the reporting period, activities at Moran were also disrupted. During these incidents, Oil Search drew on our long history and experience in PNG to support landowners through our network of Village Liaison Officers and Community Affairs team members. We also facilitated communication between the PNG Government and local landowner groups and assisted the PNG Government s attempts to meet its obligations by providing transportation and lodging arrangements for PNG Government officers visiting communities. Our interactions with the PNG Government on these outstanding payments is ongoing at the time of publication. We will continue to work with the local landowner groups and the PNG Government to facilitate communication and assist the Government in their efforts to meet obligations. All royalties, dividends, levies and other cash benefits paid by Oil Search to the PNG Government are disclosed in this Report and in our submission to the annual PNG EITI Report. Our contribution in non-cash benefits such as business development, infrastructure development, employment and training is explained in more detail in our 2017 Social Responsibility Report. 10

13 BASIS OF PREPARATION Basis of Preparation SCOPE This Transparency Report includes Oil Search s payments to governments for the year ending 31 December It does not cover the PNG LNG Project as operational control rests with ExxonMobil PNG Limited. REPORTING CURRENCY All payment figures are reported in US dollars (US$). Payments in PNG Kina (PGK) have been converted into US$ at either the exchange rate on the day of payment or using these average annual conversion rates: 2015 PGK1 = US $ PGK1 = US $ PGK1 = US $0.31 MATERIALITY No materiality threshold has been set for payment streams. We have identified significant payment streams and reported them individually, while smaller payments streams have been aggregated into common generic payment streams for the purposes of reporting. PAYMENTS TO GOVERNMENTS Includes payments by all Oil Search entities to government departments or authorities where we operate. This excludes amounts paid to State-Owned Enterprises, which are reported separately in our 2017 Social Responsibility Report. PAPUA NEW GUINEA PAYMENT STREAM NAME RECIPIENT SCOPE AND METHODOLOGY Petroleum Tax PNG Internal Revenue Commission Net, at rates set out in the applicable legislation and regulations. 8 Net, at rates per share declared by the Oil Search Board Oil Search share dividend Kumul Petroleum Holdings Limited (KPHL) and paid during the period. Oil Search Directors tax PNG Internal Revenue Commission Net, with Salary and Wages Tax calculated and withheld from fees paid to Non-Executive Directors. Royalties 9 Independent State of PNG Gross, calculated at a rate of 2% of the well head value of oil or gas exported. Development levies 9 Independent State of PNG Gross, calculated at 2% of the well head value of the petroleum produced. Salary and Wages Tax Other government taxes Other PNG Internal Revenue Commission PNG Internal Revenue Commission Payments made to the PNG Police Other government fees and charges Gross, calculated on salaries and wages paid to Company employees and personal income taxes for employees in PNG. Gross, including excise duty, Foreign Contractor Withholding Tax, Goods and Services Tax, Interest Withholding Tax and stamp duties. Includes payments made to the Royal PNG Constabulary (RPNGC) in line with the Police Act 1998, the Public Services (Management) Act 2014 and the PNG National Government Public Service General Orders. Payment is in the form of per diem allowances, made with the full consent and approval of RPNGC. Gross, including licence fees, data request fees, environmental water and waste permits, in-house customs agency fees, manufacturer licence, PNG passports and visas, PNG work permit fees, telecommunication licences and drivers licences. 8. Oil Search Limited (OSL) share dividend payments were made to the Independent Public Business Corporation (IPBC) before KPHL was previously known as National Petroleum Company of PNG (NPCP). 9. Royalties and development levies are reported on an accrual basis to align with financial reporting. For actuals, please refer to the relevant PNG EITI report. 11

14 Transparency Report 2017 Socio-economic payments Includes Oil Search s contributions in PNG only. Suppliers and contractors: Includes payments made to PNG Landowner Companies, State Owned Enterprises and all other suppliers currently paid in Kina (converted to US$ for inclusion). Employees: Includes employee training, salary, wages, benefits and other employee expenses. Shareholders: Includes dividends paid to shareholders in PNG, including the PNG Government. Community: Includes Company contributions to the Oil Search Foundation (OSF), community development projects, education sponsorships, partnerships, other donations and amounts spent on behalf of the PNG Government to deliver Tax Credit Scheme projects. Government: Includes royalties, development levies, Directors tax, Petroleum Tax, Salary and Wages Tax, and other government taxes, fees and charges, all paid to the PNG Government. PAYMENTS TO OTHER COUNTRIES AUSTRALIA STREAM AND RECIPIENT NAME Australian Taxation Office SCOPE AND METHODOLOGY Includes: Net income tax Gross Fringe Benefits Tax, Goods and Services Tax and Pay As You Go (PAYG) instalments, and Interest Withholding Tax. Revenue New South Wales Gross Payroll Tax Total paid to other Australian Government entities Includes payments to the Australian Securities and Investments Commission (ASIC) and Australia Post. MIDDLE EAST AND NORTH AFRICA Kurdistan We relinquished our interest in the Taza licence in Payments made in 2017 were to the Kurdistan Ministry of Finance and Economy. Yemen We are working with the Yemeni Government to complete the transaction that will see Oil Search fully exit Yemen. No payments were made to the Yemeni Government in Tunisia We relinquished our interest in the Tajerouine licence in No payments were made to the Tunisian Government in

