Northern Petroleum Plc. Annual Report and Accounts 2013

Transcription

1 Northern Petroleum Plc Annual Report and Accounts

2 Northern Petroleum Plc Annual Report and Accounts Northern Petroleum Plc Production led growth Northern Petroleum is an oil and gas exploration and production Group which has undergone significant change during. The Group is now primarily focused on production and development activities which are more within the Group s control and which are expected to deliver demonstrable value for shareholders in a reasonable timeframe. Alongside this lower risk activity, Northern Petroleum continues to mature exploration and appraisal projects which can be farmed out and drilled in order to generate the possibility of very high returns on investment. Northern Petroleum s key assets are in Canada, an onshore production play with significant growth potential, and Italy, an offshore group of permits and applications containing exploration prospects and discovered oil fields. To be a focused exploration and production company, achieving material growth, with a respected reputation Strategic Report pages 6 21 Introduction 01 Highlights 02 Group at a Glance 04 Chairman s Statement Strategic Report 06 Chief Executive Officer s Statement 08 Business Model 09 Strategy 10 Review of Operations 16 Risk Management and Principal Risks 18 Group Financial Review 20 Corporate Social Responsibility Governance 22 Board of Directors 23 Corporate Governance Report 25 The Health, Safety and Environment Committee 26 The Audit Committee 27 Report on Directors Remuneration 33 Directors Report 35 Directors Responsibilities in respect of the Annual Report and the Financial Statements Financial Statements 36 Independent Auditor s Report 37 Consolidated Statement of Profit or Loss 38 Consolidated Statement of Other Comprehensive Income 39 Consolidated Statement of Financial Position 40 Consolidated Cash Flow Statement 41 Consolidated Statement of Changes in Equity 43 Notes to the Accounts 83 Unaudited Statement of Net Commercial Oil & Gas Reserve Quantities Proven and Probable Reserves 84 Company Balance Sheet 85 Notes to the Company Accounts Information 93 Notice of Annual General Meeting 95 Glossary 96 Directors, Offices and Advisers

3 Northern Petroleum Plc Annual Report and Accounts 01 Highlights Health, Safety and Environment» The Group maintained its record of no lost time incidents on its operations throughout the year, including over nine months of operations in the Netherlands» Care and maintenance of the Markwells Wood site in the UK including the cleaning and removal of storage tanks and flowlines» Abandonment of the La Tosca well site, including the reinstatement of the site to its original condition Operational» Entry into Canada with a land position acquired in north west Alberta and execution of a successful proof of concept well programme in early 2014» Sale of the Netherlands operating subsidiary to Vermilion Energy Inc.» Refocusing of the Italian portfolio to the Southern Adriatic where existing permits contain two oil discoveries and one world class exploration prospect» Completion of the four well exploration programme offshore French Guiana following up on the original Zaedyus discovery» Award of a 1.4 million acre exploration licence in South Australia, targeting an unconventional shale oil play Financial» Sale of the Netherlands operating subsidiary for 19.5 million in cash» Cash on the balance sheet at the year end was 26.0 million (31 December 2012: 22.5 million)» Impairment of historic capitalised costs resulting in a charge to the profit or loss account of 17.7 million Board and Governance» Restructure of the Board, including the appointment of a new CEO, an independent Non-executive Chairman and two new independent Non-executive Directors» Reduction in Board members from ten to six including three Executive and three Non-executive Directors Introduction

4 02 Northern Petroleum Plc Annual Report and Accounts Group at a Glance The Group s key assets are focused on production and development in Canada and exploration and appraisal in Italy. CANADA Canada Alberta 101 mmbls of original oil in place across 26,454 acres with an average recovery factor to date of 17% UNITED STATES UNITED KINGDOM FRENCH GUIANA SURINAME BRAZIL French Guiana UK Minority interest in a frontier exploration programme with the potential for significant returns Small portfolio of production, development and exploration licences

5 Northern Petroleum Plc Annual Report and Accounts Focus on offshore Southern Adriatic exploration and appraisal projects ITALY LICENCE STATUS INTEREST OPERATOR 71 Leases 100.0% Northern Canada Onshore North West Alberta Italy Onshore Exploration Longastrino* Permit 100.0% Northern Cascina Alberto Application 100.0% Northern Offshore Exploration Sicily Channel Northern Petroleum s primary assets are in Alberta, Canada and offshore the Southern Adriatic, Italy. The Albertan redevelopment project is the first move of a production led growth strategy, which should provide the business with measurable growth in production, reserves and cash flow. The Southern Adriatic permits contain two oil discoveries, one with significant recoverable resources, and Cygnus, a world class exploration prospect 12kms from the producing Aquila oilfield. While the Group s other assets are not currently a primary focus for the business, there is the potential for significant upside in the offshore French Guiana licence and the new 1.4 million acre licence with unconventional shale oil potential in the Otway Basin, South Australia. C.R146.NP Permit 100.0% Northern d351c.r-.np Application 100.0% Northern Southern Adriatic F.R39.NP Permit 100.0% Northern F.R40.NP Permit 100.0% Northern d149d.r-.np Application 100.0% Northern d60f.r-.np Application 100.0% Northern d61f.r-.np Application 100.0% Northern d65f.r-.np Application 100.0% Northern d66f.r-.np Application 100.0% Northern Sicily Channel offshore Sicily d358c.r-.el Application 50.0% Petroceltic d29g.r-.np Application 50.0% Northern d30g.r-.np Application 100.0% Northern Ionian Sea offshore Sicily d597f.r-.np Application 100.0% Northern * Orca Exploration Group Inc. own a 70% economic interest in the licence. French Guiana Offshore Exploration Guyane EEL Licence 1.4%* Shell * Northern Petroleum owns a majority interest in Northpet Investments Limited, a company which has a 2.5% interest in the Guyane licence. Australia AUSTRALIA Onshore PEL629 Licence 100.0% Northern South Australia United Kingdom Onshore Exploration PEDL126 Licence 50.0% Northern PEDL233 Licence 50.0% IGas Energy 62.5% Northern Offshore Exploration P1916 Australia Large onshore unconventional shale oil play Licence Onshore Production PL211 Horndean Licence 10.0% IGas Energy PEDL070 Avington Licence 5.0% IGas Energy Introduction Italy 03

6 04 Northern Petroleum Plc Annual Report and Accounts Chairman s Statement SUMMARY» Fundamental changes in the composition of the Board» The complementary experience and expertise of the executive team is reflected in the Non-executive Directors» Material changes in the year affecting operations and corporate governance» Changes undertaken in should now benefit the business during 2014 and beyond As the new Chairman of Northern Petroleum Plc I am pleased to report on behalf of the Board the continuing transformation of the Group. Significant board changes have been made during the year, designed to support and challenge the new management team in their drive to create value for shareholders. The Board recognises the challenges that the Group faces and using our collective experience we are working together to realise the value of the opportunity that currently presents itself. We firmly believe that the strategy of production led growth will enable the Group to deliver shareholder value. There were several material events during which affected areas ranging from operations through to corporate governance. In operations, the Group sold the Dutch operating subsidiary to Vermilion Energy Inc. and acquired petroleum and natural gas lease acreage in Canada that offers production, development and exploration opportunities. Additionally the Italian portfolio was refocused to concentrate on the Southern Adriatic and the four well follow up exploration programme in French Guiana was completed. From a corporate governance perspective, Northern Petroleum was completely re shaped, with a restructured and reduced board including a new Non-executive Chairman and Chief Executive Officer. The proceeds from the sale of the Dutch assets have provided sufficient funding to carry out the proof of concept programme and initial development activity in Canada, while supporting the efforts in Italy for the acquisition of 3D seismic. Further investment in Canada will allow the project to become a material part of the business with development and production growth, and provide a foundation for further production areas and additional core value. This approach is taken in line with our strategy of production led growth, which is discussed later in this report. The business model employed by the Group encourages focus on the assets that offer the optimum chance of adding material value, while we continue to review the best way to monetise and divest assets that no longer fit with the corporate strategy. The Board changes in have led to the creation of a management team that can positively pursue this strategy. I would like to thank the former members of the Board who endeavoured to set the groundwork for the current team to build on. With active portfolio management, the new team have now been able to position the Group to grow. The experience and background of the new non-executive members of the Board complement the skills and competence of management to create an effective team in support of the delivery of shareholder value. The industry proven ability of the non-executive team provides the guidance to support the enthusiasm and drive of the management team.

