Annual Report • Aug 17, 2011
Annual Report
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organic value creation
| 2010 achievements / highlights | 2 |
|---|---|
| 2011 outlook / forecast | 3 |
| Letter to shareholders – C. Ashley Heppenstall, CEO | 4 |
| Words from the Chairman – Ian H. Lundin | 6 |
| Our business model | 8 |
| Our people | 16 |
| Our market | 18 |
| Norway | 20 |
|---|---|
| South East Asia | 24 |
| Other areas | 26 |
| Reserves, resources and production | 30 |
| Corporate responsibility | 34 |
|---|---|
| Corporate governance report 2010 | 41 |
| - Internal control and risk management | 48 |
| - Board of Directors | 50 |
| - Executive Management | 52 |
| The Lundin Petroleum share and shareholders | 54 |
| Risk factors | 56 |
| FINANCIALS | |
|---|---|
| Directors' report | 57 |
| Financial tables | 65 |
| Accounting principles | 70 |
| Notes to the fi nancial statements of the Group | 77 |
| Annual accounts of the Parent Company | 93 |
| Notes to the fi nancial statements of the Parent Company 97 | |
| Board assurance | 99 |
| Auditors' report | 100 |
| Five year fi nancial data | 101 |
|---|---|
| Key fi nancial data | 102 |
| Reserve quantity information | 103 |
| Shareholder information | 104 |
| Defi nitions | 105 |
References to "Lundin Petroleum" or "the Company" pertain to the corporate group in which Lundin Petroleum AB (publ) (company registration number 556610–8055) is the parent company or to Lundin Petroleum AB (publ), depending on the context.
exploration
EBITDA* MUSD 636
PRODUCTION* 32,700 boepd
* includes UK for the fi rst quarter
Reserves replacement ratio 237%
INVESTMENT CAPEX MUSD 540 exploration and development budget
FORECAST PRODUCTION 28,000 – 33,000 boepd
C. ASHLEY HEPPENSTALL PRESIDENT AND CEO
2010 was a very successful year for Lundin Petroleum. The fundamental cornerstone of our strategy is to create shareholder value through exploration and this delivered positive results in 2010 with the Avaldsnes and Apollo discoveries in the Greater Luno Area off shore Norway. We have already commenced in 2011 an additional fi ve well drilling programme in the Greater Luno Area to appraise the Avaldsnes discovery as well as targeting additional exploration prospects. I believe that our Avaldsnes discovery has the potential to open up a new production hub on the Norwegian Continental Shelf and with Lundin Petroleum being one of the largest owners of acreage in this area which will be extremely positive for us.
We also crystallised the value of our United Kingdom business in 2010 through the spin-off of these assets into EnQuest plc, a new independent oil company with a particular focus on the United Kingdom Continental Shelf. This transaction has proved to be particularly successful resulting in a MUSD 358 profi t for Lundin Petroleum and signifi cant additional value for Lundin Petroleum shareholders who retained their shareholding in EnQuest.
I am pleased that we continue to increase our reserves and production. In 2010, our reserves increased by 18 percent and we achieved a reserve replacement ratio of close to 240 percent. In my opinion our ability to grow our reserve base is the most important factor in increasing shareholder value. Lundin Petroleum reserves are expected to increase further in 2011 as we book the reserves from our exploration discoveries such as Avaldsnes and Apollo. The increase to our reserve base will subsequently lead to increases in our production and operating cash fl ow as these reserves are developed and brought into production. Our production from non-divested assets is expected to increase in 2011 by approximately 10 percent and production is expected to double from current levels to over 60,000 boepd in the next fi ve years from various development projects in Norway.
Lundin Petroleum produced a net result for the fi nancial year of 2010 of MUSD 498 which includes the gain of MUSD 358 reported on the spin-off of our UK business. Our remaining operations continue to produce strong operating cash fl ow, achieving MUSD 157 in the fourth quarter of 2010 to give a total operating cash fl ow for the reporting period of MUSD 599. The generation of strong operating cash fl ow is driven by our Norwegian production where the cost of operations is below USD 3.50 per barrel.
Production for 2010 averaged 32,700 boepd or 28,400 boepd if we exclude the contribution from our United Kingdom and Indonesian assets sold during the year. Strong production from our Norwegian fi elds, Alvheim and Volund contributed positively to our production fi gures which were at the high end of our guidance range. Our forecast 2011 production is 28,000 - 33,000 boepd.
Our production growth is expected to come from fi ve development projects in Norway which are collectively forecast to double our current production to over 60,000 boepd within the next fi ve years. I am confi dent that the net capital cost of these projects estimated at USD 2 billion can be funded from a combination of internally generated cash fl ow and bank borrowings without the requirement for further equity funding.
The largest project for Lundin Petroleum is the Luno fi eld development where gross recoverable reserves increased in 2010 from 95 to 148 MMboe. Conceptual development planning for the Luno fi eld is now complete and we are proceeding with front-end engineering prior to the submission of a plan of development in 2011.
We are making good progress with our other developments in Norway. The Gaupe fi eld development is progressing well and fi rst production, which is forecast to add an additional 5,000 boepd net to Lundin Petroleum, is still expected before year end 2011. We are fi nalising commercial terms with Shell for the tieback of the Nemo fi eld to their Pierce production unit in the United Kingdom following which we will be ready to submit a plan of development. Conceptual studies for the development of the Krabbe and Bøyla fi elds are progressing satisfactorily.
Our exploration led growth strategy has yielded positive results particularly in Norway where we have been one of the most successful exploration companies in recent years. Following the successes in discovering Luno, Avaldsnes and Apollo we believe that our continued exploration driven strategy will lead to further discoveries. Lundin Petroleum's 2011 work programme involves the drilling of a further ten appraisal and exploration wells in Norway including fi ve wells in the Greater Luno Area. We also expect to commence drilling in 2011 in the Barents Sea with two exploration wells. Our historical exploration fi nding costs in Norway are less than USD 0.65 per barrel after tax. The current value of these discovered resources has created signifi cant value for our shareholders
Our intention is to replicate the Norway success story in South East Asia. We have over the last few years built a local team of professionals, acquired licences and invested in 3D seismic acquisition. I have high hopes that our planned fi ve well exploration drilling programme in Malaysia in 2011 will yield positive results and act as the springboard to create a new core development and production area for Lundin Petroleum.
During 2010, the oil and gas industry has been prominent in the media. The unfortunate events of the Macondo oil spill in the Gulf of Mexico highlighted the increasing challenges facing our industry as we operate in ever harsher environments and drill deeper to produce the planet's oil resources. Lundin Petroleum and our industry have certainly made major advances in terms of safety and environmental focus over recent years. I believe that whilst we continually strive to improve our performance the negative portrayal by the media of the oil and gas industry has been unjustifi ed and does not refl ect the advances that have been made.
The availability of cheap energy has over recent decades been the primary catalyst for world economic growth which has improved the lives of the majority of the world's population. As many of the world's economies have come out of recession in recent months, focus has returned to the question of oil supply. Despite the investment in alternative forms of renewable energy, which we support, hydrocarbons will remain the primary provider of the world's energy for the foreseeable future. Our industry faces the challenge in an escalating cost and increasingly regulated market to meet this continually increasing demand for hydrocarbon resources whilst balancing the need for improved environmental and safety performance.
In 2010, we decided to join the Global Compact as a means to reconfi rm our commitment to ethical business practice. In joining the Global Compact, we committed to make the ten principles on human rights, labour, environment and anti-corruption an integral part of our business strategy, day-to-day operations and organisational culture; to incorporate the principles in our decision making process; to contribute to broad development objectives through partnerships to advance the Global Compact and responsible business practices through active outreach to stakeholders and the public at large; and to publish a Communication on Progress (COP). A number of initiatives were undertaken in 2010 in furtherance of this commitment; they are detailed in the Corporate Responsibility section of our Annual Report. Lundin Petroleum is fi rmly committed to the Global Compact and intends to continue to honor its commitments thereto in 2011 and beyond.
I am very proud that we have grown our resource base and as a result created value for our loyal shareholders. The future will be more of the same and in this respect I believe we have the asset base and team to deliver.
Yours sincerely,
C. Ashley Heppenstall President and CEO
MUSD 599
PRODUCTION (boepd)
32,700 boepd Strong production performance from Alvheim and Volund fi elds.
"
Lundin Norway has achieved an average discovery rate of 39 percent resulting in seven discoveries on the NCS over the past fi ve years.
IAN H. LUNDIN CHAIRMAN
2010 was a monumental year for our Company and commodities in general. Global oil consumption increased by over 2.5 million barrels a day as supplies were restricted by aging giant oil fi elds and lack of investments in infrastructure around the world. Entry barriers in oil rich regions such as the Middle East and Russia continue to limit access to IOC's (international oil companies) while NOC's (national oil companies) are stretched to develop their huge existing resource base let alone explore for more.
Norway is one exception of a nation rich in natural resources making a daring political decision to open its oil and gas sector to the independent industry. The results speak for themselves: the Norwegian Petroleum Directorate has announced that in 2010 alone 16 new discoveries were made on the Norwegian Continental Shelf (NCS). A total of 32 exploration wells were completed in 2010. This means a discovery success rate of 50 percent. Ten of the discoveries were made in the North Sea and six in the Norwegian Sea. Of these 32 wells Lundin Petroleum participated in six and made two discoveries in the North Sea, one of which, well 16/2-6 (Avaldsnes) could prove to be signifi cantly bigger than the large Luno discovery which the Company made in 2007. Avaldsnes is perhaps the largest oil discovery on the NCS since Snorre (discovered by Saga Petroleum in the late 80's).
Lundin Petroleum has achieved an average discovery rate of 39 percent resulting in seven discoveries on the NCS over the past fi ve years. The average fi nding cost over that period is USD 2.9 per barrel pre tax (USD 0.6 per barrel post tax).
In 2011 Lundin Petroleum is expected to participate in ten wells on the NCS of which two are exploration wells in the Barents Sea.
We look forward to repeating the success achieved on the NCS in South East Asia where the Company has been very busy building another strategic portfolio of assets over the last fi ve years. In 2011 we expect to start a drilling campaign consisting of fi ve wells in Malaysia where Lundin Petroleum has long historical links and from where it is launching its South East Asian eff ort.
Having spun off the mature UK North Sea assets into EnQuest and thereby creating signifi cant value for the shareholders, Lundin Petroleum is now much more agile and less encumbered in order to better tackle new challenges in its ongoing quest to fi nd more oil and gas. I expect that the reserves and production that was transferred to EnQuest will be replaced in short order from the exploration successes and the strong production growth that Lundin Petroleum has achieved in Norway.
The oil industry suff ered a major setback in 2010 with the Macondo oil spill. The accident occurred in April and while response measures were taken forthwith, the fi rst relief well was successfully completed and the well was declared "eff ectively dead" in September. According to the technical group responsible for controlling the spill, the total leak amounted to about 4.9 million barrels of oil, thus overtaking the 1989 Exxon Valdez oil spill as the largest ever to originate in the United States. The long-term environmental impact of this blowout, which also caused the death of 11 rig workers, will not be known for several years but the fact that the spill occurred in very deep water and far away from the coast line certainly limited its impact. It was later concluded by an offi cial inquiry that the root cause of this blowout was systemic management failures. Until the disaster occurred, the industry had a very good track record thanks to very strict safety and environmental controls that exist in most jurisdictions. So whilst these controls and safety measures failed on Macondo, the environmental relief and well control process that followed was exemplary in its sheer size and magnitude. As an approved and responsible operator, Lundin Petroleum is constantly reviewing and improving its health and safety procedures and environmental awareness.
A fi nal note on the oil market: the price of oil increased by 15 percent in 2010 whilst copper increased more than 30 percent. In general, commodities outperformed both stocks and bonds. I would attribute this strong performance in commodity prices to global growth, especially in the emerging world. There is a risk that ultra high commodity prices will slow down growth and cause volatility in the market although short term volatility does not have a signifi cant impact on the ever increasing demand for petroleum products.
Our objective as long-term investors is to continue to build on our existing reserve base and maintain strong production growth. Our vision is to create value for our shareholders.
I thank you, our shareholders, for your continued support. A special thanks goes to all our highly skilled and competent employees for their loyalty and dedication. We have come a long way together and the future looks promising.
Yours sincerely,
Ian H. Lundin Chairman of the Board
"
Lundin Petroleum believes that it is the development of this business model that has achieved success in the past and will continue to deliver results in the future.
Lundin Petroleum's business model is to generate shareholder value through the exploitation of hydrocarbons. Lundin Petroleum's strategy of organic growth involves identifying core areas of focus and then establishing a team of professional technical staff with experience in that area to use the latest technologies to explore for oil and gas. Commercial discoveries will be appraised and then, where they are deemed to be economic, progressed through to the production stage. The cashfl ow generated from production will be reinvested in the exploration and development stages. Lundin Petroleum believes that it is the development of this business model that has achieved success in the past and will continue to deliver results in the future.
As an international oil and gas exploration and production company operating globally, our aim is to explore for and produce oil and gas in the most economically effi cient, socially responsible and environmentally acceptable way, for the benefi t of shareholders, employees and co-ventures.
Lundin Petroleum applies the same standards to all activities worldwide to satisfy both the commercial, ethical and local requirements. Lundin Petroleum strives to continuously improve its performance and to act in accordance with good oilfi eld practice and high standards of corporate citizenship.
Lundin Petroleum is pursuing the following strategy:
Lundin Petroleum focuses on building core exploration areas in specifi c countries with a clear objective to grow organically. Our strategy is to improve our technical understanding and thereby to develop new play concepts. We achieve this by using the latest technology when acquiring and processing 3D seismic and by building teams of talented and experienced people.
Our objective is to continue to increase our resources through an exploration driven organic growth strategy. We will continue to allocate signifi cant capital investment to our exploration activities and ultimately believe that this will lead to further value creation for Lundin Petroleum.
Our 2010 exploration drilling programme delivered excellent results, mainly driven by Norway where most of the exploration activities have taken place. In Norway we drilled seven exploration wells in 2010 resulting in two signifi cant discoveries, Avaldsnes and Apollo, adding gross contingent resources of 115–465 MMboe. Avaldsnes, subject to further appraisal, could be the largest discovery made on the Norwegian Continental Shelf (NCS) in the last fi ve years.
Since entering the NCS we have drilled a total of 18 exploration wells and made seven discoveries, adding over 200 MMboe of resources net to Lundin Petroleum. The exploration success rate for Norway is 39 percent and post tax fi nding costs of USD 0.65 per boe.
In Norway, our licence position has grown from just over ten licences in 2003, to over 40 licences by the end of 2010. This has resulted in the defi nition of three core areas for Lundin Petroleum in Norway: - the "Greater Luno area", the Barents Sea and the "Greater Alvheim area". Norway is leading the way for Lundin Petroleum with its exploration activities and we are now one of the most successful independent operators on the NCS.
In South East Asia, where we are replicating the Norwegian model, six new licences have been awarded to Lundin Petroleum in the last two years and two new core areas have been defi ned with over 4,000 km2 of new marine 3D seismic acquired. This has resulted in a forward exploration programme of at least 12 forecast wells to be drilled in the area over the next three years.
Norway and South East Asia will be our main exploration focus in the next few years. In 2011, a total of 21 exploration and appraisal wells will be drilled including ten in Norway and fi ve in Malaysia targeting potential net un-risked resources of 483 MMboe.
LUNDIN PETROLEUM'S ORGANIC GROWTH IN NORWAY
Lundin Petroleum focuses on increasing its reserves base organically. Following exploration, shareholder value is created through the conversion of discoveries into reserves and production. Our strategy is to continuously optimise the reserves and production throughout the asset life by utilising the latest technologies and, above all, talented people.
Our objective is to at least double our production by 2015 by formulating and executing development plans for our existing Proved plus Probable Reserves. Furthermore, recent exploration successes, currently classifi ed as contingent resources, will be appraised and further matured with the aim to move them into reserves as soon as possible. Development of these reserves will result in continued production increases for Lundin Petroleum.
In 2010, Lundin Petroleum had a strong focus on turning discovered barrels into reserves, thus growing the reserves base, and turning reserves into production growth and continued strong cashfl ow.
In May 2010, fi rst oil was produced from the Volund fi eld in Norway. This fi eld, which was discovered and appraised in 2004 is now producing from three production wells supported by a water injection well with a combined well capacity of over 42,000 bopd. Volund production above the contracted capacity is constrained by the availability on the Alvheim FPSO .
Further development drilling has taken place in the Alvheim fi eld and the fi rst of fi ve phase II wells was brought on stream towards the end of 2010. Alvheim continues to have strong production performance and the average 2010 production was 8 percent above forecast. This strong
2P RESERVES GROWTH
production performance has again lead to an update in reserves and the estimated gross ultimate recovery from Alvheim is now 276 MMboe, which is 65 percent higher than the initial reserves estimate in 2005 when the Plan of Development was submitted.
Total production in 2010 net to Lundin Petroleum was 32,700 boepd which was at the upper end of our production forecast. This production includes the divested United Kingdom assets for the fi rst quarter of 2010 only. When the production from the United Kingdom and the divested Indonesian assets are excluded, the 2010 production was 28,400 boepd. Our 2011 production forecast is 28,000–33,000 boped, which on average represents an increase of close to 10 percent compared to 2010.
Part of the 2011 production increase is forecast to be from the Gaupe fi eld in Norway. The northern extension of this fi eld was discovered in 2008, the plan of development was approved mid 2010 and fi rst oil is expected in the fourth quarter of 2011.
The main driver behind our future production growth is expected to be the Luno fi eld in Norway. The fi eld was discovered in 2007, appraised in 2009 and following a further appraisal well in early 2010, reserves net to Lundin increased from 47.4 MMboe to 74 MMboe, an increase of 55 percent. In 2010 a development concept was matured and we are ready to submit a plan of development in 2011 with a targeted fi rst production towards the end of 2014. The development concept provides for enough capacity to tie back other discoveries in the area such as Apollo and Luno South.
Through out all stages of the business cycle, Lundin Petroleum seeks to generate shareholder value. All elements of the asset portfolio are constantly reviewed to determine that their value is fully refl ected in the Lundin Petroleum share price. If it is determined that the value of an asset is not being fully refl ected within the Lundin Petroleum share price, Lundin Petroleum will review all available options to determine how to realise the full value of that asset.
Lundin Petroleum has created innovative solutions to generate value from its assets for its shareholders. Where it is determined that the full value of an asset can be realised through a sale, or when an asset is deemed to be non-core to Lundin Petroleum, then the asset may be put up for sale. In certain circumstances, however, it may be that the full value realisation of an asset can only be made over a period of time and this future value increase will not be fully refl ected within a sale price. In this instance Lundin Petroleum has packaged the asset under a separate, more focussed entity and distributed the shares in the entity to its shareholders in a tax effi cient manner. This action has allowed the Lundin Petroleum shareholders to continue to hold the assets and participate in future value growth through a vehicle that will more eff ectively refl ect the value generation.
In April 2010, Lundin Petroleum announced the completion of the spin-off its UK business into a newly formed company called EnQuest plc. EnQuest acquired the UK oil and gas production, development and exploration assets and operations of both Lundin Petroleum and Petrofac Limited, a London listed company.
Lundin Petroleum received 55 percent of the shares of EnQuest which were distributed to Lundin Petroleum shareholders. EnQuest is listed on both the London Stock Exchange and the NASDAQ OMX, Stockholm. The distribution was carried out under Sweden's Lex Asea rules under which the distribution is a non-taxable event for Swedish shareholders.
In November 2010, Lundin Petroleum completed the distribution of its shareholding in Etrion Corporation. Etrion Corporation is engaged in the development and operation of solar power generation which is deemed to be non core to Lundin Petroleum's business model.
The distribution was carried out under Sweden's Lex Asea rules under which the distribution is a non-taxable event for Swedish shareholders.
Lundin Petroleum and the wider oil industry face many demanding challenges across 2011 with regards to people, capital, and technology in today's global oil and gas business. Changes in the supply and demand dynamics, social and environmental pressures, and ever changing demographic shifts, are transforming and reshaping our industry at an unprecedented rate.
The intense demand for key specialist and professional people, with world class capabilities across all working areas with in the industry, will intensify as the oil price goes beyond USD 100 per barrel. Coming through the period of the recent economic downturn has not changed the acute competition to retain and attract the very best of the available skill, talent and expertise from an ever shrinking pool of industry qualifi ed professionals.
With too few people entering the industry workforce during the past 25 years, an acute shortage now exists of employees with between 10 to 15 years of experience, capable of fulfi lling the additional positions required by the current industry economic upswing. There are very limited opportunities to hire people with ten years plus experience across the areas of geo-science, drilling and reservoir and petroleum engineering. This shortage of experienced personnel is expected to intensify over the next ten years as the number of experienced technical professionals retiring from the industry is expected to exceed that of new graduates coming in.
The issue of the age profi le of oil industry professionals has intensifi ed. Many studies such as National Petroleum Council (NPC) study1 , acutely illustrate the problem where the average age of oil industry employees is 46 to 49 years and that the average retirement age in the oil and gas sector is 55 years. The 2007 NPC report predicts an ever growing supply and demand gap for mid career technical professionals aged 30-39 for the oil industry going forward.
North American and European demand for mid career technical professionals aged 30-39
The three key people issues facing the oil industry today are:
The anticipated skills gap will be profoundly felt by the industry during the next fi ve years as senior, highly skilled geo-science and technical specialists retire from the industry. Only those companies that are wholly committed to employee retention and engagement will overcome this huge skills retention challenge. Lundin Petroleum recognises that people will remain its most integrally important asset.
In Norway, for example, the attraction and retention of seasoned and highly experienced industry professionals has been pivotal in acquiring the essential skill and experience base required to deliver on our exploration and production develop commitments to date. However, we need to ensure that our older employees have suffi cient time and incentive to transfer their specialised industry knowledge and experience in mentoring our younger employees coming in.
We are fully committed to further developing and improving our business and technical processes to allow greater collaboration, teamwork, and knowledge transfer from all of our business locations and activities. Higher productivity and greater time allotted to value-added work will continue to be achieved from all parts of the Lundin Petroleum business.
In achieving this, we will continue to off er;
Lundin Petroleum fully recognises that the quality of its employee base is the single greatest factor underpinning its future success. We will continue to invest in our talented and committed employee base. It is thanks to these committed employees whose industry experience, unsurpassed expertise and continued determination to achieve success for our shareholders and stakeholders that Lundin Petroleum will be able to deliver outstanding performance and success going forward.
Across the Lundin Petroleum group we directly employ 300 people with the engagement of a further 120 consultants and contractors who support our operations. Our reliance on this core team demands a skill base of highly qualifi ed and experienced industry professionals.
Our primary people strategy is to deliver Value Creation for all stakeholders through the alignment of pre-determined business goals and objectives for each employee through our Performance Management Process. This framework will enable us to achieve and exceed our stated corporate goals and objectives going forward. This strategy will concentrate on three key elements:
Employees = staff + contractors
3 Stability Index =
Number of employees with service of one year or more x 100 Total number of employees in post one year ago
Whilst fi nancial markets have recovered from the lows of 2009, the high levels of volatility currently being experienced shows that investors still lack confi dence in the underlying principles of the recovery. This lack of confi dence is due not only to the uncertainty around the pace of recovery and political instability, but the exposure of banks and investors to European debt, particularly in countries in risk of default such as Greece and Ireland.
The lending market showed a cautious recovery in 2010, although liquidity could tighten as banks are required to sustain higher levels of equity to support debt. European banks are taking a more long-term view to funding, accessing funding from the US market and fi xing interest rates for long-term funds, attempting to avoid the reliance on short term funds which led to problems in the credit crunch of 2008.
The oil market continued to recover from the fi nancial crisis, with prices moving past the USD100 per barrel mark in early 2011. Although part of this is due to short term disruption such as the unrest in the Middle East, the oil price has also undergone a sustained underlying increase post 9/11, driven by a narrowing gap between supply and demand for oil and oil products.
Demand for oil and gas products increased in 2010, past even 2007 levels, and is forecast to grow again in 2011.
This demand increase has mainly been sustained by increasing demand from developing economies such as China. An indication of this growth phenomenon is that from 2008-2009, when western economies underwent a demand decrease of more than fi ve percent, China showed an increase in demand for oil of six percent.
In long-term demand to 2035, the International Energy Agency Statistics database shows an increase in forecast consumption in all geopolitical areas. However, of most signifi cance is the projected doubling of consumption from 17 MMboepd
(2007) to 32 MMboepd in 2035 in the Non-OECD Asia region. This large increase in consumption must be fi lled by supply from hydrocarbon or non conventional sources, despite the increasing diffi culty in fi nding conventional reserves, and the cost of developing non conventional sources.
The supply of oil has increased from the economic crisis of 2008, but the underlying dynamic is uncertainty in the quantity and the type of supply. Short term supply can be heavily infl uenced by current political and economic events, but long-term supply is dependent on the oil price and long-term infrastructure investment.
The ability to absorb short term supply shocks is dependent on the availability of inventory and stocks. OPEC stated in 2010 that they were withholding 5-6 MMboepd of production, which can be used to relieve supply constrictions and hold the oil price within the range of USD 70–90 per barrel. However, as can be seen by the recent Libyan crisis, this ability does not relieve the situation where refi neries are geared towards processing a particular type of oil (Libyan sweet oil – OPEC produces mainly a sourer crude), and critically there are no indications of how long it would take to get this additional production onstream.
Much attention has been paid to the introduction of gas as an alternative in power generation and heating, however the infrastructure for gas is distinctly diff erent to oil. As a consequence the gas market is increasingly 'delinking', or separating from the oil market particularly in relation to price.
One of the reasons for this is a signifi cant number of discoveries of gas now coming onstream and a development in pipeline and LNG infrastructure, particularly from countries such as Russia into Europe. This has led to an adequate level of gas for the current infrastructure and a drop in the price. At the same time, the oil price has not experienced a drop – oil is particularly important and not easily substitutable in transportation, and has not experienced the same level of reserves replacement and infrastructure development.
As reserves are less and less available in stable political areas with good economic terms, replacement of reserves can require development of more expensive assets in frontier areas (often with a high level of risk). Some alternatives to these frontier areas have been found through the advent of new technology which allows the development of alternative sources such as shale oil and gas, which has had notable success in the United States and has a growing focus in Europe.
There are two main focuses for oil and gas companies trying to replace reserves or to increase their resource base. In high oil price regimes, the appetite for acquisitions tends to decrease as companies hesitate to pay high prices for assets and move towards organic growth as a methodology for reserve replacement – either through exploration drilling or reworking existing development assets.
A notable exception to this is the Chinese National Oil companies who appear strongly in the mergers and acquisitions market, where in 2010 they accounted for USD 26 billion of an estimated USD 183 billion of upstream deals, an 85 percent increase on the estimated fi gure of USD 14 billion in 2009 (Petroleum Economist/ Woodmac). Chinese dominance in the M&A market is expected to increase in 2011 as the Chinese budget surplus continues to grow and the national oil companies seek to secure long-term supply.
2010 has been an interesting year for petroleum companies, with a slowly recovering economy and short term political and economic events infl uencing a sharp increase in the oil price. The fundamentals of the oil markets remain the same however – there is an increasing disparity between increasing demand and the diffi culty in replenishing long-term supply of oil and oil products, which will continue the upward pressure on the oil price.
| Field | Net Resources MMboe |
Forecast Production boepd |
Forecast First Oil |
|---|---|---|---|
| Gaupe | 11 | 5,000 | 2011 |
| Nemo | 11 | 6,000 | 2012/13 |
| Bøyla | 3 | 2,000 | 2013 |
| Krabbe | 9 | 4,800 | 2013/14 |
| Luno | 74 | >30,000 | 2014/15 |
| Total | 108 | 47,800 |
Norway is the principal area of operation for Lundin Petroleum having grown substantially since our entrance into Norway in 2003. Through the strategy of organic growth utilising the latest technology and a core team of experienced professionals the existing portfolio of licences comprises the full spectrum of exploration and appraisal, development and production assets.
The Alvheim fi eld (Working Interest (WI) 15%) produced on average gross 86,000 boepd during 2010. Gross ultimate recoverable reserves increased to 276 MMboe. Phase II of the Alvheim project, which involves the drilling of four additional multi-lateral wells, is expected to be completed in 2012 to further increase the production. There is further growth potential in the greater Alvheim area from the development of existing discoveries and from further exploration.
The Volund fi eld (WI 35%) is located to the south of Alvheim and is a sub-sea tieback to the Alvheim FPSO. The fi eld came on stream in May 2010 and by the end 2010 it was producing to its allocated capacity of 25,000 boepd.
The Luno exploration well in licence PL338 (WI 50%), operated by Lundin Petroleum, was successfully drilled as an oil discovery in late 2007. The fi rst appraisal well was completed in early 2009 and has confi rmed the extension of the Luno fi eld to the north east. A second appraisal well was completed in early 2010 which proved 50 metres of net pay with excellent reservoir characteristics. As a result, gross proven plus probable reserves have been increased from 95 MMboe to 148 MMboe. Lundin Petroleum has substantially completed the conceptual studies for a standalone development for the Luno fi eld and expects to be ready to submit a Plan of Development in 2011. A further discovery was made during 2009 on the Luno South prospect. The discovery was made in fractured basement reservoir and is potentially connected to large volumes of oil in place but will require further work to determine resource potential and commerciality.
| NORWAY KEY DATA | 2010 | 2009 |
|---|---|---|
| Reserves (MMboe) | 139 | 121 |
| Contingent resources (MMboe) | 871 | 451 |
| Average production per day (Mboepd) | 18 | 14 |
| Net turnover (MUSD) | 523 | 314 |
| Sales price achieved (USD/boe) | 78 | 60 |
| Cost of operations (USD/boe) | 3 | 3 |
| Operating cash fl ow contribution (USD/boe) | 70 | 57 |
Excludes Ragnarrock and Luno South discoveries
In 2010, two new oil fi nds were made in the Greater Luno area. First, the Avaldsnes prospect exploration well found and tested good quality oil bearing sandstones in PL501. Initial estimates are that the discovery contains gross resources of between 100 to 400 MMboe on block. A 2011 exploration and appraisal programme is expected to take place to both appraise the existing discovery and assess the possible extension of the accumulation onto PL265 (10% Lundin Petroleum) to the west. The second well targeted the Apollo prospect, which was considered to be a southerly extension of the Draupne fi eld accumulation onto PL338. Although the main target was deep to prognosis and water bearing, oil was encountered in good quality sandstones at Palaeocene and Lower Cretaceous levels. The discovery is likely to be appraised in 2012. Initial gross resource estimates are 15 to 65 MMboe on licence PL338.
Lundin Petroleum has a major exploration acreage position in the Greater Luno Area covering licences PL359 (WI 40%), PL409 (WI 70%), PL410 (WI 70%), PL501 (WI 40%) and PL265 (WI 10%).
The Gaupe fi eld (WI 40%) on PL292 is being developed by BG as a tie-back to the Armada complex in the United Kingdom. The fi eld obtained development approval in June 2010, with fi rst oil expected in late 2011. Gross reserves are estimated at 31.3 MMboe, with net peak production of some 5,000 boepd expected in early 2012.
Lundin Petroleum also has a number of discoveries that are potential subsea tiebacks to existing production facilities off shore, in the coming years. Nemo (PL148) is included in 2P reserves, whereas Peik (PL088), Krabbe (PL301), Viper (Alvheim area), Gekko (Alvheim area) and Bøyla (Alvheim area) are classifi ed as contingent resources. Together with the Avaldsnes (PL501) and SE Tor (PL066) discoveries, these give some 87 MMboe net contingent resources.
Lundin Petroleum has an active exploration and appraisal programme during 2011 with up to ten wells planned to be drilled in Norway. The key areas of activity are exploration and appraisal wells on the Avaldsnes discovery and neighbouring PL265 potential (four wells), and the start of drilling activity in the Barents Sea (two wells). The net unrisked resource exposure associated with the Norway exploration programme is approximately 350 MMboe.
TORSTEIN SANNESS Managing Director Torstein has 40 years of international experience in the oil and gas industry. He has successfully lead Lundin Petroleum in Norway since 2004.
HANS CHRISTEN RØNNEVIK Exploration Manager Hans Christen has 40 years of exploration experience in Norway. Hans Christen joined Lundin Petroleum in 2004 and has been instrumental in the Company's exploration successes in Norway.
ELSE MARGRETHE GRANDAL Senior Exploration Geologist Else has over 20 years experience as exploration
geologist in Norway. She has worked for Lundin Petroleum since 2008 and is responsible for fi eld evaluation.
TROND KRISTENSEN Senior Geophysicist Trond has 20 years of experience in Norway and has been responsible for building Lundin Petroelum's Norwegian portfolio of licences. He joined Lundin Petroleum in 2004.
MONA KJØLSETH Senior Geophysicist Mona has over 25 years experience as a geophysicist in Norway. She has worked for Lundin Petroleum since 2006.
BJØRN SUND Project Director
Bjørn has over 30 years experience as a senior manager in major development projects in Norway. He joined Lundin Petroleum in 2008 to lead the Luno fi eld development.
KRISTINE GJESSING Senior Reservoir Engineer Kristine has 20 years of international experience as a reservoir engineer. She has worked on Lundin Petroleum projects since 2008.
JOHAN BYSVEEN Drilling Manager Johan has 20 years of experience in off shore drilling projects. He has managed the Lundin Petroleum's drilling activities in Norway since 2005.
Lundin Petroleum has built an exciting portfolio of exploration assets in Malaysia with the defi nition of two core areas off shore Sabah and Peninsular Malaysia. Over 4,000 km2 of new 3D off shore seismic was acquired between 2009 and 2010 and interpretation and prospect generation on licences PM308A (WI 35%), PM308B (WI 75%) and SB303 (WI 75%) is now completed.
During 2010, an additional PSC was signed covering the 6,230 km2 of Blocks SB307 and SB308.
Exploration drilling is expected to commence in 2011. A fi ve back-to-back well programme is planned using the Off shore Courageous drilling rig in licences SB303 (two wells), PM308A (two wells) and PM308B (one well). Total net unrisked potential resources associated with the 2011 exploration programme are 136 MMboe.
In parallel, the Company is evaluating new development opportunities. The Tiga Papan discovery located in licence SB307 is being assessed as a future development. Ongoing reprocessing of existing 3D seismic and feasibility studies will determine an appraisal drilling strategy.
Lundin Petroleum has a 33.33 percent working interest in Block 06/94 in the Nam Con Son Basin, off shore southern Vietnam. There are a number of oil and gas discoveries in the basin.
During 2010, two wells were drilled. However, with the exception of very thin uncommercial gas pay, the wells were unsuccessful and were plugged and abandoned.
The partnership is currently negotiating the possibility of an extension to the licence period for further technical evaluations.
AHMAD ZULYUSRI BIN ZAINAL ABIDIN (Zul) Job title: Procurement Executive YEE AH CHIM Geophysicist Kuala Lumpur, Malaysia
Malaysia Zul has worked for Lundin Petroleum since 2008 and has Yee joined Lundin Petroleum in 2008 as a geophysicist working on the upcoming exploration programme in Malaysia.
Kuala Lumpur, Malaysia
Zul has worked for Lundin Petroleum since 2008 and has been involved with oil and gas project work in South East Asia since 2001.
The Singa gas fi eld was brought on stream in May 2010. Initial production diffi culties led to low production rates, but as of fourth quarter 2010 the fi eld has been producing steadily at approximately 30 MMscfd of gross gas. This production level is below initial forecasts due to wellhead temperature and produced liquids constraints. Work is ongoing to increase production levels. Net reserves are estimated at 4.3 MMboe (26 bscf ).
A gas sales agreement has been signed that will supply gas to customers in West Java. Lundin Petroleum working interest in the Lematang Block of 25.88 percent.
In 2010, Lundin Petroleum completed the sale of its interests in the Salawati Island and Basin blocks to RH Petrogas for a consideration of MUSD 37.1 eff ective 1 January 2010 with additional payments due in the event of further fi eld development of up to MUSD 3.9.
A signifi cant new 3D offshore seismic was completed in 2010 on the Baronang and Cakalang blocks. On the onshore Rangkas Block, 2D seismic acquisition is ongoing and will be completed during 2011 with exploration drilling planned to commence in 2012. In December 2010, Lundin Petroleum was awarded a new production sharing contract (PSC) for the off shore South Sokang Block (60% operated interest) which carries a seismic commitment. In March 2011 Lundin Petroleum was awarded a PSC for the Gurita Block (WI 100%).
| INDONESIA – KEY DATA1 | 2010 | 2009 |
|---|---|---|
| Reserves (MMboe) | 4 | 14 |
| Contingent resources (MMboe) | 2 | 4 |
| Average production per day (Mboepd) | 2 | 2 |
| Net turnover (MUSD) | 40 | 37 |
| Sales price achieved (USD/boe) | 65 | 61 |
| Cost of operations (USD/boe) | 24 | 23 |
| Operating cash fl ow contribution (USD/boe) | 11 | 14 |
Includes Salawati Basin and Island up to the date of disposal. Reserves and Contingent resources as at 31 December 2010 excludes Salawati Basin and Island reserves.
Jakarta, Indonesia
Joni has worked for Lundin Petroleum since 2008 and has been working on prospect generation on our Indonesian assets. He has over 15 years of experience and has held various geological and geophysical positions.
The French fi elds are mature production assets which have been on stream for many years. In the Paris Basin (WI 43.3-100%) and Aquitaine Basin (WI 50%), cost eff ective drilling intervention and work over activities are ongoing to maintain production levels. With successful water injection techniques, improved performance has been achieved in several fi elds in the Paris Basin, leading to increases in production rates and reserves.
Facilities and infrastructure are in place with excess capacity to enable a rapid development of new reserves. The French assets generate low decline and predictable long-term production for Lundin Petroleum.
Further exploration opportunities and exploitation of contingent resources are being pursued to increase French production. Lundin Petroleum embarked on studies to understand the shale oil potential of the Paris Basin with the aim to start a concept work plan as soon as the French authorities allow further shale oil activities.
Following the successful exploration of the Villeseneux fi eld in 2009, the exploration well was brought on stream in 2010. The drilling of a second Villeseneux well is planned in the fi rst half of 2011.
After drilling of the Villeseneux well an eight well drilling program will start in the Grandville fi eld, of which fi ve are planned to be drilled in 2011. The Grandville development plan was approved in 2010 and comprises drilling, a new gathering system and a new production centre. If successful a further four wells can be drilled, which are currently carried in contingent resources.
The Les Mimosas fi eld was discovered in 2004 and started production from one producer. A water injector was drilled in 2010 and water injection started in June. Oil is currently being trucked but it is planned to install a pipeline in 2011 to export oil from Les Mimosas to the Les Arbousiers facilities.
One of the largest fi elds in Aquitaine is the Courbey fi eld with a current recovery factor of less than ten percent. Seismic reprocessing is ongoing and this will be followed in 2011 by a fi eld development study.
| FRANCE KEY DATA | 2010 | 2009 |
|---|---|---|
| Reserves (MMboe) | 22 | 22 |
| Contingent resources (MMboe) | 7 | 10 |
| Average production per day (Mboepd) | 3 | 3 |
| Net turnover (MUSD) | 94 | 79 |
| Sales price achieved (USD/boe) | 79 | 61 |
| Cost of operations (USD/boe) | 17 | 15 |
| Operating cash fl ow contribution (USD/boe) | 42 | 35 |
Maintenance technician Montmirail, France
Pascal joined Lundin Petroleum in 2006 and is working with maintenance and workover of production wells in the Paris Basin.
Head of Geophysical operations Moscow, Russia
Svetlana has more than 20 years of industry experience in geology and geophysics. She joined Lundin Petroleum in 2006.
Russia is one of Lundin Petroleum's core areas with major focus on the Lagansky Block in the Caspian where Lundin Petroleum has a 70 percent interest (WI 70%).
The Lagansky Block is 2,000 square kilometres in size and is located off shore in the north Caspian area, close to major, world class hydrocarbon discoveries. The Morskaya discovery was made in 2008 and contains contingent resources of 110 MMboe net to Lundin Petroleum.
