Annual Report & Accounts 2013

 

CORPORATE GOVERNANCE STATEMENT

The Board of Petroceltic International plc is firmly committed to business integrity, high ethical values and professionalism in all of its activities and operations. It is therefore committed to maintaining the highest standards of corporate governance. As an AIM/ESM listed company, Petroceltic is not required to, and does not, report on its application of the UK Corporate Governance Code (‘the UK Code’) as issued by the Financial Reporting Council in September 2012. However, the Board has undertaken to design appropriate corporate governance arrangements having regard to best practice, and in particular the UK Code, taking into account the size of the Group and nature of its activities. This Corporate Governance Statement, together with the Director Remuneration Report, describe the corporate governance arrangements in place

Role of the Board

The Board is responsible for presenting a fair assessment of the Group’s position and prospects and for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. The Board is also collectively responsible for the success of the Group and is accountable to shareholders for the creation and delivery of strong, sustainable financial performance and long-term shareholder value. In order to achieve this, the Board directs and monitors the Group’s affairs within a framework of prudent and effective controls which enable risk to be assessed and managed effectively. The Board sets the Group’s strategic aims and reviews management and financial performance, ensuring all necessary resources are in place to achieve these aims. The Chairman encourages proper debate at Board meetings, inviting Non-executive Directors to provide constructive challenge.

The Board has a formal schedule of matters specifically reserved to it for decision. Business matters which are considered to be of a routine operational nature and which are below a certain size threshold are delegated to executive management. All Directors have access to the advice and services of the Company Secretary, who is responsible to the Board for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. In addition, the Company Secretary ensures that Directors receive an appropriate induction to the Company and that the Board has access to appropriate and regular professional skills and knowledge development.

Composition+-

The Board is currently comprised of nine Directors; three Executive Directors and six Non-executive Directors. The biographies of all the Directors appear here in this Report. In the context of the international nature of the Company’s activities, it is considered that each of the Directors holds an extensive array of experience in the oil and gas industry. There is a good balance of commercial, financial and technical skills which are appropriate to the requirements of the business with due regard to diversity, and there is a clear division of responsibilities between the Board members responsible for the running of the Company’s business. The roles of Chairman and Chief Executive are separate and there is a clear division of responsibilities between them. Each Director is proposed for re-election every year and each new Director is subject to election at the first Annual General Meeting after appointment.

When reviewing the on-going balance and independence of the Board, the Board has had regard to the Code. The Company is of the view that the Board of Directors is of sufficient size that the requirements of the business can be met and that changes to the Board’s composition and the Committees can be managed without undue disruption and is not too large so as to be unwieldy. In addition, it is considered that the current balance of the composition of the Board of Directors is appropriate for the Group. In addition, the Company has a formal Diversity Policy in place, the principles of which are followed when considering the composition of the Board. During the year, Ian Craig was appointed as an independent Non-executive Director and will be put to the shareholders at the AGM. The appointment of Mr Craig was made on merit against objective criteria having regard to the composition of the Board and the skills and experience of Mr Craig in the oil and gas industry. On most occasions, the Company would seek the services of an external search consultancy or use open advertising when looking to recruit a Non-executive Director. However, this was not considered necessary with regards to Mr Craig as he had been identified as having the specific major project development and implementation experience required for the position.

Five of the directors, Rob Arnott, Alan Parsley, James Agnew, Ian Craig and Hugh McCutcheon, are considered by the Board to be independent. The Nominations Committee has considered the position of Hugh McCutcheon, whose previous employer has an advisory relationship with the Company, and has deemed him to be independent. James Agnew has been appointed as Senior Independent Director.

Board meetings+-

The Chairman ensures that the Board meets for regular scheduled meetings to review the Group’s operations and trading performance, to set and monitor strategy, and to consider business development initiatives. The Board will also meet for unscheduled meetings if there are specific matters which require Board discussion. The Company Secretary will ensure that the Board receives Board papers, including an agenda and supporting documentation, in advance of these meetings.

The Board met formally on 18 occasions during 2013, the following is a table of attendance at Board and Committee meetings:

Full

Remuneration

Audit

Nominations

 

Board

Committee

Committee

Committee

Name

meetings

meetings

meetings

meetings

 

 

 

 

Robert Adair

18/18

 

 

2/2

Hugh McCutcheon

18/18

 

5/5

2/2

Brian O’Cathain+

17/18

 

 

2/2

Tom Hickey

18/18

 

 

 

David Thomas

18/18

 

 

 

James Agnew+

17/18

6/6

5/5

2/2

Rob Arnott

18/18

6/6

 

2/2

Con Casey^

7/8

4/4

2/2

 

Ian Craig*

3/4

 

 

 

Alan Parsley+

16/18

6/6

5/5

 

Total meetings held

18

6

5

2

^ resigned from the Board on 7 June 2013.