7 Northern Petroleum Plc Annual Report and Accounts 05 Introduction During the past twelve months, our business has undergone a significant and transformational period of change. This report provides the detail of the preparation work undertaken during the year to position Northern Petroleum for its new strategy of production led growth and the progress achieved to date. Jon Murphy Non-executive Chairman Ensign service rig conducting re-entry operations on well 14 22, Alberta, Canada. The experience of the Board ensures that we are aware of our responsibility to look after all our stakeholders, manage risk and undertake our activities in a manner consistent with globally recognised best practice. These responsibilities are something that we consider very important to the health of the business as we outline later in this report. We are confident that 2014 will see the positive impact of changes initiated in. We continue to refine our approach and operations in order to create and deliver value from our existing portfolio while working hard to upgrade our assets by pursuing new opportunities which fit our revised strategy. I am very excited about working with this new team and I have every confidence that we will deliver opportunities that are capable of adding significant value to Northern Petroleum. The particular challenges the Group faced in are largely behind us and 2014 is set to be an exciting and rewarding year. I thank our staff and shareholders for their support during a year of transformation and I look forward to continued support as we focus on starting to develop the production that will lead the Group to sustainable value creation. Jon Murphy Non-executive Chairman 14 April 2014

8 06 Northern Petroleum Plc Annual Report and Accounts Chief Executive Officer s Statement SUMMARY» Change in primary operational focus to north west Alberta, Canada» Rationalisation of the Italian portfolio to focus on the Southern Adriatic» Relationship building undertaken in Italy to mitigate against external events which hindered progress» Clear corporate communication required to set transparent objectives to the market and deliver against these» Update on the Group s resource position critical to understanding where the true value lies» Group well positioned for production led growth A transformational year was a year of significant change for Northern Petroleum. The Group said farewell to the Chairman and Managing Director who had been with the Group for 18 years and 14 years respectively. Further significant board changes were made during the year with the Board reduced from 10 members at the start of the year to the final complement of six members in early The incoming Non executive Directors have brought in a wealth of experience and expertise from industry and financing, that will provide the necessary guidance and governance to support the management team and staff as the business grows. Operationally the Group refocused from the Netherlands to Canada with the acquisition of petroleum and natural gas leases in north west Alberta during the first quarter, followed by the completion of the sale of the Netherlands operating subsidiary in the last quarter. Much work was conducted on the Canadian assets during the year, with both subsurface and operational preparative work performed to allow drilling operations to commence in the first quarter of A consolidation of the Italian portfolio was also conducted during the year with a number of permits and applications relinquished in order to allow a more focused approach to the remaining interests. The key area in Italy is now the permits and applications held in the Southern Adriatic where significant progress has been made throughout the year in understanding the potential of the area. This has been done in conjunction with a concerted effort to develop relationships within Italy to allow progress through the approvals process. We believe that the Group s objectives and the value that could be realised by the development of the discoveries are now fully recognised within the Italian government. In particular in the Southern Adriatic, independent assessment of the Giove discovery has estimated a recoverable contingent resource of 26 million barrels of oil. In addition to the core areas in Canada and Italy, the Group also gained an exploration licence in South Australia where there is shale oil, condensate and gas potential. The work programme for the first year will assess this potential and the Group will determine the forward plan from this. In French Guiana, the operator completed the exploration drilling programme without commercial success. A large desktop study consolidating the seismic and well data gathered to date has now been undertaken by the partnership to establish future exploration targets in the licence. Finally in the UK, the Group is looking at the best way to maximise the value of the licences through a sale or farm out. The need for change The need for change at Northern Petroleum has become clear over a number of years. The producing fields in the Netherlands did not perform as expected leading to reserve write downs and the capital cost of developing the fields was too great for the Group, in an investment environment where raising money for small companies was very challenging. Progress in Italy stalled with the changes in legislation after the Gulf of Mexico spill and the decision by Shell not to drill a farm in well offshore west of Sicily. Further, the need for good corporate governance required a shake up of the Board. All these issues and a number of others contributed to the operational and board changes that were effected during. The spirit of change engendered by this has been captured well by the management and staff and everyone is very motivated to work towards a new era for the business. These events have provided the first steps to position Northern Petroleum for the future.

9 Northern Petroleum Plc Annual Report and Accounts 07 Positioning for growth Much of the work performed in and continued in early 2014 has been to enable growth. When the new management team came together in July, a review with investors concluded that the Group needed to be clear in communication with shareholders and deliver on promises made. Three short term operational goals were set by the team: the sale of the Netherlands subsidiary, the start-up of operations in Canada and making progress with the Italian Southern Adriatic permits. Two of those three objectives have now been met with the sale of the Netherlands subsidiary concluding in October and operations in Canada commencing in February The third objective is still of great importance to the growth of the business and much effort has been made to move the work programme in Italy forward. This has included running through a tender process with seismic acquisition companies to have a vessel available to conduct the 3D seismic survey in the fourth quarter of. Unfortunately the environmental approval process is still pending within the Italian government and it has not yet been possible to conduct the survey; something that has had a direct affect not only on Northern Petroleum, but also on the service suppliers. Many other companies and industries have been impacted by the impasse within the Italian Environment Ministry. However, we continue to work hard with the Italian authorities to allow the survey to progress as planned in 2014, with the recent changes in the Italian administration and government viewed as positive to the industry. Along with the operational goals, and essential to positioning the Group appropriately, the management team also endeavoured to increase the standards of corporate governance within the business. Key to corporate governance is the composition of the Board and particularly the Non-executive Directors. With the three new non-executive directors in place, I believe that the Group has an exceptionally strong board for its size, with the right skill set to complement, challenge and ultimately support the executive members. To further enhance the capacity to grow the business from a strong and credible foundation, gaining an up to date picture of the reserve and resource base of the business was critical. This has been achieved through third party review, and while the change in categorisation and reduction of the Southern Adriatic resource was a material change, it has given the management team a clear picture of where the true value lies. The changes in the primary financial statements this year reflect the significant operational changes that the business has undergone during. Three key events have driven these changes: the sale of the operating subsidiary in the Netherlands, the strategic exercise reviewing the direction of the business which has led to the impairment of certain assets, and the consolidation of the now controlled joint venture which owns the French Guiana interest. While these changes have produced significant non-cash losses in the profit or loss account for, with the focus in the future being towards production, the primary financial statements will be more closely aligned with measuring the performance of the business across each year as opposed to across a multi-year exploration campaign. The management and staff have been working hard to establish the asset status and optimum route forward in both surface and subsurface work programmes. Together with building relationships with all stakeholders, this and the work discussed above, allows the Group to go forward with optimism and focus on the fundamental issues of growth in both value and reputation. Looking forward Northern Petroleum is now moving into a new era where the strategy of production led growth will be a significant component of future success. In a market where the appetite for risk has reduced, the companies that show focused use of capital to create sustainable growth offer more to investors. This new strategy for the Group is already making progress with the start up of operations to grow production in north west Alberta. The positive results of the proof of concept project where all three of the wells encountered economically recoverable light oil, now support plans for the full redevelopment of these lands to be finalised and implemented. This will be a key focus for the Group over the coming year. To enhance the Group s production capability further, opportunities will be evaluated with a view to establishing an additional core area. This will reduce the risk of reliance on one area and allow technical skills proven in north west Alberta to be utilised elsewhere. In addition to production led growth, we recognise that growth through a sensible exploration and appraisal strategy is also required to provide the potential for very large returns on investment. The opportunity that the Southern Adriatic presents is world class and we will continue to pursue this through working together with the Italian authorities to gain approval to shoot the 3D seismic. There will also be a sustained effort to demonstrate the value to other industry players such that we can develop an appropriate joint venture to fully evaluate the Cygnus prospect and Giove discovery through the drill bit. Further to the Italian opportunities, a review of exploration potential is being conducted to identify the key focus areas that the Group may enter in the future. This will identify exploration opportunities at an early stage to ensure that we are able to keep our exploration portfolio in the right shape to generate new opportunities without significant capital commitment. In summary Northern Petroleum has been through a transformational year during. The new strategic approach to focus on production led growth will be very important for the future as the new Board and management team aim to deliver an exploration and production company that provides investors the value that they expect. I look forward to updating existing and new shareholders regularly as our Group develops in this exciting new environment. Keith Bush Chief Executive Officer 14 April 2014 Introduction Governance Strategic Report Financial Statements Information

10 08 Northern Petroleum Plc Annual Report and Accounts Business Model A simple business model which will produce positive results over a reasonable investment horizon. Production led growth Sustainable value creation Exploration and appraisal upside Capital discipline Production led growth Production and reserves provide clear, demonstrable value for shareholders and investment community to evaluate. Growing this core value alongside a more volatile exploration and appraisal campaign will create a sustainable business model with a good rate of return for the shareholder. Exploration and appraisal upside The Group s exploration and appraisal assets each have the ability to produce significant returns to shareholders upon successful monetisation. The outcome and timing of maturing these assets are less in the control of the management, therefore a broad portfolio of such opportunities needs to be created to achieve success. Capital discipline As a smaller Group, financial resources are relatively limited. The forecast rates of return of all projects need to be evaluated on an equal basis, to ensure they contribute to the overall growth of the business at the appropriate level of risk.