A new 3D seismic acquisition programme was conducted in 2010. Processing is ongoing and will be followed by interpretation to provide a better understanding of the nature of the remaining potential in the block. Several additional structures have been identifi ed and their resource potential will be assessed.
Lundin Petroleum has a 50 percent licence interest in three producing fi elds in Komi. Production comes from Devonian carbonate reservoirs. Infi ll drilling had successfully increased production to around 9,000 boepd in 2009, but decline continues, and in 2010 production was 7,200 boepd gross. Infi ll drilling is expected to continue in 2011. Oil is exported via the nearby Transneft pipeline system and about 60-65 percent is sold domestically.
| RUSSIA – KEY DATA | 2010 | 2009 |
|---|---|---|
| Reserves (MMboe) | 17 | 17 |
| Contingent resources (MMboe) | 110 | 163 |
| Average production per day (Mboepd) | 4 | 5 |
| Net turnover (MUSD) | 67 | 74 |
| Sales price achieved (USD/boe) | 52 | 38 |
| Cost of operations (USD/boe) | 9 | 9 |
| Operating cash fl ow contribution (USD/boe) | 8 | 7 |
The Netherlands is a mature gas province providing Lundin Petroleum with stable, long-term onshore and off shore production. The production is generated from non-operated interests. Although most of the producing fi elds are mature, additional infi ll drilling and development opportunities are actively pursued.
The produced gas is sold to Gasterra under a long-term contract in accordance with the Dutch government's small gas fi eld policy.
In early 2010, a successful well, De Hoeve-1, was completed and together with the successful Vinkega-1 gas well onshore Gorredijk licence completed in 2009, these discoveries are planned to be brought on-stream in the early part of 2011. Further drilling possibilities are being reviewed, and four onshore exploration wells are planned for 2011.
| NETHERLANDS KEY DATA | 2010 | 2009 |
|---|---|---|
| Reserves (MMboe) | 4 | 3 |
| Average production per day (Mboepd) | 2 | 2 |
| Net turnover (MUSD) | 35 | 40 |
| Sales price achieved (USD/boe) | 44 | 50 |
| Cost of operations (USD/boe) | 11 | 12 |
| Operating cash fl ow contribution (USD/boe) | 26 | 30 |
Lundin Petroleum has one non-operated exploration licence off shore Ireland in the Slyne Basin (Inishmore licence 50%). A one year licence extension was granted in late 2010. A 3D seismic survey was acquired in 2010, and will be interpreted during 2011. This will allow the partnership to decide whether to enter Phase II in late 2011, which will carry a drilling commitment.
The Oudna fi eld (WI 40%) came on stream in November 2006. The fi eld is producing at stable rates of over 2,000 bopd, gross. In 2010 the fi eld has produced above expectations. The Oudna fi eld consists of a single production well supported by a single water injection well, both tied back to the Ikdam FPSO. Reservoir pressure is maintained by water injection and artifi cial lift is provided by a crude oil powered jet-pump. The Oudna fi eld is now expected to continue producing into 2012.
The Ikdam FPSO is owned by Ikdam Production S.A. and the shareholders are Lundin Petroleum (40%), Teekay-Petrojarl Production AS (40%) and Gezina AS (20%).
Contingent resources have been removed given the impending sale of the Birsa licence and the very small volumes associated with the Zelfa licence.
| TUNISIA – KEY DATA | 2010 | 2009 |
|---|---|---|
| Reserves (MMboe) | 0.5 | 0.3 |
| Contingent resources (MMboe) | – | 8 |
| Average production per day (Mboepd) | 1 | 1 |
| Net turnover (MUSD) | 30 | 26 |
| Sales price achieved (USD/boe) | 77 | 55 |
| Cost of operations (USD/boe) | 39 | 27 |
| Operating cash fl ow contribution (USD/boe) | 26 | 13 |
Lundin Petroleum has an 18.75 percent interest in Block Marine XI and a 21.55 percent working interest in the adjoining Block Marine XIV, off shore Congo (Brazzaville). Previous exploration activity on the Block Marine XI has resulted in four small oil discoveries. All discoveries are situated near existing facilities and in shallow water.
One year licence extensions were requested and granted for both blocks during 2010. The decision to enter phase II and commit to a additional well was made on Block Marine XI based on latest technical studies. Marine XIV decision to enter the next phase is subject to the 2011 drilling results. Work is ongoing to defi ne a two well exploration programme for 2011 – one well on each licence.
Note: Reserves and resources are published as per end of year. 1 excluding United Kingdom
2P RESERVES187MMboe
RESERVES REPLACEMENT RATIO237% INCREASE IN RESERVES 18%
As of end 2010, Lundin Petroleum had 186.7 million barrels of oil equivalent (MMboe) of proven and probable (2P) oil and gas reserves. This is an increase of 18 percent when compared to last year, taking into account production of 11.9 MMboe in 2009 and the sales of 85.5 MMboe of reserves related to UK assets which were spun off into EnQuest PLC and the Salawati assets in Indonesia which were sold to RH Petrogas. The reserves replacement ratio, which is calculated by dividing the increase in reserves during 2010 by the production in 2010 is 237 percent. Of the 186.7 MMboe of 2P reserves, 84 percent is related to oil reserves and 98 percent of the total 2P reserves are situated in tax-royalty regimes. Lundin Petroleum is quoting all of its reserves in working interest barrels of oil equivalent. All reserves are externally audited by Gaff ney, Cline and Associates.
Following two years of reporting a reserves replacement ratio of close to 400 percent, Lundin Petroleum has had another year with a strong reserves replacement of 237 percent. In other words, every barrel produced in 2010 has been replaced by almost 2.4 barrels of 2P reserves, giving a strong reserves base for future production growth.
In Norway, Lundin Petroleum's reserves increased from 120.9 MMboe to 139.2 MMboe, despite production of 6.6 MMboe. This is mainly as a result of the appraisal well drilled in the Luno fi eld early 2010, which resulted in an increase in the Luno reserves from 47.5 MMboe to 74 MMboe. Furthermore, reserves increases were achieved for the Alvheim, Gaupe and Nemo fi elds. This was off set by moving 8.7 MMboe of Peik reserves to contingent resources pending the decision to develop this fi eld.
Small reserves increases were booked in Tunisia, Netherlands and France, all more than replacing the 2010 production.
| 2P Reserves Summary | MMboe |
|---|---|
| End 2009 | 255.9 |
| - Produced | 11.9 |
| + New reserves (excluding sales/acquisitions) | 28.3 |
| - Sales | 85.5 |
| End 2010 | 186.7 |
Oil price (Brent) USD 85/bbl fl at + 2 % escalation on oil price and costs
Lundin Petroleum calculates reserves and resources according to 2007 Petroleum Resources Management System (PRMS) Guidelines of the Society of Petroleum Engineers (SPE), World Petroleum Congress (WPC), American Association of Petroleum Geologists (AAPG) and Society of Petroleum Evaluation Engineers (SPEE). Lundin Petroleum's reserves are certifi ed by Gaff ney, Cline and Associates (GCA), an independent reserves auditor. Reserves are defi ned as those quantities of petroleum which are anticipated to be commercially recovered from known accumulations from a given date forward. Estimation of reserves is inherently uncertain and to express an uncertainty range, reserves are subdivided in Proved, Probable and Possible categories. Lundin Petroleum reports its reserves as Proved plus Probable (2P) reserves.
Proved reserves are those quantities of petroleum which, by analysis of geological and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under current economic conditions, operating methods and governmental regulations. Proved reserves can be categorised as developed or undeveloped. If deterministic methods are used, the term reasonable certainty is intended to express a high degree of confi dence that the quantities will be recovered. If probablistic methods are used, there should be at least a 90 percent probability that the quantities actually recovered will equal or exceed the estimates.
Probable reserves are those unproved reserves which analysis of geological and engineering data suggests are more likely than not to be recoverable.In this context, when probablistic methods are used, there should be at least a 50 percent probability that the quantities actually recovered will equal or exceed the sum of estimated proved plus probable reserves.
According to the SPE/WPC contingent resources are those quantities of petroleum which are estimated, on a given date, to be potentially recoverable from known accumulations, but which are not currently considered to be commercially recoverable.
RESOURCES DEFINED
Prospective resources Under the SPE/WPC defi nitions exploration resources are classifi ed as prospective resources. Prospective resources are those quantities of petroleum which are estimated, on a given date, to be potentially recoverable from undiscovered accumulations.
As an integrated Exploration and Production company, Lundin Petroleum is continuously aiming to grow the business by identifying exploration targets and maturing exploration targets into drillable prospects, and thus increase its prospective resource base. By drilling exploration wells and discoveries, prospective resources are moved into contingent resources and after formulating a development strategy and demonstrating commerciality, contingent resources are moved into 2P reserves.
TARGETED PROSPECTIVE RESOURCES DURING 2011 483 MMboe
In addition to its certifi ed reserves, Lundin Petroleum has a number of discovered oil and gas resources which classify as contingent resources. All contingent resource estimates have been audited by Gaff ney, Cline and Associates.
At end 2010 Lundin Petroleum has 259.2 MMboe of contingent resources. This compares to 285 MMboe at end 2009. Major changes are related to the removal of 54.3 MMboe of UK related contingent resources and a 53.2 MMboe downgrade of the contingent resources in the Morskaya fi eld following the results of the interpretation of 3D seismic. This reduction was off set by the inclusion of 97.6 MMboe contingent resources for the Avaldsnes and Apollo fi elds in Norway, which were discovered in 2010.
Morskaya contingent resources net to Lundin Petroleum are based on the current working interest of 70 percent. To comply with Russia's foreign strategic investment law, Lundin Petroleum is in discussions with Russian state owned entities to participate with a 51 percent interest in Morskaya.
Lundin Petroleum has an active work programme to mature contingent resources into reserves. Two appraisal wells are scheduled for 2011 to apprise the Avaldsnes discovery following which conceptual fi eld development work will start. Conceptual development studies for the Krabbe fi eld are progressing with the aim to choose a concept in 2011. The Apollo discovery will likely be appraised in 2012.
Lundin Petroleum has a substantial portfolio of exploration licences. In 2011 Lundin Petroleum is planning to drill (operated and non-operated) 21 exploration and appraisal wells targeting in total 483 MMboe of net unrisked prospective resources. Ten of these exploration and appraisal wells are expected to be drilled in Norway and fi ve are planned to be drilled as part of a new drilling campaign in Malaysia. The other wells are planned to be drilled in the Netherlands and Congo (Brazzaville).
Lundin Petroleum produced a total of 11.9 MMboe in 2010 from fi elds in Norway, France, Netherlands, Russia, Tunisia and Indonesia and from the United Kingdom for the fi rst quarter only. Production throughout the year has been at the upper end of the production guidance.
The main contributor to the strong production has been the continued good performance of the Alvheim fi eld in Norway. Both fi eld production and FPSO uptime have been above forecast. Furthermore, the Volund fi eld started production in April 2010 and produces over the Alvheim FPSO with a minimum contracted capacity of 25,000 bopd. However, well capacity is such that Volund can and has been producing more when there is additional capacity available on the Alvheim FPSO.
The development of the Volund fi eld is now complete. A further three multi-lateral development wells will be drilled on the Alvheim fi eld in 2011 and one well in 2012. Further development options are being investigated in both Volund and Alvheim fi elds.
Lundin Petroleum sold a total of 11.7 MMboe at an average oil price achieved of USD 72.26 per boe. The average Dated Brent price for 2010 was USD 79.50 per barrel.
The oil produced in Russia which is 11 percent of Lundin Petroleum's total production is sold either on the Russian domestic market or exported into the international market. 40 percent of the Russian sales in 2010 were on the international market at an average price of USD 76.17 per barrel and the remaining 60 percent of Russian sales being sold on the domestic market at an average price of USD 34.98 per barrel.
Production quantities in a period can diff er from sales quantities for a number of reasons. Timing diff erences can arise due to inventory, storage and pipeline balances eff ects. Several of Lundin Petroleum's fi elds are producing into storage tanks onboard FPSOs, such as the Alvheim/Volund fi elds in Norway and the Oudna fi eld in Tunisia or into onshore storage tanks such as the fi elds in the Aquitaine basin in France. These storage tanks are offl oaded on a regular basis depending on the production volume and it is only at the point of having offl oaded these tanks that the sale of this crude is recorded in the income statement and this can sometimes lead to a misalignment between what is reported as produced crude oil volume versus sold crude oil volumes. However, over time these diff erences between reported production and sales volumes will balance out.
In certain fi scal regimes part of the production volume has to be transferred to the government as a tax and/or royalty payment in kind which results in lower sales volumes than production volumes. In 2010, production from Lundin Petroleum's Oudna fi eld in Tunisia and from the Indonesian fi elds (including the divested Salwati assets) were liable for such "in-kind" payments.
Lundin Petroleum's production forecast for 2011 is in the range of 28,000 to 33,000 boepd. This compares to 28,400 boepd in 2010, excluding the production from the divested UK and Indonesian assets.
2010 PRODUCTION PERFORMANCE 28,400boepd excluding production from divested assets
» Principle 10: Businesses should work against corruption in all its forms, including extortion and bribery.
Corporate Responsibility (CR) is Lundin Petroleum's way of integrating sustainable social, environmental and economic development in its exploration and production activities. Over the years Lundin Petroleum's CR department has, in consultation with Operations, Finance & Administration put in place systems, processes and procedures to carry out activities in accordance with good oilfi eld practice and with due regard for the health and safety of its staff and contractors, for the preservation of the environment, and for the socio-economic development of areas of operations.
In May 2010, Lundin Petroleum confi rmed its CR commitment by formally joining the United Nations Global Compact (UNGC). The UNGC is a voluntary initiative that aims to encourage businesses worldwide to adopt sustainable and socially responsible policies, and to report on their implementation1 .
Specifi cally, the UNGC asks companies to embrace, support and enact, within their sphere of infl uence, the ten principles of the UNGC.
By joining the UNGC, Lundin Petroleum pledged to make the ten principles an integral part of the Company's business strategy, day-to-day operations and organizational culture, to incorporate the principles in the decision making process of the Board of Directors, to contribute to broad development objectives through partnerships, to advance the Global Compact and responsible business practices through active outreach to stakeholders and the public at large and to publish a Communication on Progress (COP).
Below is a review of the current CR framework documents and management structure, as well as a report on the CR/HSE actions undertaken in 2010. This report is also submitted as Lundin Petroleum's UNGC COP.
1 For further information on the UNGC, please refer to www.unglobalcompact.org.
Lundin Petroleum's Code of Conduct, which is at the core of its Corporate Responsibility commitment details the Vision, Values and Principles by which the Company is guided, as well as the Responsibilities it has towards its stakeholders: shareholders, staff , host countries, host communities and the environment. The Company commits, inter alia, to uphold generally accepted principles on the protection of human rights and the environment, to refrain from engaging in bribery or corrupt business practices and to respect and promote employees rights, as per the UNGC principles.
The Code of Conduct has remained unchanged since its adoption in 2001 as it continues to refl ect the views of Lundin Petroleum's directors, management and staff . A formal review of the Code of Conduct and Global Compact implementation will take place at Board level in the spring of 2011 to mark Lundin Petroleum's fi rst year of membership in the UNGC.
Lundin Petroleum's Health & Safety Policy sets the aim to conduct all operations in a manner that protects people and property and complies with applicable legislation. The principal health and safety objective is to provide a safe working environment for employees, contract personnel and members of the general public.
Lundin Petroleum's Environmental Policy sets the aim to protect the environment and to ensure that exploration and production operations are conducted in compliance with applicable environmental laws and regulations and meet company-specifi ed environmental procedures and programmes.
Lundin Petroleum's Community Relations Policy sets the aim to enhance the living standards and well being of the people in the areas it operates by, for example, hiring local staff and/or participating in community projects.
These Policies have remained unchanged, as they continue to represent Lundin Petroleum's high level commitment to Health, Safety, Environment (HSE) and Communities.
Lundin Petroleum's HSE Management System, the Green Book, sets corporate requirements for the systematic and comprehensive integration of HSE issues in the management of the Company's worldwide operations. It aims to achieve continuous improvement of HSE performance through a pro-active management process covering planning, implementation, monitoring and review activities.
No changes were made to the Green Book in 2010, as the document was revised in 2009; it has, however, been strengthened through the adoption of three corporate HSE Guidelines (see below The Corporate Guidelines).
In order to reinforce the commitments made in Lundin Petroleum's Code of Conduct, HSE Policies and the Green Book and to avoid potential negative impacts on people, assets and the environment, the Company promotes the following high level HSE goals throughout its operations:
These goals have been communicated to General and HSE managers in the Group, together with suggested "Promote, Prevent & Reduce" actions from the Health, Safety and Environment perspectives.
Lundin Petroleum elaborates a corporate HSE Plan on a yearly basis. The purpose of this Plan is to have a systematic approach to HSE management, to increase HSE awareness among staff and involve them in planned activities, to promote a sound HSE culture at corporate management level as well as reinforce the Company's corporate HSE goals. The corporate HSE Plan describes the Company's main operations and the HSE activities which will be undertaken to ensure that operations are carried out in accordance with HSE best practice. The Plan is developed by the VP Corporate Responsibility (VPCR) in consultation with the CEO and Chief Operating Offi cer (COO), and is checked for progress at minimum on a quarterly basis. The Plan covers general, management system, audit and verifi cation, as well as offi ce activities.
In 2010 most activities were carried out per, or above, the corporate HSE Plan, except for the frequency of HSE Quarterly Management Meetings, and for the corporate reviews of the HSE Management Systems Requirements, which were carried out as follows:
Country management are required under the Green Book to have their own country and/or asset HSE Plans as a means to manage HSE issues on a pro-active basis, setting HSE goals and objectives and ensuring that HSE issues are addressed by line management.
A new corporate reporting requirement has been set for 2011 whereby country operations will report monthly on progress against their HSE Plan in order for corporate to have regular and auditable information regarding every country's HSE management activities.
A new feature in Lundin Petroleum's CR framework in 2010 has been the development of corporate Guidelines. The purpose of the Guidelines is to assist country operations in focussing on specifi c CR & HSE issues which corporate has identifi ed as requiring special attention in view of developments within the Company or industry. In 2010, the following Guidelines were issued:
The Guidelines for HSE Managers for the Budgeting Process assists HSE managers, through a series of questions, to ensure that HSE issues have been properly addressed and integrated in operational budgets. HSE managers are required to report to corporate that they are satisfi ed with the operational budgets.
The Guidelines on Oil Spill Preparedness were issued following the Deepwater Horizon accident as an additional control mechanism to ensure that Group companies have the proper response equipment, plans, capability and third party arrangements in place. Emergency preparedness is part of the Green Book and since 2004 all off shore operated drilling and production activities are covered under corporate contract with Oil Spill Response Ltd, the Guidelines are thus a reinforcement of existing practice.
The Guidelines on Sustainable Investments replace the former Corporate Donations Policy; the document was revised to refl ect Lundin Petroleum's management of stakeholder issues such as community relations and environmental protection, in view of its new focus areas, i.e. Europe and South East Asia (see below under Sustainable Investments).
Lundin Petroleum has corporate requirements and procedures that aim to ensure that operations are conducted in a safe and respectful manner throughout the Group; these include the HSE Management System Requirements (MSR), which provide guidance on the specifi c requirements on operations under the Green Book. In 2010 the HSE MSR Self-Assessment Form was used as a basis for formal HSE MS audits (Tunisia) and reviews (France, Indonesia and Malaysia). In 2011 the same document will be relied upon to carry out formal audits of all operated assets.
The corporate HSE Reporting Requirements, modifi ed in 2009 to align with the Occupational Safety and Health Administration standards (OSHA 1904), remained unchanged in 2010. The Company is thus building a track record of HSE performance to carry out multi-year comparisons of HSE performance (see below under Comparison 2009-2010 HSE KPIs).
Crisis management procedures are also in place to ensure business continuity in the event of a problem either at operations or corporate. Operated country operations are required to carry out at least one emergency drill involving corporate, in order to test the eff ectiveness of the emergency response procedure and communications between corporate and operations during emergency situations. The requirement was fulfi lled by all operated assets in 2010.
Lundin Petroleum's whistleblowing procedure, adopted in 2008 to provide an avenue for all the employees in the Group to raise concerns about improper, unethical or illegal conduct in the workplace and to obtain reassurance that they will be protected from reprisals or victimisation for whistleblowing in good faith has not resulted in any allegation of misconduct.
There are operational HSE procedures in every country of operations covering the full spectrum of exploration and production activities, from environmental, security and risk studies and assessments, to permit-to-work systems, Job Safe Analyses, oil spill and emergency response preparedness as well as HSE and business continuity plans. All procedures are tested and verifi ed on an ongoing basis, through drills as well as internal, external and/or regulatory audits.
Lundin Petroleum's Board of Directors has a supervisory role regarding HSE issues. In 2009, it was decided that the Board would have a member acting as focal point for HSE issues. In 2010 a dialogue has taken place between management and the Board member to review HSE management and performance issues on an ongoing basis.
Lundin Petroleum HSE Quarterly Management Meeting, initiated end 2009, convenes senior and operational management to review HSE performance in the Group, progress against HSE Plan and discuss HSE implications of planned operational activities and other matters of interest. In 2010 only one of the four scheduled meetings was held, although HSE management and performance issues were addressed in individual meetings between the VPCR and the CEO, COO, the Senior VP Operations (SVPO) and/or the Group Human Resources Manager (HR Manager). The topics covered at the quarterly meeting were:
BERNT RUDFJORD HSE Manager Oslo, Norway
Bernt has 25 years experience as a petroleum engineer. He joined Lundin Petroleum in 2006 and is responsible for health, safety and environment regarding drilling and development projects.
Lundin Petroleum's corporate HSE Committee, consisting of the SVPO, VPCR and HR Manager, is tasked with addressing HSE matters on a needs basis. Meetings focus on a single issue or review a number of issues such as KPIs, the HSE implications of planned or current operations, the implication of the Deepwater Horizon accident, and potential problem areas, etc. In 2010 the Committee met informally on a monthly basis and held four formal meetings.
Lundin Petroleum gathers on a bi-monthly basis Group HSE and General Managers in a conference call. Each HSE Teleconference includes a review of main concerns/issues of the month, a status and discussion of HSE Key Performance Indicators (KPIs), lessons learned, and a presentation by one of the assets about a specifi c HSE issue. Five teleconferences were held in 2010. The topics of the presentations were:
All HSE corporate, operational and industry documents as well as teleconference materials including presentations are posted on a dedicated HSE web forum, accessible by GMs, Operations and HSE managers throughout the Group.
The Company tracks a number of HSE Key Performance Indicators (KPIs) for its operated assets as a means to monitor the status of performance throughout the Group. In doing so it also fulfi ls its UNGC commitments regarding labour and the environment.
The Health & Safety indicators tracked on an ongoing basis throughout the Group and reported on a monthly basis to corporate are Fatalities, Lost Time Incidents, Restricted Work Incidents (RWI) and Medical Treatment Incidents (MTI) among staff and contractors. Coupled with the number of hours worked, these indicators enable the Company to determine its Total Recordable Incident Rate (TRIR) per 200'000 hours worked. In addition to these lagging indicators (reporting incidents that have occurred), the Company also tracks leading indicators such as Near Misses with High Potential. The importance of leading indicators is that they throw a light on potential problems areas and enable the Company to take pro-active measures to avoid them from developing into incidents.
The environmental indicators that have been reported on a monthly basis since 2004 are oil spills beyond 1 barrel and, since 2009, chemical and hydrocarbon leaks over 1m3 . In addition, operated assets report greenhouse gas emissions (CO2, NOX , SOX , CO, N2 O, CH4 , nmVOC) on a yearly basis.
Lundin Petroleum had an ambitious work programme in 2010 with sustained exploration and production activities throughout the Group. In accordance with Lundin Petroleum's HSE Reporting Requirements, accidents and incidents involving people or the environment were noted, investigated and reported to corporate, both on an ad hoc basis, for cases requiring immediate attention, and on a monthly basis. The severity of the incidents was limited insofar as none had a permanent impact on the injured party or on the environment, however, their number has given rise to concern and action by corporate and country management in the relevant areas, as per below.
Group HSE KPIs were as follows:
There have been no fatalities among staff or contractions in Lundin Petroleum's operated and non-operated assets since the Company's creation in 2001.
» UK (6 NCwP): the fi rst was in relation to the use of a chemical whose permit had expired the other fi ve were in relation to the oil in water concentration which slightly exceeded the permit level (i.e. 118 mg versus 110 permitted). These non-compliances were the subject of communications with the regulator.
Despite the various actions taken at corporate and country level to track and improve HSE performance throughout the Group, the record is mixed. There are reasons for concern in some areas and there are clear improvements in others.
The fi gures above and in the Table below indicate that there have been clear improvements in staff HSE performance, but a deterioration in contractor performance. This is mainly attributable to the onshore seismic campaign which was carried out in the second half of 2010 in Indonesia. While the HSE track record and management system of the main contactor was assessed and reviewed prior to contract allocation, the capacity of subcontractors was not suffi ciently taken into consideration. This coupled with the fact that the campaign involved approximately 1200 mostly unskilled personnel operating in unfavourable weather conditions resulted in an overall unsatisfactory HSE performance. Lundin Petroleum corporate and country management carried out a number of fi eld inspections which resulted in a series of recommendations and demands, which the main contractor started to address forthwith. These involved HSE management system measures, such as timely reporting and investigation of incidents, equipment upgrades, improvement to the number and capacity of fi eld personnel, etc. As a result there was an improved HSE performance towards the end of the year; however, as the campaign is ongoing in 2011, additional management time and resources have been dedicated to this project to ensure the positive trend continues.
On a positive note, despite Norway's extensive exploration and production activity, there were no reportable incidents in 2010.
| HSE INDICATOR DATA | 2010 | 2009 | |
|---|---|---|---|
| Exposure Hours | Employees | 731,793 | 905,166 |
| Contractors | 2,336,409 | 3,454,980 | |
| Employees | 0 | 0 | |
| Fatalities | Contractors | 0 | 0 |
| Employees | 2 | 2 | |
| Lost Time Incidents 1 | Contractors | 2 | 1 |
| Employees | 0 | 1 | |
| Restricted Work Incidents 2 | Contractors | 7 | 0 |
| Employees | 0 | 2 | |
| Medical Treatment Incidents 3 | Contractors | 17 | 7 |
| Lost Time Incident Rate 4 | Employees | 0.55 | 0.44 |
| Contractors | 0.17 | 0.06 | |
| Employees | 0.55 | 1.10 | |
| Total Recordable Incident Rate 4 | Contractors | 2.23 | 0.46 |
| No. | 1 | 1 | |
| Oil Spills | Vol. (m3 ) |
10 | 40 |
| No. | 1 | 2 | |
| Chemical Spills | Vol. (m3 ) |
7.7 | 129.775 |
| No. | 0 | 1 | |
| Hydrocarbon Leaks | Mass (kg) | 0 | 4 |
| Near Misses with High Potential | No. | 3 | 24 |
| Non-compliance with Permits/Consents | No. | 6 | 19 |
1 Lost Time Incident (LTI) is an incident which results in a person having at least one day away from work.
Lundin Petroleum's mission is to fi nd and produce oil and gas, a valuable source of energy required for global economic development, in an effi cient and responsible way. It fulfi ls this mission by having in place the CR framework and structure described above, providing staff and contractors with the necessary support and guidance in terms of training, procedures, equipment and tools, etc. to carry out activities competently and with minimal disturbance to people and the environment. Lundin Petroleum has set the additional goal of having a positive impact on people and the environment by initiating or participating in projects which promote social welfare, environmental protection and good governance.
After joining the UN Global Compact in 2010, Lundin Petroleum issued new Guidelines on Sustainable Investments to encourage and assist country management within the Group to refl ect upon the types of activities they are engaged in and determine ways in which they could positively impact the people and the environment in their areas of operations. The Guidelines were presented within the Group in an HSE Teleconference and discussed with GMs and/or HSE offi cers of each country individually.
There are two mechanisms for contributions under the Guidelines: community development projects and corporate donations. Community development projects are elaborated as part of Lundin Petroleum's and/or operating partners' licence commitments in economically challenged areas; they are part and parcel of the operations and are done on a scale that refl ects the extent and nature of the operational activities. Corporate donations take place in areas where Lundin Petroleum has limited interface with local communities, either because the activities are off shore or because they are partner-operated.
Sustainable investments have taken place in fi elds which both the United Nations' Global Compact and the Millennium Development Goals promote namely social welfare, environment and governance. Below is a sample of the projects which Lundin Petroleum funded in 2010.
Poverty is a social plague which aff ects children in a disproportionate way. Since 2006, Lundin Petroleum has been a partner of SOS Children's Village, Sweden and has supported a number of children's villages in operated (Indonesia, Tunisia) and non-operated (Vietnam, Cambodia) areas. This support has continued in 2010 through direct contributions from Indonesian and Tunisian offi ces to their respective Villages and a corporate contribution via Sweden to Vietnam, a non-operated area.
Improving access to basic health is another goal which Lundin Petroleum promotes. In 2010, it organised a fundraiser among its staff and matched raised amounts to fund health projects carried out by Partners in Health further to the earthquake that took place in Haiti on January 12, 2010. In Indonesia, as part of its onshore 472 km 2D seismic campaign, the Company funded a medical campaign for children carried out by the Hope Foundation.
Lundin Petroleum continued to support the Southern Sudan's Older People's Organization's (SSOPO) Project of Vocational Training in Food Processing, which helps women from the Juba area to acquire vocational skills. The Company decided to maintain its support to this project even though it no longer has operational interests in Sudan, as its contribution enables SSOPO to get co-funding from other organisations.
Preservation of the environment is included in Lundin Petroleum's day-to-day operations and was also the subject of sustainable investments in 2010. The Company sponsored an environmental protection initiative in the Volga Delta area whereby volunteers collected rubbish from river banks and camping sites, and sensitised local residents and tourists to the principles of preservation of the environment and eco-tourism. The initiative was recognised by the Governor of Astrakhan as having great value to the area and was reported in multiple local media.
Biodiversity was another aspect covered by Lundin Petroleum's sustainable investments. The Company supported a research project in relation to the artifi cial breeding of sturgeons, whose population in the Volga Delta area is decreasing due to poaching activities. It also facilitated the nesting of Siberian cranes, a critically threatened species according to the International Union for Conservation of Nature (IUCN). In France, the Company sponsored posters identifying rare fauna and fl ora species in the swamps areas and the need to preserve them.
Climate Change remains an important consideration for Lundin Petroleum, which tracks green house gas emissions in the course of its operations. In 2010 it participated again in the Carbon Disclosure Project and for the second consecutive year featured in the Nordic 200 Carbon Disclosure Leadership Index (CDLI). The Company ranked fi rst among Nordic oil and gas companies and third among all Swedish companies rated by the Carbon Disclosure Project. Lundin Petroleum was commended for its approach to corporate governance in respect of climate change disclosure practice, its good internal data management and understanding of climate change issues.
Lundin Petroleum addressed the issue of governance both internally and externally. Internally the Company prepared a presentation on the UNGC's two fi rst principles on human rights (i.e. support and respect the protection of human rights and avoid complicity in human rights abuses). The presentation was made to senior corporate management at the HSE Quarterly Meeting in 2010 and at the HSE Teleconference with Group General and HSE Managers in Q1 2011. A copy of the presentation as well as Lundin Petroleum's Human Rights Primer are posted on Lundin Petroleum's internal HSE web forum.
In addition, Lundin Petroleum has sponsored research and a workshop at the Institute of Graduate Studies, Geneva, Switzerland on "Global and local governance in the energy sector". The workshop, held over two days in February 2010, gathered academics and representatives from the non-governmental and private sectors, who presented and discussed the issue of governance from a macro societal level to a micro company level. Every participant, including Lundin Petroleum, contributed an article which will be published by the Journal of Global Governance in the second half of 2011.
The object of Lundin Petroleum's business is to explore, develop and produce oil and gas and to develop other energy resources, as laid down in its Articles of Association. The Company aims to create value for its shareholders through exploration and organic growth. To achieve this value creation, Lundin Petroleum applies a governance structure that favours straightforward decision making processes, with easy access to the relevant decision makers, while nonetheless providing the necessary checks and balances for the control of the activities, both operationally and fi nancially.
The governance structure of Lundin Petroleum can be summarised in the following chart and will be described in further detail in this corporate governance report.
This corporate governance report has been subject to a review by the Company's auditors.
Since its creation, Lundin Petroleum has been guided by general principles of corporate governance to:
Lundin Petroleum adheres to principles of corporate governance found in both internal and external rules and regulations. As a Swedish public limited company listed on the NASDAQ OMX Stockholm, Lundin Petroleum is subject to the Swedish Companies Act (SFS 2005:551) and the Annual Accounts Act (1995:1554), as well as the Rule Book for Issuers of the NASDAQ OMX Stockholm (which rules can be found on the website www.nasdaqomx.com).
In addition, the Company abides by principles of corporate governance found in a number of internal and external documents.
The Swedish Code of Corporate Governance (Code of Governance) is based on the tradition of self-regulation and acts as a complement to the corporate governance rules contained in the Companies Act, the Annual Accounts Act and other regulations such as the Rule Book for Issuers and generally acceptable behaviour in the securities market. The Code of Governance can be found on the website www.bolagsstyrning.se. A revised Code of Governance entered into force on 1 February 2010 and certain rules became applicable in stages during the course of 2010. Lundin Petroleum has applied the new rules introduced in 2010 when such new rules entered into force.
The Code of Governance is based on the "comply or explain principle", which entails that a company may choose to apply another solution than the one provided by the Code of Governance if it fi nds an alternative solution to be more appropriate in a particular case. The company must however explain why it did not comply with the rule in question and describe the company's preferred solution, as well as the reasons for it. Lundin Petroleum complied in all major aspects with the Code of Governance in 2010, other than in a few instances as mentioned in this report.
Lundin Petroleum's Articles of Association, which form the basis of the governance of the Company's operations, set forth the Company's name, the seat of the Board, the object of the business activities, the shares and share capital of the Company and contain rules with respect to the Shareholders' Meetings. The Articles of Association can be found on the Company's website www.lundin-petroleum.com.
Lundin Petroleum's Code of Conduct is a set of principles formulated by the Board to give overall guidance to employees, contractors and partners on how the Company is to conduct its activities. As an international oil and gas exploration, development and production company operating globally, the aim of the Company is to explore for and produce oil and gas in the most economically effi cient, socially responsible and environmentally acceptable way, for the benefi t of its shareholders, employees and co-venturers. The Company applies the same standards to its activities worldwide to satisfy both its commercial and ethical requirements.
The Code of Conduct was adopted at the formation of Lundin Petroleum in 2001 when no external rules or regulations regarding corporate governance, which the Company had to follow, existed. The Company decided to make its values, principles and commitment explicit in order to set the necessary framework for its ethical conduct, against which the Company could be assessed and evaluated. Compliance with the Code of Conduct is reviewed on an annual basis by the Board. The Code of Conduct can be found on the Company's website www.lundin-petroleum.com.
While the Code of Conduct provides the Company's ethical framework, dedicated policies, guidelines and procedures have been developed to outline specifi c rules and controls applicable in the diff erent business areas. The Company has policies, guidelines and procedures covering for example Operations, Accounting and Finance, Corporate Responsibility including HSE (Health, Safety and Environment), Legal, Information Systems, Human Resources and Corporate Communications. The policies, guidelines and procedures, which are available internally, are reviewed on a continuous basis and are adjusted as and when required.
In addition, Lundin Petroleum has a dedicated HSE Management System (Green Book), modelled after the ISO 14001 standard, which gives guidance to management, employees and contractors regarding the Company's intentions and expectations in HSE matters. The Green Book serves to ensure that all operations meet Lundin Petroleum's legal and ethical obligations, responsibilities and commitments within the HSE fi eld. A more detailed description of the Green Book is available on the Company's website www.lundin-petroleum.com.
The Rules of Procedure of the Board contain the fundamental rules regarding the division of duties between the Board, the committees, the Chairman of the Board and the Chief Executive Offi cer (CEO). The Rules of Procedure also include instructions to the CEO, instructions for the fi nancial reporting to the Board and the terms of reference of the Board committees. The Rules of Procedure, which are adopted annually by the Board, are in the process of being up-dated in view of the modifi ed Code of Governance and will be considered by the Board during the fi rst half of 2011.
The shares of Lundin Petroleum are listed on the Large Cap list of the NASDAQ OMX Stockholm. At the end of 2010, the issued share capital of Lundin Petroleum amounted to SEK 3,179,105.80 divided into 317,910,580 shares with a quota value of SEK 0.01 each. All shares carry the same voting rights and the same rights to a share of the Company's assets.
Lundin Petroleum had at the end of 2010 a total of 39,303 shareholders listed with Euroclear Sweden. Lundin Petroleum AB itself held 6,882,638 of its own shares representing 2.2 percent of the share capital. As per 31 December 2010, the major shareholders of the Company, which held more than ten percent of the shares (and votes), were Lorito Holdings (Guernsey) Ltd and Zebra Holdings and Investment (Guernsey) Ltd, two investment companies wholly owned by Lundin family trusts, which together held 27.4 percent of the shares. In addition, Landor Participations Inc, an investment company wholly owned by a trust whose settler is Ian H. Lundin, held 3.8 percent of the shares. More detailed information regarding the shares and shareholders of Lundin Petroleum in 2010 can be found on pages 54–55.
The shareholders of the Company decide how the Nomination Committee is to be formed at each Annual General Meeting (AGM). The tasks of the Nomination Committee include making recommendations to the AGM regarding the election of the Chairman and other Board members, fees for the Chairman and the other Board members, including fees for Board committee work, election of auditors, fees for the auditors, election of the Chairman at the AGM and principles for appointment of the Nomination Committee for the AGM of the following year. The Nomination Committee members are, regardless of how they are appointed, required to promote the interests of all shareholders of the Company.
Further to the Nomination Committee's responsibility to propose members to the Board to the AGM, the Chairman of the Board undertakes each year an evaluation of the work of the Board and its members and presents the results and conclusions to the Nomination Committee. No remuneration is paid to the Chairman or any other member of the Nomination Committee for their work on the Nomination Committee.
In accordance with the principles resolved by the 2010 AGM, the Nomination Committee for the 2011 AGM consists of the following members, representing four of the larger shareholders of the Company.
| Committee Member | Representing | Shares represented |
|---|---|---|
| KG Lindvall | Swedbank Robur Fonder | 4.1 percent |
| Ossian Ekdahl | Första AP-fonden | 1.8 percent |
| Anders Algotsson | AFA Försäkring | 1.8 percent |
| Ian H. Lundin | Lorito Holdings (Guernsey) Ltd., Landor Participations Inc. and Zebra Holdings and Investment (Guernsey) Ltd., also non-executive Chairman of the Board of Lundin Petroleum |
31.2 percent |
| Magnus Unger | Non-executive Board member of Lundin Petroleum who acts as the Chairman of the Nomination Committee |
Magnus Unger was again unanimously elected as Chairman, a function that he has held since the Nomination Committee formed for the 2006 AGM. The fact that he is a Board member constitutes a deviation from the Code of Governance, however, he was considered by the Nomination Committee to be best suited for the task. Further, Magnus Unger and Ian H. Lundin are not deemed to be independent of the Company's major shareholders, as explained in the schedule on pages 50–51 which also constitutes a deviation from the Code of Governance. The Nomination Committee however considered their appointment justifi ed.
The names of the members of the Nomination Committee were announced and posted on the Company's website on 15 October 2010. The Nomination Committee held three meetings during the year and informal contacts took place between such meetings. The report of the Nomination Committee regarding its work and proposals for the 2011 AGM will be published on the Company's website together with the notice of the AGM. The Nomination Committee for the 2011 AGM represents approximately 39 percent of the share capital of the Company.