* appointed to the Board on 16 September 2013, and to the Audit Committee on 5 December 2013.

+ Board meetings missed due to pre-arranged vacation with meeting having been arranged at short notice.

 

All the Directors bring independent judgment to bear on issues affecting the Group and all have full and timely access to information necessary to enable them to discharge their duties. The Chairman ensures that senior management are available and may ask them to attend part of the meeting to provide further appropriate and timely information as required. The Directors are also able to take independent professional advice if this will facilitate the decision-making process.

The Board undertakes an annual performance review process facilitated by an external adviser, Evalu8 Limited, including a review of the Board Committees. The review covers a number of areas such as board composition, types of meetings, material required for meetings and strategic decisions.

Board committees+-

The following committees deal with specific aspects of Group affairs, each Committee has written terms of reference approved by the Board:

Audit Committee

Chaired by Hugh McCutcheon, a Chartered Accountant, who has recent and relevant financial experience, the Audit Committee is currently comprised of four Non-executive Directors, the other members being James Agnew, Alan Parsley and Ian Craig. The duties of the Committee include the review of the accounting principles, policies and practices adopted in preparing the financial statements, external compliance matters, internal control principles and the review of the Group’s financial results. It also considers how to maintain an appropriate relationship with the Company’s auditors. The Committee approves fees in respect of non-audit services provided by external auditors in order to safeguard the external auditor’s independence and objectivity. The external auditors have the opportunity to meet with the Audit Committee without executive management present at least once a year. The terms of reference of the Audit Committee are detailed on the Company website (www.petroceltic.com).

Remuneration Committee

Chaired by Dr Alan Parsley, the Remuneration Committee is currently comprised of three Non-executive Directors, the other members being James Agnew and Rob Arnott. All members are independent of management. The committee determines the contract terms, remuneration and other benefits of the Executive Directors, together with awards under any share option scheme or performance share plan. None of the Executive Directors is involved in deciding his own remuneration. Full details are given in the Directors’ remuneration report section of the Annual Report and Accounts. The terms of reference of the Remuneration Committee are detailed on the Company website (www.petroceltic.com).

Nominations Committee

Chaired by Robert Adair, the Nominations Committee is comprised of five Directors, the other members being Brian O’Cathain, James Agnew, Hugh McCutcheon and Rob Arnott, and is responsible for identifying and proposing candidates for appointment to the Board, having regard to the balance and structure of the Board. The Nominations Committee will regularly consider succession planning for Directors and other senior executives, and make recommendations to the Board with regard to membership of the Audit and Remuneration Committees in consultation with the Chairman of each Committee. The majority of the Nominations Committee is deemed to be independent of management. The Company is committed to ensuring that appointments are open to any candidate regardless of gender or nationality and will follow the terms and principles of the Company’s Diversity Policy (see this page. The terms of reference of the Nominations Committee are detailed on the Company website (www.petroceltic.com).

Board performance evaluation+-

The Board undertakes an annual evaluation of its own performance and of its Committees. The evaluation is facilitated by an external consultant, Evalu8 Limited. Board evaluations undertaken have concluded, to date, that each of the Executive and Non-executive Directors were committed to performing effectively in clearly defined functions and roles and that the Board as a whole continues to operate in a competent manner. No material concerns have arisen although a number of suggestions have been made with a view to increasing the efficiency of the Board and Committee process, including for example, the timing of Committee meetings in relation to Board meetings, and the use of electronic mediums with respect to Board papers. These suggestions have been or are being acted upon. Should any matter of concern arise, the Board will follow this up. The exercise also includes an evaluation of the Chairman’s performance, taking into account the views of the other Directors.

Relations with shareholders+-

The Group maintains regular contact with shareholders through meetings, conferences, publications such as the annual report and interim report, via press releases, the Company website (www.petroceltic.com) and through communications from public relations agencies in Ireland and the UK. The Directors are responsive to shareholder telephone enquiries throughout the year and shareholders are invited to send emails to IR@petroceltic.com. The company website also provides up-to-date share price information and financial results. Timely and accurate disclosure is made on all material matters through press releases and regular operational updates and presentations are posted to the website at the same time as they are released to the market. Shareholders may also register on the Group’s website to receive e-mail alerts of Group announcements.