11 Northern Petroleum Plc Annual Report and Accounts 09 Strategy The Group has established key performance indicators to clearly define what is important to the successful implementation of the Group s strategy and provide a benchmark against which to measure performance. Strategy Following the management changes in, Northern Petroleum undertook an internal review process to assess the best strategic direction for the Group. This process took into consideration the Group s existing assets, collective skills and experience and compared these to the opportunities that currently exist within the industry. Alongside these key areas of consideration, thought was given to the balance of risk and reward required by the shareholders and new investors to create interest and future investment. In recent years the investment community has moved away from volatile, exploration led strategies, especially at the smaller end of the market, and it is not clear when this may change. Investors are interested in companies with sustainable business models, that have a realistic chance of growth in an appropriate time frame. Taking into account this sentiment and given the experience and skill set of the Group s board and senior management, Northern Petroleum is focusing on production led growth, primarily onshore, as the key component of the new strategy. The key strengths of a production led growth strategy are: creating a sustainable business model that allows the Group to grow; building core, demonstrable value; operations that are more in the control of the Group, with a faster return on investment; a cost environment more appropriate for a small company with limited resources; and assets which can support greater equity and debt investment at the right time. The second component of the strategy is to continue to provide our investors with exposure to exploration and appraisal opportunities, primarily offshore, but only with a controlled outlay of the Group s capital. As a relatively small exploration and production company, Northern Petroleum must provide its investors with the possibility of high returns to match the inherent risks of investing at the smaller end of the market. The timing and results of this type of activity are less within the management s control and typically take longer to mature to a point where a return on investment can be realised. However, in conjunction with the primary strategic focus of production led growth, this exploration and appraisal activity will provide the opportunity for significant upside in addition to the foundation of a more predictable, but very valuable, increase in core value from production. Through the successful implementation of this strategy, Northern Petroleum aims to provide its shareholders with exciting short term activity and value growth, while building a well balanced exploration and production business of material size over the medium to long term. KEY PERFORMANCE INDICATORS Health, Safety and Environment Undertaking exploration and production activities safely, without a negative impact on people, the operating environment or the Group s reputation is fundamental to the successful growth of the business. The Group s management and staff will be assessed annually across a specific set of measurements using an HSE scorecard, benchmarked against industry best practice, as well as full regulatory compliance. The scorecard will include industry standard HSE metrics such as Lost Time Incident Frequency as well as zero spills and zero stakeholder complaints. Any projects conducted will include several key contractors, and the HSE component of their evaluation, selection and management will be essential to the HSE KPIs. Incident prevention will be the most significant factor in meeting HSE goals and consequently a high level of training and competency is being established to ensure that all staff and contractors are fully aware of their duty in respect of HSE, and are competent to perform the tasks required of them ensuring the safety of all involved and with no harm to the environment. Reserves and production A key part of the Group s strategy is to create shareholder value that is measurable. As an exploration and production company, increasing levels of reserves and average production rates are an important component of the growth of the business and can be clearly defined and measured. Finding and development costs In order to provide competitive rates of return to shareholders, the Group must ensure that it incurs appropriate levels of cost in exploration, appraisal and development activities. Sufficient levels of capital must be provided to allow the growth of the business in a cost effective way. Projects must compete internally for the allocation of capital and demonstrate a robust rate of return. The average cost incurred to find and bring assets into profitable production will be measured against industry standards. Staff scorecard To successfully deliver the Group s strategy, the Group must retain and attract appropriate and quality staff. Providing a work environment that is positively challenging and rewarding for ambitious individuals in the industry is fundamental to building a successful business. The Group s management will be measured against a scorecard of criteria including detailed objective setting, set against the defined strategy, and focused on the growth of shareholder value. Introduction Governance Strategic Report Financial Statements Information

12 10 Northern Petroleum Plc Annual Report and Accounts Review of Operations Canada ACTIVITY As part of a review of development opportunities around the world, Canada was considered the most suitable country for four main reasons: the ease of access to data, the established industry and infrastructure, the low cost of proving opportunity concepts, and the running room to create core value and significant cash flow for the Group. Canada provides the Group with the opportunity to quickly replace the production from the Netherlands and build an increasing production base that can sustain growth. The decision to enter into Canada was taken in the first quarter of with the acquisition of 9,320 acres of oil and gas leases in the Virgo area of north west Alberta. Activity post the first quarter was focused on preparing the optimum test programme for the newly acquired lands. A full subsurface work programme was conducted to examine how best to evaluate the Keg River redevelopment opportunity. This included the purchase and interpretation of 3D seismic over the lands, the creation of static and dynamic reservoir models to evaluate the remaining potential in the oil pools and preparation for operations, with a focus on existing well locations that could be most effectively worked on. The original concept of the play was to re-enter existing wells to reinstate production from the Keg River reefs. Subsurface work during the summer of showed that there were further opportunities available with the drilling of new wells into previously produced reefs, rather than just conducting re-entry operations. Drilling of new wells would also reduce the operational risk as the condition of all the downhole equipment is known. The work also showed that well re-entry was still a viable option and therefore a three well proof of concept programme was developed. The programme was designed to test the commercial viability of reinstating production in Keg River carbonate reefs, which were mainly drilled and produced in the 1960s, 70s and 80s. The programme comprised the re-entry of an old production well, 14-22, the drilling of a new well into a previously produced reef, 13-33, and the drilling of a new well into a newly identified reef, D structure map illustrating well penetrations into Keg River pinnacle reefs. Re-entry operations on well 14-22, Virgo area. The proof of concept programme was approved by the Board at the end of the third quarter and well licencing work commenced at that point. This included full consultation with the local population along with the appropriate environmental surveys and reporting. At the time of the applications for the three well licences, there was an unprecedented backlog at the Alberta Energy Regulator, due to a change in procedure combined with a large number of industry applications. This caused the process to take longer than forecast, and meant that the proof of concept work programme moved into early 2014.

13 Northern Petroleum Plc Annual Report and Accounts 11 Rig up of the Ensign service rig on well Isolation packer recovery on well PLANNED ACTIVITY During the production operations in the first quarter of 2014, two new wells were successfully drilled, and 13-33, and one well was successfully re entered, 14-22, where production from all previously producing horizons was shut off apart from the Keg River. The results from well proved the concept of oil re-equilibration over time, which supports the option of re-entering other wells across the Group s acreage and bringing them back into commercial production. The results from well proved that the larger reefs, which have historically only been produced by one well, will support multiple new wells targeting unswept oil zones. While it is not expected that there will be many more new reefs found, well 16-19, which was drilled into a previously undrilled reef, successfully calibrated the Group s 3D seismic interpretation, which will be beneficial for the location of future wells on existing reefs and is a standalone economically viable discovery. The Group acquired its initial land position of 9,320 acres through three Alberta Crown land lease sales in. The Group has participated in four further land sales this year, targeting specific land sections to help augment the Group s position in this play. Total land acquisition costs have been Cdn$2.8 million including fees and initial rental payments. The average price paid by the Group in in acquiring its initial land position was Cdn$186 per hectare. The highest average price paid in a land sale in the area in 2014 has been Cdn$475 per hectare. The Group s aggregate land position now comprises 26,454 acres with an Alberta Energy Regulator calculated 101 mmbbls STOOIP, from which 17.5 mmbbls of oil has been produced, giving an average recovery factor of 17 per cent. Internal review has identified more than 100 reefs or partial reefs which are now being graded for future drilling and production. The ongoing work programme in 2014 will be to evaluate the results of the production testing and focus on the redevelopment plan for the Virgo area. The primary focus is to increase the recovery factor by an initial five per cent through primary recovery techniques. In addition, work in 2014 will consider the potential of secondary recovery from water flood, which has been done on a limited basis and with some success in the wider area. Redevelopment programme planning is expected to continue for the remainder of the year. A further drilling programme is being planned for later this year and will target reefs that enhance the understanding of the area and provide good production opportunities. Introduction Governance Strategic Report Financial Statements Information