The Shareholders' Meeting is the highest decision-making body of Lundin Petroleum where the shareholders exercise their voting rights and infl uence the operations of the Company. Shareholders may request that a specifi c issue be included in the agenda provided such request reaches the Board of the Company in due time. The AGM is to be held each year before the end of June at the seat of the Board in Stockholm. The notice of the AGM, which is to be given no more than six and no less than four weeks prior to the meeting, is to be announced in the Post- och Inrikes Tidningar (the Swedish Gazette) and on the Company's website. The documentation for the AGM is provided on the Company's website in Swedish and in English at the latest three weeks before the AGM.
At the AGM, the shareholders decide on a number of key issues regarding the governance of the Company, such as election of the members of the Board and the auditors, the remuneration of the Board, management and the auditors, including approval of the Policy on Remuneration, discharge of the Board members and the CEO from liability and the adoption of the annual accounts and appropriation of the Company's result. Extraordinary General Meetings (EGM's) are held as and when required for the operations of the Company.
The 2010 AGM was held on 6 May 2010 at the Skandia movie theatre in Stockholm. The AGM was attended by 331 shareholders, personally or by proxy, representing 51.6 percent of the share capital. The Chairman of the Board, all Board members and the CEO were present, as well as the Company's auditors and all Nomination Committee members, with the exception of one member.
The resolutions passed by the 2010 AGM include:
The minutes of the 2010 AGM are available in Swedish and in English on the Company's website.
Since the CEO does not speak fl uent Swedish, his presentation during the 2010 AGM was delivered in English, and not in Swedish as required by the Code of Governance. However, Swedish subtitles were provided concurrently.
An EGM was held on 22 March 2010 at Näringslivets hus in Stockholm. The EGM was attended by 149 shareholders, personally or by proxy, representing 46.8 percent of the share capital. The Chairman of the Board and two other Board members, including the CEO, as well as the Company's auditors, were present. However, four out of seven Board members were unable to attend due to previous commitments, which thus led to a deviation from the Code of Governance. Prior to the EGM, the Board had considered the matter and had unanimously approved the transaction.
The EGM resolved to approve the sale of Lundin North Sea B.V. to a newly formed UK company called EnQuest plc (EnQuest) in exchange for such number of shares of EnQuest as would be equal to 55 percent of the total outstanding shares of EnQuest, and resolved on a dividend to the eff ect that all of Lundin Petroleum's shares in EnQuest, corresponding to approximately 55 percent of the total number of shares in EnQuest, were distributed to the shareholders of Lundin Petroleum, including authorisation to the Board to decide upon the record date for the right to receive shares in EnQuest. The minutes of the EGM are available in Swedish and in English on the Company's website. Since the CEO does not speak fl uent Swedish, his presentation during the EGM was delivered in English, and not in Swedish as required by the Code of Governance.
An EGM was held on 4 November 2010 at Näringslivets hus in Stockholm. The EGM was attended by 167 shareholders, personally or by proxy, representing 44.4 percent of the share capital. Two Board members, including the CEO, were present. However, fi ve out of seven Board members were unable to attend due to previous commitments, which thus led to a deviation from the Code of Governance. Prior to the EGM, the Board had considered the matter and had unanimously approved the transaction.
The EGM resolved on a dividend to the eff ect that all of Lundin Petroleum's shares in Etrion Corporation (Etrion), corresponding to approximately 40 percent of the total number of shares in Etrion, were distributed to the shareholders of Lundin Petroleum, including authorisation to the Board to decide upon the record date for the right to receive shares in Etrion. The minutes of the EGM are available in Swedish and in English on the Company's website. Since the CEO does not speak fl uent Swedish, his presentation during the EGM was delivered in English, and not in Swedish as required by the Code of Governance.
The Company's external auditor is elected for a period of four years to provide for continuity in the audit process. At the 2010 AGM, no election of auditor took place as the audit fi rm PricewaterhouseCoopers AB was elected at the 2009 AGM as the auditor of the Company for the period until the 2013 AGM. The auditor in charge is the authorised public accountant Bo Hjalmarsson. The auditors' fees are described in the notes to the fi nancial statements – see Note 8 on page 78.
According to the Articles of Association, the Board shall consist of a minimum of three and a maximum of ten directors with a maximum of three deputies. As mentioned above, Ian H. Lundin, also Chairman of the Board, Magnus Unger, William A. Rand, Lukas H. Lundin, C. Ashley Heppenstall, also CEO of the Company, Asbjørn Larsen and Dambisa F. Moyo were re-elected at the 2010 AGM for the period until the next AGM. There are no deputy members and no members appointed by employee organisations.
The Chairman of the Board, Ian H. Lundin, is not employed by the Company, does not receive any salary from the Company and is not eligible for participation in the Company's incentive programmes. The Chairman is responsible for ensuring that the Board's work is well organised and conducted in an effi cient manner. He further upholds the reporting instructions for management, as drawn up by the CEO and as approved by the Board of Directors, however, he does not take part in the day-to-day decision-making concerning the operations of the Company.
All Board members elected at the 2010 AGM have extensive experience from the world of business and several members are also highly experienced within the oil and gas fi eld. The Nomination Committee considered, taking into account the business operations of Lundin Petroleum and its current phase of development, that the Board is composed of multi-faceted individuals who are well-suited for the job with breadth in expertise, experience and background. Further, in preparation of the elections at the 2010 AGM, the Nomination Committee considered the independence of each (proposed) Board member and determined that the composition of the Board met the independence requirements of the Code of Governance both in respect of independence towards the Company and the Group management and towards the Company's major shareholders. For further details hereon, please refer to the schedule on pages 50–51.
The Board of Directors' primary duties are the organisation and management of the Company's operations and include the following:
In its work, the Board is guided by the Rules of Procedure, which set out how the Board is to conduct its work. The Board of Directors generally holds at least fi ve ordinary meetings per calendar year. At the meetings, the following matters are addressed:
During 2010, seven board meetings took place, including the statutory meeting, and a fi eld trip to Norway was carried out. In addition, one executive session was held in Malaysia, in connection with a Board meeting, whereby the Board was given the opportunity to interact directly with management, as well as with local staff . At the executive session, an operational up-date and a fi nancial overview for the entire Group were presented and a detailed review of the South East Asian assets and operations was given. Members of management further attended a number of Board meetings to present and report on specifi c questions, as and when required.
The Board's work in 2010 included strategic discussions on proposed asset disposals and acquisitions, including in respect of the EnQuest and Etrion transactions. The Board considered several management proposals, regarding for example, signifi cant drilling rig commitments and development plans to be submitted, and reviewed and discussed the auditors' report regarding the auditors' work. The Board continuously monitored the Company's operations and fi nancial position and reviewed and approved the Company's six month and year end reports. The Board further regularly received updates from management on the 2010 operations and fi nancial status and reviewed and approved the 2011 budget and work programme.
The Board is also responsible for evaluating the work of the CEO on a continuous basis and shall at least once a year, without management present at the meeting, specifi cally consider this issue. In 2010, the Compensation Committee, on behalf of the Board, undertook a review of the work and performance of management, including the CEO, and presented the results thereof at a Board meeting, including proposals regarding the compensation of the CEO and management. Neither the CEO nor other management were present at the Board meetings when such discussions took place.
A formal review of the work of the Board was conducted in November 2010 through a questionnaire submitted to all Board members. Several aspects of the Board's work were considered and individual feedback from all of the Board members was received. The overall conclusions were the following:
» Board structure
The Board as a whole possesses the right skills and background for addressing issues facing the Company; the composition of the Board and the Board committees is appropriate; the Board committees have clear scopes of responsibilities and charges; there should be no term limits or a fi xed retirement policy.
» Board meetings
The number of Board meetings is appropriate; the meetings are well planned with clear agendas and the Board generally receives adequate materials in advance of the meetings; the meetings are chaired eff ectively and the time at the meetings is used effi ciently; the members prepare for meetings and participate constructively; the Board focuses properly on competitive, fi nancial and other challenges that the Company faces and is adequately involved in determination of the Company's strategy; the Board effi ciently monitors the Company's operating performance and implementation of the strategy.
» Other
Information provided between meetings is adequate and timely and the staff and related support to the Board and the committees functions adequately; there is generally suffi cient time for committee meetings and the committee reports give appropriate information to the Board; new members are oriented and briefed before joining the Board; the CEO performance review is adequate; the Board is well organised to handle a crisis situation; holding Board meetings in various regions in conjunction with site visits is benefi cial; the Board focuses on activities that help maximise shareholder value; the Board members are appropriately compensated for their work.
The results and conclusions of the review were presented to the Nomination Committee.
The remuneration of the Chairman and other Board members follows the resolution adopted by the AGM. The 2010 AGM decided that the Board shall receive a total compensation equal to SEK 3,500,000. The Chairman was awarded an amount of SEK 800,000 and each other Board member, with the exception of the CEO, an amount of SEK 400,000. The AGM further decided to award SEK 100,000 for each Board committee assignment, however, limited to a total of SEK 700,000 for committee work. In addition, the 2010 AGM approved an amount of SEK 2,500,000 to be paid to Board members for special assignments outside the directorship.
The remuneration of the Board of Directors is detailed further in the schedule on pages 50–51 and in the notes to the fi nancial statements – see Note 45 on page 89.
The Board has established a Compensation Committee, an Audit Committee and a Reserves Committee. The terms of reference of each committee are included in the Rules of Procedure of the Board.
The function of the Compensation Committee is to receive information and prepare the Board's and the AGM's decisions on issues concerning the Policy on Remuneration and compensation of the CEO and the management of the Company. The objective of the Committee in determining compensation for management is to provide a compensation package that is competitive and motivating, will attract and retain qualifi ed individuals and will encourage and promote performance. The Committee regularly evaluates the terms of employment of management, taking into account individual performance, responsibilities, length of service and levels of compensation provided by industry companies.
The Compensation Committee shall according to the terms of reference be composed of four non-executive Directors and the members during 2010 were William A. Rand, Chairman of the Committee, Lukas H. Lundin, Magnus Unger and Dambisa F. Moyo. All Committee members were independent of the Company and the Group management. William A. Rand has presided the Compensation Committee since its inception in 2002 and thus possesses extensive experience in compensation matters. In addition, considering the varied backgrounds and experience of the Committee members in general, the Compensation Committee has ample knowledge and experience of management remuneration issues. The Compensation Committee held four meetings in 2010.
The function of the Audit Committee is to assist the Board in ensuring that the Company's fi nancial reports are prepared in accordance with the Swedish Annual Accounts Act and accounting practices applicable to a company incorporated in Sweden and listed on the NASDAQ OMX Stockholm. The Audit Committee supervises the Company's fi nancial reporting and the effi ciency of the Company's internal controls, internal audit and risk management. The Audit Committee reviews, on behalf of the Board, the Company's quarterly (Quarter 1 and Quarter 3) interim fi nancial statements, reviews and makes recommendations to the Board in relation to the Company's six month and yearly fi nancial statements and ensures maintenance of, and compliance with, the Company's internal control systems. The Audit Committee regularly liaises with the Group's external auditors as part of the annual audit process and also reviews the audit fees and the auditors' independence and impartiality. In addition, the Board of Directors meets at least once a year with the auditors without management, including the CEO, present at the meeting.
The Audit Committee shall according to the terms of reference be composed of three non-executive Directors and the members during 2010 were William A. Rand, Chairman of the Committee, Magnus Unger and Asbjørn Larsen. All members were independent of the Company and the Group management and Asbjørn Larsen was also independent of the Company's major shareholders. Asbjørn Larsen's previous assignments include the position of Chief Financial Offi cer and Chief Executive Offi cer of a Norwegian listed upstream petroleum company and he therefore has extensive experience in accounting and audit matters. The Audit Committee held six meetings in 2010.
Further details regarding the work of the Audit Committee can also be found in the section regarding internal control on pages 48–49.
In connection with the listing of the Lundin Petroleum shares on the Toronto Stock Exchange on 24 March 2011, a Reserves Committee of the Board was created in 2011 in accordance with applicable Canadian securities regulation.
The function of the Reserves Committee is to review and report to the Board on matters relating to the Company's policies and procedures for reporting oil and gas reserves and related information. National Instrument 51-101 (NI 51-101) issued under applicable Canadian securities regulation prescribes standards of disclosure for oil and gas companies, and assigns certain responsibilities to the Board in respect of the Company's compliance with NI 51-101. The Board is entitled to delegate certain of its responsibilities under NI 51-101 to the Reserves Committee. In particular, the Reserves Committee is to report to the Board on the Company's procedures for disclosing oil and gas reserves and other related information, on the appointment of the independent qualifi ed reserves auditor and on the Company's procedures for providing information to the independent qualifi ed reserves auditor. The Reserves Committee is also to meet with management and the independent qualifi ed reserves auditor to review, and determine whether to recommend that the Board approve, the statement of reserves and other oil and gas information required to be submitted annually under NI 51-101.
The Reserves Committee shall according to the terms of reference be composed of Directors, the majority of which are independent as defi ned in NI 51-101. The members appointed in February 2011 were Ian H. Lundin, Chairman of the Committee, and Asbjørn Larsen.
The President and CEO of the Company, C. Ashley Heppenstall, who is also a member of the Board of Directors, is responsible for the management of the day-to-day operations of Lundin Petroleum. The CEO is appointed by, and reports to, the Board and is also responsible for ensuring that the Board receives, in accordance with the Board's instructions to the CEO, all relevant information to ensure that the Board's decisions are well-founded. The CEO is assisted in his functions by the other members of Executive Management and other Group management.
The main responsibility for the operations of subsidiaries, and for ensuring that all of Lundin Petroleum's internal rules and principles are followed by all Group companies and employees, rests with the manager of each subsidiary (General Manager/ Managing Director), as well as with Group management. General Managers/Managing Directors regularly report on all commercial, technical, HSE, fi nancial and legal issues to the Group's Executive Management.
The remuneration of management in 2010 and the Company's Policy on Remuneration are described in the notes to the fi nancial statements – see Note 45 on pages 89–91.
The Board of Directors established an Investment Committee in 2009 to assist the Board in investment related decisions. The Investment Committee's tasks include reviewing and evaluating investment proposals, annual budgets, supplementary budget approvals, commitments, relinquishment of licences etc, as well as reviewing and approving the Group's fi ve year Asset Business Plan. The Investment Committee reports to the Board and is composed of the Company's Executive Management being the CEO, the Chief Operating Offi cer (COO), Senior Vice President Operations (SVP Operations) and Chief Financial Offi cer (CFO).
The responsibility of the Board of Directors for internal control is regulated by the Swedish Companies Act, the Swedish Annual Accounts Act and the Code of Governance. This report on internal control is submitted by Lundin Petroleum's Board of Directors and has been prepared in compliance with the Swedish Annual Accounts Act and is accordingly limited to internal control and risk management regarding fi nancial reporting. It describes how internal control over the fi nancial reporting is organised, but does not comment on its eff ectiveness.
Lundin Petroleum's Financial Reporting Internal Control System consists of fi ve key components, as described below and is based upon the Committee of Sponsoring Organisations of the Treadway Commission (COSO) model.
The internal control system for fi nancial reporting has been created to ensure the Group's objective for fi nancial reporting will be fulfi lled.
Lundin Petroleum's objective for fi nancial reporting is:
"The fi nancial reporting objective of Lundin Petroleum is to provide reliable and relevant information for internal and external purposes, in compliance with existing laws and regulations, in a timely and accurate manner."
An internal control system can only provide reasonable and not absolute assurance against material misstatement or loss, and is designed to manage rather than eliminate the risk of failure to achieve the fi nancial reporting objectives.
The internal control of fi nancial reporting is a continuous evaluation of the risks and control activities within the Group. The evaluation work involves internal as well as external benchmarking. This evaluation process and the work that follows is an ongoing process involving enhancement of control activities such as procedures and processes and information and communication within the Group.
Lundin Petroleum's Board of Directors has the overall responsibility for establishing an eff ective internal control system. The Audit Committee assists the Board and prepares matters relating to fi nancial reporting, internal control and the reporting of fi nancial risks. The Committee also supervises the effi ciency of the internal auditing, internal control and fi nancial reporting and reviews all interim and annual fi nancial reports before release.
Lundin Petroleum has an internal audit function whose main responsibility is to ensure adherence to the internal control framework by carrying out annual tests. The internal audit function reports to the Group's CFO and to the Audit Committee of the Board of Directors. The Board of Directors also receives on a regular basis fi nancial reports and matters regarding the Group's fi nancial position and development are discussed at every meeting.
The operational responsibility for maintaining an eff ective control environment and for operating the system of internal control and risk management is delegated to the CEO and the responsibility is exercised in cooperation with Group management at varying levels. The development and implementation of a Group-wide framework of consistent policies, guidelines and procedures, as part of a strengthening of the management and control function of the Group, is an ongoing process. Together with laws and external regulations, these internal policies, guidelines and procedures form the control environment which is the foundation of the internal control and risk-management process. All employees are accountable for compliance with these policies, guidelines, procedures within their areas of control and risk management.
A risk assessment is conducted annually at Lundin Petroleum. The risk assessment includes identifying, sourcing and measuring the risk of material error in the fi nancial reporting and accounting systems in the Group. For further details on the diff erent risks, see the Risk Factors section on page 56.
As part of the risk assessment for 2010, Lundin Petroleum has reviewed and analysed the risks that exist within the fi nancial reporting process and has structured its internal control systems around the risks identifi ed. The risks have been assessed through a standardised methodology based on likelihood and impact. The following main categories have been assessed; revenue and receivables, procurement and payables, production and inventory, capitalised expenditure and fi xed assets, tax, treasury and cash management, fi nancial reporting and information systems. When a risk is identifi ed and evaluated, a control activity is implemented to minimise the risks in the fi nancial reporting process. Those risks are documented in a Group-wide risk map. Conclusions of the risk assessment are reported to management and the Board through the Audit Committee.
The fi nance department is responsible for the consolidated accounts, consolidated reports and for fi nancial and administrative control systems. Various control activities are incorporated in the fi nancial reporting process to ensure that the fi nancial reporting gives a true and fair view at any reporting date and that business is conducted effi ciently. Control activities range from review of results by management to specifi c reconciliation of accounts and analysis of the processes for fi nancial reporting. The ultimate responsibility for ensuring that control activities are appropriate and in accordance with the Group's policies, lies with the General Managers/Managing Directors of the Group companies.
The choice of control activities depends on the nature of the risk identifi ed and the results of a cost-benefi t analysis. Developed control activities within Lundin Petroleum include processes for approval of business transactions, reconciliations, reviews of operating performance, security of assets, segregation of duties, policies, guidelines and procedures and information systems.
As part of the control activities the following documents have been issued:
Further, the Investment Committee was established by the Board to assist the Board in overseeing the Group's investment decisions and to make recommendations to the Board as required. The Investment Committee meets at least twice per month.
The internal audit function performs on a regular basis risk assessments and audits and coordinates the joint venture audits within the Group. The oil and gas industry is based upon companies sharing costs and risks through joint venture arrangements. Joint venture partners have audit rights over the operating partner. To ensure that accounting procedures are followed and costs are incurred in accordance with the joint operating agreement, for non-operated assets, Lundin Petroleum undertakes regularly audits of joint ventures.
Communicating relevant information throughout all levels of the Group and to external parties is an important part of internal control. The communications policy that has been approved by the Board of Directors defi nes how external information is to be issued, by whom and the way in which the information should be given.
Financial information is published in the following forms:
Policies, guidelines and procedures, such as the Group Accounting Principles Manual, Authorisation Guidelines and Finance and Administration Manual are communicated on a regular basis to all employees and are accessible through the information system network.
Monitoring of the fi nancial reporting of Lundin Petroleum is carried out by the Board of Directors, Group management, the internal audit function and by other employees holding various functions within the Group. Operational monitoring includes monthly and quarterly follow-up of results against budget and forecast and is carried out by the fi nance department at Group and at local level. Monitoring and reporting is also done by the internal audit function, which provides objective support to the Board on matters relating to the internal control by investigating major areas of risk and by doing reviews in defi ned areas. An important role of the internal audit function is to follow up that the results from previous years' reviews have been implemented.
The Board reviews and evaluates comprehensive fi nancial information regarding the Group as a whole and the entities it comprises. The Board also reviews, primarily through the Audit Committee, the most important accounting principles applied by the Group in the fi nancial reporting, as well as changes to these principles. Minutes are taken at all meetings of the Audit Committee and are provided to all Board members and the external auditors. The Rules of Procedures of the Board include detailed instructions regarding the type of internal fi nancial reports that shall be submitted to the Board.
| Name | Ian H. Lundin | C. Ashley Heppenstall | Asbjørn Larsen | Lukas H. Lundin |
|---|---|---|---|---|
| Function | Chairman (since 2002) | President and CEO, Director | Director | Director |
| Elected | 2001 | 2001 | 2008 | 2001 |
| Born | 1960 | 1962 | 1936 | 1958 |
| Education | Bachelor of science degree in Petroleum Engineering from the University of Tulsa. |
Bachelor of Science degree in Mathematics from the University of Durham. |
Norwegian School of Economics and Business Administration (NHH). |
Graduate from the New Mexico Institute of Mining, Technology and Engineering. |
| Experience | Ian H. Lundin was previously CEO of International Petroleum Corp during 1989–1998, of Lundin Oil during 1998–2001 and of Lundin Petroleum during 2001–2002. |
C. Ashley Heppenstall was previously CFO of Lundin Oil during 1998–2001 and of Lundin Petroleum during 2001–2002. |
Asbjørn Larsen was CFO of Saga Petroleum during 1978–1979 and President and CEO during 1979–1998. |
Lukas H. Lundin has held several key positions within companies where the family Lundin has a major shareholding. |
| Current board duties | Chairman of the board of Etrion Corporation and Bukowski Auktioner AB |
Member of the board of Etrion Corporation, Vostok Nafta Investment Ltd and Gateway Storage Company Limited |
Chairman of the board of Belships ASA, vice chairman of the board of Saga Fjordbase AS, member of the board of Selvaag Gruppen AS, GreenStream Network Oyj, The Montebello Cancer Rehabilitation Foundation and The Tom Wilhelmsen Foundation |
Chairman of the Board of Lundin Mining Corp, Vostok Nafta Investment Ltd, Denison Mines Corp., Lucara Diamond Corp, NGEx Resources Inc., Atacama Minerals Corp and Lundin for Africa, member of the board of Kinross Gold Corp, Fortress Minerals Corp and Bukowski Auktioner AB |
| Shares in Lundin Petroleum (as at 31 December 2010) |
Nil1 | 1,391,283 | 12,000 | 788,3314 |
| Incentive schemes | None | See schedule on page 52 | None | None |
| Attendance Board meetings | 7/7 | 7/7 | 7/7 | 7/7 |
| Attendance Audit Committee |
6/6 | |||
| Attendance Compensation Committee |
3/4 | |||
| Remuneration for Board and Committee work |
SEK 800,000 (USD 111,182) |
Nil | SEK 500,000 (USD 69,489) |
SEK 500,000 (USD 69,489) |
| Remuneration for special assignments outside the directorship 7 |
SEK 1,685,059 (USD 234,186) |
Nil | Nil | Nil |
| Independent of the Company and the Group management 8 |
Yes1 | No3 | Yes | Yes |
| Independent of the Company's major shareholders 8 |
No2 | No3 | Yes | No4 |
1 Ian H. Lundin has been regularly retained by management to perform remunerated work duties which fall outside the scope of the regular work of the Board, e.g. in connection with the Company's major transactions. It is the Nomination Committee's opinion that despite his work, he remains independent of the Company and the Group management.
2 Ian H. Lundin is the settler of a trust that owns Landor Participations Inc., an investment company that holds 12,038,956 shares in the Company, and he is a member of the Lundin family that holds, through a family trust, Lorito Holdings (Guernsey) Ltd. which holds 76,342,895 shares in the Company and Zebra Holdings and Investment (Guernsey) Ltd which holds 10,844,643 shares in the Company.
3 C. Ashley Heppenstall is the President & CEO of Lundin Petroleum.
4 Lukas H. Lundin is a member of the Lundin family that holds, through a family trust, Lorito Holdings (Guernsey) Ltd. which holds 76,342,895 shares in the Company and Zebra Holdings and Investment (Guernsey) Ltd which holds 10,844,643 shares in the Company.
| Dambisa F. Moyo | William A. Rand | Magnus Unger | Name |
|---|---|---|---|
| Director | Director | Director | Function |
| 2009 | 2001 | 2001 | Elected |
| 1969 | 1942 | 1942 | Born |
| Doctorate in Economics at Oxford University, Masters from Harvard University's Kennedy School of Government, MBA in Finance and Bachelors in Chemistry from the American University in Washington D.C. |
Commerce degree (Honours Economics) from McGill University and a law degree from Dalhousie University, Master of Laws degree in International Law from the London School of Economics. |
MBA from the Stockholm School of Economics. |
Education |
| Dambisa F. Moyo worked as a consultant for the World Bank during 1993–1995 and at Goldman Sachs during 2001–2008. |
William A. Rand practised law in Canada until 1972, after which he co-founded an investment company and pursued private business interests. |
Magnus Unger was an Executive Vice President within the Atlas Copco group during 1988–1992. |
Experience |
| Member of the board of SABMiller, Barclays plc, Barclays Bank plc and Room to Read |
Member of the board of Lundin Mining Corp., Vostok Nafta Investment Ltd, Denison Mines Corporation, New West Energy Services Inc. and NGEx Resources Inc. |
Member of the board of Black Earth Farming Ltd. and CAL-Konsult AB |
Current board duties |
| Nil | 120,441 | 50,000 | Shares in Lundin Petroleum (as at 31 December 2010) |
| None | None | None | Incentive schemes |
| 6/7 | 7/7 | 6/7 | Attendance Board meetings |
| 6/6 | 6/6 | Attendance Audit Committee |
|
| 4/4 | 4/4 | 4/4 | Attendance Compensation Committee |
| SEK 500,000 (USD 69,489) |
SEK 600, 000 (USD 83,387) |
SEK 600, 000 (USD 83,387) |
Remuneration for Board and Committee work |
| Nil | Nil | SEK 100,000 (USD 13,898) |
Remuneration for special assignments outside the directorship 7 |
| Yes | Yes | Yes | Independent of the Company and the Group management 8 |
| Yes | No5 | No6 | Independent of the Company's major shareholders 8 |
5 William A. Rand is in the Nomination Committee's opinion not deemed independent of the Company's major shareholders since he holds directorships in companies in which the Lundin family, through a family trust, holds ten percent or more of the share capital and voting rights.
6 Magnus Unger is in the Nomination Committee's opinion not deemed independent of the Company's major shareholders since he held directorships in companies in which the Lundin family, through a family trust, holds ten percent or more of the share capital and voting rights.
7 The remuneration paid during 2010 relates to fees paid for special assignments undertaken on behalf of the Group. The payment of such fees was in accordance with fees approved by the 2010 AGM.
8 New rules regarding the independence of Board members were introduced in 2010 and the Nomination Committee will take into account the new rules in the proposals to be submitted to the 2011 AGM and in the separate report that will be published on the Company's website together with the notice of the 2011 AGM.
| Name | C. Ashley Heppenstall | Alexandre Schneiter | Geoff rey Turbott | Chris Bruijnzeels |
|---|---|---|---|---|
| Function | President and Chief Executive Offi cer, Director |
Executive Vice President and Chief Operating Offi cer |
Vice President Finance and Chief Financial Offi cer |
Senior Vice President Operations |
| With Lundin Petroleum since |
2001 | 2001 | 2001 | 2003 |
| Born | 1962 | 1962 | 1963 | 1959 |
| Education | Bachelor of Science degree in Mathematics from the University of Durham. |
Graduate from the University of Geneva with a degree in geology and a masters degree in Geophysics. |
Member of the Institute of Chartered Accountants of New Zealand. |
Graduate from the University of Delft with a degree in Mining Engineering. |
| Experience | C. Ashley Heppenstall was previously CFO of Lundin Oil during 1998– 2001 and of Lundin Petroleum during 2001–2002. |
Alexandre Schneiter has worked with public companies where the family Lundin has a major shareholding since 1993. |
Geoff rey Turbott has worked with public companies where the family Lundin has a major shareholding since 1995. |
Chris Bruijnzeels worked with Shell International during 1985-1998 in several reservoir engineering functions and with PGS Reservoir Consultants during 1998-2003 as Principle Reservoir Engineer and Director Evaluations. |
| Board duties | Member of the board of Etrion Corporation, Vostok Nafta Investment Ltd and Gateway Storage Company Limited |
Member of the board of ShaMaran Petroleum Corp, EnQuest plc and Swiss Sailing Team AG |
None | None |
| Shares in Lundin Petroleum (as at 31 December 2010) |
1,391,2831 | 223,133 | 60,000 | 21,333 |
| Incentive warrants outstanding |
– | – | – | – |
| Phantom options (as recalculated following the EnQuest plc and Etrion Corporation distributions) |
2,062,848 | 1,512,755 | 962,662 | 962,662 |
1 Shareholdings and part ownerships in enterprises with which Lundin Petroleum has signifi cant business relations; Etrion Corporation: 3,317,629 shares
Stockholm, 7 April 2011
The Board of Directors of Lundin Petroleum AB (publ)
It is the board of directors who is responsible for the corporate governance report for the year 2010 on pages 41–53 and that it has been prepared in accordance with the Annual Accounts Act. As a basis for our opinion that the corporate governance report has been prepared and is consistent with the annual accounts and the consolidated accounts, we have read the corporate governance report and assessed its statutory content based on our knowledge of the company.
In our opinion, the corporate governance report has been prepared and its statutory content is consistent with the annual accounts and the consolidated accounts.
Stockholm, 7 April 2011
Bo Hjalmarsson Bo Karlsson Authorised Public Accountant PricewaterhouseCoopers AB PricewaterhouseCoopers AB
Lead Auditor Authorised Public Accountant
Lundin Petroleum's shares are listed on the Large Cap list of the Nasdaq OMX ("OMX") Stockholm in Sweden. Lundin Petroleum's share is part of the OMX 30 index, at the OMX in Stockholm, Sweden. On 24 March 2011, Lundin Petroleum's shares were listed on the Toronto Stock Exchange (TSX).
Trading of Lundin Petroleum shares takes place on the OMX. Lundin Petroleum's market capitalisation as at 31 December 2010 was MSEK 26,017.
During the year a total of 543,156 million shares were traded on the OMX to a value of approximately MSEK 27,421. A daily average of 2,146,859 Lundin Petroleum shares were traded on the OMX in Stockholm.
The registered share capital at 31 December 2010 amounts to SEK 3,179,106 represented by 317,910,580 shares of quota value SEK 0.01 each and representing 1 vote each. All outstanding shares are common shares and carry equal rights to participation in Lundin Petroleum's assets and earnings. One trading unit consists of 200 shares.
As part of the remuneration package to employees, the Group operate a Long-term Incentive Plan (LTIP). The LTIP up to and including 2007 included the granting of incentive warrants and are detailed in Note 46 on pages 91–92. There were no outstanding incentive warrants as at 31 December 2010.
The Annual General Meeting (AGM) of Lundin Petroleum held on 6 May 2010 resolved to authorise the Board of Directors to decide on the repurchase and sale of Lundin Petroleum shares on the OMX during the period until the next AGM. The maximum number of shares that can be repurchased and held in treasury from time to time cannot exceed fi ve percent of all shares of Lundin Petroleum. The purpose of the authorisation is to provide the Board of Directors with an instrument to optimise Lundin Petroleum's capital structure and to secure Lundin Petroleum's costs in relation to the LTIP.
On 24 May 2010 the Board of Directors resolved to mandate the management to execute repurchases of Lundin Petroleum shares on OMX. Under this mandate Lundin Petroleum acquired 2,417,926 of its own shares during June and July 2010.
The total number of repurchased shares held by Lundin Petroleum at 31 December 2010 amounted to 6,882,638.
During the AGM in 2010 it was resolved that the Board of Directors is authorised to issue no more than 35,000,000 new shares, without the application of the shareholders pre-emption rights, in order to enable the Company to raise capital for the Company's business operations and business acquisitions. If the authorisation is fully utilised the dilution eff ect on the share capital will amount to ten percent.
Lundin Petroleum's primary objective is to add value to the shareholders, employees and society through profi table operations and growth. This added value will be expressed partly by dividends paid and partly by a long-term increase in the share price. This will be achieved by increased hydrocarbon reserves, developing discoveries and thereby increasing production and ultimately cash fl ow and net income.
The size of any dividend would have to be determined by Lundin Petroleum's fi nancial position and the possibilities for growth through profi table investments. Dividends will be paid when Lundin Petroleum generates sustainable cash fl ow and net income from operations to maintain long-term fi nancial strength and fl exibility. Over time the total return to shareholders is expected to accrue to a greater extent from the increase in share price than from dividends received.
Due to the nature of Lundin Petroleum's operations, the dividend policy is to give priority to the funding of ongoing projects, and satisfy the immediate capital requirements of Lundin Petroleum.
Since Lundin Petroleum was incorporated in May 2001 and up to 31 December 2010 the Parent Company share capital has developed as shown below.
| Share data | Month and year |
Quota value (SEK) |
Change in number of shares |
Total number of shares |
Total share capital (SEK) |
|---|---|---|---|---|---|
| Formation of the Company | May 2001 | 100.00 | 1,000 | 1,000 | 100,000 |
| Share split 10,000:1 | June 2001 | 0.01 | 9,999,000 | 10,000,000 | 100,000 |
| New share issue | June 2001 | 0.01 | 92,861,283 | 102,861,283 | 1,028,613 |
| New share issue | July 2001 | 0.01 | 3,342,501 | 106,203,784 | 1,062,038 |
| New share issue | November 2001 | 0.01 | 106,203,784 | 212,407,568 | 2,124,076 |
| Warrants | June 2002 | 0.01 | 35,609,748 | 248,017,316 | 2,480,173 |
| Incentive warrants | 2002 | 0.01 | 667,700 | 248,685,016 | 2,486,850 |
| Incentive warrants | 2003 | 0.01 | 2,840,450 | 251,525,466 | 2,515,255 |
| Incentive warrants | 2004 | 0.01 | 2,222,900 | 253,748,366 | 2,537,484 |
| Incentive warrants | 2005 | 0.01 | 3,391,800 | 257,140,166 | 2,571,402 |
| Incentive warrants | 2006 | 0.01 | 1,219,500 | 258,359,666 | 2,583,597 |
| Valkyries acquisition | 2006 | 0.01 | 55,855,414 | 314,215,080 | 3,142,151 |
| Incentive warrants | 2007 | 0.01 | 1,335,500 | 315,550,580 | 3,155,506 |
| Incentive warrants | 2008 | 0.01 | 2,360,000 | 317,910,580 | 3,179,106 |
| Total | 317,910,580 | 317,910,580 | 3,179,106 |
Distribution of shareholdings in Lundin Petroleum as provided by Euroclear Sweden as at 31 December 2010.
| Numbers of | Percentage of | |
|---|---|---|
| Size categories as at 31 Dec 2010 | shareholders | shares,% |
| 1-500 | 25,842 | 1.47 |
| 501-1,000 | 6,017 | 1.61 |
| 1,001-10,000 | 6,451 | 6.10 |
| 10,001-50,000 | 669 | 4.50 |
| 50,001-100,000 | 102 | 2.29 |
| 100,001- 500,000 | 134 | 9.54 |
| 500,001 - | 88 | 74.49 |
| Total | 39,303 | 100.00 |
Lundin Petroleum had 39,303 shareholders as at 31 December 2010. The proportion of shares held by institutional investors amounted to 85.0 percent. Foreign investors held 56.8 percent of the shares.
| The 15 largest shareholders provided | Numbers of | Subscription |
|---|---|---|
| by VPC, as at 31 Dec 2010 | shares | capital/votes,% |
| Lorito Holdings Ltd | 76,342,895 | 24.01 |
| Swedbank Robur | 13,163,483 | 4.14 |
| Landor Participations Inc. | 12,038,956 | 3.79 |
| Zebra Holdings Ltd. | 10,844,643 | 3.41 |
| Handelsbanken fonder | 8,342,829 | 2.62 |
| Lundin Petroleum AB | 6,882,638 | 2.16 |
| LGT Bank in Liechtenstein Ltd | 6,030,083 | 1.90 |
| SEB Investment Management | 5,833,426 | 1.83 |
| AFA Försäkring | 5,649,074 | 1.78 |
| Första AP-fonden | 5,623,212 | 1.77 |
| Andra AP-fonden | 5,540,335 | 1.74 |
| Fjärde AP-fonden | 4,464,270 | 1.40 |
| Nordea Investment funds | 3,755,492 | 1.18 |
| Lannebo fonder | 3,663,800 | 1.15 |
| Skandia | 3,652,418 | 1.15 |
| Other shareholders | 146,083,026 | 45.95 |
| Total | 317,910,580 | 100.00 |
The 15 largest shareholders are registered with the Euroclear Sweden, the Swedish Securities Register Center.
Lorito Holdings (Guernsey) Ltd. is an investment company wholly owned by a Lundin family trust.
Landor Participations Inc. is an investment company wholly owned by a trust whose settler is Ian H. Lundin.
Zebra Holdings and Investment (Guernsey) Ltd. is an investment company wholly owned by a Lundin family trust.
Traded daily volume (monthly average) Lundin Petroleum AB (LUPE) share price (monthly daily average)
Share Price 2010
The major risk the Lundin Petroleum Group faces is the nature of oil and gas exploration and production itself. Oil and gas exploration, development and production involve high operational and fi nancial risks, which even a combination of experience, knowledge and careful evaluation may not be able to fully eliminate or which are beyond the Company's control. Lundin Petroleum's long-term commercial success depends on its ability to fi nd, acquire, develop and commercially produce oil and natural gas reserves. A future increase in Lundin Petroleum's reserves will depend not only on its ability to explore and develop any properties Lundin Petroleum may have from time to time, but also on its ability to select and acquire suitable producing properties or prospects. In addition, there is no assurance that commercial quantities of oil and gas will be discovered or acquired by Lundin Petroleum. Other risks have been categorised to either Operational Risks or Financial Risks.
The Group faces a number of risks and uncertainties in the areas of operation which may have an adverse impact on its ability to successfully pursue its exploration, appraisal and development plans as well as on its production of oil and gas.
Completion of a well does not assure a profi t on the investment or recovery of drilling, completion and operating costs. In addition, drilling hazards or environmental damage could greatly increase the cost of operations, and various fi eld operating conditions may adversely aff ect the production from successful wells. These conditions include delays in obtaining governmental approvals or consents, shut-ins of connected wells resulting from extreme weather conditions, insuffi cient storage or transportation capacity or other geological and mechanical conditions. While diligent well supervision and eff ective maintenance operations can contribute to maximising production rates over time, production delays and declines from normal fi eld operating conditions cannot be eliminated and can be expected to adversely aff ect revenue and cash fl ow levels to varying degrees.
Oil and natural gas exploration and development activities are dependent on the availability of drilling and related equipment in the particular areas where such activities will be conducted. Demand for such limited equipment or access restrictions may aff ect the availability of such equipment to Lundin Petroleum and may delay exploration and development activities.
Lundin Petroleum's success depends in large measure on certain key personnel. The competition for qualifi ed personnel in the oil and natural gas industry is intense and there can be no assurance that Lundin Petroleum will be able to continue to attract and retain all personnel necessary for the development and operation of its business.
In general, estimates of economically recoverable oil and natural gas reserves and the future net cash fl ows therefrom are based upon a number of variable factors and assumptions, such as historical production from the properties, production rates, ultimate reserve recovery, timing and amount of capital expenditures, marketability of oil and gas, royalty rates, the assumed eff ects of regulation by governmental agencies and future operating costs, all of which may vary from actual results. All such estimates are to some degree speculative, and classifi cations of reserves are only attempts to defi ne the degree of speculation involved. For those reasons, estimates of the economically recoverable oil and natural gas reserves attributable to any particular group of properties, classifi cation of such reserves based on risk of recovery and estimates of future net revenues expected therefrom prepared by diff erent engineers, or by the same engineers at diff erent times, may vary.
Estimates of proved reserves that may be developed and produced in the future are often based upon volumetric calculations and upon analogy to similar types of reserves rather than actual production history. Estimates based on these methods are generally less reliable than those based on actual production history. Subsequent evaluation of the same reserves based upon production history and production practices will result in variations in the estimated reserves and such variations could be material.