There is active dialogue and regular contact between the Group and institutional investors. A programme of meetings and briefings by the full-time Executive Directors with institutional investors and analysts are held following the half-yearly and year-end results and, in addition, there are meetings with institutional investors and analysts throughout the year. There were numerous such meetings with institutional investors and attendances at investor conferences by Directors during 2013. This programme aims to ensure that the performance, strategies and objectives of the Group are clearly communicated to the investment community and provides the forum for institutional shareholders to address any corporate governance issues. The Executive Directors provide feedback from the shareholders to the Board as a whole to ensure that all Directors develop an understanding of the views of major shareholders about the Company. The current arrangements for communication between the Company and its shareholders are considered to be satisfactory and effective. The Senior Independent Director, and indeed other Non-executive Directors, are available to meet shareholders if required. The Board regards the AGM as a particularly important opportunity for shareholders, Directors and management to meet and exchange views.

Communication with investors is considered a vital part of the Group’s corporate governance standards. Each year all shareholders receive, or have access to by electronic communication, a letter from the Chairman and a copy of the Annual Report and Accounts. The Board is committed to protect and facilitate the exercise of shareholders’ rights and all shareholders are encouraged to attend the AGM, to engage fully with the Company and to ask questions. Wherever practical, all Directors are present and the Chair of the Audit, Remuneration and Nominations Committees are in attendance in order to answer questions on the activities of these committees. Following the AGM, details regarding the level of votes received, including proxy votes, for and against each resolution proposed are posted on the Company’s website.

Significant shareholder+-

Robert Adair, through Skye Investments Limited (“Skye”) and his personal holding, has an interest in 23.40% of the shares in issue. The Directors do not consider that the activities of Skye conflict with the interests of the Company. A relationship agreement has been signed between Petroceltic, Robert Adair and Skye to ensure that commercial transactions and relationships with Skye are conducted on an arm’s length basis. Robert Adair and Skye will use all reasonable endeavours to procure that the Company carries on its business independently of Robert Adair and Skye and their associates, that all arrangements between any member of the Company and Robert Adair, Skye or their associates are conducted on arm’s length terms and that they shall refrain from voting on related party transactions on which they are required by relevant market rules to abstain from voting.

Robert Adair and Skye have undertaken to vote in favour of all ordinary course resolutions proposed at the Company’s Annual General Meetings for a period of 24 months from 15 May 2014 and to vote in favour of any capital raising recommended by the Company. They have also undertaken, amongst other things, not to exercise their rights as shareholders to requisition shareholder meetings, remove any Director of the Company, bring forward or support a derivative action against any Director or oppose any authorised action or recommendation of the Board unless consent has been granted in respect of such action by the Board.

Robert Adair and Skye have also agreed to a standstill agreement, pursuant to which they have agreed not to acquire or offer to acquire (and to procure that none of their associates or concert parties will acquire or offer to acquire) any securities in the Group which would result in their percentage holding in the Group increasing by 2%, or make an offer for all or any part of the share capital of the Group.

This relationship agreement shall terminate on the earlier of:

    (i) the Company ceasing to be admitted to either the ESM or AIM, or the official lists maintained by the Irish Stock Exchange and the FSA and to trading on the main securities markets of the Irish Stock Exchange and the London Stock Exchange; or

    (ii) Robert Adair, Skye and their associates ceasing to be entitled to exercise or control the exercise of 10% or more of the voting rights in the Company.

Risk Management+-

The Board is responsible for reviewing risk management. The Group has established a process of internal controls to include financial, operational, strategic, political, corporate, health and safety, commercial and business ethics risk management. An element of risk is central to the activities of oil and gas exploration and development and it is the Board’s objective to be aware of the risks through an identification process, to evaluate them and to mitigate them where possible, to insure against them where appropriate, and to manage any residual risk.