14 12 Northern Petroleum Plc Annual Report and Accounts Review of Operations continued Italy ACTIVITY The Southern Adriatic permits and applications have been the focus of attention as they have the potential to be transformational for the Group. The Group s management has expended significant effort, including regular dialogue with the Italian Ministries and British Embassy in Rome to gain the required environmental approvals for the planned 3D seismic operations and for the award of the adjacent application areas. However, the key requirement of ministerial signature for the environmental impact assessments has not been achieved, therefore it has not yet been possible to conduct the 3D seismic work programme nor have the applications converted to permits. The Southern Adriatic acreage takes precedence within the Italian acreage portfolio as it lies within a proven hydrocarbon province containing the producing Aquila oil field. The Cygnus prospect is up dip of it and evidence from the development wells for the field indicate that Cygnus could have a shared oil water contact with Aquila. During ERC Equipoise Limited ( ERCE ) assessed the prospective resources for the Cygnus prospect, recognising in the high case estimate a common oil water contact with the Aquila field giving a prospective resource of 979 million barrels with 790 million barrels of recoverable oil within the 100 per cent owned permit F.R39.NP. The ERCE prospective resource estimate for the mean case, using a shallower contact giving partial hydrocarbon fill and a separation from the Aquila field from the mapped prospect, is 446 million barrels, of which 401 million barrels are within the permit. The Cygnus prospect is a stratigraphic trap with its reservoir comprising resedimented carbonates derived from the adjacent Apulian platform. The distal and basin equivalent of these sequences are productive in the Aquila field. ERCE estimate a chance of success of 12 per cent for the Cygnus prospect. Significant technical work has been conducted on the discoveries within the Southern Adriatic permits in. Studies on the Giove discovery have indicated the potential for larger oil in place than previously recognised and a review of the well results has indicated a better recovery factor may be applied, further increasing the potential. Therefore in order to obtain a consistent picture through the Southern Adriatic permits, ERCE was also contracted to review the Giove and Cygnus prospect showing re-sedimented carbonate mound isopach (thickness m). Giove discovery top carbonate structure map (metres subsea). Rovesti discoveries and the new work performed by the Group. The review performed by ERCE gave positive results for Giove, with an increase in the expected recoverable resource to 26 million barrels. However the recoverable resource from Rovesti was reduced due to a re interpretation of the available log data. ERCE has reclassified both Giove and Rovesti as contingent resource volumes. Previously both assets have been categorised as reserves. The reclassification is reflected on the balance sheet by transferring the historical acquisition and development costs from tangible to intangible. This now allows the Group to focus on moving the Giove discovery through the appraisal phase to establish whether there is a viable development for the field, and realise the potential value that this will bring. As part of the effort to focus within a particular area in Italy, a number of the pending applications have been withdrawn. These include two in the Southern Adriatic where the potential for oil was not considered as good as the other application and permit areas.

15 Northern Petroleum Plc Annual Report and Accounts 13 PLANNED ACTIVITY Italy has experienced a period of political transition, culminating in a change in the Prime Minister and other government ministers, including the Environment Minister and the Minister for Economic Development. The Group view these changes as positive, and along with some of the initiatives proposed and fully supported by Northern Petroleum, believes that the new National Energy Strategy will have a positive impact on exploration and production in Italy. We look forward to the implementation of the plans that will enhance the ability of the Group to grow its presence in the country by reducing the administrative hurdles. Southern Adriatic The permits containing the Cygnus prospect and the Giove discovery are the prime targets of the planned 3D seismic survey. The survey will be acquired in 2014 assuming that the appropriate environmental approval is obtained, and a survey vessel can be contracted. Once acquired the seismic will be processed and interpreted as soon as possible in order to establish drilling locations, both to test the Cygnus prospect and also appraise the Giove discovery. In conjunction with this work, the farm out process will continue in order to bring in additional experience and funding into the permits. Ionian Sea Three gas discoveries (Fedra, Florida and Fiorenza) and exploration prospects are contained within the application d597f.r-.np. These are in deep water adjacent to the producing Luna, Hera Lacinia and Linda gas fields operated by Eni. 3D seismic coverage acquired by Eni will be evaluated once this application has been awarded. Southern Adriatic permits and applications. Sicily Channel Permit C.R146.NP contains the Vesta oil prospect, interpreted as having the same age reservoir sequence as the on trend Vega oil field. The permit is currently suspended and is also subject to farm in interest. Closer to the Sicily coast, applications are awaiting award and contain leads similar to the on trend Palma oil discovery. Following the strategic change in the focus of the business historic exploration costs in the Sicily Channel in licences that have been relinquished have been written off. Po Valley Cascina Alberto is the only application onshore and contains a prospect similar to structures such as the Villafortuna-Trecate oil field. Once the application is awarded, the Group will continue the technical work to establish a possible drill location to evaluate the prospect. The Longastrino permit contains additional leads not currently considered for further evaluation. With no firm exploration efforts in this permit, it has been decided to write off historic exploration costs. Introduction Governance Strategic Report Financial Statements Information

16 14 Northern Petroleum Plc Annual Report and Accounts Review of Operations continued French Guiana ACTIVITY The Zaedyus oil discovery in 2011 was made with the first deepwater well in this basin. That gave encouragement to execute an exploration programme comprising an extensive 3D seismic acquisition covering the deepwater margin and a four well drilling campaign to follow up on the initial success. The 3D seismic has demonstrated that numerous deepwater fan systems exist with the potential for stratigraphic traps similar to Zaedyus. The drilling programme demonstrated that early success can be difficult to replicate. However a great deal of information has been gained that will substantially de-risk future exploration and make the acreage potentially attractive to a purchaser who can benefit from the knowledge gained from the previous five well exploration programme. The discovery well Zaedyus-1 (GM-ES-1) encountered 72 meters of net oil pay in two turbidite sand sequences within a large fan system (Cingulata) that contains multiple turbidite lobes. The follow on four well exploration programme targeted three locations within the Cingulata fan and one on a separate fan system, Cebus, located on the first of two 3D seismic surveys acquired in These wells all encountered reservoir sequences, some with oil shows, but resulted in no commercial discovery. The shareholding held by the company in Northpet Investments Limited ( Northpet ) has increased resulting from an arrangement entered into in 2008 whereby each of the two shareholders, Northern Petroleum and Wessex Exploration PLC ( Wessex ) had an option to elect not to fund its share of joint venture cash calls in return for the other shareholder receiving an increased share holding in Northpet, the jointly owned investment vehicle. Wessex elected to take advantage of this option in October, which resulted in the Group now owning a net beneficial interest of 1.4 per cent in the licence. This arrangement has been superceded and the equity held by shareholders in Northpet is now fixed. Future cash calls will have to be honoured or the defaulting party will lose their equity in Northpet. This change has resulted in the consolidation of Northpet onto the balance sheet as the Group now owns 55.9 per cent of the vehicle. PLANNED ACTIVITY Shell and its joint venture partners have integrated the data from the five wells with the newly processed 3D seismic. This data has been interpreted and mapped resulting in the identification of a portfolio of prospects and leads in the Central Slope area of the Guyane Maritime permit. Northern Petroleum will decide on how best to proceed with its involvement in the acreage once the seismic interpretation is completed by the operator. The Netherlands ACTIVITY The Netherlands provided the Group with production revenue from six gas fields, discoveries to be developed and exploration potential. To fully realise the potential of the acreage, funds were required beyond those available to the Group. Production revenue was also expected to reduce as Nederlandse Aardoile Maatscappij B.V. took a revenue share, post development payback, on four of the fields, unless increased investment was applied to them. Therefore the decision was made to divest the portfolio while the opportunity existed for the purchaser to build on what Northern Petroleum had achieved and therefore pay a price that reflected the future potential that could be realised through a greater level of investment. Northern Petroleum Netherland BV was sold to Vermilion Oil & Gas Netherlands BV for 19.5 million while retaining a net profits interest in the undeveloped Papekop oil and gas field and any development of the Posidonia unconventional shale oil play. The economic date for the transaction was 1 January ; however the sale completed on 10 October. The net effect of the financial performance of the Netherlands subsidiary for the period up to 10 October and the disposal is shown with the profit or loss account under discontinued operations. On site flow testing in the Netherlands.