Extensive national, state, and local environmental laws and regulations in foreign jurisdictions aff ect nearly all of the operations of Lundin Petroleum. These laws and regulations set various standards regulating certain aspects of health and safety, and environmental quality, provide for civil and criminal penalties and other liabilities for the violation of such standards and establish in certain circumstances obligations to remediate current and former facilities and locations where operations are or were conducted. In addition, special provisions may be appropriate or required in environmentally sensitive areas of operation. See also pages 34–40 Corporate Responsibility for more information.
The Company could be the target of legal complaints raised by customers, employees and other third parties in the areas of health, environmental, safety or business related issues or the failure to comply with applicable legislation and regulations. Even if such disputes were to be resolved successfully, without fi nancial consequences they could negatively impact the Group's reputation and take up resources that could be used for other purposes.
The petroleum industry is competitive in all its phases. Lundin Petroleum's competitors will include oil and natural gas companies that have substantially greater fi nancial resources, staff and facilities than those of Lundin Petroleum. Lundin Petroleum's ability to increase reserves in the future will depend not only on its ability to explore and develop its present properties, but also on its ability to select and acquire suitable producing properties or prospects for exploratory drilling. Competitive factors in the distribution and marketing of oil and natural gas include price and methods and reliability of delivery.
Lundin Petroleum is, and will be, actively engaged in oil and gas operations in various countries. Risks may arise in changes in laws aff ecting foreign ownership, government participation, taxation, royalties, duties, rates of exchange and exchange control. Further, certain aspects of Lundin Petroleum's exploration and production programmes require the consent or favourable decisions of governmental bodies. In addition, Lundin Petroleum's exploration, development and production activities may be subject to political and economic uncertainties, expropriation of property and cancellation or modifi cation of contract rights, taxation, royalties, duties, foreign exchange restrictions and other risks arising out of foreign governmental sovereignty over the areas in which Lundin Petroleum's operations are conducted, as well as risks of loss in some countries due to civil strife, acts of war, guerrilla activities and insurrection. Oil installations are known to be likely objects, and even targets, of military operations and terrorism. Given their vulnerability and the considerable economic interests involved, this adds to the risk profi le of Lundin Petroleum's interests.
Financial risks such as fl uctuations in currency rates, oil price, interest rates, liquidity risk and credit risk as well as derivative instruments used has been described in Note 21 on pages 84–86 in the Financial Report.
Risks in the fi nancial reporting are described in the Internal Control Report on pages 48–49, and in Our Market on pages 18–19.
LUNDIN PETROLEUM AB (PUBL) REG NO. 556610-8055
(N) Netherlands (Sw) Switzerland Note: The Group structure shows significant subsidiaries only
The address of Lundin Petroleum AB's registered offi ce is Hovslagargatan 5, Stockholm, Sweden.
The main business of Lundin Petroleum is the exploration for, the development of, and the production of oil and natural gas. Lundin Petroleum maintains a portfolio of oil and gas production assets and development projects in various countries with exposure to exploration opportunities.
The Group does not carry out any research and development. The Group maintains branches in most of its areas of operation. The Parent Company has no foreign branches.
During the fi rst quarter of 2010, Lundin Petroleum announced its intention to spin-off the United Kingdom (UK) business. The spin-off was completed on 6 April 2010 with the sale of the UK business in exchange for shares in the newly incorporated company, EnQuest plc, and the subsequent distribution of the EnQuest shares received to Lundin Petroleum shareholders on 9 April 2010. The results of the UK business are included in the Lundin Petroleum accounts up until the end of the fi rst quarter of 2010 and are shown as discontinued operations. For more detail refer to Note 13.
On 12 November 2010, Lundin Petroleum completed the distribution of its shares in Etrion Corporation to Lundin Petroleum's shareholders, in connection with the listing of the shares of Etrion on the NASDAQ OMX Stockholm exchange. The result from Etrion is included in the consolidated accounts up to the date of the distribution.
On 29 December 2010, Lundin Petroleum completed the sale of its non-operated interests in Salawati Basin and Salawati Island assets in Indonesia to RH Petrogas.
The net production to Lundin Petroleum for the twelve month period ended 31 December 2010 (reporting period) from the Alvheim fi eld (Lundin Petroleum working interest (WI) 15%), off shore Norway, was 12,900 barrels oil equivalent per day (boepd). The Alvheim fi eld has been on production since June 2008 and continues to perform above expectations. This excellent reservoir performance has resulted in increased gross ultimate recoverable reserves during 2010 to 276 million of barrels of oil equivalent (MMboe). Phase 2 of Alvheim development drilling commenced in the second quarter of 2010 and involves the drilling of fi ve multilateral wells. The fi rst Phase 2 well came on production in late 2010, with three wells to be drilled in 2011 and a further well to be drilled in 2012. The cost of operations for the Alvheim fi eld averaged below USD 3.50 per barrel for the reporting period.
The net production to Lundin Petroleum from the Volund fi eld (WI 35%) amounted to 5,300 boepd for the reporting period. The fi rst two development wells (one producer and one water injector) on the Volund fi eld were successfully completed in 2009 but due to limitations in production capacity on the Alvheim FPSO the fi rst Volund production well did not commence production until April 2010. Phase 2 of Volund development drilling which involved a further two multilateral production wells was successfully completed in the third quarter of 2010. As a result, Volund fi eld production increased to 9,700 boepd net in the fourth quarter of 2010 which was above the 8,700 boepd net Volund fi eld fi rm capacity booked on the Alvheim FPSO.
In October 2009, a new oil discovery, estimated to contain gross recoverable resources of 20 MMboe on the Marihøne prospect in PL340
(WI 15%) was announced. This discovery has been renamed Bøyla and plans are currently being developed for a subsea tieback to the Alvheim FPSO.
On 15 February 2011, Lundin Petroleum announced that it had successfully concluded the drilling of the Caterpillar exploration well (24/9-10S) and its sidetrack (24/9-10A) located in production licence PL340 (WI 15%) approximately 31 kilometres south of the Alvheim FPSO. A comprehensive data acquisition programme was undertaken with a preliminary gross resource range for the Caterpillar discovery estimated at between 5 to 12 MMboe. Development studies are progressing for the Bøyla fi eld tieback to the Alvheim FPSO. The Caterpillar discovery located 8 kilometres to the southeast of Bøyla is likely to be developed as part of the Bøyla development concept.
The Luno fi eld located in PL338 (WI 50%) was discovered in 2007 and has subsequently been appraised by two further wells. The results of these appraisal wells have been incorporated into the reservoir model being used for development planning and has resulted in an upgrade of gross proven and probable (2P) reserves from 95 MMboe to 148 MMboe for the Luno fi eld. The reserves have been estimated by third party reserves auditors Gaff ney Cline & Associates. Conceptual development studies for a Luno fi eld standalone development are complete.
In December 2010, a further discovery was made in PL338 on the Apollo prospect. Apollo, located only 5 km from the Luno fi eld, contains estimated gross recoverable reserves of between 15 and 65 MMboe within PL338 in both Paleocene and Cretaceous reservoirs. The discovery will be appraised in 2012 and then most likely be developed through the Luno facilities.
An exploration well in PL501 (WI 40%) targeting the Avaldsnes prospect was successfully completed in the third quarter of 2010 as an oil discovery. Production tests confi rmed excellent reservoir characteristics with the well fl owing at a restricted production rate of approximately 5,000 bopd. It is estimated that the Avaldsnes discovery contains gross recoverable resources of 100 to 400 MMboe within licence PL501 and that the fault controlled structure extends to the west into PL265 (WI 10%). Appraisal of the Avaldsnes discovery will commence in the fi rst half of 2011 with the drilling of two appraisal wells in PL501. A further well will be drilled in 2011 by Statoil, operator of PL265, to test the extension of the Avaldsnes structure into PL265. The element of the Avaldsnes structure in PL265 has been named Aldous Major South. The Avaldsnes discovery has successfully proven the migration of hydrocarbons to the eastern side of the Utsira High. This has a positive impact upon the exploration potential of the Greater Luno Area and as a result further exploration wells will be drilled in 2011 on the Tellus prospect in PL338 (WI 50%) (drilled in the fi rst quarter of 2011) and the Aldous Major North prospect (formerly called Torvestad) in PL265/PL501 followed by likely wells in PL359 (WI 40%) and PL410 (WI 70%) in 2012.
The plan of development was approved in June 2010 for the Gaupe fi eld in PL292 (WI 40%), where fi rst production is expected in late 2011. The Gaupe fi eld operated by BG Group has estimated gross reserves of approximately 31 MMboe and is estimated to produce at a plateau production rate net to Lundin Petroleum of 5,000 boepd.
Development planning is ongoing on the Nemo fi eld in PL148 (WI 50%) and the Krabbe fi eld in PL301 (WI 40%). A concept selection has been completed for the Nemo fi eld and, subject to fi nalisation of commercial negotiations, it is expected that a plan of development will be submitted in 2011.
In January 2011, Lundin Petroleum was awarded ten exploration licences in the 2010 APA Licensing Round of which six licences will be operated by Lundin Petroleum.
In 2010, exploration wells on the Frusalen prospect in PL476 (WI 30%), Barchan prospect in PL400 (WI 50%) and Norall prospect in PL409 (WI 70%) were completed as dry holes and a well on the Luno High prospect in PL359 (WI 40%) was completed as non-commercial.
The net production to Lundin Petroleum in the Paris Basin (WI 100%) averaged 2,450 boepd and in the Aquitaine Basin (WI 50%) averaged 750 boepd for the reporting period. The redevelopment of the Grandville fi eld in the Paris Basin involving the drilling of eight new development wells and the installation of new production facilities has commenced.
The net gas production to Lundin Petroleum from the Netherlands averaged 2,050 boepd for the reporting period which was ahead of forecast.
The exploration well De Hoeve-1 in the onshore Gorredijk concession (WI 7.75%) was successfully completed in the fi rst quarter 2010 as a gas discovery.
A 3D seismic acquisition programme in the Slyne Basin licence 04/06 (WI 50%) was completed in the third quarter of 2010.
On 6 April 2010, Lundin Petroleum completed the spin-off of its operations in the United Kingdom into EnQuest plc, a newly formed company focusing on the UK North Sea.
The net production to Lundin Petroleum from the United Kingdom is included for the fi rst quarter of 2010 only and averaged 2,250 boepd during the reporting period.
Salawati Island and Basin (Papua)
The net production to Lundin Petroleum from Salawati (Salawati Island WI 14.5%, Salawati Basin WI 25.9%) was 2,000 boepd for the reporting period.
In December 2010, Lundin Petroleum completed the sale of its Salawati interests to RH Petrogas (RHP). The consideration for the sale was MUSD 37.1 plus an additional MUSD 3.9 in the event of certain future fi eld developments.
The net production to Lundin Petroleum from the Singa gas fi eld (WI 25.9%) during the reporting period amounted to 400 boepd. Production from the Singa fi eld commenced during the second quarter of 2010. Current gross production from the fi rst production well was approximately 20 million standard cubic feet per day (MMscfd) of sales gas and was restricted by surface facility limitations resulting from higher hydrocarbon liquid production than expected.
Additional liquid removal facilities are planned to be installed and until such time production will remain constrained. Production is expected to increase to a gross plateau rate of 50 MMscfd following further development drilling. The original Singa gas sales agreement with PT PLN (Persero), an Indonesian state owned electricity company, was amended in February 2010 incorporating an increased gas price and to allow PT PGN (Persero), an Indonesian state owned gas distributor, to buy initial production from the Singa fi eld. The gas sales contract with PT PGN (Persero) was signed in April 2010. The average gas price for both contracts is in excess of USD 5 per million British thermal units (MMbtu).
A 474 km 2D seismic acquisition programme on the Rangkas block (WI 51%) commenced in 2010 and was completed in the fi rst quarter of 2011.
A 975 km2 3D seismic acquisition programme on the Baronang and Cakalang blocks (WI 100%) was completed in April 2010 and interpretation is ongoing. In addition, a 1,500 km 2D seismic acquisition programme is planned to be completed on Cakalang in 2011.
A new Production Sharing Contract for the South Sokang block was signed in December 2010 (WI 60%).
A total of 2,150 km2 of 3D seismic acquisition on Blocks PM308A (WI 35%), PM308B (WI 75%) and SB303 (WI 75%) was completed in 2009. The seismic data processing and interpretation work has identifi ed numerous drilling targets for the 2011/2012 drilling campaign. Five exploration wells are expected to be drilled this year commencing in April 2011 and a jack up rig has been secured for this programme.
In 2010, Lundin Petroleum signed a new Production Sharing Contract encompassing blocks SB307 and SB308 (WI 42.5%) off shore Sabah. A 330 km2 3D acquisition programme on blocks SB307 and SB308 was completed during the second quarter of 2010.
Exploration wells on the Hoa-Hong-X1 and Hoa Dao High prospects in Block 06/94 (WI 33.33%) were completed in 2010. Both wells were plugged and abandoned after either being dry or encountering uncommercial quantities of gas.
The net production to Lundin Petroleum from Russia for the period was 3,600 boepd.
In the Lagansky Block (WI 70%) in the northern Caspian a major oil discovery was made on the Morskaya fi eld in 2008. The discovery due to its off shore location is deemed to be strategic by the Russian Government under the Foreign Strategic Investment Law. As a result a 50 percent ownership by a state owned company is required prior to development. During 2010, 103 km2 of new 3D seismic was acquired on the Lagansky block which will target new exploration drilling locations.
The net production to Lundin Petroleum from the Oudna fi eld (WI 40%) was 1,000 boepd for the reporting period. The Oudna fi eld production continues to outperform expectations.
Exploration drilling is expected to resume in 2011 with one well on Block Marine XIV (WI 21.55%) and a further well on Block Marine XI (WI 18.75%).
The net result including discontinued operations for the fi nancial year ended 31 December 2010 (reporting period) amounted to MUSD 498.5 (MUSD -537.1). The net result attributable to shareholders of the Parent Company including discontinued operations for the reporting period amounted to MUSD 511.9 (MUSD -411.3) representing earnings per share on a fully diluted basis of USD 1.64 (USD -1.31).
Lundin Petroleum reports a net result from continuing operations for the reporting period of MUSD 129.5 (MUSD -545.8). The net result attributable to shareholders of the Parent Company from continuing operations amounted to MUSD 142.9 (MUSD -420.0) representing earnings per share on a fully diluted basis of USD 0.46 (USD -1.34).
Operating cash fl ow including discontinued operations for the reporting period amounted to MUSD 598.6 (MUSD 471.9) representing operating cash fl ow per share on a fully diluted basis of USD 1.92 (USD 1.51). Earnings before interest, tax, depletion and amortisation (EBITDA) including discontinued operations for the reporting period amounted to MUSD 635.6 (MUSD 486.2) representing EBITDA per share on a fully diluted basis of USD 2.04 (USD 1.55).
Production including discontinued operations for the reporting period amounted to 11,940.0 (13,931.7) thousand barrels of oil equivalent (Mboe) representing 32.7 Mboe per day (Mboepd) (38.2 Mboepd) and was comprised as follows:
| Production | 2010 | 2009 |
|---|---|---|
| Norway | ||
| - Quantity in Mboe | 6,629.8 | 5,060.9 |
| - Quantity in Mboepd | 18.2 | 13.9 |
| France | ||
| - Quantity in Mboe | 1,160.8 | 1,249.2 |
| - Quantity in Mboepd | 3.2 | 3.4 |
| Netherlands | ||
| - Quantity in Mboe | 756.7 | 759.3 |
| - Quantity in Mboepd | 2.1 | 2.1 |
| Indonesia | ||
| - Quantity in Mboe | 887.1 | 896.3 |
| - Quantity in Mboepd | 2.4 | 2.4 |
| Russia | ||
| - Quantity in Mboe | 1,321.2 | 1,890.0 |
| - Quantity in Mboepd | 3.6 | 5.2 |
| Tunisia | ||
| - Quantity in Mboe | 372.2 | 494.9 |
| - Quantity in Mboepd | 1.0 | 1.4 |
| Total from continuing operations | ||
| - Quantity in Mboe | 11,127.8 | 10,350.6 |
| - Quantity in Mboepd | 30.5 | 28.4 |
| Non-controlling interest in Russia | ||
| - Quantity in Mboe | – | 162.2 |
| - Quantity in Mboepd | – | 0.4 |
| Total from continuing operations excluding | ||
| non-controlling interest | ||
| - Quantity in Mboe | 11,127.8 | 10,188.4 |
| - Quantity in Mboepd | 30.5 | 28.0 |
| Discontinued operations - United Kingdom | ||
| - Quantity in Mboe | 812.2 | 3,743.3 |
| - Quantity in Mboepd | 2.2 | 10.2 |
| Total excluding non-controlling interest | ||
| - Quantity in Mboe | 11,940.0 | 13,931.7 |
| - Quantity in Mboepd | 32.7 | 38.2 |
In 2009, Lundin Petroleum fully consolidated two subsidiaries in Russia over which it had control, with the portion not owned by Lundin Petroleum shown as a non-controlling interest. The average production for Russia for the fi nancial year ended 31 December 2009 adjusted to Lundin Petroleum's share of ownership was 4.8 Mboepd. Lundin Petroleum sold the two controlled Russian subsidiaries during the second half of 2009.
Production quantities in a period can diff er from sales quantities for a number of reasons. Timing diff erences can arise due to inventory, storage and pipeline balances eff ects. Other diff erences arise as a result of paying royalties in kind as well as the eff ects from production sharing agreements.
Net sales of oil and gas for the reporting period amounted to MUSD 785.2 (MUSD 567.5) and are detailed in Note 1. The average price achieved by Lundin Petroleum for a barrel of oil equivalent amounted to USD 72.26 (USD 57.16) and is detailed in the following table. The average Dated Brent price for the reporting period amounted to USD 79.50 (USD 61.67) per barrel.
Sales for the reporting period were comprised as follows:
| Sales Average price per boe expressed in USD |
2010 | 2009 |
|---|---|---|
| Norway | ||
| - Quantity in Mboe | 6,712.5 | 5,200.1 |
| - Average price per boe | 77.93 | 60.48 |
| France | ||
| - Quantity in Mboe | 1,168.0 | 1,277.9 |
| - Average price per boe | 79.35 | 60.94 |
| Netherlands | ||
| - Quantity in Mboe | 756.7 | 759.3 |
| - Average price per boe | 44.37 | 50.49 |
| Indonesia | ||
| - Quantity in Mboe | 607.7 | 609.4 |
| - Average price per boe | 65.31 | 60.58 |
| Russia | ||
| - Quantity in Mboe | 1,290.0 | 1,976.4 |
| - Average price per boe | 51.65 | 37.64 |
| Tunisia | ||
| - Quantity in Mboe | 382.6 | 465.5 |
| - Average price per boe | 77.15 | 54.72 |
| Total from continuing operations | ||
| - Quantity in Mboe | 10,917.5 | 10,288.6 |
| - Average price per boe | 71.92 | 55.16 |
| Discontinued operations - United Kingdom | ||
| - Quantity in Mboe | 814.4 | 3,630.8 |
| - Average price per boe | 76.82 | 62.83 |
| Total | ||
| - Quantity in Mboe | 11,731.9 | 13,919.4 |
| - Average price per boe | 72.26 | 57.16 |
The oil produced in Russia is sold on either the Russian domestic market or exported into the international market. 40 percent (40 percent) of Russian sales for the reporting period were on the international market at an average price of USD 76.17 per barrel (USD 57.23 per barrel) with the remaining 60 percent (60 percent) of Russian sales being sold on the domestic market at an average price of USD 34.98 per barrel (USD 24.67 per barrel).
Other operating income amounted to MUSD 13.4 (MUSD 4.3) for the reporting period and includes MUSD 9.3 (MUSD –) of income relating to Etrion's solar business. Also included in other operating income is tariff income from France and the Netherlands and income for maintaining strategic inventory levels in France.
Production costs for the reporting period amounted to MUSD 157.1 (MUSD 155.3) and are detailed in Note 2. The production and depletion costs per barrel of oil equivalent produced from continuing oil and gas operations are detailed in the table below:
| USD per boe | 2010 | 2009 |
|---|---|---|
| Cost of operations | 8.63 | 9.22 |
| Tariff and transportation expenses | 1.57 | 1.52 |
| Royalty and direct taxes | 3.74 | 3.96 |
| Changes in inventory/overlift | -0.31 | 0.01 |
| Other | 0.38 | 0.30 |
| Total production costs | 14.01 | 15.01 |
| Depletion | 12.85 | 11.41 |
| Total cost per boe | 26.86 | 26.42 |
Actual cost of operations for oil and gas operations for the reporting period was MUSD 96.1 and was in line with the comparative period of MUSD 95.4. Production volumes were 8 percent higher than 2009 resulting in the lower cost of operations per barrel compared to the comparative reporting period. The cost of operations per barrel for the reporting period of USD 8.63 per barrel was also signifi cantly below the original market guidance of USD 10.35 per barrel for continuing operations for 2010 due to the higher production and lower costs. The average cost of operations per barrel for 2011 is expected to remain at this lower level.
The tariff and transportation expenses for 2010 is 11 percent higher at MUSD 17.4 compared to the comparative reporting period at MUSD 15.7. This increase is mainly due to the increased production contribution from the Volund fi eld, Norway. The operating cost of the Volund fi eld consists of an operating expense share and a tariff element payable to the Alvheim fi eld consortium. The operating expense of the Alvheim production facilities is shared between the Alvheim (WI 15%), Volund (WI 35%) and Vilje (WI -%) fi elds based on volume throughput. Lundin Petroleum has a 15 percent working interest in the Alvheim fi eld and a 35 percent interest in the Volund fi eld and the tariff self-to-self element is eliminated for accounting purposes leaving a net 20 percent cost for Volund in tariff and transportation expenses.
Royalty and direct taxes includes Russian Mineral Resource Extraction Tax ("MRET") and Russian Export Duties. The rate of MRET is levied on the volume of Russian production and varies in relation to the international market price of Urals blend and the Rouble exchange rate. MRET averaged USD 13.83 (USD 10.23) per barrel of Russian production for the reporting period. The rate of export duty on Russian oil is revised by the Russian Federation monthly and is dependent on the average price obtained for Urals Blend for the preceding one month period. The export duty is levied on the volume of oil exported from Russia and averaged USD 37.59 (USD 21.42) per barrel for the reporting period. The royalty and direct taxes have increased compared to the comparative period following the rise in crude prices impacting the cost of Russian MRET and export duty.
There are both permanent and timing diff erences that result in sales volumes not being equal to production volumes during a period. Changes to the hydrocarbon inventory and under or overlift positions result from these timing diff erences and an amount of MUSD 3.4 (MUSD 0.1) was credited to the income statement for the reporting period.
Depletion costs amounted to MUSD 145.3 (MUSD 118.1) and are detailed in Note 3. Depletion per barrel is in line with forecast for the year. Norway contributed approximately 70 percent of the total depletion charge for the year at a rate of USD 15.33 per barrel. The depletion charge for the comparative period includes MUSD 11.3 in respect of the Oudna fi eld, Tunisia, which was fully depleted by the end of 2009.
Exploration costs for the reporting period amounted to MUSD 127.5 (MUSD 134.8) and are detailed in Note 4. Exploration and appraisal costs are capitalised as they are incurred. When exploration drilling is unsuccessful the costs are immediately charged to the income statement as exploration costs. All capitalised exploration costs are reviewed on a regular basis and are expensed where there is uncertainty regarding their recoverability.
During 2010, Lundin Petroleum expensed MUSD 94.5 (MUSD 69.5) of exploration costs relating to Norway. In the fi rst quarter of 2010, Lundin Petroleum announced that the wells drilled in Blocks PL359 and PL476 in Norway were not commercial successes and as such, the costs associated with these wells of MUSD 22.6 were expensed. During the fourth quarter of 2010, Lundin Petroleum drilled two unsuccessful wells in Blocks PL400 and PL409 in Norway, the Barchan and the Norall prospects respectively, and expensed MUSD 58.0 relating to these two wells. Other Norwegian exploration costs of MUSD 13.9 were expensed relating mainly to licence relinquishments.
During 2010, Lundin Petroleum drilled two unsuccessful wells in Block 06/94, Vietnam and expensed MUSD 31.9 (MUSD 7.2) being the costs of the wells and the associated seismic, study and licence costs.
Gain on sale of assets amounted to MUSD 66.1 (MUSD 4.6) for the reporting period.
On 12 November 2010, Lundin Petroleum distributed its shares held in Etrion. The value of the distribution was based upon the market price of the Etrion share on the date of distribution resulting in a gain being reported in the consolidated fi nancial results of MUSD 57.7.
On 29 December 2010, Lundin Petroleum completed the sale of the Salawati assets in Indonesia to RH Petrogas which resulted in a gain on disposal of MUSD 8.4.
General, administrative and depreciation expenses for the reporting period amounted to MUSD 42.0 (MUSD 28.8) and includes an amount of MUSD 11.7 (MUSD 9.9) relating to Etrion and MUSD 10.3 (MUSD 1.4) to non-cash charges in relation to the Group's Long-term Incentive Plan (LTIP) scheme.
Awards to employees under the Group's LTIP scheme are valued using the Black & Scholes pricing model using the share price as at the balance sheet date. The cost is accrued over the vesting period of the awards in accordance with accounting rules. During 2010, the Lundin Petroleum share price increased by over 45 percent compared to the share price at the end of 2009 and accordingly, the cost associated with the LTIP was refl ected during the reporting period. The value of the LTIP award as calculated using the Black & Scholes valuation is applied to the vested portion of all outstanding LTIP awards including that of prior periods and therefore the charge to the income statement in 2010 refl ects the change in the provision.
Financial income for the reporting period amounted to MUSD 21.0 (MUSD 82.0) and is detailed in Note 9.
Foreign exchange gains amounted to MUSD 13.4 (MUSD 66.0) in the reporting period. The Euro weakened against both the US Dollar and the Norwegian Kroner during the reporting period giving rise to exchange gain movements on the intercompany loans receivable by a subsidiary using a functional currency of the Euro partially off set by foreign exchange losses on the US Dollar external debt borrowed by a subsidiary using a functional currency of the Euro.
Interest income for the reporting period amounted to MUSD 3.4 (MUSD 4.6). The interest income includes an amount of MUSD 0.5 relating to a loan to Etrion Corporation which was no longer eliminated on consolidation from November 2010 following the distribution of the shares held in Etrion and a further amount of MUSD 0.6 interest on a tax refund. Included in the prior reporting period is accrued interest on the Norwegian tax refund in respect of the 2008 exploration expenditure amounting to MUSD 2.3.
Included in the comparative reporting period in gain on sale of shares was an amount of MUSD 10.2 relating to the sale of the shareholding in a company owning an interest in Dutch gas processing and transportation infrastructure.
Guarantee fees for the reporting period amounted to MUSD 2.3 (MUSD 0.1) and includes a MUSD 2.0 (MUSD –) fee for supporting certain fi nancial obligations for ShaMaran Petroleum.
Financial expenses for the reporting period amounted to MUSD 33.5 (MUSD 52.5) and are detailed in Note 10.
Interest expenses for the reporting period amounted to MUSD 10.0 (MUSD 8.9) and relates mainly to interest on the Group's bank loan facility and a charge of MUSD 3.6 (MUSD 0.1) relating to Etrion's loan facilities. In accordance with the Group's accounting policy, a part of the interest expense associated with the development of the Volund fi eld has been capitalised and following the commencement of production in 2010 from the fi eld, the interest is now charged to the income statement.
In January 2008, the Group entered into an interest rate hedging contract to fi x the LIBOR rate of interest at 3.75 percent p.a. on MUSD 200 of the Group's USD borrowings for the period from January 2008 until January 2012. An amount of MUSD 7.0 (MUSD 5.7) was charged to the income statement for the reporting period for settlements under the hedging contract.
In November 2009, Etrion entered into various interest rate swap arrangements as part of external loan agreements. A change in the market value of these swap arrangements amounted to an expense of MUSD 3.9 (MUSD 0.5) for the reporting period.
A provision for the costs of site restoration is recorded in the balance sheet at the discounted value of the estimated future cost. The eff ect of the discount is unwound each year and charged to the income statement. An amount of MUSD 4.0 (MUSD 2.5) has been charged to the income statement for the reporting period. The increase versus the comparative period is due to increased liabilities following the inclusion of the Volund fi eld, Norway and other cost revisions refl ected at the end of 2009.
Included in other fi nancial expenses in the comparative period is an amount of MUSD 29.8 relating to the write down of the investment in Etrion following Etrion's write down of its Venezuelan oil and gas assets.
The result from share in associated company for the comparative reporting period amounted to MUSD -25.5 and consisted of the 44.81 percent equity share of the result of Etrion owned by Lundin Petroleum. The results of Etrion have been fully consolidated into the Lundin Petroleum consolidated accounts from 30 September 2009 and up until the distribution, and as such, there is no amount recorded for 2010 in the result from share in associated company.
Included in the expense of MUSD 25.5 for the comparative period is an amount of MUSD 22.8 relating to the write down of Etrion's Venezuelan oil and gas assets.
The tax charge for the reporting period amounted to MUSD 251.9 (MUSD 45.7) and is detailed in Note 12.
The current tax charge on continuing operations for the reporting period amounted to MUSD 68.2 (MUSD 32.0). In the reporting period, there is a MUSD 36.1 (MUSD 2.2) current tax charge relating to Norway in respect of the 28 percent onshore tax regime where the losses brought forward have been utilised. The tax charge in Norway consists of both the 28 percent onshore regime and the 50 percent off shore regime. Certain tax allowances earned on development expenditure are currently off setting the 50 percent Norway off shore tax regime
The deferred tax charge amounted to MUSD 183.7 (MUSD 13.7) for the reporting period. The deferred tax charge for 2009 includes a MUSD 86.9 deferred tax release on the Lagansky block impairment taken in 2009.
The Group operates in various countries and fi scal regimes where corporate income tax rates are diff erent from the regulations in Sweden. Corporate income tax rates for the Group vary between 20 percent and 78 percent. The eff ective tax rate for the Group for the reporting period amounted to 66 percent including the gain on sales of assets. Excluding the gain on sales of assets, the eff ective tax rate for the Group for the reporting period amounted to 80 percent. These eff ective rates are calculated from the face of the income statement and do not refl ect the eff ective rate of tax paid within each country of operation. The main contributor to the tax charge is Norway with an eff ective tax rate of 74 percent. Reported losses in non-operating entities, with zero or low tax credits recorded, increase the eff ective rate. The eff ective rate of cash tax payable in the reporting period is 22 percent excluding the gain on sale of assets, because tax loss carry forwards and exploration expenditure provided a tax deduction in Norway during the year.
The net result attributable to non-controlling interest for the reporting period amounted to MUSD -13.4 (MUSD -125.8) and mainly relates to the non-controlling interest's share in Etrion which was fully consolidated until the date of the distribution of the Etrion shares. The net result attributable to non-controlling interest for the comparative period primarily consisted of the non-controlling interest's share in the Lagansky Block impairment.
The net result from discontinued operations for the reporting period amounted to MUSD 369.0 (MUSD 8.7) and relates to the net result of MUSD 10.9 (MUSD 8.7) for the United Kingdom up to 6 April 2010, the date of the UK spin-off , and the subsequent gain on the sale of the UK assets of MUSD 358.1 (MUSD –). For more detail refer to Note 13.
Oil and gas properties amounted to MUSD 1,999.0 (MUSD 2,540.3) and are detailed in Note 14.
Development and exploration expenditure incurred for the reporting period was as follows:
| in MUSD | 2010 | 2009 |
|---|---|---|
| Norway | 106.3 | 88.1 |
| France | 13.2 | 6.3 |
| Netherlands | 4.5 | 5.3 |
| Indonesia | 10.2 | 34.9 |
| Russia | 6.6 | 10.1 |
| Development expenditures | ||
| from continuing operations | 140.8 | 144.7 |
| Discontinued operations - United Kingdom | 17.1 | 63.5 |
| Development expenditures | 157.9 | 208.2 |
| in MUSD | 2010 | 2009 |
|---|---|---|
| Norway | 160.8 | 198.5 |
| France | 1.0 | 3.1 |
| Indonesia | 13.5 | 9.7 |
| Russia | 18.3 | 45.2 |
| Vietnam | 15.3 | 9.2 |
| Congo (Brazzaville) | 2.5 | 13.8 |
| Malaysia | 10.6 | 23.9 |
| Other | 4.4 | 4.7 |
| Exploration expenditures | ||
| from continuing operations | 226.4 | 308.1 |
| Discontinued operations - United Kingdom | 0.2 | 2.3 |
| Exploration expenditures | 226.6 | 310.4 |
Other tangible assets amounted to MUSD 15.3 (MUSD 15.3) and represents offi ce fi xed assets and real estate. See Note 16.
Financial assets amounted to MUSD 114.9 (MUSD 85.4) and are detailed in Notes 19 to 23. Other shares and participations amounted to MUSD 68.6 (MUSD 32.4) and primarily relate to the shares held in ShaMaran Petroleum. Long-term receivables amounted to MUSD 23.8 (MUSD 24.2) and relates to the convertible loan provided to Africa Oil Corporation for MUSD 23.8 (MUSD 23.8). Other fi nancial assets amounted to MUSD 22.5 (MUSD 28.6) and mainly represents VAT paid on costs in Russia that is expected to be recovered amounting to MUSD 16.5 (MUSD 17.5) and capitalised fi nancing fees of MUSD 4.7 (MUSD 7.5).
The deferred tax asset amounted to MUSD 15.1 (MUSD 27.9) and mainly relates to unutilised tax losses in the Netherlands.
Receivables and inventories amounted to MUSD 236.2 (MUSD 198.0) and are detailed in Notes 24 to 27. Inventories include hydrocarbons and consumable well supplies and amounted to MUSD 20.0 (MUSD 27.4). The main reduction in value is due to the sale of the Indonesian Salawati assets which carried inventories of hydrocarbons and well supplies. Trade receivables amounted to MUSD 94.2 (MUSD 80.7). Higher levels of production from Norway following the start up of the Volund fi eld have off set the receivables due from the UK and Salawati fi elds that were sold during 2010 but were included in the comparative period. The short-term loan receivable of MUSD 74.5 (MUSD 33.9) mainly relates to the loan outstanding to Etrion. The comparative period includes a MUSD 30.0 advance in relation to the acquisition of the 30 percent interest in the Lagansky Block to the non-controlling partner. This transaction was successfully completed during the third quarter of 2010.
Cash and cash equivalents amounted to MUSD 48.7 (MUSD 77.3). Included in cash and cash equivalents at 31 December 2009 is an amount of MUSD 23.4 held by Etrion. Cash balances are held to meet operational and investment requirements.
Provisions amounted to MUSD 769.7 (MUSD 897.6) and are detailed in Note 12 and Notes 30 to 32. This amount includes a provision for site restoration of MUSD 93.8 (MUSD 132.7). The decrease of the site restoration provision from the comparative period is mainly due to the UK business spin-off and consequent removal of the United Kingdom provision amount of MUSD 53.7.
The provision for deferred taxes amounted to MUSD 650.7 (MUSD 743.6) and is arising on the excess of book value over the tax value of oil and gas properties net of deferred tax assets which are netted off against deferred tax liabilities in accordance with International Financial Reporting Standards (IFRS) where they relate to the same jurisdiction. The deferred tax provision has decreased from the comparative period due to the UK business spin-off and consequent removal of the United Kingdom provision amount of MUSD 251.6.
The liability for derivative instruments amounted to MUSD – (MUSD 3.1) and relates to the long-term portion of the fair value of the interest rate swap entered into in January 2008 in relation to the Company's MUSD 850 credit facility.
Other provisions amounted to MUSD 23.8 (MUSD 16.8) and include a provision for Lundin Petroleum's LTIP scheme of MUSD 18.8 (MUSD 4.6) and termination indemnity provisions in Tunisia of MUSD 2.9 (MUSD 2.5). The comparative period includes an exchange obligation of Etrion amounting to MUSD 5.7.
Long-term interest bearing debt amounted to MUSD 458.8 (MUSD 545.7) and relates to the amount drawn under the Group's MUSD 850 revolving borrowing base and letter of credit fi nancing facility.
Total current liabilities amounted to MUSD 185.0 (MUSD 257.5). Included in this amount are joint venture creditors of MUSD 100.9 (MUSD 140.0) and trade payables of MUSD 16.0 (MUSD 20.5) and relate to ongoing operational costs.
Tax payables amounted to MUSD 39.7 (MUSD 20.9) and are detailed in Note 12. The short term portion of the fair value of the interest rate swap entered into in January 2008 is included in current liabilities and amounted to MUSD 6.9 (MUSD 7.1).
Accrued expenses and prepaid income of MUSD 7.7 (MUSD 16.5) and other liabilities of MUSD 13.4 (MUSD 20.1) are detailed in Notes 36 and 37.
Short-term loans amounted to MUSD 0.5 (MUSD 32.4). The amount for the comparative period related mainly to the advance received in relation to the agreement with a subsidiary of Gunvor International BV to acquire a 30 percent interest in the Lagansky Block for an amount of MUSD 30.0. This transaction was successfully completed during the third quarter of 2010.
On 9 April 2010, Lundin Petroleum made a distribution of the EnQuest shares received in consideration for the sale of the UK business in a ratio of 1.3473 shares in EnQuest for each Lundin Petroleum share held. The distribution was valued at the market price of the shares at the time of the distribution and amounted to MUSD 656.3.
On 12 November 2010, Lundin Petroleum made a distribution of the shares it held in Etrion to its shareholders in a ratio of 0.2283 shares in Etrion for each Lundin Petroleum share held. The distribution was valued at the market price of the shares at the time of distribution and amounted to MUSD 61.3.
The value of these distributions has been charged against shareholders equity.
The Annual General Meeting will be held in Stockholm on 5 May 2011.
In 2008, Lundin Petroleum implemented a LTIP scheme consisting of a Unit Bonus Plan which provides for an annual grant of units that will lead to a cash payment at vesting. The LTIP will be payable over a period of three years from award. The cash payment will be determined at the end of each vesting period by multiplying the number of units then vested by the share price. The share price for determining the cash payment at the end of each vesting period will be the fi ve trading day average closing Lundin Petroleum share price prior to and following the actual vesting date.
The AGM held on 13 May 2009 approved the 2009 LTIPs, being one Phantom Option Plan for Executive Management (being the President and Chief Executive Offi cer, the Chief Operating Offi cer, the Chief Financial Offi cer and the Senior Vice President Operations) and one Unit Bonus Plan for certain other employees.
On 9 April 2010, Lundin Petroleum distributed the shares of EnQuest that it had received in consideration for the sale of the UK business. On 12 November 2010, Lundin Petroleum distributed the shares of Etrion. These events triggered a recalculation of the number of units and phantom options allocated and the strike price at which the phantom options are exercisable.
The LTIP for Executive Management includes 5,500,928 phantom options with an exercise price of SEK 52.91 (rebased from 4,000,000 phantom options and SEK 72.76 respectively following the distribution of the EnQuest and Etrion shares). The phantom options will vest in May 2014 being the fi fth anniversary of the date of grant. The recipients will be entitled to receive a cash payment equal to the average closing price of the Company's shares during the fi fth year following grant, less the exercise price, multiplied by the number of phantom options.
The number of units relating to the 2008 and 2009 Unit Bonus Plans outstanding as 31 December 2010 were 211,807 and 435,498 respectively. In addition, a further 723,950 units were awarded to employees under the 2010 Unit Bonus Plan and 701,250 remain outstanding as at 31 December 2010.
During 2010, new rules regarding management remuneration were introduced in Sweden following the introduction of a revised Code of Corporate Governance (Code of Governance). In light of these changes, the Company's Compensation Committee considered the implications of the new rules on the content and scope of the Company's Policy on Remuneration. Based on its review, the Compensation Committee concluded that the Policy remains in compliance with the rules of the Code of Governance and that no changes to the content of the Policy, as a result of the new rules, are required.