The Company has categorised key risks into eight principal categories, each with a number of sub-categories. Each sub-category of risk is analysed on a regular basis to assess the extent of the risk, the mitigants in place, and what action items are required to address the risk, if any. The risk is then categorised according to the perceived level of the risk and the timing of implementing the identified action plan. Depending upon the outcome of this review, action items will be allocated to certain members of the senior management and Executive Director team for their overall responsibility. In summary, these are as follows:

Risk

Sub-category

Mitigants

Strategic

Geographical spread

Liquids/gas split

Business development opportunities

Financial resources

Corporate M&A

Strategic and geographical focus of portfolio

Ongoing business development, financial and corporate initiatives

Political

Algeria

Bulgaria

Egypt

Greece

Italy

Kurdistan Region of Iraq

Romania

In-country presence with strong local representation and contacts

Operational

Reservoir/production performance

Project delivery

Exploration success

Reserves risk

Rig availability

Partner risk

Lease/concession commitments

Third party delays

Strong technical, operational, financial and legal teams and practices at a local and corporate level

Continual review and quality assurance/ quality control processes

Health, Safety, Environmental, Social

Major HSE incident

Minor HSE incident

Management System implementation

Recent further upgrading of HSE processes and team

Business Ethics

Employees and consultants

Service providers, associated persons

Adequate procedures

Facilitation payments

Continual monitoring and, if necessary upgrading, of policies, procedures and training practices

Financial

Cashflow

Receivables

Financing

Commodity price risk

Fiscal change

Group tax structure

Insurance

Strong cashflow from producing assets supplemented by debt availability and, if necessary, other sources of finance

Low exposure to commodity price changes

Commercial

Work programme commitments

Commodity sales contracts

Commercial contracts

Rig contracts

Continual monitoring of commitments and cash requirements by finance team

All commodity sales contracts in place

Corporate

Human resources

Corporate governance

Management processes

Shareholder sentiment

Litigation

Established Board, corporate governance, risk and management processes in place

In addition to this process, the Board will also seek to identify certain specific risks within each category of the risk register. These risks are then analysed and plotted on a risk matrix which demonstrates the likelihood of that risk arising and the impact it would have on the Company. Any such risk which is plotted above a certain tolerance threshold entails actioning of immediate mitigation measures. Those risks below this threshold may also cause mitigation measures to be actioned depending upon the context of the risk.

The Directors believe that the frequency of Board and Executive Committee meetings and the level of detail presented at these meetings provide the appropriate process to identify, evaluate and manage these risks on an on-going basis. In addition, the Board has received presentations and gives active consideration to the longer term risks and risk management framework relevant to the enlarged Group. The process is regularly reviewed by the Board and accords with the guidance for directors in the Code.

Business ethics+-

Petroceltic operates a zero tolerance to bribery and corruption across its global operations and abides by the provisions of the UK Bribery Act 2010 (the “Act”). Staff are required to complete and pass assessments relating to this. In addition, staff are required to sign a certificate to comply with the Company’s Business Ethics Policy. Petroceltic considers the Act to be important legislation and has reviewed and upgraded the Business Ethics Policy and Whistleblowing Policy to ensure that they are in compliance with the provisions of this Act. A copy of the principles of this policy can be found on the Company website (www.petroceltic.com). The Group intends to continuously review its policies and procedures and add to them as necessary.

Diversity policy+-

Petroceltic has a Diversity Policy in place which seeks to ensure that there is no discrimination against workers or consultants on the basis of their gender, sexual orientation, marital or civil partner status, gender reassignment, race, colour, nationality, ethnic or national origin, religion or belief, disability or age. The Company will also seek to accommodate the religious observations and beliefs of all workers and consultants. The principle of non-discrimination and equality of opportunity applies equally to the treatment of former workers, visitors, customers and suppliers by members of the Group’s current workforce.

The Group will follow the provisions of the Diversity Policy when considering an appointment to the Board.

The Group will review the Diversity Policy on a regular basis to ensure that its objectives are being met.

Internal control+-

The Board confirms that the Group has complied with the Code provisions on internal control, having established the procedures necessary to implement the guidance originally issued in 1999 as the Turnbull Committee Report, subsequently updated by the Financial reporting Council in the report “Internal Control: Guidance for Directors on the Combined Code” and by reporting in accordance with that guidance.

The Board considers that the system of internal financial controls which have been developed and implemented over many years meet the needs, risks and opportunities of the Group. These controls provide reasonable, but not absolute, assurance against material mis-statement or loss. The system of internal financial control is designed to give confidence that proper accounting records are maintained and that the financial information which is prepared for management and which is provided to shareholders is accurate and reliable. The Board has reviewed the operation and effectiveness of the Group’s system for the period up to the date of approval of the financial statements in order to ensure that they are effective in managing risks to which the Group is exposed and are satisfied that this is the case.