17 Northern Petroleum Plc Annual Report and Accounts 15 The UK ACTIVITY The UK portfolio provided oil production from the Horndean and Avington oil fields during. The primary reservoir play for the Weald Basin has historically been the Great Oolite carbonate, a low permeability reservoir that can contain large volumes of oil in place. Recovery factors are low as are production rates, which generally have a slow decline. The majority of the fields in the area produce from this reservoir, including Horndean and Avington. Net production to the Group from these fields during was approximately 20 barrels of oil per day. In conjunction with the operator of licence PEDL233 containing the Baxters Copse discovery, and following an internal exercise analysing the Markwells Wood discovery, the Group has decided to reclassify the 4.3 million barrels of 2P reserves assigned to these assets as 2C contingent resource. While both assets have the potential to be commercial discoveries, further appraisal needs to be undertaken to confirm a viable development plan which would lead to commercial production. Australia ACTIVITY Having recognised that unconventional resources are best developed where sufficient land access is available, the Group resolved to consider countries that would provide the opportunity to evaluate a large area. Australia was also recognised as providing extremely supportive state governments and free access to seismic and well data to evaluate the onshore acreage. Having learnt from evaluating shale sequences in the Netherlands and the UK, the Group applied for what was considered to be an unexplored unconventional resource play, concentrating on where this would have light oil and liquid rich gas potential. The Otway Basin licence covering 1.4 million acres in South Australia was awarded in September and has a five year term. The Group has also relinquished the onshore licences PEDL256 and PEDL155, which contain the Havant prospect, after extensive consultation with the licence joint venture partners. The wider UK asset portfolio, including the minority interests in the producing Horndean and Avington oil fields and the offshore Isle of Wight exploration licence is not a primary focus for the Group. These UK assets are being considered for sale and the Group has invited expressions of interest, however no acceptable offer has progressed to a final divestment. With limited capital commitment forecast, limited management time required on the assets and positive cashflow from the production, management is prepared to wait to receive a fair offer for the assets. Historical exploration and appraisal costs relating to the UK which have been previously capitalised in the balance sheet have now been written off in the profit or loss account. PLANNED ACTIVITY The first year work programme is to undertake an integrated interpretation of all the previous seismic and drilling information concentrating on two formations, the Sawpit and Casterton shale sequences, known as good quality source rocks and the associated sandstone reservoirs. New work includes seismic reprocessing, geochemistry and regional studies to incorporate any results from new wells drilled on the adjoining acreage. The Group is also seeking to bring into the licence an experienced operator with current unconventional operations, to assist with the planned work programme that envisages a first well in the third year of the licence. Recent drilling activity in the adjacent acreage operated by Beach Energy Limited ( Beach Energy ) has further enhanced the potential of the licence. The Jolly-1 well drilled to 4,026 metres recovered core in the Sawpit and Casterton Formations and had elevated mud gas readings over 340 metres of the Lower Sawpit Shale including extensive sandstone intervals. Beach Energy is drilling the Bungaloo-1 well to further evaluate the primary Casterton Formation with the Lower Sawpit Shale now a secondary target. Beach Energy considers that the well result indicates that a substantial deep basin gas play may be present in the Penola Trough, part of the Otway Basin. In the Group s acreage within the Otway Basin three troughs are present, the Robe, the St Clair, and Rivoli Tantanoola, all of which may have potential for unconventional resource plays. Introduction Governance Strategic Report Financial Statements Information

18 16 Northern Petroleum Plc Annual Report and Accounts Risk Management and Principal Risks Northern Petroleum works in an industry that contains inherent areas of risk that need to be managed appropriately. The Group uses risk management to identify the specific risks that the Group faces and ways to mitigate those risks. Risk reduction measures are then prioritised through the risk management strategy. Identifying and managing the key risks to the Group are the responsibility of the senior management and Executive Board members. The Board is then charged with monitoring and reviewing the management of these risks. DESCRIPTION MITIGATION Health, Safety, Environment Major incident KPI AFFECTED Health, Safety and Environment An incident or accident resulting in a fatality or fatalities, environmental destruction and/or pollution, significant property damage. HSE policy, training, procedures and competency are required throughout the organisation including the training of contractors if necessary. Operational procedures take account of any HSE requirements there may be. Appropriate insurances are in place. HSE audits carried out as per the annual HSE management plan. Financial Company financing KPI AFFECTED Finding and development costs Fiscal regime change KPI AFFECTED Finding and development costs Commodity price change KPI AFFECTED Finding and development costs Significant capital resource is required for the exploration and production industry. Depending upon the rate of success, the Group may need to look to alternative sources of obtaining funds other than self generating activities. Capital must be deployed efficiently in the pursuit of production and reserves targets. Any change to the hydrocarbon fiscal regime in the countries where the Group operates may have a negative effect on the value of the assets in that country. Hydrocarbon market prices are volatile and affect the economic value of the Group s production. A prolonged period of low prices may impact the Group s ability to progress its planned investment programme. Through production led growth, the Group aims to create a sustainable revenue stream. Cost and overhead management is conducted through the budgeting and tracking process. Engagement with equity and debt communities is appropriately managed along with active management of the asset portfolio. Merger and acquisition activity is also considered as required. Each project is judged on its return on investment for the Group. Operating in countries with low fiscal change risk provides some certainty around the fiscal environment. Project economics are evaluated to ensure they are robust so that the project can withstand change at reasonable levels. The robustness of projects is determined in the project economic evaluation to ensure suitable returns to the Group. Price hedging arrangements are considered during this process and would be impl emented if deemed appropriate for financial planning and to mitigate such risks in the short to medium term.

19 Northern Petroleum Plc Annual Report and Accounts 17 Technical Subsurface KPI AFFECTED Reserves and production Finding and development costs Reserves and resources KPI AFFECTED Reserves and production Finding and development costs DESCRIPTION Operations and production Production target KPI AFFECTED Reserves and production High operating cost KPI AFFECTED Finding and development costs Human resources Staff retention/recruitment KPI AFFECTED Staff scorecard There is a significant element of technical risk in exploring for and developing oil and gas fields. The chance of a commercially successful exploration discovery is generally low and the capital costs are high. Reserves or resources that are not evaluated and categorised appropriately can lead to an over evaluation of the asset. Disclosure of inaccurate numbers to stake holders can be misleading, lead to write downs and does not comply with good business practice. The Group is unable to meet its stated production targets for a variety of reasons including difficulties in or around the wells or facilities, defects in the materials or a well or field not producing as expected. Production operations incur excessive cost reducing the economic lifetime and value of the assets involved. Key personnel and positions are required in order to implement the Group strategy and run the business. The industry is currently human resource constrained and the appropriate personnel are difficult to recruit and retain. MITIGATION Robust technical work processes are used along with technical peer reviews, to ensure each opportunity has been thoroughly evaluated before investment decisions are made. Lessons learned are developed, maintained and implemented and the Group actively communicates the risk involved in projects. Robust technical work processes are used along with technical peer reviews. Reserves reviews are carried out as part of the annual reserves process. Reserve audits and verifications are conducted as necessary and for communication to stakeholders. By ensuring an appropriate development plan is in place, the Group is able to optimise production from individual wells and facilities. Production forecasting is carried out by taking a portfolio view of the well stock and capacity, allowing for planned operational downtime and an element of unplanned downtime. Operations processes are developed to maintain production. Operations team developed as fit for purpose. Appropriate processes are put in place to track operational expenditure, analyse where improvements can be made and update the processes to reflect the improvement. Strict adherence to the budgetary controls in place is required. The Group identifies the key positions and personnel and ensures that the incentive package offered reflects the key needs of the business. The working culture and environment is established such that personnel feel empowered to deliver their required work and that they can develop with the Group. Introduction Governance Strategic Report Financial Statements Information Political risk Project schedule impact KPI AFFECTED Reserves and production Northern Petroleum operates in different countries around the world and changes in political regime could affect the Group s ability to develop their assets. Regulatory and legislative alterations and delays in approvals impact negatively upon the Group s ability to commence with planned activities. When the Group evaluates new business opportunities, political risk is evaluated and priority is given to areas of lower risk. Time is taken to develop the appropriate relationships within the authorities and other industry support groups to ensure that the Group is considered as a responsible and considerate operator. Where delay is encountered, stakeholders are informed as to the impact on any project.