15 Basis of Preparation Basis of Preparation 13

16 INDEPENDENT AUDITOR S REPORT Deloitte Touche Tohmatsu ABN Grosvenor Place 225 George Street Sydney NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1220 Australia Tel: Fax: Independent Assurance Practitioner s Limited Assurance Report on the 2017 Transparency Report to the management of Papuan Oil Search Limited We have undertaken a limited assurance engagement on the subject matter detailed below (the Subject Matter ) presented in Papuan Oil Search Limited s ( OSL ) 2017 Transparency Report for the year ended 31 December Subject Matter and Reporting Criteria The Subject Matter and Reporting Criteria for our limited assurance engagement for the year ended 31 December 2017 is as follows: Subject Matter Indicators Total paid to Governments (US$ 000) Reporting Criteria Oil Search Transparency Report 2017 Basis of Preparation Total paid to suppliers and contractors in PNG (US$ 000) OSL s Responsibility for the Subject Matter The Directors of OSL are responsible for: Ensuring that the Subject Matter in the 2017 Transparency Report is prepared and presented in accordance with the Reporting Criteria Confirming the measurement or evaluation of the underlying Subject Matter against the applicable Reporting Criteria, including that all relevant matters are reflected in the Subject Matter information Designing, establishing and maintaining internal controls to ensure that the Subject Matter in the 2017 Transparency Report is prepared and presented in accordance with the Reporting Criteria. Assurance Practitioner s Independence and Quality Control We have complied with the independence and other relevant ethical requirements relating to assurance engagements, which are founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. The firm applies Auditing Standard ASQC 1 Quality Control for Firms that Perform Audits and Reviews of Financial Reports and Other Financial Information, Other Assurance Engagements and Related Services Engagements, and accordingly maintains a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited 14

17 Transparency Report 2017 Independent Auditor s Report Assurance Practitioner s Responsibility Our responsibility is to express a limited assurance conclusion on the Subject Matter based on the procedures we have performed and the evidence we have obtained. We conducted our limited assurance engagement in accordance with Australian Standards on Assurance Engagements ASAE 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information ( ASAE 3000 ), issued by the Australian Auditing and Assurance Standards Board in order to express a conclusion whether, based on the procedures performed and the evidence obtained, anything has come to our attention that causes us to believe that the Subject Matter has not been properly prepared and presented, in all material respects, in accordance with the Reporting Criteria. That standard requires that we plan and perform this engagement to obtain limited assurance about whether the Subject Matter is free from material misstatement. A limited assurance engagement in accordance with ASAE 3000 involves identifying areas where a material misstatement of the Subject Matter information is likely to arise, addressing the areas identified and considering the process used to prepare the Subject Matter in the 2017 Transparency Report. A limited assurance engagement is substantially less in scope than a reasonable assurance engagement in relation to both the risk assessment procedures, including an understanding of internal control, and the procedures performed in response to the assessed risks. The procedures we performed were based on our professional judgement and consisted primarily of: Making enquires of management to understand and evaluate the appropriateness of the Basis of Preparation used and related disclosures made by OSL In respect of the agreed Selected Transparency Performance Indicators: Interviewing key data owners responsible for the Selected Transparency Performance Indicators to understand the compilation, calculation and review processes Analysing and inspecting on a sample basis, the key systems, processes, procedures and controls relating to the collation, validation, presentation and approval process of Selected Transparency Performance Indicators included in the 2017 Transparency Report, including assessing evidence for a sample of transactions or events, where applicable Based on our understanding, using analytical procedures to identify and discuss any usual payments included in the 2017 Transparency Report Reconciling the underlying records to the 2017 Transparency Report. The procedures performed in a limited assurance engagement vary in nature and timing from, and are less in extent than for, a reasonable assurance engagement. Consequently, the level of assurance obtained in a limited assurance engagement is substantially lower than the assurance that would have been obtained had we performed a reasonable assurance engagement. Accordingly, we do not express an opinion providing reasonable assurance about whether the Subject Matter has been properly prepared and presented, in all material respects, in accordance with Reporting Criteria. Inherent limitations Non-financial information, including the Subject Matter may be subject to more inherent limitations than financial information, given both its nature and the methods used for determining, calculating and sampling or estimating such information. 15

18 Transparency Report 2017 Limitations of use Our assurance report has been prepared solely for the Directors of OSL in accordance with our engagement letter dated 14 November We disclaim any assumption of responsibility for any reliance on this report, to any person other than the Directors of OSL or for any purpose other than that for which it was prepared. Matters relating to electronic presentation of information Our limited assurance engagement included web-based information that was available via web links as of the date of this statement. We provide no assurance over changes to the content of the 2017 Transparency Report after the date of this assurance statement. Conclusion Based on the procedures performed and the evidence obtained, nothing has come to our attention that causes us to believe that the Subject Matter has not been properly prepared and presented, in all material respects, in accordance with the Reporting Criteria for the year ended 31 December DELOITTE TOUCHE TOHMATSU Samantha Jones Partner Sydney, 18 April

19 VOLUNTARY PRINCIPLES ON SECURITY AND HUMAN RIGHTS ANNUAL REPORT TO THE VPSHR INITIATIVE 2017 CLIMATE CHANGE R E P O R T TRANSPARENCY REPORT 2017 CLIMATE CHANGE REPORT 2017 Transparency Report SOCIAL RESPONSIBILITY REPORTS Social Responsibility Report Picture TBC VPSHR Report Transparency Report Climate Change Report Social Responsibility Microsite Enquiries and feedback on this report and its content is welcome. Please contact the Oil Search social responsibility team on: socialresponsibility@oilsearch.com

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