In connection with this review, the Compensation Committee also considered the Company's internal decision-making processes. Since 2009, when Lundin Petroleum's Investment Committee was established, all major management decisions regarding the worldwide operations and the fi nancial position of the Company are submitted for consideration and approval to the Investment Committee, which consists of the Company's President and Chief Executive Offi cer, Chief Operating Offi cer, Chief Financial Offi cer and Senior Vice President Operations. Considering this development, the Compensation Committee determined that the Executive Management of the Company, to which the Company's Policy on Remuneration shall be applicable, shall be the members of the Investment Committee.
As a result, it is the intention of the Board of Directors to propose to the 2011 AGM the adoption of a Policy on Remuneration for 2011 that follows the same principles as applied in 2010 and that contains similar elements of remuneration for the Executive Management as the 2010 Policy on Remuneration being basic salary, yearly variable salary, Long-term Incentive Plan (LTIP) and other benefi ts. An LTIP for the Executive Management consisting of a Phantom Option Plan was approved by the 2009 AGM. No new LTIP for the Executive Management for 2011 will be included in the Board's proposal. In addition, as in previous years, the Board of Directors will further seek authorisation to deviate from the Policy on Remuneration in case of special circumstances in a specifi c case.
For a detailed description of the Policy on Remuneration applied in 2010 and the Board and Management remunerations for the year ended 31 December 2010, refer to Note 45
For the AGM resolution on issuance of new share capital see page 54, The Lundin Petroleum Share and Shareholders.
The Directors propose that no dividend be paid for the year. For details of the dividend policy refer to the share information, page 54.
The Board of Directors propose that the unrestricted equity of the Parent Company of TSEK 6,487,891, including the net result for the year of TSEK 3,936,086 be brought forward.
At the AGM held on 6 May 2010 the current Board of Directors of Lundin Petroleum were re-elected. It is proposed that Kristin Færøvik be elected as a new member of the Board of Directors at the 2011 AGM.
The result of the Group's operations and fi nancial position at the end of the fi nancial year are shown in the following income statement, statement of comprehensive income, balance sheet, statement of cash fl ow, statement of changes in equity and related notes, which are presented in US Dollars.
The Parent Company's income statement, balance sheet, statement of cash fl ow, statement of changes in equity and related notes presented in Swedish Kroner can be found on pages 93–98.
| Expressed in TUSD | Note | 2010 | 2009 |
|---|---|---|---|
| Continuing operations | |||
| Operating income | |||
| Net sales of oil and gas | 1 | 785,162 | 567,488 |
| Other operating income | 1 | 13,437 | 4,347 |
| 798,599 | 571,835 | ||
| Cost of sales | |||
| Production costs | 2 | -157,065 | -155,311 |
| Depletion costs | 3 | -145,316 | -118,128 |
| Exploration costs | 4 | -127,534 | -134,792 |
| Impairment costs for oil and gas properties | 5 | – | -525,719 |
| Impairment costs for goodwill | 6 | – | -119,047 |
| Gross profi t | 368,684 | -481,162 | |
| Gain on sale of assets | 7 | 66,126 | 4,589 |
| Other income | 1,044 | 1,222 | |
| General, administration and depreciation expenses | 8 | -42,004 | -28,841 |
| Operating profi t | 393,850 | -504,192 | |
| Result from fi nancial investments | |||
| Financial income | 9 | 20,956 | 82,031 |
| Financial expenses | 10 | -33,463 | -52,472 |
| -12,507 | 29,559 | ||
| Result from share in associated company | 11 | – | -25,504 |
| Profi t before tax | 381,343 | -500,137 | |
| Corporation tax | 12 | -251,865 | -45,669 |
| Petroleum tax | 12 | – | – |
| -251,865 | -45,669 | ||
| Net result from continuing operations | 129,478 | -545,806 | |
| Discontinued operations | |||
| Net result from discontinued operations | 13 | 368,992 | 8,737 |
| Net result | 498,470 | -537,069 | |
| Net result attributable to the shareholders of the Parent Company: | |||
| From continuing operations | 142,883 | -420,005 | |
| From discontinued operations | 368,992 | 8,737 | |
| 511,875 | -411,268 | ||
| Net result attributable to non-controlling interest: | |||
| From continuing operations | -13,405 | -125,801 | |
| From discontinued operations | – | – | |
| -13,405 | -125,801 | ||
| Net result | 498,470 | -537,069 | |
| Earnings per share – USD 1 | |||
| From continuing operations | 0.46 | -1.34 | |
| From discontinued operations | 1.18 | 0.03 | |
| Earnings per share – USD1 | 40 | 1.64 | -1.31 |
| Diluted earning per share – USD 1 | |||
| From continuing operations | 0.46 | -1.34 | |
| From discontinued operations | 1.18 | 0.03 | |
| Diluted earnings per share – USD 1 | 40 | 1.64 | -1.31 |
Based on net result attributable to shareholders of the Parent Company.
| Expressed in TUSD | Note | 2010 | 2009 |
|---|---|---|---|
| Net result | 498,470 | -537,069 | |
| Other comprehensive income | |||
| Exchange diff erences foreign operations | -43,972 | 74,763 | |
| Cash fl ow hedges | -378 | 47,583 | |
| Available-for-sale fi nancial assets | 53,128 | -19,158 | |
| Income tax relating to other comprehensive income | 12 | -1,771 | -19,064 |
| Other comprehensive income, net of tax | 7,007 | 84,124 | |
| Total comprehensive income | 505,477 | -452,945 | |
| Total comprehensive income attributable to: | |||
| Shareholders of the Parent Company | 510,165 | -317,291 | |
| Non-controlling interest | -4,688 | -135,654 | |
| 505,477 | -452,945 |
| Expressed in TUSD | Note | 2010 | 2009 | 20081 |
|---|---|---|---|---|
| ASSETS | ||||
| Non-current assets | ||||
| Oil and gas properties | 14 | 1,998,971 | 2,540,348 | 2,688,166 |
| Solar power properties | 15 | – | 644 | – |
| Other tangible assets | 16 | 15,271 | 15,283 | 16,390 |
| Goodwill | 17 | – | 674 | 119,047 |
| Other intangible assets | 18 | – | 5,132 | – |
| Shares in jointly controlled entities and associated companies | 19 | – | – | 64,748 |
| Other shares and participations | 20 | 68,613 | 32,369 | 15,573 |
| Long-term receivables | 23,791 | 24,239 | 2,849 | |
| Deferred tax | 12 | 15,066 | 27,850 | 25,842 |
| Derivative instruments | 21 | – | 231 | – |
| Other fi nancial assets | 22–23 | 22,474 | 28,598 | 31,456 |
| Total non-current assets | 2,144,186 | 2,675,368 | 2,964,071 | |
| Current assets | ||||
| Inventories | 24 | 20,039 | 27,373 | 26,395 |
| Trade receivables | 25 | 94,190 | 80,721 | 74,511 |
| Prepaid expenses and accrued income | 26 | 6,351 | 9,833 | 9,954 |
| Short-term loan receivables | 74,527 | 33,907 | 6,900 | |
| Derivative instruments | 21 | – | – | 440 |
| Tax receivables | – | 2,241 | 59,060 | |
| Joint venture debtors | 21,389 | 28,930 | 26,684 | |
| Other receivables | 27 | 19,751 | 14,947 | 11,230 |
| Cash and cash equivalents | 28 | 48,703 | 77,338 | 57,445 |
| Total current assets | 284,950 | 275,290 | 272,619 | |
| TOTAL ASSETS | 2,429,136 | 2,950,658 | 3,236,690 | |
| EQUITY AND LIABILITIES | ||||
| Equity | ||||
| Share capital | 463 | 463 | 463 | |
| Additional paid in capital | 483,565 | 909,214 | 904,873 | |
| Other reserves | 29 | -66,135 | -68,836 | -150,769 |
| Retained earnings | -9,352 | 712,085 | 613,917 | |
| Net result | 511,875 | -411,268 | 93,958 | |
| Shareholders' equity | 920,416 | 1,141,658 | 1,462,442 | |
| Non-controlling interest | 77,365 | 95,555 | 179,793 | |
| Total equity | 997,781 | 1,237,213 | 1,642,235 | |
| Non-current liabilities | ||||
| Provision for site restoration | 30 | 93,766 | 132,698 | 89,648 |
| Pension provision | 31 | 1,421 | 1,354 | 1,298 |
| Provision for deferred tax | 12 | 650,695 | 743,646 | 674,283 |
| Derivative instruments | 21 | – | 3,122 | 7,028 |
| Other provisions | 32 | 23,805 | 16,802 | 7,113 |
| Bank loans | 33 | 458,835 | 545,729 | 555,626 |
| Other non-current liabilities | 17,836 | 12,598 | – | |
| Total non-current liabilities | 1,246,358 | 1,455,949 | 1,334,996 | |
| Current liabilities | ||||
| Trade payables | 16,031 | 20,487 | 35,393 | |
| Tax liabilities | 12 | 39,679 | 20,870 | 15,803 |
| Derivative instruments | 21 | 6,866 | 7,074 | 38,980 |
| Accrued expenses and prepaid income | 36 | 7,667 | 16,472 | 13,166 |
| Short-term debt | 33 | 450 | 32,400 | 6,900 |
| Joint venture creditors | 100,931 | 140,046 | 122,211 | |
| Other liabilities | 37 | 13,373 | 20,147 | 27,006 |
| Total current liabilities | 184,997 | 257,496 | 259,459 | |
| TOTAL EQUITY AND LIABILITIES | 2,429,136 | 2,950,658 | 3,236,690 | |
| Pledged assets | 38 | 459,220 | 699,506 | 589,686 |
| Contingent liabilities | 39 | – | – | 23,500 |
1 Following the change in presentation currency in 2010, an additional comparative period is presented (which is the same as the beginning of the previous comparative period) in accordance with IAS 1.
| Expressed in TUSD | Note | 2010 | 2009 |
|---|---|---|---|
| Cash fl ow from operations | |||
| Net result | 498,470 | -537,069 | |
| Gain on sale of assets | -424,196 | – | |
| Adjustments for non-cash related items | 41–42 | 575,955 | 1,005,388 |
| Interest received | 589 | 3,381 | |
| Interest paid | -2,937 | -6,309 | |
| Income taxes paid | -25,029 | -26,305 | |
| Changes in working capital: | |||
| Decrease/Increase in inventories | 2,611 | -1,900 | |
| Increase in underlift position | -12,068 | -4,522 | |
| Decrease in receivables | 52,885 | 25,635 | |
| Increase/decrease in overlift position | 712 | -12,392 | |
| Decrease/increase in liabilities | -109,874 | 43,691 | |
| Total cash fl ow from operations | 557,118 | 489,598 | |
| Cash fl ow used for investments | |||
| Investment in subsidiary assets | -22,553 | 26,489 | |
| Investment in associated company | 235 | – | |
| Proceeds from sale of other shares and participations | 446 | 12,285 | |
| Change in other fi nancial fi xed assets | 39 | -194 | |
| Other payments | -3,085 | -2,050 | |
| Divestments | -65,808 | – | |
| Investment in intangible assets | -200 | -2,161 | |
| Investment in oil and gas properties | -348,819 | -514,313 | |
| Investment in solar power properties | -21,210 | -644 | |
| Investment in offi ce equipment and other assets | -4,853 | -2,391 | |
| Total cash fl ow used for investments | -465,808 | -482,979 | |
| Cash fl ow used for/from fi nancing | |||
| Loans provided 1 | -75,324 | – | |
| Proceeds from borrowings | 369,308 | 601,831 | |
| Repayments of borrowings | -418,917 | -597,081 | |
| Paid fi nancing fees | -51 | -97 | |
| Purchase of own shares | -10,712 | – | |
| Proceeds from share issuance subsidiary company | 15,191 | – | |
| Dividend paid to non-controlling interest | – | -46 | |
| Total cash fl ow used for/from fi nancing | -120,505 | 4,607 | |
| Change in cash and cash equivalents | -29,195 | 11,226 | |
| Cash and cash equivalents at the beginning of the year | 77,338 | 57,445 | |
| Currency exchange diff erence in cash and cash equivalents | 560 | 8,667 | |
| Cash and cash equivalents at the end of the year | 77,338 | ||
| Cash fl ow from operations | |||
| 48,703 | |||
| From continuing operations | 880,394 | 433,227 | |
| Used for/from discontinued operations | -323,276 | 56,371 | |
| 557,118 | 489,598 | ||
| Cash fl ow used for investments | |||
| Used for continuing operations | -423,422 | -416,853 | |
| Used for discontinued operations | -42,386 | -66,126 | |
| -465,808 | -482,979 | ||
| Cash fl ow used for/from fi nancing | |||
| Used for/from continuing operations | -120,505 | 19,607 | |
| Used for discontinued operations | – -120,505 |
-15,000 4,607 |
1 Loan provided to Etrion
The eff ects of acquisitions and divestments of subsidiary companies have been excluded from the changes in the balance sheet items. The eff ects of currency exchange diff erences due to the translation of foreign group companies have also been excluded as these eff ects do not aff ect the cash fl ow. Cash and cash equivalents comprise cash and short-term deposits maturing within less than three months.
| Total Equity comprises: Expressed in TUSD |
Share capital 1 |
Additional paid-in capital |
Other reserves 2 |
Retained earnings |
Net result | Non controlling interest |
Total equity |
|---|---|---|---|---|---|---|---|
| Balance at 1 January 2009 | 463 | 904,873 | -150,769 | 613,917 | 93,958 | 179,793 | 1,642,235 |
| Transfer of prior year net result | – | – | – | 93,958 | -93,958 | – | – |
| Net result | – | – | – | – | -411,268 | -125,801 | -537,069 |
| Currency translation diff erence | – | – | 83,868 | 748 | – | -9,853 | 74,763 |
| Cash fl ow hedges | – | – | 47,583 | – | – | – | 47,583 |
| Available for sale fi nancial assets | – | – | -19,158 | – | – | – | -19,158 |
| Income tax relating to other comprehensive income | – | – | -19,064 | – | – | – | -19,064 |
| Total comprehensive income | – | – | 93,229 | 748 | -411,268 | -135,654 | -452,945 |
| Transactions with owners | |||||||
| Acquired on consolidation | – | – | 14,899 | 6,225 | – | 18,770 | 39,894 |
| Divestments | – | – | -26,195 | – | – | 32,692 | 6,497 |
| Transfer of share based payments | – | 4,341 | – | -4,341 | – | – | – |
| Share based payments | – | – | – | 1,578 | – | – | 1,578 |
| Total transactions with owners | – | 4,341 | -11,296 | 3,462 | – | 51,462 | 47,969 |
| Non-controlling share in dividend | – | – | – | – | – | -46 | -46 |
| Balance at 31 December 2009 | 463 | 909,214 | -68,836 | 712,085 | -411,268 | 95,555 | 1,237,213 |
| Transfer of prior year net result | – | – | – | -411,268 | 411,268 | – | – |
| Net result | – | – | – | – | 511,875 | -13,405 | 498,470 |
| Currency translation diff erence | – | – | -52,938 | 249 | – | 8,717 | -43,972 |
| Cash fl ow hedges | – | – | -378 | – | – | – | -378 |
| Available for sale fi nancial assets | – | – | 53,128 | – | – | – | 53,128 |
| Income tax relating to other comprehensive income | – | – | -1,771 | – | – | – | -1,771 |
| Total comprehensive income | – | – | -1,959 | 249 | 511,875 | -4,688 | 505,477 |
| Transactions with owners | |||||||
| Acquired on consolidation | – | – | – | – | – | 94 | 94 |
| Divestments | – | – | 4,660 | -10,520 | – | -13,596 | -19,456 |
| Distributions | – | -419,316 | – | -298,288 | – | – | -717,604 |
| Purchase of own shares | – | -10,712 | – | – | – | – | -10,712 |
| Transfer of share based payments | – | 4,379 | – | -4,379 | – | – | – |
| Share based payments | – | – | – | 2,769 | – | – | 2,769 |
| Total transactions with owners | – | -425,649 | 4,660 | -310,418 | – | -13,502 | -744,909 |
| Balance at 31 December 2010 | 463 | 483,565 | -66,135 | -9,352 | 511,875 | 77,365 | 997,781 |
Lundin Petroleum AB's issued share capital at 31 December 2010 amounted to SEK 3,179,106 represented by 317,910,580 shares with a quota value of SEK 0.01 each, the USD equivalent of the issued share capital is TUSD 463. Included in the number of shares issued at 31 December 2010 are 6,882,638 shares which Lundin Petroleum holds in its own name.
Other reserves are described in detail in Note 29.
Lundin Petroleum's annual report for 2010 has been prepared in compliance with International Financial Reporting Standards (IFRS). The fi nancial statements of the Group have been prepared in accordance with prevailing IFRS standards and International Financial Reporting Standards Committee (IFRIC) interpretations adopted by the EU Commission and the Swedish Annual Accounts Act (1995:1554). In addition RFR 1 "Supplementary Rules for Groups" has been applied as issued by the Swedish Financial Reporting Board. The Parent Company applies the same accounting principles as the Group, except as specifi ed in the Parent Company accounting principles on page 93.
The preparation of fi nancial statements in conformity with IFRS requires the use of certain critical accounting estimates and also requires management to exercise its judgement in the process of applying the Group's accounting principles. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are signifi cant to the consolidated fi nancial statements, are disclosed under the headline "Critical accounting estimates and judgements".
A description of the Company's operations and registered offi ce is made in the Directors' report on page 57.
The consolidated fi nancial statements have been prepared under the historical cost convention, as modifi ed by the revaluation of available for sale fi nancial assets and fi nancial assets and liabilities (including derivative instruments) at fair value through the profi t or loss.
During the fi rst quarter of 2010, Lundin Petroleum announced its intention to spin-off the United Kingdom (UK) business. The spin-off was completed on 6 April 2010 with the sale of the UK business in exchange for shares in the newly incorporated company, EnQuest and the subsequent distribution of the EnQuest shares received to Lundin Petroleum shareholders on 9 April 2010. The results of the UK business are included in the Lundin Petroleum accounts up until the end of the fi rst quarter of 2010 and are shown as discontinued operations.
On 12 November 2010, Lundin Petroleum completed the distribution of its shares in Etrion Corporation to Lundin Petroleum's shareholders, in connection with the listing of the shares of Etrion on the NASDAQ OMX Stockholm exchange. On 29 December 2010, Lundin Petroleum completed the sale of its non-operated interests in Salawati Basin and Salawati Island assets in Indonesia to RH Petrogas. The results from Etrion, Salawati Basin and Salawati Island are included in the consolidated accounts up to the date of the distribution/sale and have not been considered as discontinued operations as the operations are not signifi cant to the presentation of the Group accounts.
IFRIC 9, 'Reassessment of embedded derivatives and' IAS 39, 'fi nancial instruments, recognition and measurement', eff ective 1 July 2009. This amendment to IFRIC 9 requires an entity to assess whether an embedded derivative should be separated from a host contract when the entity reclassifi es a hybrid fi nancial asset out of the fair value though profi t or loss category. IFRIC 9 is not relevant to the Group's operations.
IFRIC 16, 'Hedges of a net investment in a foreign operation' (eff ective on or after 1 July 2009). IFRIC 16 clarifi es the accounting treatment in respect of net investment hedging. This includes the fact that net investment hedging relates to diff erences in functional currency not presentation currency, and hedging instruments may be held anywhere in the Group. IFRIC 16 is not relevant to the Group's operations.
IFRIC 17, 'Distribution of non-cash assets to owners' (eff ective on or after 1 July 2009). This interpretation provides guidance on accounting for arrangements whereby an entity distributes non-cash assets to shareholders either as a distribution of reserves or as dividends. IFRS 5 has also been amended to require that assets are classifi ed as held for distribution only when they are available for distribution in their present condition and the distribution is highly probable. This interpretation was applied during the year.
IFRIC 18, 'Transfers of assets from customers', eff ective for transfer of assets received on or after 1 July 2009. The interpretation clarifi es the requirements of IFRSs for agreements in which an entity receives from a customer an item of property plant and equipment that the entity must then use either or connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services. This interpretation was applied during the year.
IFRS 2 (amendments), 'Group cash-settled and share-based payment transactions'. (eff ective on or after 1 January 2010). In addition to incorporating IFRIC 8, 'Scope of IFRS 2', and IFRIC 11, 'IFRS 2 – Group and treasury share transactions', the amendments expand on the guidance in IFRIC 11 to address the classifi cation of Group arrangements that were not covered by that interpretation. This interpretation does not have any impact on the Group's fi nancial statements.
IFRS 3 (Revised), 'Business combinations' (eff ective on or after 1 July 2009). The revised standard continues to apply the acquisition method to business combinations, with some signifi cant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classifi ed as debt subsequently re-measured through the income statement. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair vale or at the non-controlling interest's proportionate share of the acquiree's net assets. All acquisition-related costs should be expensed. This revision has had an impact on the Group accounts as Etrion's acquisitions have been treated in line with IFRS 3 revised.
IFRS 5 (amendment), 'non-current assets held-for-sale and discontinued operations'. The amendment provides clarifi cation that IFRS 5 specifi es the disclosures required in respect of non-current assets (or disposal Groups) classifi ed as held for sale or discontinued operations. It also clarifi es that the general requirement of IAS 1 still apply, particularly paragraph 15 (to achieve a fair presentation) and paragraph 125 (sources of estimation uncertainty) of IAS 1. The Group applies IFRS 5 (amendment) from 1 January 2010. The amendment does not have a material impact on the Group's fi nancial statements.
IAS 1 (amendment), 'Presentation of fi nancial statements'. The amendment provides clarifi cation that the potential settlement of a liability by the issue of equity is not relevant to its classifi cation as current or non-current. By amending the defi nition of current liability, the amendment permits a liability to be classifi ed as non-current (provided that the entity has an unconditional right to defer settlement by transfer of cash or other assets for at least 12 months after the accounting period) notwithstanding the fact that the entity could be required by the counterparty to settle in shares at any time. The Group applies IAS 1 (amendment) from 1 January 2010. The amendment does not have a material impact on the Group's fi nancial statements.
IAS 27 (Revised), 'Consolidated and separate fi nancial statements' (eff ective from 1 July 2009). The revised standard requires the eff ects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifi es the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value, and a gain or loss is recognised in profi t or loss. IAS 27 (revised) does not have a material impact on the Group's fi nancial statements).
IAS 36 (Amendment), 'Impairment of assets' (eff ective from 1 January 2010). The amendment clarifi es that the largest cash generating unit to which goodwill should be allocated for the purposes of impairment testing is an operating segment. The amendment does not result in a material impact on the Group's fi nancial statements.
Subsidiaries are all entities over which the Group has the sole right to exercise control over the operations and govern the fi nancial policies generally accompanying a shareholding of more than half of the voting rights. The existence and eff ect of potential voting rights that are currently exercisable or convertible are considered when assessing the Group's control. Subsidiaries are fully consolidated from the date on which control is transferred to the Group and are de-consolidated from the date that control ceases.
The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identifi able assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The accounting for the excess of the cost of an acquisition over the fair value of the assets acquired refer to "Goodwill".
The non-controlling interest in a subsidiary represents the portion of the subsidiary not owned by the Group. The equity of the subsidiary relating to the non-controlling shareholders is shown as a separate item within equity for the Group.
All intercompany profi ts, transactions and balances are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.
The Group applies a policy of treating transactions with non-controlling interests as transactions with equity owners of the Group. For purchases from non-controlling interests, the diff erence between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.
As stated above, a subsidiary that is controlled by the Group will be fully consolidated within the results of Lundin Petroleum. Joint control exists when the Group does not have the control to determine the strategic operating, investing and fi nancing policies of a partially owned entity without the co-operation of others. When this is the case the entity is proportionally consolidated in accordance with the IFRS defi nition of joint control in an entity.
An investment in an associated company is an investment in an undertaking where the Group exercises signifi cant infl uence but not control, generally accompanying a shareholding of at least 20 percent but not more than 50 percent of the voting rights. Such investments are accounted for in the consolidated fi nancial statements in accordance with the equity method and are initially recognised at cost. The diff erence between the acquisition cost of shares in an associated company and the net fair value of the assets, liabilities and contingent liabilities of the associated company recognised at the date of acquisition is recognised as goodwill. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of the investment. The Group's share in the post-acquisition results of the associated company is recognised in the income statement and the Group's share in post-acquisition movements in the equity of the associated company are recognised directly in other comprehensive income of the Group. When the Group's accumulated share of losses in an associated company equals or exceeds its interest in the associated company, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.
Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group's percentage in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group.
Investments where the shareholding is less than 20 percent of the voting rights are treated as available for sale fi nancial assets. If the value of these assets has declined signifi cantly or has lasted for a longer period, an impairment charge is recognised in the income statement. If the event causing the impairment no longer exists, the impairment charge can be reversed in the income statement unless it involves an equity instrument. Dividend received attributable to these assets is recognised in the income statement as part of net fi nancial items.
Oil and gas operations are conducted by the Group as co-licencees in unincorporated joint ventures with other companies. The Group's fi nancial statements refl ect the relevant proportions of production, capital costs, operating costs and current assets and liabilities of the joint venture applicable to the Group's interests.
Items included in the fi nancial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ('functional currency'). The consolidated fi nancial statements are presented in United States Dollars, which is the currency the Group has elected to use as the presentation currency.
IAS 21 states that a company may present its fi nancial statements in any currency. The generally accepted currency of the oil industry is United States Dollars and as such the Board of Directors of Lundin Petroleum has resolved that Lundin Petroleum will present its fi nancial statements in United States Dollars with eff ect from 1 January 2010. The Board believes that presenting the fi nancial statements in this currency will further assist readers in understanding the underlying fi nancial position of the Company and its results. As a consequence the comparative fi gures are translated into United States Dollars whereby assets and liabilities are translated at the closing rate at the date of that balance sheet and income and expenses are translated at the exchange rates at the dates of the transactions. Equity is translated against historical rates.
Monetary assets and liabilities denominated in foreign currencies are translated at the rates of exchange prevailing at the balance sheet date and foreign exchange currency diff erences are recognised in the income statement. Transactions in foreign currencies are translated at exchange rates prevailing at the transaction date. Exchange diff erences are included in fi nancial income/expenses in the income statement except deferred exchange diff erences on qualifying cash fl ow hedges which are recorded in other comprehensive income. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the balance sheet rate of exchange.
The balance sheets and income statements of foreign Group companies are translated for consolidation purposes using the current rate method. All assets and liabilities of the subsidiary companies are translated at the balance sheet date rates of exchange, whereas the income statements are translated at average rates of exchange for the year, except for transactions where it is more relevant to use the rate of the day of the transaction. The translation diff erences which arise are recorded directly in the foreign currency translation reserve within other comprehensive income. Upon disposal of a foreign operation the translation diff erences relating to that operation will be transferred from equity to the income statement and included in the result on sale. Translation diff erences arising from net investments in subsidiaries, used for fi nancing exploration activities, are recorded directly in other comprehensive income.
For the preparation of the annual fi nancial statements, the following currency exchange rates have been used.
| 2010 Average |
2010 Period end |
2009 Average |
2009 Period end |
|
|---|---|---|---|---|
| 1 USD equals NOK | 6.0345 | 5.8564 | 6.2650 | 5.7767 |
| 1 USD equals Euro | 0.7537 | 0.7484 | 0.7177 | 0.6942 |
| 1 USD equals Rouble | 30.3570 | 30.5493 | 31.6803 | 29.9556 |
| 1 USD equals SEK | 7.1954 | 6.7097 | 7.6223 | 7.1165 |
Non-current assets, long-term liabilities and provisions consist for the most part solely of amounts that are expected to be recovered or paid more than twelve months after the balance sheet date. Current assets and current liabilities consist solely of amounts that are expected to be recovered or paid within twelve months after the balance sheet date.
Oil and gas operations are recorded at historical cost less depletion. All costs for acquiring concessions, licences or interests in production sharing contracts and for the survey, drilling and development of such interests are capitalised on a fi eld area cost centre basis.
Costs directly associated with an exploration well are capitalised until the determination of reserves is evaluated. If it is determined that a commercial discovery has not been achieved, these exploration costs are charged to the income statement. During the exploration and development phases, no depletion is charged. The fi eld will be transferred from the non-production cost pool to the production cost pool within oil and gas properties once production commences, and accounted for as a producing asset. Routine maintenance and repair costs for producing assets are expensed to the income statement when they occur.
Net capitalised costs to reporting date, together with anticipated future capital costs for the development of the proved and probable reserves determined at the balance sheet date price levels, are depleted based on the year's production in relation to estimated total proved and probable reserves of oil and gas in accordance with the unit of production method. Depletion of a fi eld area is charged to the income statement once production commences.
Proved reserves are those quantities of petroleum which, by analysis of geological and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under current economic conditions, operating methods and governmental regulations. Proved reserves can be categorised as developed or undeveloped. If deterministic methods are used, the term reasonable certainty is intended to express a high degree of confi dence that the quantities will be recovered. If probabilistic methods are used, there should be at least a 90 percent probability that the quantities actually recovered will equal or exceed the estimates.
Probable reserves are those unproved reserves which analysis of geological and engineering data suggests are more likely than not to be recoverable. In this context, when probabilistic methods are used, there should be at least a 50 percent probability that the quantities actually recovered will equal or exceed the sum of estimated proved plus probable reserves.
Proceeds from the sale or farm-out of oil and gas concessions in the exploration stage are off set against the related capitalised costs of each cost centre with any excess of net proceeds over all costs capitalised included in the income statement. In the event of a sale in the exploration stage any defi cit is included in the income statement.
Impairment tests are performed annually or when there are facts and circumstances that suggest that the net book value of capitalised costs within each fi eld area cost centre less any provision for site restoration costs, royalties and deferred production or revenue related taxes is higher than the anticipated future net revenue from oil and gas reserves attributable to the Group's interest in the related fi eld areas. Capitalised costs can not be carried unless those costs can be supported by future cash fl ows from that asset. Provision is made for any impairment, where the net carrying value, according to the above, exceeds the recoverable amount, which is the higher of value in use and fair value less costs to sell, determined through estimated future discounted net cash fl ows using prices and cost levels used by Group management in their internal forecasting. If there is no decision to continue with a fi eld specifi c exploration programme, the costs will be expensed at the time the decision is made.
Other tangible fi xed assets are stated at cost less accumulated depreciation. Depreciation is based on cost and is calculated on a straight line basis over the estimated economic life of 20 years for real estate and 3 to 5 years for offi ce equipment and other assets.
Additional costs to existing assets are included in the assets' net book value or recognised as a separate asset, as appropriate, only when it is probable that future economic benefi ts associated with the item will fl ow to the Group and the cost of the item can be measured reliably. The net book value of any replaced parts is written off . Other additional expenses are deemed to be repair and maintenance costs and are charged to the income statement when they are incurred.
The net book value is written down immediately to its recoverable amount when the net book value is higher. The recoverable amount is the higher of an asset's fair value less cost to sell and value in use.
The excess of the cost of acquisition over the fair value of the Group's share of the identifi able net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the diff erence is recognised directly in the income statement.
For the purpose of impairment testing, goodwill is allocated to each of the Group's cash-generating units from which the benefi ts of the business combination originates. Cash-generating units to which goodwill has been allocated are tested for impairment at least annually. If the carrying value exceeds its recoverable amount the impairment loss is allocated fi rst to reduce the goodwill on the unit and thereafter to the other assets of the unit. Impairment losses on goodwill are subsequently not reversed.
Upon disposal of a subsidiary or a jointly controlled entity the amount of goodwill is included in the profi t or loss on disposal.
Permitted projects and licences acquired in a business combination are recognised at fair value at the acquisition date. Permitted projects and licences have a fi nite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate costs of permitted projects and licences over their estimated useful lives which are usually determined according to the term of the energy supply contract signed with the local grid operator for the solar power projects.
In order to classify an asset as a non-current asset held-for-sale the carrying value needs to be assumed to be recovered through a sale transaction rather than through continuing use. It must also be available for immediate sale in its present condition and a sale must be highly probable. If the asset is classifi ed as a non-current asset held-for-sale it will be recorded at the lower of its carrying value and fair value less estimated cost of sale. There are no non-current assets held-for-sale at the balance sheet date.
At each balance sheet date the Group assesses whether there is an indication that an asset may be impaired. Where an indicator of impairment exists or when impairment testing for an asset is required, the Group makes a formal assessment of the recoverable amount. Where the carrying value of an asset exceeds its recoverable amount the asset is considered impaired and is written down to its recoverable amount.
The recoverable amount is the higher of fair value less costs to sell and value in use. Value in use is calculated by discounting estimated future cash fl ows to their present value using a pre-tax discount rate that refl ects current market assessments of the time value of money and the risks specifi c to the asset. An impairment loss is recognised in the income statement. If indications exist that previously recognised impairment losses no longer exist or are decreased, the recoverable amount is estimated. When a previously recognised impairment loss is reversed the carrying amount of the asset is increased to the estimated recoverable amount but the increased carrying amount may not exceed the carrying amount after depreciation that would have been determined had no impairment loss been recognised for the asset in prior years.
Assets and liabilities are recognised initially at fair value plus transaction costs and subsequently measured at amortised cost unless stated otherwise. Financial assets are derecognised when the rights to receive cash fl ows from the investments have expired or have been transferred and the group has transferred substantially all risks and rewards of ownership.
Lundin Petroleum recognises the following fi nancial instruments:
Changes in the fair value of derivatives that qualify as fair value hedging instruments are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability. If a hedging does no longer fulfi l the criteria for the hedge accounting, the value of the hedged asset of liability for which the eff ective interest rate method has been used will be amortised in the income statement over the remaining life. There are no fair value hedges at the balance sheet date.
The eff ective portion of changes in the fair value of derivatives that qualify as cash fl ow hedges are recognised in other comprehensive income. The gain or loss relating to the ineff ective portion is recognised immediately in the income statement. Amounts accumulated in other comprehensive income are transferred to the income statement in the period when the hedged item will aff ect the income statement. When a hedging instrument no longer meets the requirements for hedge accounting, expires or is sold, any accumulated gain or loss recognised in other comprehensive income remains in shareholders' equity until the forecast transaction no longer is expected to occur, at which point it is being transferred to the income statement.
Hedges of net investments in foreign operations are accounted for in a similar manner as cash fl ow hedges. The gain or loss accumulated in other comprehensive income is transferred to the income statement at the time the foreign operation is disposed of. There are no net investment hedges at the balance sheet date.
When derivatives do not qualify for hedge accounting, changes in fair value are recognised immediately in the income statement.
Inventories of consumable well supplies are stated at the lower of cost and net realisable value, cost being determined on a weighted average cost basis. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Inventories of hydrocarbons are stated at the lower of cost and net realisable value. Under or overlifted positions of hydrocarbons are valued at market prices prevailing at the balance sheet date. An underlift of production from a fi eld is included in the current receivables and valued at the reporting date spot price or prevailing contract price and an overlift of production from a fi eld is included in the current liabilities and valued at the reporting date spot price or prevailing contract price.
Cash and cash equivalents includes cash at bank, cash in hand and interest bearing securities with original maturities of three months or less.
Share capital consists of the registered share capital for the Parent Company. Share issue costs associated with the issuance of new equity are treated as a direct reduction of proceeds. Excess contribution in relation to the issuance of shares is accounted for in the item additional paid-in-capital.
Where any Group company purchases the Company's equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company's equity holders until these shares are cancelled or sold. Where these shares are subsequently sold, any consideration received, net of any directly attributable incremental transaction costs and related income tax eff ects, is included in equity attributable to the Company's equity holders.
The change in fair value of other shares and participations is accounted for in the fair value reserve. Upon the realisation of a change in value, the change in fair value recorded will be transferred to the income statement. The change in fair value of hedging instruments is accounted for in the hedge reserve. Upon settlement of the hedge instrument, the change in fair value remains in other comprehensive income until the hedged item eff ects the income statement. The currency translation reserve contains unrealised translation diff erences due to the conversion of the functional currencies into the presentation currency.
Retained earnings contain the accumulated results attributable to the shareholders of the Parent Company.
A provision is reported when the Company has a legal or constructive obligation as a consequence of an event and when it is more likely than not that an outfl ow of resources is required to settle the obligation and a reliable estimate can be made of the amount.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that refl ects current market assessments of the time value of money and the risks specifi c to the obligation. The increase in the provision due to passage of time is recognised as fi nancial expense.
On fi elds where the Group is required to contribute to site restoration costs, a provision is recorded to recognise the future commitment. An asset is created, as part of the oil and gas property, to represent the discounted value of the anticipated site restoration liability and depleted over the life of the fi eld on a unit of production basis. The corresponding accounting entry to the creation of the asset recognises the discounted value of the future liability. The discount applied to the anticipated site restoration liability is subsequently released over the life of the fi eld and is charged to fi nancial expenses. Changes in site restoration costs and reserves are treated prospectively and consistent with the treatment applied upon initial recognition.
Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised costs using the eff ective interest method, with interest expense recognised on an eff ective yield basis.
The eff ective interest method is a method of calculating the amortised cost of a fi nancial liability and of allocating interest expense over the relevant period. The eff ective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the fi nancial liability, or a shorter period where appropriate.
Revenues from the sale of oil and gas are recognised in the income statement net of royalties taken in kind. Sales of oil and gas are recognised upon delivery of products and customer acceptance or on performance of services. Incidental revenues from the production of oil and gas are off set against capitalised costs of the related cost centre until quantities of proven and probable reserves are determined and commercial production has commenced.
Service income, generated by providing technical and management services to joint ventures, is recognised as other income.
The fi scal regime in the area of operations defi nes whether royalties are payable in cash or in kind. Royalties payable in cash are accrued in the accounting period in which the liability arises. Royalties taken in kind are subtracted from production for the period to which they relate.
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets are added to the cost of those assets. Qualifying assets are assets that take a substantial period of time to complete for their intended use or sale. Investment income earned on the temporary investment of specifi c borrowings pending to be used for the qualifying asset is deducted from the borrowing costs eligible for capitalisation. This applies on the interest on borrowings to fi nance fi elds under development which is capitalised within oil and gas properties until production commences. All other borrowing costs are recognised in profi t or loss in the period in which they occur. Interest on borrowings to fi nance the acquisition of producing oil and gas properties is charged to income as incurred.
For a lease to qualify as a fi nance lease, substantially all of the risks and benefi ts of ownership must pass to the lessee. In all other cases the lease will be classifi ed as an operating lease. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.
Short-term employee benefi ts such as salaries, social premiums and holiday pay, are expensed when incurred.
Pensions are the most common long-term employee benefi t. The pension schemes are funded through payments to insurance companies. The Group's pension obligations consist mainly of defi ned contribution plans. A defi ned contribution plan is a pension plan under which the Group pays fi xed contributions. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as an expense when they are due.
The Group has one obligation under a defi ned benefi t plan. The relating liability recognised in the balance sheet is valued at the discounted estimated future cash outfl ows as calculated by an external actuarial expert. Actuarial gains and losses are charged to the income statement. The Group does not have any designated plan assets.
Lundin Petroleum recognises cash-settled share-based payments in the income statement as expenses during the vesting period and as a liability in relation to the long-term incentive plan. The liability is measured at fair value and revalued using the Black & Sholes pricing model at each balance sheet date and at the date of settlement, with any change in fair value recognised in the income statement for the period.
The main components of tax are current and deferred. Tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case it is matched.
Current tax is tax that is to be paid or received for the year in question and also includes adjustments of current tax attributable to previous periods.
Deferred income tax is a non-cash charge provided, using the liability method, on temporary diff erences arising between the tax bases of assets and liabilities and their carrying values in the consolidated fi nancial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction aff ects neither accounting nor taxable profi t or loss. Deferred income tax is provided on temporary diff erences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary diff erence is controlled by the Group and it is probable that the temporary diff erence will not reverse in the foreseeable future. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profi t will be available against which the temporary diff erences can be utilised.
Deferred tax assets are off set against deferred tax liabilities in the balance sheet where they relate to the same jurisdiction in accordance with IAS 12.
Operating segments are reported in a manner consistent with the internal reporting provided to Executive Management, which, due to the unique nature of each country's operations, commercial terms or fi scal environment, is at a country level. Information for segments is only disclosed when applicable.