20 18 Northern Petroleum Plc Annual Report and Accounts Group Financial Review SUMMARY» Financial performance of the Netherlands up to the point of sale and net effect of the sale presented in discontinued operations» Impairment charge of 17.7 million to the profit or loss account following internal strategic review» Northpet now consolidated as a subsidiary in the balance sheet following change in ownership interest» The reclassification of reserves to contingent resources in the Southern Adriatic has led to historic costs relating to the permits being moved to intangible assets Overview The material changes in the primary financial statements year on year reflect the significant operational changes that the business has undergone during. Three key events have driven these changes; the sale of the operating subsidiary in the Netherlands, a strategic exercise reviewing the direction of the business which has led to the impairment of certain assets, and the consolidation as a subsidiary of the now controlled joint venture which owns the French Guiana interest. Consolidated Statement of Profit or Loss Sale of the Netherlands On 10 October, Northern Petroleum completed the sale of its Dutch operating subsidiary, which contributed 95 per cent of the Group s revenue in The financial performance of the Netherlands for the period up to 10 October and the net financial effect of the sale have been presented within discontinued operations in the profit or loss account. Revenue and other items have been restated accordingly in respect of the prior year which has led to a significant fall in revenue and production costs when compared with The remaining net profits interests in any future development of the Papekop field or the Posidonia shale, which were part of the consideration, do have a value, however the value of such interests is too uncertain at this stage to capitalise as an asset on the balance sheet. While the completion date of the Dutch disposal was 10 October, the economic date for the transaction upon which the purchase consideration was calculated was 1 January. The trading of the subsidiary throughout to the point of sale contributed to a final loss on sale of 4.3 million when compared with the consolidated book value of the assets within the Group. The subsidiary company within the Group which owned the Dutch business has not incurred a taxable gain on the disposal through the use of the Substantial Shareholdings Exemption, which will also require the reinvestment of the sale proceeds within three years of the transaction. A full analysis of the financial impact of the Dutch operations, including its sale, can be found within note 3 to the accounts. Impairment Following the changes of the Board during and the disposal of the Netherlands subsidiary, an internal exercise was undertaken to determine the best strategic direction for the business and evaluate the Group s assets. The results of the exercise and the relinquishment of certain licences meant that the focus of the business was no longer prioritised on certain areas and assets where the Group had previously incurred and capitalised exploration and drilling costs. These changes have led to the impairment of assets in certain areas, including in the Po Valley and Sicily in Italy and in the Wessex and Weald Basins in the UK, where future material investment to progress exploration and appraisal opportunities is not currently deemed likely. The total charge to the profit or loss account in for impairment was 17.7 million and further detail concerning these impairments can be found in notes 16 and 17 to the accounts. A further result of the strategic exercise is the decision to adjust the methodology behind testing the impairment of the Group s intangible oil and gas assets. Historically, exploration costs have been capitalised and grouped in country pools and judged against the cash generating potential of the assets in that country taken as a whole. In future, the capital pools will be reduced to a regional basis, mirroring the geological basins of a particular play. This is not a change in the Group s accounting policy, but a more focused approach in determining the likely future commercial viability of any project.

21 Northern Petroleum Plc Annual Report and Accounts 19 The licence offshore French Guiana is regarded as one regional play and given the ongoing nature of the exploration campaign here and further drilling being considered by the operator and partners, the exploration costs to date remain capitalised on the balance sheet in line with the Group s full cost accounting policy. However if no further drilling activity is planned by the operator, this cost will be written off through the profit or loss account when such an outcome is confirmed. Costs Following the Board changes and the sale of the Group s key revenue generating subsidiary, there is an ongoing focus on cost. In prior years, a significant amount of staff cost and associated overhead expenditure was capitalised as part of ongoing exploration and development projects or was directed to supporting production in the Netherlands. While there has been a significant reduction in these costs on an actual basis, with less operational activity, the balance and nature of these costs have resulted in more cost being expensed through the profit or loss account in. Further one-off costs were incurred in the year due to the Board changes and associated termination payments. Irrespective of whether staff costs and associated overheads can be capitalised, there will continue to be a focus on ensuring the Group s cost base is in line with its operational activity. Dividends No dividend is proposed to be paid for the year ended 31 December (2012: nil). Consolidated Statement of Financial Position Consolidation of French Guiana During, Wessex, Northern Petroleum s joint venture partner in Northpet, the French Guiana licence vehicle, exercised its right under the joint venture agreement to not meet its cash calls and dilute its equity interest in Northpet. As a result, Northern Petroleum now owns 55.9 per cent of Northpet and Wessex owns 44.1 per cent. With this ownership change Northpet is now deemed to be controlled by Northern Petroleum and is no longer equity accounted for as a joint venture, but a fully consolidated subsidiary. The mechanism through which this was achieved also crystallised a foreign exchange loss previously recognised in reserves. Treatment of the Southern Adriatic In, an independent reservoir evaluation specialist was mandated to review the Group s discoveries in the Southern Adriatic offshore Italy. The results of that exercise established that the reserves previously held by the Group for the discoveries should be reclassified as contingent resources. The capitalised costs relating to the acquisition of and ongoing work programme on these assets were shown under property, plant and equipment. Following this reclassification, these capitalised costs have been moved to intangible assets to reflect the change in certainty around the future development of the discoveries. Cash and debt Cash at the year end was 26.0 million (2012: 22.5 million). Throughout the year the biggest individual investment for the Group was the ongoing operations in French Guiana which involved the drilling of three wells incurring a total investment of 8.4 million. The Group has sufficient funds to not only meet its financial commitments as they currently stand but also undertake the planned operational activity set out in the Review of Operations. However the optimum pace of development and investment to maximise returns in the Group s assets may require further external capital from equity or debt at some point in the future. During the Group acquired a relatively small amount of debt totalling 1.5 million at the year end. This relates to an Italian Government scheme, which has since been withdrawn, whereby seismic costs were partially refunded via a grant and long term government loans. The loans are repaid over five years with an interest cost of 0.5 per cent per annum. The below market interest rate element of this loan has been fair valued and recognised as a grant towards the cost of the Italian assets. At the year end, net current assets were 24.7 million (2012: 23.7 million) and net assets were 74.5 million (2012: 91.7 million). Accounting policies These financial statements have been prepared by the Board using accounting policies consistent with There have been no new or revised International Financial Reporting Standards adopted during the year which have had a material impact on the numbers reported. Details of the accounting policies used are included within the accounting policy notes starting on page 43 (Group) and page 85 (Company). Nick Morgan Finance Director 14 April 2014 Introduction Governance Strategic Report Financial Statements Information

22 20 Northern Petroleum Plc Annual Report and Accounts Corporate Social Responsibility APPROACH Northern Petroleum considers the core values of the Group to be extremely important and as such they reflect the behaviours expected in all aspects of business. The Corporate Social Responsibility ( CSR ) practices are intended to reflect the Group values and provide clear sight of how the Group manages key social issues. Systems to do this are being continuously developed to ensure the CSR strategy is compliant with business aims and objectives whilst providing all stakeholders with a consistent and transparent overview of our CSR performance. Northern Petroleum s key values are:» maintaining the highest regard for health and safety in all our operations» respect for the environment in which we work Health and Safety The ability to demonstrate a strong health and safety track record is an important factor in gaining stakeholder confidence. It is also a pre-requisite in not only our industry but throughout our organisation and forms part of the KPIs by which we measure and monitor our performance. Empowering people to intervene and stop a task or colleague if they believe the work to be unsafe requires Northern Petroleum employees to take responsibility for their personal safety and the safety of those around them. Managers and supervisors lead by example by demonstrating their personal commitment to the Group s health and safety policies. The training of staff and contractors mitigate the risk of incidents in our operations. A company-wide HSE management system is implemented across all of our operational sites through our regional administrative office locations. Northern Petroleum has a corporate emergency response plan and undertakes training exercises that take into account the specific Group operations in its locations. This system prepares personnel for dealing with a variety of emergency response incidents with more than half of employees in Head Office and its subsidiaries trained to support the incident response team.» integrity and accountability to all the stakeholders in the business. Business Ethics Northern Petroleum conducts its day to day business with transparency, fairness and integrity and requires that all employees, contractors and suppliers apply and maintain these standards in their performance. Northern Petroleum successfully mitigates disruptive impacts by pledging to develop responsible business policies in line with changing regulations, develop and maintain systems which identify potential risks and instil a sense of accountability throughout the organisation. This Strategic Report comprises the Chief Executive Officer s Statement, the Business Model and Strategy, the Review of Operations, the review of Risk Management and Principal Risks, the Group Financial Review and the review of Corporate Social Responsibility, collectively on pages 6 to 21, and is approved on behalf of the Board by The Group conducts a robust assessment of anti-bribery and corruption in the areas in which we operate. Keith Bush Chief Executive Officer 14 April 2014