The key elements of the system of internal controls are as follows:

Risk identification+-

As detailed above, the Board has established a process of identifying, evaluating and managing the key risks facing the Group’s business. This risk identification and review process has been in place during the year under review and up to the date of approval of the Annual Report and Accounts. The key business risks identified are taken into account by the Board when assessing the Group’s internal controls.

Controls and procedures+-

The Group has in place detailed operating and financial controls and procedures. The key points of the internal financial controls are the imposition of authority limits, division of responsibility, regular reporting of transactions and balances and review procedures. The operation of the Company’s administrative team is closely supervised by the Executive Directors.

Internal audit+-

The Board has considered the need for an internal audit function. It is the intention of the Audit Committee to initiate and monitor a programme of compliance and control reviews of the Company’s operations, this may, in due course, be replaced with the establishment of a separate internal audit function.

Monitoring of financial performance, operations and capital investment +-

A system is in place whereby financial performance is measured against a detailed annual budget prepared for the Group. A comprehensive budgeting system with an annual budget, based on production forecasts which are prepared internally, is reviewed by the Executive Directors and approved by the Board. The Board also monitors the regular revision of forecasts for the year, financial performance and the appropriate delegation of authorities to management. In addition, regular financial reports, including production, income statement information, analysis of expenditures, key performance indicator (“KPI”) analysis, and a cash flow statement are prepared for and discussed by the Executive Directors and the Board. Capital expenditures are controlled within the budget by a stringent procedure for the authorisation of expenditures.

The Board has established treasury risk policies which are monitored and controlled by the finance function. Regular cash flow analysis is also provided to senior management and at Board meetings: this mitigates risk and ensures efficient use of cash resources.

During 2013, the Company continued its on-going review of the key commercial and financial risks facing the Group, and of the effectiveness of the Group’s system of internal control.

Among the processes applied as part of the system of internal control are the following:

  • Detailed annual budgets are prepared for review and approval by the Board, and where necessary budgets are revised with rolling estimates produced for the Board and senior management throughout the year;
  • management accounts providing detailed budget versus actual expenditure and KPI analysis;
  • the Group wide accounting systems allow for interaction and oversight by the head office finance function on a day to day basis. It has also served to increase the level of management information available to the Group and enhanced the Group’s centralised monitoring and control function;
  • all commitments for expenditure and payments are compared to previously approved budgets and are subject to approval by personnel designated by the Board of Directors. All expenditures are subject to approval under the Group delegation of authority (“DOA”). The DOA stipulates the approval chain up to Board level for the differing levels of expenditure. Significant capital expenditure commitments are subject to authorisation for expenditure (“AFE”) approval and this is also governed by the groupwide DOA;
  • appropriately qualified staff are in place to perform their duties, and on-going training is provided;
  • there is appropriate segregation of duties and there is a system of review performed on a continuing basis. A review of controls is undertaken periodically which ensures that procedures and controls are in place and operating effectively; and
  • the Directors, through the Audit Committee, review the effectiveness of the Group’s system of internal financial control.
On behalf of the Board
Tom Hickey Brian O’Cathain
Director Director
 
15 May 2014


Ain Tsila Project Review Committee

The Petroceltic Project Advisory Committee is a key part of the overall process to ensure that the Ain Tsila project is delivered safely and to the required quality.

At important milestone points in the project, Petroceltic undertakes an Integrated Stage Gate Review (‘ISGR’), supervised by the Project Advisory Committee, to assess whether it is ready to move into the next stage. Key inputs to the ISGR are the outputs from review activities carried out by the project itself and by technical experts independent of the project. These reviews typically cover areas such as:

  • Subsurface Modelling and Well Planning
  • Finance, Commercial and Legal Framework
  • Health, Safety and Environmental
  • Engineering and Facilities
  • Cost and Schedule
  • Project Execution

The Project Advisory Committee is chaired by Ian Craig, an Independent Non-executive Director with extensive international projects experience, and includes the Executive Directors and two independent external consultants with specific Algeria development experience.The general objective of an ISGR is to assess project progress by reviewing compliance with the Project Management System (‘PMS’), and to ensure that all risks are being actively identified and managed.

The most recent ISGR in early 2014 had two main objectives:

  • To solicit the Project Advisory Committee’s approval to award the FEED contract; and
  • To confirm / identify any critical issues that need to be addressed in the near term or prior to awarding the major EPC contracts.