Lundin Petroleum recognises the following related parties: associated companies, jointly controlled entities, members or the family of the key management personnel or other parties that are partly, directly or indirectly, controlled by key management personnel or of its family or of any individual that controls, or has joint control or signifi cant infl uence over the entity.
The management of Lundin Petroleum has to make estimates and judgements when preparing the fi nancial statements of the Group. Uncertainties in the estimates and judgements could have an impact on the carrying amount of assets and liabilities and the Group's result. The most important estimates and judgements in relation thereto are:
The business of the Group is the exploration for, development of and production of oil and gas reserves. Estimates of oil and gas reserves are used in the calculations for impairment tests and accounting for depletion and site restoration. Changes in estimates in oil and gas reserves, resulting in diff erent future production profi les, will aff ect the discounted cash fl ows used in impairment testing, the anticipated date of site decommissioning and restoration and the depletion charges in accordance with the unit of production method.
The Group determines if the carrying value for investments in associated companies has suff ered any impairment where any objective evidence of impairment exists. This assessment is performed to identify where the carrying value exceeds its recoverable amount. The recoverable amounts have been determined based on value in use calculations. Assessments used in these calculations include judgement of the future cash fl ows, discount rates and exchange rates.
Amounts used in recording a provision for site restoration are estimates based on current legal and constructive requirements and current technology and price levels for the removal of facilities and plugging and abandoning of wells. Due to changes in relation to these items, the future actual cash outfl ows in relation to the site decommissioning and restoration can be diff erent. To refl ect the eff ects due to changes in legislation, requirements and technology and price levels, the carrying amounts of site restoration provisions are reviewed on a regular basis.
The eff ects of changes in estimates do not give rise to prior year adjustments and are treated prospectively over the estimated remaining commercial reserves of each fi eld. While the Group uses its best estimates and judgement, actual results could diff er from these estimates.
Determination of whether goodwill has suff ered any impairment requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The net present value calculation requires the entity to estimate the future cash fl ows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate the present value.
All events up to the date when the fi nancial statements were authorised for issue and which have a material eff ect in the fi nancial statements have been disclosed.
The following new standards, amendments and interpretations to existing standards both relating to approved and not yet approved developments by the EU and are not mandatory for the 2010 fi nancial statements and have not been adopted early. They related to the Group's accounting periods beginning on or after 1 January 2011 or later periods:
IFRIC 14, (Amendment), "IAS 19 – The limit on a defi ned benefi t assets minimum funding requirements and their interaction" (Eff ective 1 January 2013). The amendment removes unintended consequences arising from the treatment of prepayments where there is a minimum funding requirement. Results in prepayments of contributions are in certain circumstances recognised as an asset rather than an expense. The amendment is not expected to have a material impact on the Group's fi nancial statements.
IFRIC 19 "Extinguishing fi nancial liabilities with equity instruments" (Eff ective from 1 July 2010). The interpretation clarifi es the requirements of IFRSs when an entity renegotiates the terms of a fi nancial liability with its creditor and the creditor agrees to accept the entity's share or other equity instruments to settle the fi nancial liability fully or partially. The interpretation is not expected to have a material impact on the Group's fi nancial statements.
IFRS 9, "Financial instruments" (Eff ective from 1 January 2013). The standard replaces the multiple classifi cation and measurement models for fi nancial assets in IAS 39. The classifi cation model is driven by the entity's business model for managing the fi nancial assets and the contractual cash fl ow characteristics of the fi nancial assets. The amendment is not expected to have a material impact on the Group's fi nancial statements.
IAS 24 (revised 2009) "Related party disclosures" (Eff ective from 1 January 2011). The revision amends the defi nition of a related party and modifi es certain related party disclosure requirements for government related entities. The revision is not expected to have a material impact on the Group's fi nancial statements.
IAS 32 (Amendment), "Financial Instruments: Presentation – classifi cation of rights issues", (Eff ective from 1 February 2010). IAS 32 is amended to allow rights, options or warrants to acquire a fi xed number of the entity's own equity instruments for a fi xed amount of any currency to be classifi ed as equity instruments provided the entity off ers the rights, options or warrants pro rata to all of its existing owners of the same class of its own non-derivative equity instruments. The amendment is not expected to have a material impact on the Group's fi nancial statements.
| 2010 | 2009 | |
|---|---|---|
| Operating income | ||
| Net sales of: | ||
| Crude oil | ||
| - Norway | 490,390 | 296,231 |
| - France | 92,681 | 77,871 |
| - Indonesia | 34,994 | 36,617 |
| - Russia | 66,624 | 74,398 |
| - Tunisia | 29,517 | 25,469 |
| - Netherlands | 128 | 139 |
| 714,334 | 510,725 | |
| Condensate | ||
| - Netherlands | 1,088 | 848 |
| - Indonesia | 200 | 124 |
| 1,288 | 972 | |
| Gas | ||
| - Norway | 32,687 | 18,257 |
| - Netherlands | 32,357 | 37,354 |
| - Indonesia | 4,496 | 180 |
| 69,540 | 55,791 | |
| Net sales from continuing operations | 785,162 | 567,488 |
| Net sales from discontinued operations – United Kingdom |
62,567 | 228,111 |
| Net sales | 847,729 | 795,599 |
| Other income: | ||
| - France | 1,423 | 1,492 |
| - Netherlands | 1,315 | 1,228 |
| - Other | 10,699 | 1,627 |
| Other income from continuing operations | 13,437 | 4,347 |
| Other income from discontinued operations – United Kingdom |
1,983 | 5,906 |
| Total other income | 15,420 | 10,253 |
| Total operating income | ||
| from continuing operations | 798,599 | 571,835 |
| Total operating income from discontinued | ||
| operations – United Kingdom | 64,550 | 234,017 |
| Total operating income | 863,149 | 805,852 |
| Operating profi t contribution | ||
| - Norway | 303,892 | 153,045 |
| - France | 52,309 | 36,230 |
| - Indonesia | 18,203 | 3,638 |
| - Russia | 4,734 | -700,677 |
| - Tunisia | 11,500 | 3,159 |
| - Netherlands | 7,273 | 15,125 |
| - Vietnam | -31,906 | -7,203 |
| - Other | 27,845 | -7,509 |
| Operating profi t contribution from continuing operations |
393,850 | -504,192 |
| Total operating profi t contribution from |
Revenues are derived from various external customers. Intercompany sales amounts to TUSD nil (TUSD nil) and intercompany purchases amounts to TUSD nil (TUSD nil) and therefore there are no reconciling items towards the amounts stated in the income statement.
discontinued operations – United Kingdom 20,774 35,919 Total operating profi t contribution 414,624 -468,273
| 2010 | 2009 | |
|---|---|---|
| Average crude sales price, USD per boe | ||
| - Norway | 77.93 | 60.48 |
| - France | 79.35 | 60.94 |
| - Netherlands | 44.37 | 50.49 |
| - Indonesia | 65.31 | 60.58 |
| - Russia | 51.65 | 37.64 |
| - Tunisia | 77.15 | 54.72 |
| Consolidated from continuing operations | 71.92 | 55.16 |
| Total from discontinued operations - United Kingdom | 76.82 | 62.83 |
| Total consolidated | 72.26 | 57.16 |
| - Norway | 15.33 | 12.90 |
|---|---|---|
| - France | 12.60 | 10.26 |
| - Netherlands | 21.79 | 16.76 |
| - Indonesia | 4.75 | 8.18 |
| - Russia | 4.54 | 4.56 |
| - Tunisia | 0.02 | 22.87 |
| Consolidated from continued operations | 12.85 | 11.41 |
| Total from discontinued operations - United Kingdom | 13.99 | 13.83 |
| Total consolidated | 12.93 | 12.06 |
| Assets | Equity and Liabilities | |||
|---|---|---|---|---|
| 2010 | 2009 | 2010 | 2009 | |
| France | 187,991 | 243,130 | 73,749 | 91,958 |
| Norway | 1,145,846 | 1,004,753 | 675,995 | 454,319 |
| Netherlands | 203,941 | 163,710 | 511,118 | 437,953 |
| Russia | 644,913 | 661,875 | 106,761 | 135,425 |
| Indonesia | 93,795 | 90,465 | 10,883 | 28,258 |
| Tunisia | 11,065 | 17,020 | 19,471 | 26,070 |
| Congo (Brazzaville) | 34,093 | 30,646 | 672 | 6,649 |
| Vietnam | 2,179 | 17,626 | 1,047 | 4,847 |
| Malaysia | 45,105 | 33,621 | 12,613 | 9,089 |
| Venezuela | – | 11,802 | – | 2,066 |
| United Kingdom | – | 635,321 | – | 495,685 |
| Other | 60,208 | 40,689 | 19,046 | 21,126 |
| Assets/Liabilities per country |
2,429,136 | 2,950,658 | 1,431,355 | 1,713,445 |
| Shareholders' equity | N/A | N/A | 920,416 | 1,141,658 |
| Non-controlling interest | N/A | N/A | 77,365 | 95,555 |
| Total equity for the Group |
N/A | N/A | 997,781 | 1,237,213 |
| Group total | 2,429,136 | 2,950,658 | 2,429,136 | 2,950,658 |
See also Note 14 for detailed information of the oil and gas properties including depletion per country. There are no reconciling items towards the balance sheet totals.
| 2010 | 2009 | |
|---|---|---|
| Cost of operations 1 | 97,179 | 95,415 |
| Tariff and transportation expenses | 17,438 | 15,738 |
| Direct production taxes | 41,624 | 40,987 |
| Change in lifting position | -6,717 | 5,108 |
| Inventory movement - hydrocarbons | 3,317 | -5,160 |
| Inventory movement - well supplies | -9 | 141 |
| Other | 4,233 | 3,082 |
| Production costs from continuing operations | 157,065 | 155,311 |
| Production costs from discontinued operations | ||
| – United Kingdom | 32,030 | 140,036 |
| Total production costs | 189,095 | 295,347 |
Cost of operations includes TUSD 1,108 (TUSD –) relating to solar properties.
| 2010 | 2009 | |
|---|---|---|
| Norway | 101,643 | 65,301 |
| France | 14,623 | 12,821 |
| Netherlands | 16,490 | 12,727 |
| Indonesia | 4,218 | 7,334 |
| Russia | 6,002 | 8,627 |
| Tunisia | 6 | 11,318 |
| Depletion of oil and gas properties | 142,982 | 118,128 |
| Depletion of solar properties – Italy | 2,334 | – |
| Depletion from continuing operations | 145,316 | 118,128 |
| Depletion from discontinued operations | ||
| – United Kingdom | 11,362 | 51,778 |
| Total depletion costs | 156,678 | 169,906 |
| 2010 | 2009 | |
|---|---|---|
| Norway | 94,526 | 69,544 |
| France | 214 | 3,128 |
| Russia | – | 35,000 |
| Sudan | – | -1,580 |
| Congo (Brazzaville) | – | 2,522 |
| Vietnam | 31,906 | 7,203 |
| Indonesia | 604 | 7,300 |
| Cambodia | 29 | 10,989 |
| Other | 255 | 686 |
| Exploration costs from continuing | ||
| operations | 127,534 | 134,792 |
| Exploration costs from discontinued operations | ||
| – United Kingdom | 61 | 6,149 |
| Total exploration costs | 127,595 | 140,941 |
During the year exploration and appraisal project costs are capitalised as they are incurred and then reviewed on a regular basis to assess their future recoverability. When a decision is made not to proceed with a project the relevant costs are expensed.
Four unsuccessful exploration wells were drilled on licences PL359, PL400, PL409 and PL476 in Norway during 2010. The exploration costs in Norway include costs associated with these wells amounting to a total of MUSD 80.6. Other Norwegian exploration costs expensed in 2010 amounted to MUSD 13.9.
In Block 06/94, Vietnam a total of MUSD 31.9 was expensed in the reporting period relating to two unsuccessful wells and the associated seismic, study and licence costs.
Other includes exploration costs of new venture projects.
| 2010 | 2009 | |
|---|---|---|
| Russia | – | 525,719 |
| Total impairment costs for oil and gas | ||
| properties | – | 525,719 |
There were no impairment costs in the reporting period.
In 2009, Lundin Petroleum assessed the value of discoveries to date on the Lagansky Block, Russia and impaired the carrying value which resulted in an impairment charge to the income statement for the comparative reporting period of MUSD 525.7.
Lundin Petroleum carried no goodwill in the balance sheet as at 31 December 2010, the amount of goodwill relating to Russia being fully written off at the end of 2009. In the comparative reporting period, Lundin Petroleum expensed MUSD 119.0 relating to impairment of goodwill which was recognised on the Valkyries acquisition in 2006.
| 2010 | 2009 | |
|---|---|---|
| Etrion Corporation | 57,760 | – |
| Salawati assets | 8,366 | – |
| Lundin International B.V. | – | 29,975 |
| Russian onshore fi elds | – | -25,386 |
| Total gain of sale of assets | 66,126 | 4,589 |
For further detail regarding the sale of assets, reference is made to the paragraph "Gain on sale of assets" in the Directors' report on page 61. The gain on sale from the spin-off of the UK business is shown under discontinued operations - see Note 13.
| 2010 | 2009 | |
|---|---|---|
| PricewaterhouseCoopers | ||
| Audit fees | 912 | 927 |
| Audit related | 165 | 166 |
| Tax advisory services | – | 52 |
| Other fees | 36 | – |
| Total | 1,113 | 1,145 |
| Remuneration to other auditors than PricewaterhouseCoopers |
213 | 268 |
| Total | 1,326 | 1,413 |
Audit related costs include the review of the half year report.
| 2010 | 2009 | |
|---|---|---|
| Interest income | 3,409 | 4,595 |
| Foreign currency exchange gain, net | 13,360 | 66,019 |
| Insurance proceeds | 377 | – |
| Gain on sale of shares | – | 10,244 |
| Guarantee fees | 2,348 | 114 |
| Other fi nancial income | 1,462 | 1,059 |
| Financial income from continuing operations |
20,956 | 82,031 |
| Financial income from discontinued operations – United Kingdom |
360 | 32 |
| Total fi nancial income | 21,316 | 82,063 |
Exchange rate variations result primarily from fl uctuations in the value of the USD currency against a pool of currencies which includes, amongst others, EUR, NOK and the Russian Rouble (RUR). Lundin Petroleum has USD denominated debt recorded in subsidiaries using a functional currency other than USD.
The gain on sale of shares in 2009 amounting to TUSD 10,244 relates to the sale of the investment in a company owning an interest in Dutch gas processing and transportation infrastructure.
| 2010 | 2009 | |
|---|---|---|
| Loan interest expenses | 10,047 | 8,895 |
| Result on interest rate hedge settlement | 6,990 | 5,669 |
| Change in market value of interest rate hedge | 3,872 | 452 |
| Unwinding of site restoration discount | 3,989 | 2,490 |
| Amortisation of deferred fi nancing fees | 2,360 | 2,539 |
| Loss on sale of shares | 3,879 | – |
| Other fi nancial expenses | 2,326 | 32,427 |
| Financial expenses from continuing operations |
33,463 | 52,472 |
| Financial expenses from discontinued operations – United Kingdom |
1,224 | 24,398 |
| Total fi nancial expenses | 34,687 | 76,870 |
Included in other fi nancial expenses in the comparative period is an amount of MUSD 29.8 relating to the write down of the investment in Etrion following Etrion's write down of its Venezuelan oil and gas assets.
| 2010 | 2009 | |
|---|---|---|
| Group's share of net result | – | -25,504 |
| Total result from share in associated company | – | -25,504 |
The result from share in associated company for the comparative reporting period amounted to MUSD -25.5 and consisted of the 44.8% equity share of the result of Etrion owned by Lundin Petroleum. The results of Etrion have been fully consolidated into the Lundin Petroleum consolidated accounts from 30 September 2009 and as such, there is no amount recorded for 2010 in the result from share in associated company.
Included in the expense of MUSD 25.5 for the comparative period is an amount of MUSD 22.8 relating to the write down of Etrion's Venezuelan oil and gas assets.
| Tax charge | Corporation tax | Petroleum tax | |||
|---|---|---|---|---|---|
| 2010 | 2009 | 2010 | 2009 | ||
| Current | |||||
| - France | 19,116 | 8,987 | – | – | |
| - Norway | 36,115 | 2,188 | – | – | |
| - Netherlands | 5,211 | 5,528 | – | – | |
| - Indonesia | 3,661 | 2,505 | – | – | |
| - Russia | 1,469 | 2,158 | – | – | |
| - Tunisia | 2,178 | 7,928 | – | – | |
| - Singapore | 13 | 18 | – | – | |
| - Sweden | -1,018 | 2,309 | – | – | |
| - Switzerland | 648 | 393 | – | – | |
| - Italy (solar properties) | 759 | – | – | – | |
| Continuing operations | 68,152 | 32,014 | – | – | |
| Discontinued operations | 7,315 | 6,546 | – | – | |
| Total current tax | 75,467 | 38,560 | – | – | |
| Deferred | |||||
| - France | 1,254 | 1,008 | – | – | |
| - Norway | 183,309 | 111,238 | – | – | |
| - Netherlands | -382 | 3,555 | – | – | |
| - Indonesia | 3,739 | 97 | – | – | |
| - Russia | 520 | -100,457 | – | – | |
| - Tunisia | 1,576 | -3,437 | – | – | |
| - Congo (Brazzaville) | -4,232 | 1,569 | – | – | |
| - Ireland | 800 | – | – | – | |
| - Malaysia | 2,545 | 6,188 | – | – | |
| - Singapore | 175 | -447 | – | – | |
| - Vietnam | -4,043 | 884 | – | – | |
| - Cambodia | – | -2,106 | – | – | |
| - Kenya | – | -2,106 | – | – | |
| - Ethiopia | – | -2,331 | – | – | |
| - Italy (solar properties) | -1,548 | – | – | – | |
| Continuing operations | 183,713 | 13,655 | – | – | |
| Discontinued operations | 4,014 | 2,237 | -2,341 | -5,967 | |
| Total deferred tax | 187,727 | 15,892 | -2,341 | -5,967 | |
| Total tax | 263,194 | 54,452 | -2,341 | -5,967 |
Included in the comparative period is a deferred tax release on the Lagansky Block, Russia impairment, amounting to TUSD 86,896.
The tax on the Group's profi t before tax diff ers from the theoretical amount that would arise using the tax rate of Sweden as follows:
| 2010 | 2009 | |
|---|---|---|
| Profi t before tax | 381,343 | -500,137 |
| Tax calculated at the corporate tax rate in Sweden (26.3%) | -100,293 | 131,536 |
| Eff ect of foreign tax rates | -163,218 | -139,242 |
| Tax eff ect of expenses non-deductible for tax purposes | -15,063 | -66,148 |
| Tax eff ect of deduction for petroleum tax | 12,394 | 14,347 |
| Tax eff ect of income not subject to tax | 20,605 | 17,596 |
| Tax eff ect of utilisation of unrecorded tax losses | 2,700 | 5,555 |
| Tax eff ect of creation of unrecorded tax losses | -7,896 | -2,705 |
| Adjustments to prior year tax assessments | -1,094 | -6,608 |
| Tax charge | -251,865 | -45,669 |
The tax charge relating to components of other comprehensive income is as follows:
| 2010 | 2009 | |||||
|---|---|---|---|---|---|---|
| Before tax | Tax charge/credit | After tax | Before tax | Tax charge/credit | After tax | |
| Exchange diff erences on foreign operations | -43,972 | – | -43,972 | 74,763 | – | 74,763 |
| Cash fl ow hedges | -378 | 238 | -140 | 47,583 | -21,073 | 26,510 |
| Available for sale fi nancial assets | 53,128 | -2,009 | 51,119 | -19,158 | 2,009 | -17,149 |
| Other comprehensive income | 8,778 | -1,771 | 7,007 | 103,188 | -19,064 | 84,124 |
| Current tax | – | – | ||||
| Deferred tax | -1,771 | -19,064 | ||||
| -1,771 | -19,064 |
The deferred tax charge amounting to TUSD 1,771 (TUSD 19,064) has been recorded directly in other comprehensive income.
| Tax liability - | Current tax liability | Deferred tax liability | ||
|---|---|---|---|---|
| current and deferred | 2010 | 2009 | 2010 | 2009 |
| Corporation tax | ||||
| - France | 9,049 | 1,008 | 32,594 | 39,012 |
| - Norway | 20,856 | 1,780 | 517,962 | 333,637 |
| - Netherlands | 6,042 | 5,373 | 4,512 | 7,566 |
| - Indonesia | 260 | 1,939 | 4,698 | 14,034 |
| - Russia | 7 | -896 | 78,317 | 78,060 |
| - Tunisia | 1,934 | 7,496 | 658 | 2,189 |
| - Sweden | 1,531 | 2,473 | – | – |
| - United Kingdom | – | 1,605 | – | 195,298 |
| - Switzerland | – | 92 | – | – |
| - Congo (Brazzaville) | – | – | – | 4,232 |
| - Malaysia | – | – | 10,708 | 8,163 |
| - Vietnam | – | – | – | 4,043 |
| - Other | – | – | 1,246 | 1,092 |
| Total corporation tax | ||||
| liability | 39,679 | 20,870 | 650,695 | 687,326 |
| Petroleum tax | ||||
| - United Kingdom | – | – | – | 56,320 |
| Total petroleum tax liability |
– | – | – | 56,320 |
| Total tax liability | 39,679 | 20,870 | 650,695 | 743,646 |
| Specifi cation of deferred tax assets and tax liabilities 1 |
31 December 2010 |
31 December 2009 |
|---|---|---|
| Deferred tax assets | ||
| Unused tax loss carry forwards | 29,183 | 217,757 |
| Fair value of fi nancial instruments | 1,716 | 4,671 |
| Other deductible temporary diff erences | 2,790 | 3,662 |
| 33,689 | 226,090 | |
| Deferred tax liabilities | ||
| Accelerated allowances | 581,788 | 859,485 |
| Capitalised acquisition cost | 1,088 | 1,173 |
| Deferred tax on excess values | 77,936 | 78,675 |
| Other taxable temporary diff erences | 8,506 | 2,553 |
| 669,318 | 941,886 |
1 The specifi cation of deferred tax assets and tax liabilities agree to the face of the balance sheet due to the netting off of balances in the balance sheet when they relate to the same jurisdiction.
The deferred tax asset is primarily relating to tax loss carried forwards in Norway for an amount of TUSD 15,828 (TUSD 142,220) and the Netherlands for an amount of TUSD 12,732 (TUSD 15,209). The balance for the comparative period also includes unused tax loss carry forwards in the United Kingdom for an amount of TUSD 56,476. Deferred tax assets in relation to tax loss carried forwards are only recognised in so far that there is a reasonable certainty as to the timing and the extent of their realisation.
The deferred tax liability arises mainly on accelerated allowances, being the diff erence between the book and the tax value of oil and gas properties and tax on the excess value of the acquired assets in Russia.
The Group has Dutch tax loss carry forwards, including tax losses in the current fi nancial year, of MUSD 38.5 which in part are not yet assessed. The majority of the tax losses can be utilised up to 9 years. A deferred tax asset relating to the tax loss carry forwards has not been recognised as at 31 December 2010 due to the uncertainty as to the timing and the extent of their utilisation. This treatment is consistent with the comparative year's accounts.
During 2005 the Swedish tax authorities (Skatteverket) conducted a tax audit of Lundin Petroleum AB for the fi nancial years 2002 to 2003. The tax authorities disallowed a portion of expenses recharged to Lundin Petroleum AB by Group companies for costs associated with management services and certain other fees. As Lundin Petroleum AB is in a tax loss position, this disallowance of the expenses reduces the tax losses carried forward but does not result in a current tax charge. The tax losses incurred have not been recorded as deferred tax assets due to the uncertainty as to the timing of their utilisation.
The decision was appealed to the County Administrative Court in Stockholm and an extension for the payment of the penalty tax was obtained. In its decision of 15 December 2008, the County Administrative Court partly overruled the decision of the tax authorities. However, the full deduction of management fees and certain other fees was rejected. The decision was appealed to the Administrative Court of Appeal with regard to the deduction of management fees and the penalty tax as the Company believes that the management costs are a valid charge to the Parent Company of the Lundin Petroleum Group and that penalty tax should not be levied. In 2010 the Administrative Court of appeal maintained the ruling of the County Administrative Court. Following the decision of the court the penalty tax of TUSD 681 has been paid during 2010. Lundin Petroleum has requested permission to appeal to the Supreme Administrative Court and is now awaiting a response to such request.
| Discontinued operations – United Kingdom | 2010 | 2009 |
|---|---|---|
| Net sales | 62,567 | 228,111 |
| Other operating income | 1,983 | 5,906 |
| Operating income | 64,550 | 234,017 |
| Production costs | -32,030 | -140,036 |
| Depletion costs | -11,362 | -51,778 |
| Exploration costs | -61 | -6,149 |
| General, administration and depreciation expenses | -323 | -135 |
| Operating profi t | 20,774 | 35,919 |
| Financial income | 360 | 32 |
| Financial expense | -1,224 | -24,398 |
| Profi t before tax | 19,910 | 11,553 |
| Tax | -8,988 | -2,816 |
| Net result from discontinued operations | 10,922 | 8,737 |
| Gain on sale of assets | 358,070 | – |
| Net result from discontinued operations | 368,992 | 8,737 |
During the fi rst quarter of 2010, Lundin Petroleum announced its intention to spin-off the United Kingdom (UK) business. The spin-off was completed on 6 April 2010 with the sale of the UK business in exchange for shares in the newly incorporated company, EnQuest, and the subsequent distribution of the EnQuest shares received to Lundin Petroleum shareholders on 9 April 2010. The results of the UK business are included in the Lundin Petroleum accounts up until the end of the fi rst quarter of 2010 and are shown as discontinued operations.
| 31 December 2010 | 31 December 2009 | |
|---|---|---|
| Production cost pools | 879,921 | 1,223,538 |
| Non-production cost pools | 1,119,050 | 1,316,810 |
| 1,998,971 | 2,540,348 | |
| 2010 production cost pools | UK | France | Norway | Netherlands | Indonesia | Russia | Tunisia | Total |
|---|---|---|---|---|---|---|---|---|
| Cost | ||||||||
| 1 January | 845,424 | 245,136 | 499,741 | 101,634 | 63,455 | 89,482 | 105,870 | 1,950,742 |
| Additions | 17,125 | 13,189 | 79,755 | 4,458 | 10,246 | 6,633 | 6 | 131,412 |
| Disposals | -862,549 | – | – | – | -68,003 | – | – | -930,552 |
| Change in estimates | – | 3,162 | 6,790 | 3,683 | – | – | – | 13,635 |
| Reclassifi cations | – | – | 188,378 | – | 55,216 | – | – | 243,594 |
| Currency translation diff erence | – | -17,526 | -7,477 | -6,995 | 1,378 | -550 | – | -31,170 |
| 31 December | – | 243,961 | 767,187 | 102,780 | 62,292 | 95,565 | 105,876 | 1,377,661 |
| Depletion | ||||||||
| 1 January | -328,179 | -83,050 | -106,554 | -40,985 | -37,616 | -24,950 | -105,870 | -727,204 |
| Depletion charge for the year | -11,362 | -14,623 | -101,643 | -16,490 | -4,218 | -6,002 | -6 | -154,344 |
| Disposals | 339,541 | – | – | – | 39,658 | – | – | 379,199 |
| Currency translation diff erence | – | 5,770 | -1,710 | 2,514 | -1,965 | – | – | 4,609 |
| 31 December | – | -91,903 | -209,907 | -54,961 | -4,141 | -30,952 | -105,876 | -497,740 |
| Net book value | – | 152,058 | 557,280 | 47,819 | 58,151 | 64,613 | – | 879,921 |
| 2009 production cost pools | UK | France | Norway | Netherlands | Indonesia | Russia | Tunisia | Total |
|---|---|---|---|---|---|---|---|---|
| Cost | ||||||||
| 1 January | 767,914 | 230,630 | 384,018 | 86,844 | 60,964 | 140,745 | 103,759 | 1,774,874 |
| Additions | 63,524 | 6,323 | 15,609 | 5,316 | 1,592 | 10,074 | 15 | 102,453 |
| Disposals | – | – | – | – | – | -60,679 | – | -60,679 |
| Change in estimates | 3,387 | -66 | 15,499 | 6,403 | – | – | 2,242 | 27,465 |
| Reclassifi cations | 10,599 | – | – | – | 1,215 | – | – | 11,814 |
| Currency translation diff erence | – | 8,249 | 84,615 | 3,071 | -316 | -658 | -146 | 94,815 |
| 31 December | 845,424 | 245,136 | 499,741 | 101,634 | 63,455 | 89,482 | 105,870 | 1,950,742 |
| Depletion | ||||||||
| 1 January | -276,401 | -67,493 | -29,239 | -27,037 | -30,731 | -76,123 | -94,705 | -601,729 |
| Depletion charge for the year | -51,778 | -12,821 | -65,301 | -12,727 | -7,334 | -8,627 | -11,318 | -169,906 |
| Disposals | – | – | – | – | – | 59,340 | – | 59,340 |
| Currency translation diff erence | -2,736 | -12,014 | -1,221 | 449 | 460 | 153 | -14,909 | |
| 31 December | -328,179 | -83,050 | -106,554 | -40,985 | -37,616 | -24,950 | -105,870 | -727,204 |
| Net book value | 517,245 | 162,086 | 393,187 | 60,649 | 25,839 | 64,532 | – | 1,223,538 |
| Currency | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2010 non-production cost pools |
1 January | Additions | Disposals | Write-off s | Changes in estimate |
Reclassifi cation | translation diff erence |
31 December |
| Norway | 558,599 | 188,058 | – | -94,526 | – | -188,378 | -2,504 | 461,249 |
| United Kingdom | 71,641 | 249 | -71,829 | -61 | – | – | – | – |
| France | 6,821 | 997 | – | -214 | – | – | -491 | 7,113 |
| Netherlands | 1,021 | 948 | – | – | – | – | -67 | 1,902 |
| Indonesia | 65,727 | 13,486 | -3,115 | -604 | – | -55,216 | -23 | 20,255 |
| Russia | 534,186 | 18,252 | – | – | – | – | -2,319 | 550,119 |
| Tunisia | 217 | 38 | – | -255 | – | – | – | – |
| Ireland | 761 | 3,369 | – | – | – | – | -31 | 4,099 |
| Congo (Brazzaville) | 29,800 | 2,456 | – | – | – | – | – | 32,256 |
| Cambodia | – | 29 | – | -29 | – | – | – | – |
| Malaysia | 31,474 | 10,627 | – | – | – | – | -44 | 42,057 |
| Vietnam | 16,563 | 15,343 | – | -31,906 | – | – | – | – |
| Net book value | 1,316,810 | 253,852 | -74,944 | -127,595 | – | -243,594 | -5,479 | 1,119,050 |
| 2009 non-production cost | Changes in | Currency translation |
||||||
|---|---|---|---|---|---|---|---|---|
| pools | 1 January | Additions | Disposals | Write-off s | estimate | Reclassifi cation | diff erence | 31 December |
| Norway | 271,818 | 270,733 | – | -69,544 | 8,887 | – | 76,705 | 558,599 |
| United Kingdom | 86,047 | 2,342 | – | -6,149 | – | -10,599 | – | 71,641 |
| France | 6,617 | 3,100 | – | -3,128 | – | – | 232 | 6,821 |
| Netherlands | 163 | 865 | – | -41 | – | – | 34 | 1,021 |
| Indonesia | 29,436 | 44,848 | – | -7,300 | – | -1,215 | -42 | 65,727 |
| Russia | 1,048,217 | 45,243 | -75 | -560,719 | – | – | 1,520 | 534,186 |
| Tunisia | 203 | 14 | – | – | – | – | – | 217 |
| Sudan | – | -1,580 | – | 1,580 | – | – | – | – |
| Congo (Brazzaville) | 18,481 | 13,841 | – | -2,522 | – | – | – | 29,800 |
| Kenya | 9,881 | 858 | -10,736 | – | – | – | -3 | – |
| Cambodia | 9,741 | 1,248 | – | -10,989 | – | – | – | – |
| Ethiopia | 11,218 | 974 | -12,186 | – | – | – | -6 | – |
| Malaysia | 7,639 | 23,873 | – | – | – | – | -38 | 31,474 |
| Vietnam | 14,517 | 9,249 | – | -7,203 | – | – | – | 16,563 |
| Other | 1,043 | 473 | – | -645 | – | – | -110 | 761 |
| Net book value | 1,515,021 | 416,081 | -22,997 | -666,660 | 8,887 | -11,814 | 78,292 | 1,316,810 |
In 2010 the reclassifi cation from Non-Production cost pools to Production cost pools related to the production startup on the Volund fi eld, Norway and Singa fi eld, Indonesia.
Lundin Petroleum carried out its annual impairment tests at 31 December 2010 in conjunction with the annual reserves certifi cation process. Lundin Petroleum used an oil price deck of USD 85 per barrel infl ating at 2% per annum, a future cost infl ation factor of 2% per annum and a discount rate of 10% to calculate the future pre-tax cash fl ows. There were no impairment of assets required for the fi nancial year ended 31 December 2010.
During 2010, MUSD 1.9 (MUSD 2.9) of capitalised interest costs were added to oil and gas properties and relate to oil and gas assets in Norway.
The Group participates in joint ventures with third parties in oil and gas exploration activities. The Group is contractually committed under various concession agreements to complete certain exploration programmes. The commitments as at 31 December 2010 are estimated to be MUSD 588.0 (MUSD 253.2) of which third parties who are joint venture partners will contribute approximately MUSD 220.3 (MUSD 82.6).
| 2010 | 2009 | |
|---|---|---|
| Cost | ||
| 1 January | 644 | – |
| Acquired on consolidation | 313,421 | 121 |
| Additions | 21,210 | 523 |
| Disposals | -337,329 | – |
| Reclassifi cation | 2,102 | – |
| Currency translation diff erence | -48 | – |
| 31 December | – | 644 |
| Depletion | ||
| 1 January | – | – |
| Depletion charge for the year | -2,334 | – |
| Disposals | 2,350 | – |
| Currency translation diff erence | -16 | – |
| 31 December | – | – |
| Net book value | – | 644 |
The solar power properties were held by Etrion. Etrion was distributed during 2010.
| 2010 | 2009 | |||||
|---|---|---|---|---|---|---|
| Real estate | Offi ce equipment and other assets |
Total | Real estate | Offi ce equipment and other assets |
Total | |
| Cost | ||||||
| 1 January | 10,491 | 17,302 | 27,793 | 10,537 | 14,751 | 25,288 |
| Acquired on consolidation | – | – | – | – | 1,099 | 1,099 |
| Disposals | – | -5,405 | -5,405 | -71 | -425 | -496 |
| Additions | 708 | 4,145 | 4,853 | 32 | 2,407 | 2,439 |
| Write-off | – | -1,352 | -1,352 | – | -1,224 | -1,224 |
| Reclassifi cation | – | – | – | – | – | – |
| Currency translation diff erence | -17 | 484 | 467 | -7 | 694 | 687 |
| 31 December | 11,182 | 15,174 | 26,356 | 10,491 | 17,302 | 27,793 |
| Depreciation | ||||||
| 1 January | -1,262 | -11,248 | -12,510 | -992 | -7,906 | -8,898 |
| Acquired on consolidation | – | – | – | – | -610 | -610 |
| Disposals | – | 4,838 | 4,838 | 7 | 907 | 914 |
| Depreciation charge for the year | -92 | -2,785 | -2,877 | -280 | -3,137 | -3,417 |
| Currency translation diff erence | 17 | -553 | -536 | 3 | -502 | -499 |
| 31 December | -1,337 | -9,748 | -11,085 | -1,262 | -11,248 | -12,510 |
| Net book value | 9,845 | 5,426 | 15,271 | 9,229 | 6,054 | 15,283 |
Disposals includes the values of other tangible fi xed assets of companies disposed of during the year ended 31 December 2010.
The depreciation charge for the year is based on cost and an estimated useful life of 3 to 5 years for offi ce equipment and other assets. Real estate is depreciated using an estimated useful life of 20 years. Depreciation is included within the general, administration and depreciation line in the income statement.
| 2010 | 2009 | |
|---|---|---|
| 1 January | 674 | 119,047 |
| Acquired on consolidation | 398 | 674 |
| Impairment | – | -119,047 |
| Disposal | -1,072 | – |
| 31 December | – | 674 |
Acquired on consolidation in 2009 represents the values assigned to goodwill upon fi rst consolidation of Etrion at 30 September 2009. This goodwill refl ects the excess of purchase consideration over the fair value of an acquired solar power project. Goodwill of TUSD 398.0 relates to Etrion acquisitions in 2010. Etrion was distributed during 2010.
The book amount for goodwill recorded at 1 January 2009 is in relation to the acquisition of Valkyries in 2006 and was fully written off in 2009.
| 2010 | 2009 | |
|---|---|---|
| Licences | Licences | |
| Cost | ||
| 1 January | 5,132 | – |
| Acquired on consolidation | 334 | 3,023 |
| Investments | 200 | 2,115 |
| Reclassifi cation | -2,102 | – |
| Disposal | -3,344 | – |
| Currency translation diff erence | -220 | -6 |
| 31 December | – | 5,132 |
The licences relate to solar power projects held by Etrion. Etrion was distributed during 2010.
| Book amount | Book amount | ||||
|---|---|---|---|---|---|
| Consolidation method | Number of shares | Share % | 31 December 2010 | 31 December 2009 | |
| Ikdam Production SA | Equity | 1,600 | 40.00 | 0 | 0 |
| RF Energy Investments Ltd. | Proportional consolidation | 11,540 | 50.00 | – | – |
| - CJSC Pechoraneftegas 1 | 20,000 | Direct 100.00, indirect 50.00 | – | – | |
| - LLC Zapolyarneftegas 1 | 1 | Direct 100.00, indirect 50.00 | – | – | |
| - LLC NK Recher-Komi 1 | 1 | Direct 100.00, indirect 50.00 | – | – | |
| - Geotundra BV 1 | 20,000 | Direct 100.00, indirect 50.00 | – | – | |
| 0 | 0 |
1 Through the proportional consolidation of RF Energy Investments Ltd. the subsidiaries of RF Energy Investments Ltd. are also proportionally consolidated in the Lundin Petroleum accounts. "Direct" refers to RF Energy's ownership percentage, "indirect" refers to the Group's ultimate ownership percentage.
The amounts included below for the jointly controlled entities and associated companies represent 100% of the reported accounts.
| Income statement per 31 December 2010 |
Ikdam Production SA | RF Energy consolidated |
|---|---|---|
| Income statement | Balance Sheet | ||||
|---|---|---|---|---|---|
| per 31 December 2010 | Ikdam Production SA | RF Energy consolidated | per 31 December 2010 | Ikdam Production SA | RF Energy consolidated |
| Revenue | 2,737 | 133,248 | Non-current assets | 3,497 | 127,696 |
| Operating cost | -4,971 | -126,622 | Current assets | 881 | 24,116 |
| Net result | -2,234 | 6,626 | Total assets | 4,378 | 151,812 |
| Equity | -11,547 | 89,022 | |||
| Non-current liabilities | 15,373 | 48,569 | |||
| Current liabilities | 552 | 14,221 | |||
| Total liabilities | 4,378 | 151,812 | |||
| 31 December 2010 | |||||
|---|---|---|---|---|---|
| Other shares and participation comprise: | Number of shares | Share % | Book amount | Book amount | |
| ShaMaran Petroleum Corp. | 50,000,000 | 8.02 | 68,205 | 21,426 | |
| Cofraland B.V. | 31 | 7.75 | 404 | 436 | |
| Maison de la géologie | 2 | 1.25 | 4 | 4 | |
| Baripetrol SA | – | – | – | 8,100 | |
| PetroCumarebo SA | – | – | – | 1,900 | |
| Island Oil and Gas plc | – | – | – | 503 | |
| 68,613 | 32,369 |
In October 2009, Lundin Petroleum received 50 million shares of ShaMaran Petroleum Corp. (ShaMaran) in consideration for the sale of Lundin International BV (LIBV), a 100% owned subsidiary, which had commenced negotiations for Production Sharing Contracts (PSCs) for three separate exploration and development blocks in Kurdistan. Lundin Petroleum will receive an additional 50 million shares of ShaMaran if ShaMaran receives the approval of a development plan for the PSC covering the Pulkhana Block, Kurdistan. There can be no assurance that this condition will be satisfi ed.