23 Northern Petroleum Plc Annual Report and Accounts 21 Personnel Human resource within the oil and gas industry is fundamental to the success of any exploration and production business. Recruiting and retaining the right people is core to this, and as part of CSR, the Group ensures that personnel are treated properly and given the professional development they require. Training programmes are adapted with the individual to allow focused development in the areas that will provide the most benefit both to the Group and individual. This ensures that the Group creates an internal talent pool capable of realising the Group s strategy. The Group also provides the appropriate HR support such that should employees have any issues or concerns, they have easy access to the support they need to resolve them. Recruiting, where possible, from local communities and the countries in which we operate assists Northern Petroleum in developing committed and motivated employees. This also provides a broad local knowledge base with a diversity that reflects the local communities we operate in and allows us to maintain strong stakeholder relationships. Environment Northern Petroleum is committed to setting a positive and responsible example to the protection of the environment in the areas in which we operate to minimise any adverse effects of our business. A robust environmental performance is imperative to maintaining our solid reputation as a responsible operator and our ability to generate shareholder value. We are conscious of the impact to the environment that oil and gas activity can have and to mitigate the risk we conduct comprehensive Environmental Impact Assessments ( EIA ) before operational activity commences. These ensure compliance with industry standards and applicable local and federal guidelines and regulations. By identifying and planning possible issues before operations commence we are able to protect the environment during the works and restore the area as appropriate upon completion of our activities, thus ensuring minimal impact on the local community. Community It is beneficial to consult with our stakeholders and become a trusted, responsible neighbour. By partnering with local and national governments and local communities we encourage an open and transparent dialogue with public consultations to aid and improve our operations, minimise disruption to local residents and businesses whilst managing expectations carefully. By seeking to gain access to lands through approaches that are sensitive to local landowners concerns and principles, we maintain healthy relationships within the communities in which we operate whilst generating socio-economic benefits that focus on local needs. Northern Petroleum develops policies in line with governmental legislation to mitigate disruptive impacts upon local communities and ensure that all employees and contractors are aware of their responsibilities, instilling individual accountability. Equal Opportunity and Diversity Northern Petroleum value all of its employees whilst promoting and supporting the rights and opportunities of each individual. We are committed to diversity and opportunities for advancement within the Group with these factors not being influenced by any other factor than ability and performance. Every effort is made to provide a working environment where each individual is treated with respect, free from bullying, harassment, discrimination or intimidation on the basis of nationality, race, sex, religion, beliefs, sexual orientation or disability. Northern Petroleum is proud that its employees comprise 29 per cent women in the Group ranging in departments from administrative to financial to technical; we intend to remain focused upon advancing women within the oil and gas industry through mentorship, leadership training and personal development plans. Introduction Governance Strategic Report Financial Statements Information All personnel are responsible for improving the performance of the environmental policy objective of reducing our impact upon the environment.

24 22 Northern Petroleum Plc Annual Report and Accounts Board of Directors Jon Murphy Non-executive Chairman Jon was appointed as Chairman in September and has over 30 years of experience in the mid-cap exploration and production industry. Jon holds a BSc. in Geology from the University of London. His career includes several years with Lasmo plc where he held various positions in geology, planning and new business, and in 1999 he joined Venture Production plc as Chief Operating Officer where he remained until Venture s sale in He is currently a Non-executive Director of Trinity Exploration and Production plc. 4 Keith Bush Chief Executive Officer Keith joined Northern Petroleum in May 2012 as Chief Operating Officer, was appointed to the Board in November the same year, and was made Chief Executive Officer in July. Keith gained a degree in Physics and has over 20 years industry experience. Commencing his career with Western Atlas Logging Services, Keith progressed to hold managerial positions in Amerada Hess, Burlington Resources and was most recently employed as General Manager Operations for E.ON Ruhrgas in Norway. Keith has extensive experience in the North Sea, North Africa and Norway. 2 Stewart Gibson Non-executive Director Stewart was appointed as a Non-executive Director in December. Most recently he was with Sterling Resources Ltd from the early days of its growth until retiring from the position of CEO in May He has over 40 years experience in the oil industry encompassing all aspects of the upstream oil and gas business, both onshore and offshore with extensive international involvement. Stewart has a BSc. in Geology from the University of Aberdeen and an MSc. in Petroleum Reservoir Engineering from Imperial College. 5 Nick Morgan Finance Director Nick was appointed Finance Director in November Before joining Northern Petroleum, Nick spent over 13 years in investment banking where he focused on advising the international E&P industry. He specialised in advising upon mergers and acquisitions and providing equity capital markets advice and services to a broad range of global oil and gas companies, both public and private. For the last six years he was employed by Tristone Capital, the global energy investment bank, and latterly GMP Securities. Nick qualified as a chartered accountant at Price Waterhouse and is a member of the Institute of Chartered Accountants in England and Wales. 3 Iain Lanaghan Non-executive Director Iain Lanaghan was appointed as a Non executive Director in February Iain is the Non-executive Chairman of MET and was previously at Faroe Petroleum plc, where he spent four years as Group Finance Director. He was also Group Finance Director of FTSE 250 FirstGroup plc and was a founder of the German bus and rail group Abellio GmBH. He planned the floatation of 3i-backed Atlantic Power Group and then led its merger with the Norwegian group Petroleum Geo-Services. He has advised a variety of financial investors in the transport and energy sectors. Iain is a chartered accountant, having qualified with KPMG in London. 6 Graham Heard Exploration and Technical Director Graham was appointed as Exploration and Technical Director in May 2007, having been the Exploration Manager of Northern Petroleum for the previous four and a half years. He is a former Chairman (1991) of the Petroleum Exploration Society of Great Britain. Graham has over 35 years experience as a petroleum geologist, beginning his career with Arco and then gaining extensive international experience with independents Siebens Oil and Quintana Petroleum. He subsequently held various Executive positions with Sovereign Oil & Gas Plc, Neste Production Limited and Sands Oil & Gas Plc.

25 Northern Petroleum Plc Annual Report and Accounts 23 Corporate Governance Report Dear shareholder, As newly appointed Chairman of the Board, I will be working with the new Board of Northern Petroleum to focus on the medium and long term growth of the Group, its strategy and adherence to best practice standards in corporate governance where practicable. We will continue to review and address areas for improvement within our corporate governance especially during phases of operational growth. The Board fosters a culture of accountability, integrity, honesty and hard work throughout the organisation as a whole. Jon Murphy Non-executive Chairman 14 April 2014 One of the tasks of the Board is to ensure that Northern Petroleum maintains a high level of corporate governance throughout the organisation. Significant progress has been made during to bring the Group in line with best practice. Governance was increased through the appointments of Jon Murphy as an independent Non-executive Chairman and Stewart Gibson and Iain Lanaghan as independent Non-executive Directors, with Stewart Gibson appointed as Senior Independent Director. Internal reviews were undertaken on the Board Committees identifying areas of improvement and developing improved processes and procedures. The Group is not required to comply with the principles of good corporate governance and the recommendations of best practice as set out in the principles of the revised UK Corporate Governance Code (the Code ) published in May 2010 by the Financial Reporting Council and revised in September While the Group does not comply with the Code, in so far as is practicable and appropriate for an AIM quoted company of Northern Petroleum s size, the business seeks to follow the guidance set out in the Code. The Board The role of the Board The Board provides leadership and guidance to the Group in its day to day and future operations whilst developing and protecting shareholder interests. It is responsible for the sustainable financial performance and committing to the long term success of the business. Board changes In the Board was fundamentally changed. The Executive Directors, Maurice Eaton, Chris Foss and Derek Musgrove stepped down along with Non-executive Directors Dr Rex Gaisford, Richard Latham, Anthony Brewer and Jerry White. Keith Bush was appointed as Chief Executive Officer and Jon Murphy joined the Board in September to assume the post of Non-executive Chairman. Stewart Gibson joined as a Non-executive Director at the end of the year and subsequent to the year end, Iain Lanaghan completed the Board restructuring by joining as the final Non executive Director. BOARD COMPOSITION Introduction Governance Strategic Report Financial Statements Information Executive Directors 3 Non-executive Directors 3