The fair value of ShaMaran is calculated using the quoted share price at the Toronto Stock Exchange.
During 2010, Lundin Petroleum sold its shareholding in Island Oil and Gas and also distributed Etrion which held shares in Baripetrol SA and PetroCumarebo SA.
As at 31 December 2010, the other shares and participations include TUSD 408.0 recognised at cost because their fair value cannot be measured reliably since there is no quoted share price and due to the uncertainty of the timing of the future cash fl ows from these companies.
As an international oil and gas exploration and production company operating globally, Lundin Petroleum is exposed to fi nancial risks such as fl uctuations in currency rates, oil price, interest rates as well as credit fi nancing. The Group shall seek to control these risks through sound management practice and the use of internationally accepted fi nancial instruments, such as oil price hedges and interest rate hedges. Lundin Petroleum uses fi nancial instruments solely for the purpose of minimising risks in the Group's business.
Lundin Petroleum is a Swedish company which is operating globally and therefore attracts substantial foreign exchange exposure, both transactional as well as conversion from functional currency to presentation currency. The functional currency of Lundin Petroleum's subsidiaries are Norwegian Kroner (NOK), Euro (EUR) and Russian Rouble (RUR), as well as US Dollar, making Lundin Petroleum sensitive for fl uctuation of these currencies against the US Dollar, the presentation currency.
As at 31 December 2010 and 2009, no foreign exchange forward contracts were entered into.
The following table summarises the eff ect a shift of these currencies against the US Dollar would have on operating result through the conversion of the income statements of the Group's subsidiaries from functional currency to the presentation currency US Dollar for the year ended at 31 December 2010.
| Operating result in the fi nancial statements (MUSD) | 393.9 | 393.9 |
|---|---|---|
| Shift of currency exchange rates to: | ||
| USD/EUR | 1.4595 | 1.2062 |
| SEK/USD | 6.5413 | 7.9149 |
| NOK/USD | 5.4859 | 6.6380 |
| RUR/USD | 27.5973 | 33.3927 |
| Total eff ect on operating result (MUSD) | 37.5 | -37.5 |
The foreign currency risk to the Group's income and equity from conversion exposure is not hedged.
Lundin Petroleum's policy on currency rate hedging is, in case of currency exposure, to consider setting the rate of exchange for known costs in non-US Dollar currencies to US Dollars in advance so that future US Dollar cost levels can be forecasted with a reasonable degree of certainty. The Group will take into account the current rates of exchange and market expectations in comparison to historic trends and volatility in making the decision to hedge.
Price of oil and natural gas are aff ected by the normal economic drivers of supply and demand as well as the fi nancial investors and market uncertainty. Factors that infl uence these include operational decisions, natural disasters, economic conditions, political instability or confl icts or actions by major oil exporting countries. Price fl uctuations can aff ect Lundin Petroleums fi nancial position.
The table below summarises the eff ect a shift in the oil price would have had on the net result at 31 December 2010:
| Net result in the fi nancial statements (MUSD) | 498.5 | 498.5 |
|---|---|---|
| Possible shift (USD/boe) | -5 | 5 |
| Total eff ect on net result (MUSD) | -20.0 | 20.0 |
Lundin Petroleum's policy is to adopt a fl exible approach towards oil price hedging, based on an assessment of the benefi ts of the hedge contract in specifi c circumstances. Based on analysis of the circumstances Lundin Petroleum will assess the benefi ts of forward hedging monthly sales contracts for the purpose of establishing cash fl ow. If it believes that the hedging contract will provide an enhanced cash fl ow then it may choose to enter into an oil price hedge.
For the year ended 31 December 2010, the Group did not enter into oil price hedging contracts. There are no oil price hedging contracts outstanding as at 31 December 2010.
Interest rate risk is risk to the earnings due to uncertain future interest rates. Lundin Petroleum is exposed to interest rate risk through the credit facility (see also liquidity risk below). Lundin Petroleum will assess the benefi ts of interest rate hedging on borrowings on a continuous basis. If the hedging contract provides a reduction in the interest rate risk at a price that is deemed acceptable to the Group, then Lundin Petroleum may choose to enter into an interest hedge.
The table below summarises the eff ect an increase/decrease in the interest rate for the credit facility would have had on the net result for the year ended 31 December 2010:
| Net result in the fi nancial statements (MUSD) | 498.5 | 498.5 |
|---|---|---|
| Possible shift (%) | -10 | 10 |
| Total eff ect on net result (MUSD) | 0.9 | -0.9 |
In January 2008, the Group entered into an interest hedging contract fi xing the LIBOR rate of interest at 3.75% p.a. on MUSD 200 of the Group's USD borrowings for the period January 2008 to January 2012.
Lundin Petroleum's policy is to limit credit risk by limiting the counter-parties to major banks and oil companies. Where it is determined that there is a credit risk for oil and gas sales, the policy is to require an irrevocable letter of credit for the full value of the sale. The policy on joint venture parties is to rely on the provisions of the underlying joint operating agreements to take possession of the licence or the joint venture partner's share of production for non-payment of cash calls or other amounts due.
As at 31 December 2010 the Group's trade receivables amounted to MUSD 94.2 (MUSD 80.7). There is no recent history of default. Other long-term and short-term receivables are considered recoverable. The provision for bad debt as at 31 December 2010 amounted to MUSD – (MUSD –). Cash and cash equivalents are maintained with banks having strong long-term credit ratings.
Liquidity risk is defi ned as the risk that the Group could not be able to settle or meet its obligations on time or at a reasonable price. Group treasury is responsible for liquidity, funding as well as settlement management. In addition, liquidity and funding risks and related processes and policies are overseen by management.
Lundin Petroleum has a secured revolving borrowing base facility of MUSD 850, of which MUSD 459 had been drawn in cash as at 31 December 2010. The MUSD 850 facility is a revolving borrowing base facility secured against certain cash fl ows generated by the Company. The amount available under the facility is recalculated every six months based upon the calculated cash fl ow generated by certain producing fi elds at an oil price and economic assumptions agreed with the banking syndicate providing the facility. As part of the semi-annual redetermination process under the facility, a new borrowing base amount of approximately MUSD 867 was calculated eff ective 1 January 2011. See also Note 33.
Lundin Petroleum has, through its subsidiary Lundin Malaysia BV, entered into four Production Sharing Contracts (PSC) with Petroliam Nasional Berhad, the oil and gas company of the Government of Malaysia ("Petronas"), in respect of the licences PM308A, PM308B, SB307 and SB308, and SB303 in Malaysia. BNP Paribas, on behalf of Lundin Malaysia BV has issued bank guarantees in support of the work commitments in relation to these PSCs amounting to MUSD 86.3. In addition, BNP Paribas have issued additional bank guarantees to cover work commitments in Indonesia amounting to MUSD 15.9.
It is expected that the Group's ongoing development and exploration expenditure requirements will be funded by the Group's operating cash fl ows and loan facility. No loan repayments are required for the credit facility in 2011.
The accounting principles for fi nancial instruments have been applied to the line items below:
| 31 December 2010 TUSD |
Loan receivables and other receivables |
Available for-sale |
Derivatives used for hedging |
Financial liabilities valued at amortised cost |
|---|---|---|---|---|
| Assets | ||||
| Other shares and participations |
– | 68,613 | – | – |
| Long-term receivables | 23,791 | – | – | – |
| Trade receivables | 94,190 | – | – | – |
| Short-term loan receivable | 74,527 | – | – | – |
| Cash and cash equivalents | 48,703 | – | – | – |
| 241,211 | 68,613 | – | – | |
| Liabilities | ||||
| Trade Payables | – | – | – | 16,031 |
| Bank loans | – | – | – | 458,835 |
| Other non-current liabilities | – | – | – | 17,836 |
| Derivative instruments | – | – | 6,866 | – |
| Short-term debt | – | – | – | 450 |
| – | – | 6,866 | 493,152 |
| 31 December 2009 TUSD |
Loan receivables and other receivables |
Available -for-sale |
Derivatives used for hedging |
Financial liabilities valued at amortised cost |
|---|---|---|---|---|
| Assets | ||||
| Other shares and participations |
– | 32,369 | – | – |
| Long-term receivables | 24,239 | – | – | – |
| Trade receivables | 80,721 | – | – | – |
| Short-term loan receivable | 33,907 | – | – | – |
| Derivative instruments | – | – | 231 | – |
| Cash and cash equivalents | 77,338 | – | – | – |
| 216,205 | 32,369 | 231 | – | |
| Liabilities | ||||
| Trade Payables | – | – | – | 20,487 |
| Bank loans | – | – | – | 545,729 |
| Other non-current liabilities | – | – | – | 12,598 |
| Derivative instruments | – | – | 10,196 | – |
| Short-term debt | – | – | – | 32,400 |
| – | – | 10,196 | 611,214 |
For fi nancial instruments measured at fair value in the balance sheet, the following fair value measurement hierarchy is used:
Level 1: based on quoted prices in active markets;
Level 2: based on inputs other than quoted prices as within level 1, that are either directly or indirectly observable;
Level 3: based on inputs which are not based on observable market data.
Based on this hierarchy, fi nancial instruments measured at fair value can be detailed as follows:
| 31 December 2010 | |||
|---|---|---|---|
| TUSD | Level 1 | Level 2 | Level 3 |
| Assets | |||
| Available for sale fi nancial assets | |||
| - Equity securities | 68,205 | 408 | |
| 68,205 | 408 | ||
| Liabilities | |||
| Derivatives used for hedging | 6,866 | ||
| 6,866 |
The outstanding derivative instruments can be specifi ed as follows:
| Fair value of outstanding | 31 December 2010 | 31 December 2009 | |||
|---|---|---|---|---|---|
| derivative instruments in the balance sheet: |
Assets | Liabilities | Assets | Liabilities | |
| Interest rate swaps | – | 6,866 | 231 | 10,196 | |
| Total | – | 6,866 | 231 | 10,196 | |
| Non-current | – | – | 231 | 3,122 | |
| Current | – | 6,866 | – | 7,074 | |
| Total | – | 6,866 | 231 | 10,196 | |
The fair value of the interest rate swap is calculated using the forward interest rate curve applied to the outstanding portion of the swap transaction. The eff ective proportion of the interest rate swap as at 31 December 2010 amounted to TUSD 6,866 (TUSD 9,498).
For risks in the fi nancial reporting see the section Internal Control and Risk Management for the Financial Reporting in the Corporate Governance report on pages 48–49 and for operational risk factors see page 56 for more information.
The deferred fi nancing fees amount to TUSD 4,650 (TUSD 7,514) and related to the costs incurred for establishing the bank credit facility and are being amortised over the estimated usage of the facility. In 2010 amortisation expenses amounted to TUSD 2,360 (TUSD 2,539). See also Note 10.
Other fi nancial assets excluding deferred fi nancing fees amount to TUSD 17,824 (TUSD 21,084) and mainly represent VAT paid on exploration and development costs in Russia that is expected to be recovered from VAT received on future project revenues.
| 31 December 2010 | 31 December 2009 | |
|---|---|---|
| Hydrocarbon stocks | 11,128 | 15,917 |
| Drilling equipment and consumable materials |
8,911 | 11,456 |
| 20,039 | 27,373 |
| Drilling equipment and consumable | ||
|---|---|---|
| material comprise: | 2010 | 2009 |
| 1 January | 11,456 | 13,114 |
| Disposals | -2,417 | -431 |
| Purchase | 5,538 | 5,597 |
| Used in production | -5,375 | -6,744 |
| Currency translation diff erence | -417 | 248 |
| 8,785 | 11,784 | |
| Provisions | 126 | -328 |
| 31 December | 8,911 | 11,456 |
The trade receivables relate to a number of independent customers from whom there is no recent history of default. The provisions for bad debt is therefore nil.
| 31 December 2010 | 31 December 2009 | |
|---|---|---|
| Prepaid rent | 791 | 311 |
| Joint venture balances | – | 1,733 |
| Prepaid insurances | 1,925 | 376 |
| Accrued income | – | 116 |
| Other | 3,635 | 7,297 |
| 6,351 | 9,833 |
Joint venture balances included in prepaid expenses and accrued income relate only to unincorporated joint ventures.
| 31 December 2010 | 31 December 2009 | |
|---|---|---|
| Underlift | 13,452 | 8,649 |
| VAT receivable | 2,951 | 3,000 |
| Other current assets | 3,348 | 3,298 |
| 19,751 | 14,947 |
Cash and cash equivalents include only cash at hand or on bank. No short term deposits are held as at 31 December 2010.
| Available for-sale reserve |
Hedge reserve |
Currency translation reserve |
Total Other reserves |
|
|---|---|---|---|---|
| Balance at 1 January 2009 | 7,054 | -32,798 | -125,025 | -150,769 |
| Total comprehensive income | -17,150 | 25,722 | 84,657 | 93,229 |
| Aquired on consolidation | – | – | 14,899 | 14,899 |
| Divestments | – | – | -26,195 | -26,195 |
| Balance at 31 Dec 2009 | -10,096 | -7,076 | -51,664 | -68,836 |
| Total comprehensive income | 51,119 | 373 | -53,451 | -1,959 |
| Divestments | – | 1,554 | 3,106 | 4,660 |
| Balance at 31 Dec 2010 | 41,023 | -5,149 | -102,009 | -66,135 |
| 2010 | 2009 | |
|---|---|---|
| 1 January | 132,698 | 89,648 |
| Acquired on consolidation | 162 | – |
| Disposals | -53,827 | -764 |
| Unwinding of site restoration discount | 4,717 | 5,406 |
| Payments | -930 | -215 |
| Changes in estimates | 13,635 | 36,352 |
| Currency translation diff erence | -2,689 | 2,271 |
| 31 December | 93,766 | 132,698 |
Included in the unwinding of site restoration discount of TUSD 4,717 (TUSD 4,406) is an amount of TUSD 728 (TUSD 2,916) relating to discontinued activities. In calculating the present value of the site restoration provision, a pre-tax discount rate of 5.5% (5.5%) was used. Based on the estimates used in calculating the site restoration provision as at 31 December 2010, 90% of the total amount is expected to settle after more than 20 years.
| 2010 | 2009 | |
|---|---|---|
| 1 January | 1,354 | 1,298 |
| Fair value adjustment | 85 | 136 |
| Instalments paid | -138 | -121 |
| Currency translation diff erence | 120 | 41 |
| 31 December | 1,421 | 1,354 |
In May 2002, the Compensation Committee recommended to the Board of Directors, and the Board of Directors approved that a pension to be paid to Mr Adolf H. Lundin upon his resignation as Chairman of the Board of Directors and his appointment as Honorary Chairman. It was further agreed that upon the death of Mr Adolf H. Lundin, the monthly payments would be paid to his wife, Mrs Eva Lundin for the duration of her life.
Up to October 2006 the pension amount agreed consisted of monthly payments totalling an annual amount of TCHF 206 (TUSD 164) and thereafter of monthly payments totalling an annual amount of TCHF 138 (TUSD 132) payable to the widow of Adolf H. Lundin, Mrs Eva Lundin, which will continue for the duration of her life. The Company may, at its option, buy out the obligation to make the pension payments through a lump sum payment in the amount of TCHF 1,800 (TUSD 1,728).
| Termination indemnity |
||||
|---|---|---|---|---|
| LTIP | provision | Other | Total | |
| 1 January 2010 | 4,581 | 4,063 | 8,158 | 16,802 |
| Disposals | – | -1,606 | -7,285 | -8,891 |
| Additions | 16,315 | 445 | 1,602 | 18,362 |
| Release | – | – | – | – |
| Payments | -2,139 | – | -15 | -2,155 |
| Currency translation diff erence | 64 | – | -378 | -313 |
| 31 December 2010 | 18,821 | 2,902 | 2,082 | 23,805 |
For details of the LTIP see Note 46.
The termination indemnity provision represents Lundin Petroleum's share of the provision for employment termination costs for the Oudna joint venture in Tunisia, and Salawatis in Indonesia. The Salawatis were disposed of in December 2010. Disposals of TUSD 6,455 included in other relates to Etrion following the distribution in November 2010.
In relation to bank loans, the following amounts were outstanding:
| 31 December 2010 | 31 December 2009 | |
|---|---|---|
| Current | ||
| Repayment within 6 months | 450 | 1,950 |
| Repayment between 6–12 months | – | 450 |
| Long term |
| 459,285 | 548,129 | |
|---|---|---|
| Repayment after 5 years | – | 1,103 |
| Repayment within 2–5 years | 458,835 | 544,626 |
The table above analyses the Group's fi nancial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. Loan repayments are made based upon a net present value calculation of the assets' future cash fl ows. No loan repayments are currently forecasted under this calculation. The loan repayments as shown in the table are driven by the loan reduction schedule.
The interest rate on Lundin Petroleum's credit facility is fl oating, and is currently LIBOR + 0.9%.
Fair value on bank loans as at 31 December 2010 has been estimated to book value as the loans had fl oating interest rate.
The Group's credit facility agreement provides that an "event of default" occurs where the Group does not comply with certain material covenants or where certain events occur as specifi ed in the agreement, as are customary in fi nancing agreements of this size and nature. If such an event of default occurs and subject to any applicable cure periods, the external lenders may take certain specifi ed actions to enforce their security, including accelerating the repayment of outstanding amounts under the credit facility. The Group is not in breach of the debt covenants.
As at 31 December 2009 an amount of MUSD 30.0 was outstanding as short-term debt regarding the advance in relation to the agreement with a subsidiary of Gunvor International BV.
There are no fi nance leases within the Group.
There are no operating leases within the Group.
| 31 December 2010 | 31 December 2009 | |
|---|---|---|
| Holiday pay | 2,721 | 2,164 |
| Operating costs | 235 | 7,392 |
| Social security charges | 1,554 | 1,554 |
| Salaries and wages | 159 | 589 |
| Other | 2,998 | 4,773 |
| 7,667 | 16,472 |
| 31 December 2010 | 31 December 2009 | |
|---|---|---|
| Overlift | 1,761 | 1,287 |
| Acquisition liabilities | 5,680 | 5,925 |
| Joint venture partners | – | 6,300 |
| VAT payable | 1,075 | 1,221 |
| Social charges payable | 610 | 1,246 |
| Other liabilities | 4,247 | 4,168 |
| 13,373 | 20,147 |
On 26 October 2007, the Group entered into a credit facility under which an amount of MUSD 458.8 was outstanding as at 31 December 2010. The fi nancing facilities consist of a MUSD 850 revolving borrowing base and letter of credit facility. This facility was secured by a pledge over the shares of the asset holding companies of the Group and future cash fl ows generated from the pledged companies.
The amount stated for pledged assets of MUSD 459 (MUSD 699) as at 31 December 2010 represents the net asset book values of the pledged companies.
In connection with the acquisition by Lundin Petroleum of the additional 30% interest in the Lagansky Block in 2009, Lundin Petroleum has agreed to pay to the former owner of the Lagansky Block a fee to be based on USD 0.30 per barrel of oil in respect of 30% of the proven and probable reserves in the Lagansky Block as at the date a decision is made to proceed to a development.
In connection with the acquisition of a 30% interest in the Lagansky Block by a subsidiary of Gunvor International BV in 2009, Gunvor has agreed to pay to Lundin Petroleum a fee to be based on USD 0.15 per barrel of oil (up to gross 150 MMbbls) and USD 0.30 per barrel of oil (over gross 150 MMbbls) of the proven and probable reserves in the Lagansky Block as at the date a decision is made to proceed to a development.
The amounts of the contingent asset and liability related to the Lagansky Block are dependent on the outcome of future exploration and production activities. Due to the uncertainties related to these activities, estimates of the cash infl ow and outfl ow can not be calculated with certainty.
In connection with the sale by Lundin Petroleum of its Salawati (Indonesia) interests to RH Petrogas in 2010, RH Petrogas has agreed to pay to Lundin Petroleum up to MUSD 3.9 as deferred consideration. The amount and timing of such payment will be determined based on certain future fi eld developments within the Salawati Island block.
In connection with the sale by Lundin Petroleum of Lundin International BV to ShaMaran in October 2009, ShaMaran has agreed to issue an additional 50 million shares of ShaMaran to Lundin Petroleum if ShaMaran receives the approval of a development plan for the PSC covering the Pulkhana Block, Kurdistan. See Note 20.
Earnings per share is calculated by dividing the net result attributable to shareholders of the Parent Company by the weighted average number of shares for the year.
| 2010 | 2009 | |
|---|---|---|
| Net result attributable to shareholders of the Parent | ||
| Company (in USD) | 511,875,000 | -411,268,000 |
| Weighted average number of shares for the year | 312,096,990 | 313,420,280 |
| Earnings per share (in USD) | 1.64 | -1.31 |
Diluted earnings per share is calculated by adjusting the weighted average number of shares for the year with the dilution eff ect of outstanding warrants and to divide the net result attributable to shareholders of the Parent Company by the diluted weighted shares.
| 2010 | 2009 | |
|---|---|---|
| Net result attributable to shareholders of the Parent | ||
| Company (in USD) | 511,875,000 | -411,268,000 |
| Weighted average number of shares for the year | 312,096,990 | 313,420,280 |
| Dilution eff ect of outstanding warrants | – | – |
| Weighted average number of shares for the year after | ||
| considering the dilution eff ect of outstanding warrants. | 312,096,990 | 313,420,280 |
| Earnings per share (diluted) (in USD) | 1.64 | -1.31 |
| Note | 2010 | 2009 | |
|---|---|---|---|
| Other provisions | 1,719 | 187 | |
| Impairment cost for goodwill | 6 | – | 119,047 |
| Impairment of oil and gas properties | 5 | – | 525,719 |
| Exploration costs | 4 | 127,595 | 140,941 |
| Depletion, depreciation and amortisation | 14/15/16 | 159,555 | 173,323 |
| Amortisation of deferred fi nancing fees | 10 | 2,360 | 2,539 |
| Interest income | -3,416 | -4,626 | |
| Current tax | 12 | 75,467 | 38,560 |
| Interest expense | 10,495 | 11,996 | |
| Unrealised exchange gains | -13,712 | -48,496 | |
| Gain on sale of assets | 3,879 | -35,996 | |
| Other non-cash items | 42 | 212,013 | 82,196 |
| Adjustment to cash fl ow from operations | 575,955 | 1,005,388 |
| 2010 | 2009 | |
|---|---|---|
| Deferred tax | 185,385 | 9,925 |
| Site restoration discount | 4,717 | 5,406 |
| Share based payments | 19,522 | 12,946 |
| Result from associated company | – | 53,466 |
| Other non-cash items | 2,389 | 453 |
| 212,013 | 82,196 |
During the reporting period, the Group has entered into transactions with related parties on an arm's length basis as described below:
The Group received MUSD 0.3 (MUSD 0.1) from ShaMaran Petroleum for the provision of offi ce and other services, MUSD 0.3 (MUSD 0.3) for the provision of technical services and MUSD 2.0 (MUSD –) for supporting certain fi nancial obligations.
The Group received MUSD 0.9 (MUSD 0.6) from Africa Oil Corporation being interest on a loan of MUSD 23.8 (MUSD 23.8) and MUSD 0.2 (MUSD –) for supporting certain fi nancial obligations.
The Group paid MUSD 0.4 (MUSD –) to other related parties in respect of aviation services received.
Furthermore, the Group provided a loan to Etrion which amounted to MUSD 74.0 (MUSD –) as at 31 December 2010. Interest is charged on the loan and in the reporting period following the distribution of the Etrion shares by the Group, amounted to MUSD 0.5. The loan is repayable in November 2011.
| 2010 | 2009 | |||
|---|---|---|---|---|
| Average number of | Total | of which | Total | of which |
| employees per country | employees | men | employees | men |
| Parent Company | ||||
| Sweden | – | – | – | – |
| Total Parent Company | – | – | – | – |
| Subsidiary companies in Sweden |
– | – | – | – |
| Subsidiary foreign companies |
||||
| France | 58 | 46 | 55 | 44 |
| Norway | 70 | 49 | 56 | 38 |
| Netherlands | 7 | 3 | 7 | 4 |
| Indonesia | 21 | 15 | 20 | 14 |
| Russia | 60 | 38 | 182 | 143 |
| Tunisia | 10 | 7 | 9 | 6 |
| Singapore | 4 | 2 | 4 | 3 |
| Malaysia | 19 | 16 | 16 | 11 |
| Ethiopia | – | – | 4 | 3 |
| Kenya | – | – | 2 | 1 |
| United Arab Emirates | 3 | 2 | 3 | 2 |
| Switzerland | 53 | 36 | 43 | 30 |
| Venezuela | 11 | 6 | 4 | 2 |
| Italy | 11 | 8 | ||
| United Kingdom 1 | 9 | 6 | 34 | 23 |
| Total subsidiary companies | 336 | 236 | 439 | 324 |
| Total Group | 336 | 236 | 439 | 324 |
1 Weighted average following disposal in 2010.
For the Group, a total of 29 persons held board or senior management positions within the Group (2009: 26). Two women are included in these positions in 2010 (2009: two).
| Salaries, other | 2010 | 2009 | |||
|---|---|---|---|---|---|
| remuneration and social security costs per country |
Salaries and other remuneration |
Social security costs |
Salaries and other remuneration |
Social security costs |
|
| Parent Company | |||||
| Sweden | 486 | 39 | 646 | 119 | |
| Total Parent Company | 486 | 39 | 646 | 119 | |
| Subsidiary companies in Sweden |
– | – | – | – | |
| Subsidiary foreign companies |
|||||
| France | 3,842 | 1,801 | 4,037 | 2,157 | |
| Norway | 21,061 | 5,071 | 12,878 | 3,368 | |
| Netherlands | 1,062 | 98 | 908 | 99 | |
| Indonesia | 2,186 | 38 | 1,201 | 31 | |
| Russia | 4,622 | 276 | 5,893 | 475 | |
| Tunisia | 1,121 | 63 | 847 | 64 | |
| Singapore | 1,434 | 2 | 1,519 | 3 | |
| Malaysia | 5,852 | 107 | 2,934 | 2 | |
| Ethiopia | – | – | 206 | 4 | |
| Kenya | – | – | 105 | 5 | |
| United Arab Emirates | 234 | – | 204 | – | |
| Switzerland | 24,699 | 2,088 | 19,659 | 1,647 | |
| Venezuela | 248 | 40 | 132 | 23 | |
| Italy | 679 | 274 | – | – | |
| United Kingdom | 1,218 | 223 | 5,628 | 995 | |
| Total subsidiary companies |
68,258 | 10,081 | 56,151 | 8,873 | |
| Total Group | 68,744 | 10,120 | 56,797 | 8,992 | |
| of which defi ned contribution plan cost |
3,557 | 2,851 | |||
| of which defi ned benefi t plan cost |
132 | 127 |
| Salaries, other remuneration per |
2010 | 2009 | ||||
|---|---|---|---|---|---|---|
| country split between the Board of Directors/ MD and other employees |
Board of Directors and MD |
Other employees |
Board of Directors and MD |
Other employees |
||
| Parent Company | ||||||
| Sweden | 486 | – | 646 | – | ||
| Total Parent Company | 486 | – | 646 | – | ||
| Subsidiary companies in Sweden |
– | – | – | – | ||
| Subsidiary foreign companies |
||||||
| France | – | 3,842 | – | 4,037 | ||
| Norway | 2,121 | 18,940 | 1,085 | 11,793 | ||
| Netherlands | 415 | 647 | 337 | 571 | ||
| Indonesia | 502 | 1,683 | 408 | 793 | ||
| Russia | 778 | 3,844 | 2,075 | 3,818 | ||
| Tunisia | 311 | 810 | 367 | 479 | ||
| Singapore | 803 | 632 | 492 | 1,027 | ||
| Malaysia | 816 | 5,036 | 538 | 2,395 | ||
| Ethiopia | – | – | 168 | 38 | ||
| Kenya | – | – | 46 | 59 | ||
| United Arab Emirates | – | 234 | – | 204 | ||
| Switzerland | 9,433 | 15,266 | 9,092 | 10,567 | ||
| Venezuela | – | 248 | – | 132 | ||
| Italy | – | 679 | – | – | ||
| United Kingdom | 437 | 781 | 2,131 | 3,497 | ||
| Total subsidiary companies |
15,668 | 52,590 | 16,739 | 39,412 | ||
| Total Group | 16,155 | 52,590 | 17,385 | 39,412 |
Amounts for Switzerland includes cost for personnel of Etrion SA up until
deconsolidation.
| Salaries and other remuneration to | Board | Committee | Total remuneration for Board and |
Total | Total | |
|---|---|---|---|---|---|---|
| non-executive directors (TSEK) 1 | Fees | Fees | Committee work | Other 2 | 2010 | 2009 |
| Ian H. Lundin | 800 | – | 800 | 1,685 | 2,485 | 2,270 |
| Magnus Unger | 400 | 200 | 600 | 100 | 700 | 757 |
| Lukas H. Lundin | 400 | 100 | 500 | – | 500 | 558 |
| William A. Rand | 400 | 200 | 600 | – | 600 | 600 |
| Asbjørn Larsen | 400 | 100 | 500 | – | 500 | 450 |
| Dambisa F. Moyo | 400 | 100 | 500 | – | 500 | 292 |
| Total | 2,800 | 700 | 3,500 | 1,785 | 5,285 | 4,927 |
The amounts are presented in SEK as the Board remuneration is due in SEK as per the decisions of the 2010 AGM. The total remuneration for 2010 in USD is TUSD 735. 2
Other remuneration paid during 2010 relates to fees paid for special assignments undertaken on behalf of the Group. The payment of such fees was in accordance with fees approved by the 2010 AGM.
There are no severance pay agreements in place for any non-executive directors and such directors are not eligible to participate in any of the Company's incentive programmes.
During 2010, new rules regarding management remuneration were introduced in Sweden following the introduction of a revised Code of Corporate Governance (Code of Governance). In light of these changes, the Company's Compensation Committee considered the implications of the new rules on the content and scope of the Company's Policy on Remuneration. Based on its review, the Compensation Committee concluded that the Company's Policy on Remuneration remains in compliance with the rules of the Code of Governance and that no changes to the content of the Policy, as a result of the new rules, are required.
In connection with this review, the Compensation Committee also considered the Company's internal decision-making processes. Since 2009, when Lundin Petroleum's Investment Committee was established, all major management decisions regarding the worldwide operations and the fi nancial position of the Company are submitted for consideration and approval to the Investment Committee, which consists of the Company's President and Chief Executive Offi cer, Chief Operating Offi cer, Chief Financial Offi cer and Senior Vice President Operations. Considering this development, the Compensation Committee determined that the Executive Management of the Company, to which the Company's Policy on Remuneration shall be applicable, shall be the members of the Investment Committee.
Please see page 64 for further information on the Board of Directors' proposal regarding the Policy on Remuneration for 2011.
It is the aim of Lundin Petroleum to recruit, motivate and retain high calibre executives capable of achieving the objectives of the Group, and to encourage and appropriately reward superior performance in a manner that enhances shareholder value. Accordingly, the Group operates a Policy on Remuneration which ensures that there is a clear link to business strategy and a close alignment with shareholder interests and current best practice, and aims to ensure that executives are rewarded fairly for their contribution to the Group's performance.
The Company's Policy on Remuneration for executives, approved by the 2010 AGM, is described here below. The term 'executives' refers to the President and Chief Executive Offi cer (CEO), and other members of Group management that includes the Executive Vice President and Chief Operating Offi cer (COO), and other executive offi cers at Vice President level.
The Policy on Remuneration complies with the principles for compensation previously awarded to Group management and is based on individual agreements concluded between the Company and each executive.
The Compensation Committee is to receive information on, and to determine matters regarding the compensation of Group management. The Committee meets regularly and is responsible for reviewing the Policy on Remuneration and the compensation of executives and for making recommendations thereon to the Board of Directors. The Committee also has access to external advisors to ensure that salary and benefi t packages are competitive and appropriate.
The proposed compensation level, criteria for variable salary and other employment terms for the CEO are submitted by the Compensation Committee to the Board for approval. For other executives, the CEO is responsible for proposing appropriate terms of compensation for approval to the Compensation Committee and for reporting to the Board.
There are fi ve key elements to the remuneration package of executives in the Group: a) basic salary;
b) yearly variable salary;
The basic salary shall be based on market conditions, be competitive, and shall take into account the scope and responsibilities associated with the position, as well as the skills, experience and performance of the executive. The basic salary shall be reviewed annually to ensure that it remains competitive. In order to assess the competitiveness of the salary and benefi t packages off ered by the Group, comparisons may be made to those off ered by similar companies. In such circumstances, the comparator group is chosen with regard to:
a) companies in the same industry;
b) the size of the company (turnover, profi ts and employee numbers);
c) the diversity and complexity of their businesses;
d) the geographical spread of their businesses; and
e) their growth, expansion and change profi le.
Periodic benchmarking activities within the oil and gas sector shall also be undertaken to ensure that compensation packages remain in line with current market conditions.
The Company considers that a yearly variable salary is an important part of the remuneration package where associated performance targets refl ect the key drivers for value creation and growth in shareholder value.
At the end of each year, the CEO will make a recommendation to the Compensation Committee regarding the payment of the yearly variable salary to employees based upon their individual contribution to the Company's performance. This includes the achievement of the Company's strategic objective of growth and enhancement of shareholder value through increases in the stock price resulting from increased reserves, production, cash fl ow and profi t.
After consideration of the CEO's recommendations, the Compensation Committee will recommend to the Board of Directors for approval the level of the yearly variable salary of the CEO, and of all other executives and employees, to the extent that such award is in excess of USD 10,000 per employee. The yearly variable salary shall normally be within the range of 1 - 10 monthly salaries, however, the Compensation Committee may recommend to the Board of Directors for approval yearly variable salary outside of this range in circumstances or in respect of performance which the Compensation Committee considers to be exceptional.
a) Management other than senior executives
The 2010 Long-term Incentive Plan (LTIP) for management other than senior executives is designed to align management incentives with shareholder interests and entails a remuneration plan related to the Company's share price. Senior executives, being the CEO, the COO, the Chief Financial Offi cer and the Senior Vice President Operations, do not participate in the 2010 LTIP (for a description of the 2009 LTIP for senior executives approved by the 2009 AGM, please refer to b) below).
The 2010 LTIP for management other than senior executives includes the granting of units that are converted into a cash award related to the Company's share price. The LTIP will be payable over a period of three years from award in order to aid in the retention of staff . The LTIP consists of an annual grant of units that will be converted into a cash payment at vesting. The cash payment will be determined at the end of each vesting period by multiplying the number of units by the share price. The LTIP has a three year duration whereby the initial grant of units vests equally in three tranches: one third after one year; one third after two years; and the fi nal third after three years. The cash payment is conditional upon the holder of the units remaining an employee of the Lundin Petroleum Group at the time of the payment. The units may not be assigned to any third party.
The Compensation Committee recommends to the Board of Directors a total number of units to be allocated each year for the following three years, together with a recommendation for the individual allocations. The respective individual allocations shall be based on both the position within the Company and the achievement of the Company's strategic objective of growth and enhancement of shareholder value through increases in the stock price resulting from increased reserves, production, cash fl ow and profi t. The total number of units granted in 2010 for the whole Group, including management other than senior executives, was approximately 720,000. In comparison to unit awards in previous years, the number of units granted for 2010 takes into account the eff ect of the spin-off of the Company's UK business into EnQuest plc and the subsequent distribution of the EnQuest plc shares to Lundin Petroleum's shareholders. Similarly, the number of units was adjusted following the distribution of the Company's shares in Etrion Corporation, see Note 46.
The 2009 LTIP for senior executives approved by the 2009 AGM includes the issuance by Lundin Petroleum of phantom options exercisable after fi ve years from the date of grant. The exercise of these options does not entitle the recipient to acquire shares of Lundin Petroleum, but to receive a cash payment based on the appreciation of the market value of such shares.
The senior executives were granted phantom options with an exercise price equal to 110 percent of the average of the closing prices of the Company's shares on the NASDAQ OMX Stockholm for the ten trading days immediately following the 2009 AGM. In accordance with the terms of the 2009 LTIP, the exercise price was adjusted in connection with the distribution by Lundin Petroleum to its shareholders of shares of EnQuest plc and Etrion Corporation and such adjusted exercise price is equal to SEK 52.91. Such options will vest on the fi fth anniversary of the date of grant. The recipient will be entitled to receive a cash payment equal to the average closing price of Lundin Petroleum's shares during the fi fth year following grant, less the exercise price. Payment of the award under these phantom options will occur in two equal instalments: (i) fi rst on the date immediately following the fi fth anniversary of the date of grant, and (ii) second on the date which is one year following the date of the fi rst payment.
The total number of phantom options granted to senior executives is 5,500,928, following adjustments in connection with the distribution by Lundin Petroleum to its shareholders of EnQuest plc and Etrion Corporation. No senior executive who receives an award of phantom options is eligible for a grant of awards under the LTIP for management other than senior executives described in a) above during the fi ve year vesting period of the phantom options.
If the recipient of an award of phantom options resigns from the Group or if the recipient's employment is terminated for cause or similar during the fi ve year vesting period, the award of phantom options will immediately terminate. If the recipient's employment is terminated for any other reason during such period, the award of phantom options will vest and become immediately payable, based on the average closing price of Lundin Petroleum's shares during the 90 day period prior to such termination. If a third party acquires more than 50% of the then outstanding Lundin Petroleum shares, the award of phantom options will vest and become immediately payable based on the value per Lundin Petroleum share paid by such third party.
From an accounting perspective the 2009 LTIP for senior executives and the 2010 LTIP for management other than senior executives are regarded as compensation for services provided and will, under IFRS 2, result in accounting costs which will be distributed over the three or fi ve year vesting period. Lundin Petroleum's liability under the LTIP will be measured at fair market value and will be revalued at each reporting period (quarterly). The changes in value will be recognised in the income statement over the three or fi ve year period so that the accumulated cost over the period corresponds to the value of the LTIP on the fi nal date.
Lundin Petroleum's Board of Directors received an authorization by the 2010 AGM to repurchase shares on the NASDAQ OMX Stockholm. The purpose with the share
repurchase is, inter alia, to fi x the undertaking under the LTIP, including any applicable social charges. The repurchased shares could be sold in the market in conjunction with the payments under the LTIP, meaning that the actual cash payment by Lundin Petroleum under the LTIP would correspond to the total price paid for the repurchased shares. An increase of the undertaking under the LTIP due to a rise of the stock price would thus be secured by the corresponding increase of the value of the repurchased shares. 2,392,338 shares were repurchased during the fi nancial year ended 31 December 2010 such that Lundin Petroleum held 6,882,638 of its own shares as at 31 December 2010.
The LTIP has previously included share and option based plans where, among other features, certain performance conditions were attached to the vesting of the options or shares. For further information regarding these plans, please see Note 46.
The pension benefi ts comprise a defi ned contribution scheme with premiums calculated on the full basic salary. The pension contributions in relation to the basic salary are dependent upon the age of the executive.
Non-fi nancial benefi ts shall be based on market terms and shall facilitate the discharge of each executive's duties.
A mutual termination period of between one month and six months applies between the Company and executives, depending on the duration of the employment with the Company. In addition, severance terms are incorporated into the employment contracts for executives that give rise to compensation in the event of termination of employment due to a change of control of the Company.
The Compensation Committee shall approve termination packages that exceed USD 150,000 in value per individual.