26 24 Northern Petroleum Plc Annual Report and Accounts Corporate Governance Report continued Key matters reserved for the Board The key matters reserved for the consideration and sanction by the Board are: approval of the Group s overall direction, strategy and annual business plan; approval of the Group s annual financial statements, interim management statements and changes in the Group s accounting policies or practices; changes relating to the capital structure of the Group, material share issues and the Group s dividend policy; approval of the annual Group budget and of individual project budgets as required by the Group Delegation of Authority guideline; major changes in the nature of business operations, including entering new countries, licence applications and new business activities; material investments and divestments in the ordinary course of business; adequacy of corporate governance, internal control systems, hedging policy and risk management; the creation and approval of terms of reference, chairmanship, membership and delegation of authority to all committees of the Board; authorisation of potential conflicts of interest of Directors and determining the independence of Directors; appointments to the Board; succession planning for the Board and senior management; the appointment and removal of the Group s external auditor, corporate brokers and financial advisers; How the Board functions The Board has six scheduled meetings per year and meets annually to discuss the Group strategy. The agenda for each meeting is set by the Chairman in conjunction with the Executive Directors, with Board papers sent to members for consideration prior to the meeting. Gender diversity Northern Petroleum support equal opportunities in the organisation and will always appoint senior management and board positions based on experience and aptitude regardless of gender. Communication with shareholders As a publicly quoted company on the AIM Market of the London Stock Exchange, Northern Petroleum must adhere to the AIM Rules with regard to shareholder and market communication. The Group s management has recognised the need for improved communication with all its stakeholders and has prioritised the requirement for a clear and consistent message concerning the business performance and operations, without which shareholder support is not possible. Alongside the Annual Report and Accounts and the Interim Report, management undertakes investor roadshows throughout the year to existing and potential new investors. The Group gives presentations at regular industry and investment community events and all presentations and webcasts are made available on the Group s website. The Group has also established a corporate account on Twitter and LinkedIn, both of which forms of social media are becoming additional channels for investor communication. Annual General Meeting ( AGM ) Shareholders are encouraged to attend and participate at the Group AGM. The Board, as a whole, will be present at the AGM (pursuant to unavoidable circumstances) and will be available to answer questions or concerns raised by shareholders. The Secretary to the Board will also be in attendance. principal terms and conditions of employment of all Directors; changes in employee share schemes and other long term incentive schemes; decisions to prosecute or defend material litigation; and annual Board, committee and Chairman appraisals.

27 Northern Petroleum Plc Annual Report and Accounts 25 The Health, Safety and Environment Committee Dear shareholder, As Chairman of the Health, Safety and Environment Committee, I am committed to maintaining the excellent safety standards Northern Petroleum has achieved for many years. We will continue to make HSE a priority throughout the organisation ensuring a top down culture of accountability and prompt action. With new operations in Canada we will ensure that the culture developed and embraced by Northern Petroleum continues in the new operating area. Keith Bush Chairman of the HSE Committee 14 April 2014 The Health, Safety and Environment Committee The role of the Health, Safety and Environment Committee The Health, Safety and Environment Committee ensure that appropriate measures, policies and procedures are developed and implemented such that the Group and contractors working for Northern Petroleum adhere to industry best practice with regard to ensuring safe operations and protecting the environment. The Group develops an HSE scorecard on an annual basis, which is used to capture and report the lagging and leading indicators in HSE performance. This is approved by the HSE committee and performance against it is tracked throughout the year. The HSE management system is reviewed, updated and implemented regularly along with the Group safety procedures and crisis management plans for each location. Risk registers and assessments are undertaken for each operational location with planned and spontaneous site visits being undertaken by senior management. The Committee regularly reports to the Board on any serious HSE incidents including environmental incident spills and workplace accidents and incidents, with prompt actions being taken to identify and improve any necessary areas and reports submitted after a thorough investigation. HSE Committee activities during monitored and reviewed the Group operations in the Netherlands and Canada as necessary with specific HSE reporting systems, incident investigation systems and crisis management plans implemented at each site; Crisis Management and Incident Response training was undertaken throughout the organisation with the assistance of RPS Group Plc as independent instructors; relevant legislative and regulatory alterations were monitored and, where applicable, implemented after agreement from the Board; and»» HSE Key Performance Indicators for 2014 reviewed, amended and agreed by the Board as part of a HSE scorecard that will form part of the Group performance evaluation at the end of the year. Introduction Governance Strategic Report Financial Statements Information

28 26 Northern Petroleum Petroleum Plc Annual Report and Accounts The Audit Committee Dear shareholder, As newly appointed Chairman of the Audit Committee, I will be taking the lead in advising on the financial risks affecting the Group and the industry overall. The Committee is advised by our external auditor, KPMG, and in attendance by the Finance Director, Group Financial Controller and individual senior managers with budgetary responsibilities as and when necessary. I plan to ensure over the coming years that there is a strong adherence to corporate governance and best practice. Iain M Lanaghan Chairman of the Audit Committee 14 April 2014 The Audit Committee The role of the Audit Committee The Audit Committee monitors the integrity of the published financial information of the Group including the financial statements presented in the Annual and Half Yearly Reports. It reviews and assesses internal financial reporting and the effectiveness of internal controls and risk management processes in conjunction with the Board. The Audit Committee evaluates the security and detection of fraudulent activities including money laundering and bribery to ensure the compliance of Northern Petroleum employees. Internal controls The Board assigns to the Audit Committee the responsibility of monitoring and making suggestions to improve the Group s internal controls governing the finances of the business. These controls are used to protect the Group s assets and ensure consistent financial information for internal and external use. Internal controls are reviewed operationally and financially with senior managers taking responsibility for their departments and implementing any changes that have been identified and recommended to the Board by the Audit Committee. Financial reporting Financial statements are prepared under International Financial Reporting Standards ( IFRS ) with the Audit Committee reviewing and approving the financial results for the Annual Report and Accounts for the year ended. The Audit Committee reviews and approves the external auditors scope of work to be undertaken for the next financial reporting year. Whistle blowing and anti-bribery Northern Petroleum encourages staff to use the whistle blowing policy in order to raise concerns which will be investigated and assessed with appropriate measures taking place. Whistle blowing episodes raised are taken very seriously by the Board. All concerns are raised confidentially and the Group has recently introduced whistle blowing procedures through a third party provider to ensure further anonymity. The Audit Committee is pleased to report that zero incidents were raised during. The Group whistle blowing procedure complies with The UK Bribery Act 2010 ( the Act ) and forms part of the Group s Anti Bribery and Corruption Policy. All employees agree to adhere to the policy and report any instances of bribery or other suspicious activities.

29 Northern Petroleum Plc Annual Report and Accounts 27 Report on Directors Remuneration Dear shareholder, As the newly appointed Chairman of the Remuneration Committee, my remit to the Board, via the committee is to ensure that the overall reward to the Executive Directors and senior management team are competitive, performance driven and aligned with shareholder value creation. Basic salary levels and any bonus awards are compared annually to positions within peer companies and take into account individual performance against a set of pre agreed objectives. Stewart Gibson Chairman of the Remuneration Committee 14 April 2014 This report sets out the details of the remuneration policy for the Group s Directors, describes its implementation and discloses the amounts paid in. The report meets statutory requirements, in particular the relevant regulations on Directors remuneration reports pursuant to the Companies Act 2006 and, provisions of the Code as prescribed for AIM quoted companies. Additional remuneration details have been offered voluntarily. Remuneration Committee membership and process The Remuneration Committee comprises the Non-executive Chairman, Jon Murphy and the two Non-executive Directors, Stewart Gibson and Iain Lanaghan. It is chaired by Stewart Gibson. During the year Dr. Rex Gaisford, Anthony Brewer and Derek Musgrove resigned from the Committee. The Committee met twice during to assist the Board in determining the remuneration arrangements and contracts of the Directors and senior employees. No Director plays a part in any discussion regarding his own remuneration. Advisers The Committee has engaged PricewaterhouseCoopers as its independent Executive remuneration advisers. Activities during During the Committee discussed and decided upon: approval of Executive salary levels for ; and reviewed the application of current remuneration policies and examined whether these need to be amended in light of best practice guidelines and market circumstances. Remuneration policy for 2014 The Remuneration Committee is currently working with PricewaterhouseCoopers on a proposed long term incentive plan for In addition, the Group will enrol in a pension scheme, in line with the UK workplace pension requirements. The Committee is planning no further changes to the operation of the remuneration policy in Introduction Governance Strategic Report Financial Statements Information