The Board of Directors is, following the decision of the 2010 AGM, authorised to deviate from the Policy on Remuneration in accordance with Chapter 8, section 53 of the Swedish Companies Act in case of special circumstances in a specifi c case. No such deviations were made in 2010.
| Salaries and other remuneration to Executive Management (TUSD) |
Salary | Bonuses 1 | 2008 Unit Bonus Plan (second tranche) |
2007 Performance Share Plan |
Benefi ts 2 | Total 2010 |
Total 2009 3 |
Pensions 2010 4 |
Pensions 2009 |
|---|---|---|---|---|---|---|---|---|---|
| C. Ashley Heppenstall | 773 | 888 | 115 | – | 112 | 1,888 | 972 | 74 | 61 |
| Alexandre Schneiter | 530 | 601 | 92 | – | 24 | 1,247 | 637 | 47 | 38 |
| Chris Bruijnzeels | 426 | 389 | 57 | 19 | 38 | 929 | 450 | 37 | 25 |
| Geoff rey Turbott | 472 | 397 | 57 | – | 22 | 948 | 525 | 41 | 32 |
| Total | 2,201 | 2,275 | 321 | 19 | 196 | 5,012 | 2,583 | 199 | 156 |
In December 2010 the Compensation Committee awarded a bonus for 2010 of one month's salary to Executive Management (included in the bonus expense for 2010). In January 2011 the Compensation Committee met and reassessed the bonus payments made for 2010 considering the employees' contributions to the results of the Group and the achievement of personal targets and awarded additional bonuses equal to 8 monthly salaries payable in January 2011. Included in the bonus expense for 2010 is also an amount of TUSD 988 (TUSD 483) relating to bonuses awarded in January 2010 relating to 2009. The Compensation Committee recommended to the Board of Directors and the Board of Directors approved an exceptional performance bonus of TUSD 1,104 following the EnQuest plc transaction as the Compensation Committee considered such bonuses warranted. 2
Benefi ts paid include school fees and health insurance. 3
Total 2009 is including the payment of the fi rst tranche under the 2008 Unit Bonus Plan. 4 Pension contributions relate to payments to non-contributory pension funds in excess of the minimum Swiss statutory levels.
The normal retirement age for the CEO is 65 years. The pension contribution is 10% of the qualifying income for pension purposes, 40% of which is funded by the employee. Qualifying income is defi ned as annual basic salary.
Since December 2006 enhanced severance terms have been incorporated into the employment contracts for Executive Management. These provisions give rise to compensation in the event of termination of employment due to a company change of control. If the executive elects to resign or if the executive's employment is terminated without cause within one year following the change of control, then the executive shall be entitled to receive the stated compensation. The associated compensation is two years' basic salary for Executive Management.
The Executive Management has no outstanding incentive warrants, however, the third and last tranche under the 2008 Unit Bonus Plan is outstanding, which will vest and be payable in 2011, see Note 46.
The Company maintains the Long-term Incentive Plans described below.
At the AGM held on 16 May 2007, the shareholders of Lundin Petroleum approved the implementation of a Long-term Incentive Plan (LTIP) consisting of a Share Option Plan and a Performance Share Plan. Employees had the choice to select either the Share Option Plan or the Performance Share Plan or a 50/50 allocation of both.
The Share Option Plan included the conditional granting of options with a vesting period of 18 months and subject to the achievement of a performance condition measuring Total Shareholder Return (TSR) relative to a peer group of companies. The options were issued at a 10% premium to the average closing price of Lundin Petroleum shares for the ten days after the 2007 AGM. Employees could earn between 0 and 100% of the options depending upon the Company's performance measured using a relative TSR. The period for the performance condition expired on 30 November 2008 at which time 50% of the options awarded were issued as incentive warrants.
Movements in the number of incentive warrants outstanding and their related weighted average exercise prices are as follows:
| 2010 | ||||
|---|---|---|---|---|
| Average weighted exercise price in SEK per share |
Incentive warrants outstanding |
Average weighted exercise price in SEK per share |
Incentive warrants outstanding |
|
| At 1 January | 78.05 | 1,410,750 | 90.87 | 4,921,750 |
| Granted | – | – | – | – |
| Not vested | – | – | – | – |
| Exercised | – | – | – | – |
| Lapsed | 78.05 | -1,410,750 | 96.02 | -3,511,000 |
| At 31 December | – | – | 78.05 | 1,410,750 |
No incentive warrants were exercised during 2009 or 2010. The 1,410,750 incentive warrants that were exercisable at 31 December 2009 lapsed on 29 May 2010. There were no incentive warrants outstanding at 31 December 2010.
The Performance Share Plan included a conditional award of Lundin Petroleum shares with a vesting period of three years and subject to the achievement of a performance condition relative to TSR. The number of shares awarded under the Performance Share Plan was based on the value of the options granted under the Share Option Plan. The employees could earn between 50 and 100% of the award of shares depending upon the Company's performance measured using a relative TSR. Under the Performance Share Plan, Lundin Petroleum made a conditional award of 67,751 shares subject to the achievement of performance criteria. In June 2007, Lundin Petroleum acquired 68,000 of its own shares to fully hedge its potential obligation under the Performance Share Plan. On 29 May 2010, the 67,751 performance shares were delivered to employees.
The related total expense accounted for during the period amounted to TUSD 7,814 (TUSD 4,281).
At the AGM on 13 May 2008, the shareholders of Lundin Petroleum approved the implementation of a new LTIP which related to the Company's share price and consisted of an annual grant of units that would be converted into a cash payment at vesting. The cash payment would be determined at the end of each vesting period by multiplying the number of units by the share price at the relevant time. The 2008 LTIP had a three year duration whereby the initial grant of units vested equally in three tranches: one third after one year; one third after two years; and the fi nal third after three years. The cash payment is conditional upon the holder of the units remaining an employee of the Lundin Petroleum Group at the time of payment. At the AGMs on 13 May 2009 and 6 May 2010, the shareholders of Lundin Petroleum approved the implementation of LTIPs for employees other than Executive Management (being the Chief Executive Offi cer, the Chief Operating Offi cer, the Chief Financial Offi cer and the Senior Vice President Operations) that follow the same principles as the 2008 LTIP.
The following table shows the number of units issued under LTIP, the amount outstanding as at 31 December 2010 and the year in which the units will vest.
| Year of vesting 1 | |||||||
|---|---|---|---|---|---|---|---|
| Outstanding | |||||||
| Unit Bonus Plan | Total units | 31 Dec 2010 | 2009 | 2010 | 2011 | 2012 | 2013 |
| 2008 | 723,239 | 211,807 | 205,821 | 222,855 | 213,940 | – | – |
| 2009 | 670,400 | 435,498 | – | 232,437 | 219,980 | 219,980 | – |
| 2010 | 723,950 | 701,250 | – | – | 236,299 | 236,299 | 236,300 |
The numbers provided for the year of vesting have been recalculated from the number outstanding at 31 December 2010 to refl ect the Etrion distribution.
On 9 April 2010, Lundin Petroleum distributed the shares of EnQuest that it had received in consideration for the sale of the UK business. Under the rules of the LTIPs, the distribution triggered a recalculation of the number of units allocated.
On 12 November 2010, Lundin Petroleum distributed the shares of Etrion. This event triggered a recalculation of the number of units allocated. This recalculation of the units was approved by the Compensation Committee in February 2011.
The total number of units vesting do not necessarily equal the units awarded due to the recalculation following distributions by Lundin Petroleum off setting units that have lapsed following employees leaving the Group.
The costs associated with the unit bonus plans are as given in the following table.
| (TUSD) | 2010 | 2009 |
|---|---|---|
| 2008 | 1,625 | 1,696 |
| 2009 | 2,901 | 2,585 |
| 2010 | 3,070 | – |
| 7,596 | 4,281 |
The costs for 2010 also included an amount of TUSD 218 relating to employees of the UK operations that were shown as discontinued items.
At the AGM on 13 May 2009, the shareholders of Lundin Petroleum approved the implementation of a new LTIP for Executive Management consisting of a grant of phantom options exercisable after fi ve years from the date of grant. The exercise of these options entitles the recipient to receive a cash payment based on the appreciation of the market value of such shares. Payment of the award under these phantom options will occur in two equal instalments: (i) fi rst on the date immediately following the fi fth anniversary of the date of grant, and (ii) second on the date which is one year following the date of the fi rst payment.
The total costs related to the 2009 LTIP for Executive Management amounted to TUSD 8,894 (TUSD 657) for the fi nancial year ended 31 December 2010.
On 9 April 2010, Lundin Petroleum distributed the shares of EnQuest that it had received in consideration for the sale of the UK business. Under the rules of the LTIP the distribution triggered a recalculation of the number of phantom options allocated and the strike price at which the phantom options are exercisable.
On 12 November 2010, Lundin Petroleum distributed the shares of Etrion. This event triggered a recalculation of the number of phantom options allocated and the exercise price at which the phantom options are exercisable. This recalculation of the units was approved in February 2011. The number of phantom options outstanding at 31 December 2010 amounted to 5,500,928 (4,000,000) with an exercise price of SEK 52.91 (SEK 72.76).
For further details regarding these LTIPs, please see Note 45.
The results of Etrion were consolidated during 2010 until 12 November 2010 when the shares in Etrion held by Lundin Petroleum were distributed to its shareholders. Included within the consolidated general and administration costs was an amount of MUSD 2.7 representing costs under Etrion's stock option plan.
In March 2011, Lundin Petroleum converted MUSD 13.0 of a MUSD 23.8 convertible loan receivable from Africa Oil Corporation (AOC) into 14 million shares in AOC at a conversion price of Canadian Dollars (CAD) 0.90 per share. The shares were subsequently sold on the open market for CAD 2.00 per share realising MCAD 28.0 in proceeds.
In addition to the primary listing on the NASDAQ OMX, Stockholm the Lundin Petroleum share has started trading on 24 March 2011 on the Toronto Stock Exchange. No additional shares were issued in connection to the secondary listing.
In March 2011, Lundin Petroleum was awarded a PSC for the Gurita Block (WI 100%), Indonesia.
The business of the Parent Company is investment in and management of oil and gas assets. The net result for the Parent Company amounted to MSEK 3,936.1 (MSEK -32.3) for the reporting period.
The result includes a dividend received from a subsidiary of MSEK 3,995.2 (MSEK –), fi nancial income of MSEK 15.3 (MSEK –) for supporting certain fi nancial obligations for ShaMaran Petroleum and interest expense of MSEK 28.0 (MSEK –) on a MSEK 3,951.0 promissory note made to a subsidiary in relation to the UK business spin-off to EnQuest. The promissory note was cancelled on 1 July 2010 following the dividend distribution by a subsidiary. There is a tax credit of MSEK 7.3 resulting from an adjustment to the prior year tax accrual.
The distributions of the shares in EnQuest and Etrion, as detailed above, were recorded at the book value of the shares in Lundin Petroleum AB and amounted to MSEK 3,949.7 for the distribution of the EnQuest shares and MSEK 391.7 for the distribution of the Etrion shares.
The fi nancial statements of the Parent Company are prepared in accordance with accounting principles generally accepted in Sweden, applying RFR 2 issued by the Swedish Financial Reporting Board and the Annual Accounts Act (1995: 1554). RFR 2 requires the Parent Company to use similar accounting principles as for the Group, i.e. IFRS to the extent allowed by RFR 2. The Parent Company's accounting principles do not in any material respect deviate from the Group principles, see pages 70–76.
| Expressed in TSEK | Note | 2010 | 2009 |
|---|---|---|---|
| Operating income | |||
| Other operating income | 1 | 25,822 | 33,154 |
| Gross profi t | 25,822 | 33,154 | |
| General, administration and depreciation expenses | 2 | -72,222 | -49,281 |
| Operating profi t | -46,400 | -16,127 | |
| Result from fi nancial investments | |||
| Financial income | 3 | 4,012,086 | 8,589 |
| Financial expenses | 4 | -36,928 | -7,133 |
| 3,975,158 | 1,456 | ||
| Profi t before tax | 3,928,758 | -14,671 | |
| Corporation tax | 5 | 7,328 | -17,600 |
| Net result | 3,936,086 | -32,271 |
| Expressed in TSEK | Note | 2010 | 2009 |
|---|---|---|---|
| Net result | 3,936,086 | -32,271 | |
| Other comprehensive income | – | – | |
| Total comprehensive income | 3,936,086 | -32,271 | |
| Total comprehensive income attributable to: | |||
| Shareholders of the Parent Company | 3,936,086 | -32,271 | |
| 3,936,086 | -32,271 |
| Expressed in TSEK | Note | 2010 | 2009 |
|---|---|---|---|
| ASSETS | |||
| Non-current assets | |||
| Shares in subsidiaries | 14 | 7,871,947 | 7,871,812 |
| Receivables from Group companies | 6/12 | – | 19,950 |
| Total non-current assets | 7,871,947 | 7,891,762 | |
| Current assets | |||
| Prepaid expenses and accrued income | 456 | 448 | |
| Other receivables | 7 | 6,719 | 4,917 |
| Cash and cash equivalents | 6,735 | 532 | |
| Total current assets | 13,910 | 5,897 | |
| TOTAL ASSETS | 7,885,857 | 7,897,659 | |
| EQUITY AND LIABILITIES Restricted equity |
|||
| Share capital | 3,179 | 3,179 | |
| Statutory reserve | 861,306 | 861,306 | |
| Total restricted equity | 864,485 | 864,485 | |
| Unrestricted equity | |||
| Other reserves | 2,551,805 | 5,120,750 | |
| Retained earnings | – | 1,887,788 | |
| Net profi t | 3,936,086 | -32,271 | |
| Total unrestricted equity | 6,487,891 | 6,976,267 | |
| Total equity | 7,352,376 | 7,840,752 | |
| Non-current liabilities | |||
| Other provisions | 8 | 36,403 | 36,403 |
| Payables to Group companies | 9/12 | 482,281 | – |
| Total non-current liabilities | 518,684 | 36,403 | |
| Current liabilities | |||
| Trade payables | 993 | 87 | |
| Tax liability | 10/12 | 10,272 | 17,600 |
| Accrued expenses and prepaid income | 11 | 3,125 | 2,484 |
| Other liabilities | 407 | 333 | |
| Total current liabilities | 14,797 | 20,504 | |
| TOTAL EQUITY AND LIABILITIES | 7,885,857 | 7,897,659 | |
| Pledged assets | 13 | 3,081,228 | 4,978,037 |
| Contingent liabilities | 13 | – | – |
| Expressed in TSEK | 2010 | 2009 |
|---|---|---|
| Cash fl ow used for operations | ||
| Net result | 3,936,086 | -32,271 |
| Tax per income statement | -7,328 | 17,600 |
| Dividend | -3,995,158 | – |
| Other non-cash items | 82,514 | 5,132 |
| Interest expenses paid | 542 | 3 |
| Unrealised exchange losses | 623 | 1,356 |
| Changes in working capital: | ||
| Increase/decrease in current assets | -1,876 | 6,970 |
| Increase/decrease in current liabilities | 1,078 | -359 |
| Total cash fl ow from/used for operations | 16,481 | -1,569 |
| Cash fl ow from investments | ||
| Long-term receivables granted | – | -34,100 |
| Repayments received on long-term receivables | 1,661 | 34,838 |
| Proceeds from sale of associated company | 1,590 | – |
| Proceeds from sale of other shares and participations | 70,209 | – |
| Total cash fl ow from investments | 73,460 | 738 |
| Cash fl ow used for fi nancing | ||
| Purchase of own shares | -83,157 | – |
| Total cash fl ow used for fi nancing | -83,157 | – |
| Change in cash and cash equivalents | 6,784 | -831 |
| Cash and cash equivalents at the beginning of the year | 532 | 1,184 |
| Currency exchange diff erence in cash and cash equivalents | -581 | 179 |
| Cash and cash equivalents at the end of the year | 6,735 | 532 |
| Restricted Equity | Unrestricted equity | |||||
|---|---|---|---|---|---|---|
| Expressed in TSEK | Share capital 1 |
Statutory reserve |
Other reserves 2 |
Retained earnings |
Net result |
Total equity |
| Balance at 1 January 2009 | 3,179 | 861,306 | 5,089,856 | 1,855,683 | 62,778 | 7,872,802 |
| Transfer of prior year net result | – | – | – | 62,778 | -62,778 | – |
| Total comprehensive income | – | – | – | – | -32,271 | -32,271 |
| Transfer of share based payments | – | – | 30,894 | -30,894 | – | – |
| Share based payments | – | – | – | 221 | – | 221 |
| Balance at 31 December 2009 | 3,179 | 861,306 | 5,120,750 | 1,887,788 | -32,271 | 7,840,752 |
| Transfer of prior year net result | – | – | – | -32,271 | 32,271 | – |
| Total comprehensive income | – | – | – | – | 3,936,086 | 3,936,086 |
| Dividend | – | – | -2,515,168 | -1,826,272 | – | -4,341,440 |
| Purchase of own shares | – | – | -83,157 | – | – | -83,157 |
| Transfer of share based payments | – | – | 29,380 | -29,380 | – | – |
| Share based payments | – | – | – | 135 | – | 135 |
| Balance at 31 December 2010 | 3,179 | 861,306 | 2,551,805 | – | 3,936,086 | 7,352,376 |
1 Lundin Petroleum AB's issued share capital at 31 December 2010 amounted to SEK 3,179,106 represented by 317,910,580 shares with a quota value of SEK 0.01 each. Included in the number of shares issued at 31 December 2010 are 6,882,638 shares which Lundin Petroleum holds in its own name.
From 1 January 2006 the additional paid in capital has been included in Other reserves as well as currency diff erences on loans to subsidiaries.
| 2010 | 2009 | |
|---|---|---|
| Norway | 14,642 | 12,937 |
| United Kingdom | 2,876 | 11,047 |
| Tunisia | 4,595 | 4,718 |
| Malaysia | 1,680 | 3,546 |
| Indonesia | 2,029 | 590 |
| Ethiopia | – | 1,063 |
| Kenya | – | -747 |
| 25,822 | 33,154 |
The auditors of the Parent Company are PricewaterhouseCoopers.
| 2010 | 2009 | |
|---|---|---|
| Audit fees | 1,376 | 1,260 |
| Audit related | 365 | 378 |
| 1,741 | 1,638 |
| 2010 | 2009 | |
|---|---|---|
| Dividend | 3,995,158 | – |
| Interest income Group | – | 7,720 |
| Other | 16,928 | 869 |
| 4,012,086 | 8,589 |
Included in the other fi nancial income for the Parent Company is an amount of TSEK 15,271 (TSEK –) received for supporting certain fi nancial obligations of ShaMaran Petroleum.
| 2010 | 2009 | |
|---|---|---|
| Interest expenses Group | 30,789 | – |
| Interest expense non Group | 542 | – |
| Other fi nancial expenses Group | 9 | 5,717 |
| Foreign exchange losses, net | 624 | 1,356 |
| Tax penalty | 4,907 | – |
| Other | 57 | 60 |
| 36,928 | 7,133 |
During 2005 the Swedish tax authorities (Skatteverket) conducted a tax audit of Lundin Petroleum AB for the fi nancial years 2002 to 2003. The tax authorities disallowed a portion of expenses recharged to Lundin Petroleum AB by Group companies for costs associated with management services and certain other fees.
The decision has been appealed. In 2010 The Administrative Court of appeal maintained the ruling of the County Administrative Court. Following the decision of the court the penalty tax of TSEK 4,907 has been paid during 2010. Lundin Petroleum has appealed to the Supreme Administrative Court and is now awaiting a response to such request. For further details refer to Note 12 of the fi nancial statements of the Group.
| 2010 | 2009 | |
|---|---|---|
| Profi t before tax | 3,928,758 | -14,671 |
| Tax calculated at the corporate tax rate in Sweden (26.3%) |
-1,033,263 | 3,858 |
| Tax eff ect of received dividend | 1,050,727 | – |
| Tax eff ect of Controlled Foreign Companies | -3,705 | -23,225 |
| Tax eff ect of expenses non-deductible for tax purposes |
-1,590 | -1,623 |
| Increase unrecorded tax losses | -12,169 | – |
| Tax eff ect of utilisation of unrecorded tax losses | – | 3,390 |
| Tax eff ect on adjustment tax calculation 2008 and 2009 |
7,328 | – |
| Tax credit/charge | 7,328 | -17,600 |
| 31 December 2010 | 31 December 2009 | |
|---|---|---|
| Receivables from Group companies | – | 19,950 |
| – | 19,950 |
Long-term receivables due from subsidiaries amounting to TSEK – (TSEK 19,950) represented funding of operations within the subsidiaries for which repayment is not foreseen within an agreed repayment schedule.
| 31 December 2010 | 31 December 2009 | |
|---|---|---|
| Due from Group companies | 5,139 | 4,190 |
| VAT receivable | 504 | 727 |
| Others | 1,076 | – |
| 6,719 | 4,917 |
Other provisions as at 31 December 2010 amounted to TSEK 36,403 (TSEK 36,403) and related to corporate income tax.
Payables to Group companies as at 31 December 2010 amounted to TSEK 482,281 (TSEK –) and related mainly to the purchase of the Etrion shares prior to distribution.
Tax liability as at 31 December 2010 amounted to TSEK 10,272 (TSEK 17,600) and related to corporate income tax.
| 31 December 2010 | 31 December 2009 | |
|---|---|---|
| Social security charges | 276 | 442 |
| Directors fees | 1,069 | 68 |
| Audit | 1,212 | 960 |
| Other | 568 | 1,014 |
| 3,125 | 2,484 |
The accounting principles for fi nancial instruments have been applied to the line items below:
| Loan receivables and other receivables |
Financial liabilities valued at amortised cost |
|
|---|---|---|
| Assets | ||
| Other receivables due from Group companies |
5,139 | |
| Cash and cash equivalents | 6,735 | |
| Liabilities | ||
| Payables to Group companies | 482,281 | |
| Trade Payables | 993 | |
| Tax liability | 10,272 | |
| 11,874 | 493,546 |
Please see Group Note 38 and 39 for details.
| Registration number | Registered offi ce | Number of shares |
Percentage | Nominal value per share |
Book amount 31 December 2010 |
Book amount 31 December 2009 |
|
|---|---|---|---|---|---|---|---|
| Directly owned | |||||||
| Lundin Energy AB | 556619-2299 | Stockholm, Sweden | 10,000,000 | 100 | SEK 0.01 | 100 | 100 |
| Lundin Petroleum BV | BV 1216140 | The Hague, Netherlands | 180 | 100 | EUR 100.00 | 7,871,847 | 7,871,712 |
| 7,871,947 | 7,871,812 | ||||||
| Indirectly owned | |||||||
| Lundin Norway AS | 986 209 409 | Oslo, Norway | 1,320,000 | 100 | NOK 100.00 | ||
| Lundin Netherlands Holding BV | BV 87466 | The Hague, Netherlands | 150 | 100 | EUR 450.00 | ||
| Lundin Netherlands BV | BV 86811 | The Hague, Netherlands | 30,000 | 100 | EUR 450.00 | ||
| Lundin Tunisia BV | BV 1355993 | The Hague, Netherlands | 180 | 100 | EUR 100.00 | ||
| Lundin Nigeria Ltd (under liquidation) |
RC 615830 | Lagos, Nigeria | 10,000,000 | 100 | N 1.00 | ||
| Lundin Exploration BV | BV 1303454 | The Hague, Netherlands | 180 | 100 | EUR 100.00 | ||
| Lundin Block 5B BV | BV 1225618 | The Hague, Netherlands | 180 | 100 | EUR 100.00 | ||
| Lundin Marine BV | BV 1310579 | The Hague, Netherlands | 180 | 100 | EUR 100.00 | ||
| - Lundin Marine SARL | 06B090 | Pointe Noire, Congo | 200 | 100 | FCFA 5,000 | ||
| Lundin South East Asia BV | BV 1384642 | The Hague, Netherlands | 18,000 | 100 | EUR 1.00 | ||
| Lundin Ventures BV | BV 1386730 | The Hague, Netherlands | 18,000 | 100 | EUR 1.00 | ||
| Lundin Vietnam BV | BV 1272860 | The Hague, Netherlands | 180 | 100 | EUR 100.00 | ||
| Lundin Cambodia BV | BV 1397919 | The Hague, Netherlands | 18,000 | 100 | EUR 1.00 | ||
| Lundin Data Services BV | BV 1458414 | The Hague, Netherlands | 18,000 | 100 | EUR 1.00 | ||
| Lundin Malaysia BV | BV 1458418 | The Hague, Netherlands | 18,000 | 100 | EUR 1.00 | ||
| Lundin Netherlands Facilities BV | BV 1509030 | The Hague, Netherlands | 18,000 | 100 | EUR 1.00 | ||
| Lundin Petroleum SA | 1731/1999 | Collonge-Bellerive, Switzerland |
1,000 | 100 | CHF 100.00 | ||
| Lundin Services BV | BV 1229867 | The Hague, Netherlands | 180 | 100 | EUR 100.00 | ||
| Lundin Holdings SA | Nanterre B442423448 | Montmirail, France | 1,853,700 | 100 | EUR 10.00 | ||
| - Lundin International SA | Nanterre B572199164 | Montmirail, France | 1,721,855 | 99.86 | EUR 15.00 | ||
| - Lundin Gascogne SNC | Nanterre B419619077 | Montmirail, France | 100 | 100 | EUR 152.45 | ||
| Lundin Indonesia Holding BV | BV 1386728 | The Hague, Netherlands | 18,000 | 100 | EUR 1.00 | ||
| - Lundin Lematang BV | BV 547158 | The Hague, Netherlands | 40 | 100 | EUR 450.00 | ||
| - Lundin Oil & Gas BV | BV 547156 | The Hague, Netherlands | 40 | 100 | EUR 450.00 | ||
| - Lundin Sareba BV | BV 608284 | The Hague, Netherlands | 40 | 100 | EUR 450.00 | ||
| - Lundin Banyumas BV | BV 1140222 | The Hague, Netherlands | 182 | 100 | EUR 100.00 | ||
| - Lundin Rangkas BV | BV 1479636 | The Hague, Netherlands | 18,000 | 100 | EUR 1.00 | ||
| - Lundin Cakalang BV | BV 1479547 | The Hague, Netherlands | 18,000 | 100 | EUR 1.00 | ||
| - Lundin Baronang BV | BV 1479551 | The Hague, Netherlands | 18,000 | 100 | EUR 1.00 | ||
| - Lundin South Sokang BV | BV 1509027 | The Hague, Netherlands | 18,000 | 100 | EUR 1.00 | ||
| - Natuna Ventures BV | BV 1408196 | The Hague, Netherlands | 18,000 | 100 | EUR 1.00 | ||
| Lundin Russia BV | BV 1386727 | The Hague, Netherlands | 18,000 | 100 | EUR 1.00 | ||
| - Culmore Holding Ltd | 162316 | Nicosia, Cyprus | 1002 | 100 | CYP 1.00 | ||
| - Lundin Russia Services BV | BV 1391268 | The Hague, Netherlands | 18,000 | 100 | EUR 1.00 | ||
| - Lundin Russia Ltd. | 656565-4 | Vancouver, Canada | 55,855,414 | 100 | CAD 1.00 | ||
| - Lundin Lagansky BV | BV 1397745 | The Hague, Netherlands | 18,000 | 100 | EUR 1.00 | ||
| - Mintley Caspian Ltd | 160901 | Nicosia, Cyprus | 5000 | 70 | CYP 1.00 | ||
| - LLC PetroResurs | 1047796031733 | Moscow, Russia | 1 | 100 | RUR 10,000 | ||
| - LundinNeft LLC (under liquidation) |
1057747770002 | Moscow, Russia | 1 | 100 | USD 100,000 |
Etrion Corporation and subsidiaries were distributed on 12 November 2010. Lundin North Sea BV and subsidiaries were spun-off to EnQuest plc on 6 April 2010. Lundin Indonesia BV and Lundin Salawati BV were sold during 2010.
During 2010 Valkyries Cyprus Ltd. and Valkalm Holding Ltd. merged with Culmore Holding Ltd.
During 2010 the 100% investment in Lundin Investment Ltd., Lundin Sudan (Halaib) BV, Lundin Albania BV, Lundin Blora BV and Lundin Munir BV were liquidated.
Lundin Nigeria Ltd and Lundin Neft LLC were under liquidation as at 31 December 2010.
At 7 April 2011, the Board of Directors and the President of Lundin Petroleum AB have adopted this annual report for the fi nancial year ended 31 December 2010.
The Board of Directors and the President & CEO certify that the annual fi nancial report for the Parent Company has been prepared in accordance with generally accepted accounting principles in Sweden and that the consolidated accounts have been prepared in accordance with IFRS as adopted by the EU and give a true and fair view of the fi nancial position and profi t of the Company and the Group and provides a fair review of the performance of the Group's and Parent Company's business, and describes the principal risks and uncertainties that the Company and the companies in the Group face.
Stockholm, 7 April 2011
Lundin Petroleum AB (publ) Org. Nr. 556610-8055
Ian H. Lundin Chairman
C. Ashley Heppenstall President & CEO
Lukas H. Lundin Board Member
William A. Rand Board Member
Magnus Unger Board Member
Asbjørn Larsen Board Member
Dambisa F. Moyo Board Member
We have audited the annual accounts, the consolidated accounts, the accounting records and the administration of the board of directors and the president & CEO of Lundin Petroleum AB (publ) for the year 2010. The company's annual accounts and the consolidated accounts are included in the printed version on pages 57–99. The board of directors and the President & CEO are responsible for these accounts and the administration of the company as well as for the application of the Annual Accounts Act when preparing the annual accounts and the application of international fi nancial reporting standards IFRSs as adopted by the EU and the Annual Accounts Act when preparing the consolidated accounts. Our responsibility is to express an opinion on the annual accounts, the consolidated accounts and the administration based on our audit.
We conducted our audit in accordance with generally accepted auditing standards in Sweden. Those standards require that we plan and perform the audit to obtain reasonable assurance that the annual accounts and the consolidated accounts are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the accounts. An audit also includes assessing the accounting principles used and their application by the board of directors and the president & CEO and signifi cant estimates made by the board of directors and the president & CEO when preparing the annual accounts and consolidated accounts as well as evaluating the overall presentation of information in the annual accounts and the consolidated accounts. As a basis for our opinion concerning discharge from liability, we examined signifi cant decisions, actions taken and circumstances of the company in order to be able to determine the liability, if any, to the company of any board member or the president & CEO. We also examined whether
any board member or the president & CEO has, in any other way, acted in contravention of the Companies Act, the Annual Accounts Act or the Articles of Association. We believe that our audit provides a reasonable basis for our opinion set out below.
The annual accounts have been prepared in accordance with the Annual Accounts Act and give a true and fair view of the company's fi nancial position and results of operations in accordance with generally accepted accounting principles in Sweden. The consolidated accounts have been prepared in accordance with international fi nancial reporting standards IFRSs as adopted by the EU and the Annual Accounts Act and give a true and fair view of the Group's fi nancial position and results of operations. The statutory administration report is consistent with the other parts of the annual accounts and the consolidated accounts.
We recommend to the annual meeting of shareholders that the income statements and balance sheets of the parent company and the Group be adopted, that the profi t of the parent company be dealt with in accordance with the proposal in the administration report and that the members of the board of directors and the president & CEO be discharged from liability for the fi nancial year.
Stockholm, 7 April 2011
Bo Hjalmarsson Bo Karlsson Authorised Public Accountant PricewaterhouseCoopers AB PricewaterhouseCoopers AB
Lead Auditor Authorised Public Accountant
| Income Statement Summary (TUSD) | 2010 | 2009 | 2008 | 2007 | 2006 |
|---|---|---|---|---|---|
| Continuing operations | |||||
| Operating income | 798,599 | 571,835 | 628,939 | 416,669 | 242,957 |
| Production costs | -157,065 | -155,311 | -198,269 | -152,947 | -89,378 |
| Depletion | -145,316 | -118,128 | -95,046 | -80,008 | -47,392 |
| Exploration costs | -127,534 | -134,792 | -110,023 | -20,439 | -16,755 |
| Impairment costs | – | -644,766 | -78,572 | – | – |
| Gross profi t | 368,684 | -481,162 | 147,029 | 163,275 | 89,432 |
| Gain on sale of assets | 66,126 | 4,589 | 20,481 | – | – |
| General, administration and depreciation expenses | -40,960 | -27,619 | -19,684 | -24,317 | -14,434 |
| Operating profi t/(loss) | 393,850 | -504,192 | 147,826 | 138,958 | 74,998 |
| Financial investments | -12,507 | 29,559 | -110,121 | -5,470 | -308 |
| Result from share in associated company | – | -25,504 | 4,480 | – | – |
| Profi t/(loss) before tax | 381,343 | -500,137 | 42,185 | 133,488 | 74,690 |
| Tax | -251,865 | -45,669 | -40,824 | -76,196 | -31,640 |
| Net result from continuing operations | 129,478 | -545,806 | 1,361 | 57,292 | 43,050 |
| Discontinued operations | |||||
| Net result from discontinued operations | 368,992 | 8,737 | 59,042 | 83,794 | 55,459 |
| Net result | 498,470 | -537,069 | 60,403 | 141,086 | 98,509 |
| Net result attributable to the shareholders of the Parent Company: |
511,875 | -411,268 | 93,958 | 141,750 | 99,673 |
| Net result attributable to non-controlling interest: | -13,405 | -125,801 | -33,555 | -664 | -1,164 |
| NET RESULT | 498,470 | -537,069 | 60,403 | 141,086 | 98,509 |
| Balance Sheet Summary (TUSD) | 2010 | 2009 | 2008 | 2007 | 2006 |
| Tangible fi xed assets | 2,014,242 | 2,556,275 | 2,704,556 | 2,631,890 | 2,116,029 |
| Other non-current assets | 129,944 | 119,093 | 259,515 | 334,685 | 242,214 |
| Current assets | 284,950 | 275,290 | 272,619 | 316,021 | 218,153 |
| TOTAL ASSETS | 2,429,136 | 2,950,658 | 3,236,690 | 3,282,596 | 2,576,396 |
| Shareholders' equity | 920,416 | 1,141,658 | 1,462,442 | 1,513,340 | 1,304,219 |
| Non-controlling interest | 77,365 | 95,555 | 179,793 | 209,893 | 235,291 |
| Total equity | 997,781 | 1,237,213 | 1,642,235 | 1,723,233 | 1,539,510 |
| Provisions | 769,687 | 897,622 | 779,370 | 856,547 | 652,861 |
| Interest bearing debt | 476,671 | 558,327 | 555,626 | 427,243 | 202,649 |
| Current liabilities | 184,997 | 257,496 | 259,459 | 275,573 | 181,376 |
| TOTAL SHAREHOLDERS' EQUITY & LIABILITIES | 2,429,136 | 2,950,658 | 3,236,690 | 3,282,596 | 2,576,396 |
The primary objective of Lundin Petroleum is to add value for the shareholders, employees and co-venturers through profi table operations and growth. The added-value of Lundin Petroleum will fl ow from a mixture of improved cash fl ow and profi tability from the producing assets and through exploration and technical success leading to an increase in reserves. Cash fl ow and profi tability from the producing assets can be improved through good technical management of the assets leading to improved production levels and lower production costs.
Lundin Petroleum aims to increase hydrocarbon reserves through exploration and acquisitions. Lundin Petroleum will fund acquisitions through a mixture of internally generated funds, third party debt and if necessary, through new equity.
The shareholders' equity of Lundin Petroleum does not refl ect the underlying value of its assets as the recorded value relates to part exploration and development expenditures and part acquisition costs capitalised in accordance with generally accepted accounting principles (IFRS). The underlying value of Lundin Petroleum's assets is the calculation of discounted cash fl ows based on future production from its reserves, which cash fl ow is then invested proactively to grow the reserves and production base.
Key fi nancial data is based on the total of continuing and discontinued operations.
| Financial data | 2010 | 2009 | 2008 | 2007 | 2006 | |
|---|---|---|---|---|---|---|
| Operating income | TUSD | 863,149 | 805,852 | 977,719 | 812,440 | 599,116 |
| EBITDA | TUSD | 635,647 | 486,171 | 596,825 | 453,851 | 371,915 |
| Net result | TUSD | 498,470 | -537,069 | 60,403 | 141,086 | 107,727 |
| Operating cashfl ow | TUSD | 598,586 | 471,946 | 625,763 | 463,094 | 308,233 |
| Data per share | ||||||
| Shareholders' equity per share | USD | 2.96 | 3.64 | 4.67 | 4.80 | 4.15 |
| Operating cash fl ow per share | USD | 1.92 | 1.51 | 2.00 | 1.47 | 1.10 |
| Cash fl ow from operations per share | USD | 1.79 | 1.56 | 1.92 | 1.49 | 1.00 |
| Earnings per share | USD | 1.64 | -1.31 | 0.30 | 0.45 | 0.39 |
| Earnings per share fully diluted | USD | 1.64 | -1.31 | 0.30 | 0.45 | 0.39 |
| EBITDA per share fully diluted | USD | 2.04 | 1.54 | 1.89 | 1.44 | 1.32 |
| Dividend per share | USD | 2.30 | – | – | – | – |
| Quoted price at the end of the fi nancial period | USD | 12.47 | 7.95 | 5.25 | 10.52 | 11.58 |
| Number of shares issued at period end | 317,910,580 | 317,910,580 | 317,910,580 | 315,550,580 | 314,215,080 | |
| Number of shares in circulation at period end | 311,027,942 | 313,420,280 | 313,420,280 | 315,550,580 | 314,215,080 | |
| Weighted average number of shares for the period | 312,096,990 | 313,420,280 | 315,682,981 | 315,020,401 | 280,867,805 | |
| Weighted average number of shares for the period | ||||||
| (fully diluted) | 312,096,990 | 313,420,280 | 315,682,981 | 315,409,915 | 282,251,337 | |
| Key ratios | ||||||
| Return on equity | % | 45 | -37 | 3 | 9 | 11 |
| Return on capital employed | % | 47 | -29 | 11 | 14 | 22 |
| Net debt/equity ratio | % | 36 | 40 | 35 | 21 | 12 |
| Equity ratio | % | 41 | 42 | 51 | 52 | 51 |
| Share of risk capital | % | 67 | 66 | 71 | 71 | 81 |
| Interest coverage ratio | % | 3,591 | -2,865 | 973 | 2,203 | 4,010 |
| Operating cash fl ow/interest ratio | % | 2,803 | 2,605 | 3,797 | 3,631 | 4,848 |
| Yield | % | 18 | – | – | – | – |
Shareholders' equity per share: Shareholders' equity divided by the number of shares in circulation at period end.
Operating cash fl ow per share: Operating income less production costs and less current taxes divided by the weighted average number of shares for the period.
Cash fl ow from operations per share: Cash fl ow from operations in accordance with the consolidated statement of cash fl ow divided by the weighted average number of shares for the period.
Earnings per share: Net result attributable to shareholders of the Parent Company divided by the weighted average number of shares for the period.
Earnings per share fully diluted: Net result attributable to shareholders of the Parent Company divided by the weighted average number of shares for the period after considering the dilution eff ect of outstanding warrants.
EBITDA per share fully diluted: EBITDA divided by the weighted average number of shares for the period after considering the dilution eff ect of outstanding warrants. EBITDA is defi ned as operating profi t before depletion of oil and gas properties, exploration costs, impairment costs, depreciation of other assets and gain on sale of assets. Quoted price at the end of the fi nancial period: The quoted price in USD is based on the quoted price in SEK converted in USD against the closing rate of the period.
Weighted average number of shares for the period: The number of shares at the beginning of the period with changes in the number of shares weighted for the proportion of the period they are in issue.
Return on equity: Net result divided by average total equity.
Return on capital employed: Income before tax plus interest expenses plus/less exchange diff erences on fi nancial loans divided by the average capital employed (the average balance sheet total less non-interest bearing liabilities).
Net debt/equity ratio: Net interest bearing liabilities divided by shareholders' equity.
Equity ratio: Total equity divided by the balance sheet total.
Share of risk capital: The sum of the total equity and the deferred tax provision divided by the balance sheet total.
Interest coverage ratio: Result after fi nancial items plus interest expenses plus/less exchange diff erences on fi nancial loans divided by interest expenses.
Operating cash fl ow/interest ratio: Operating income less production costs and less current taxes divided by the interest charge for the period.
Yield: dividend per share in relation to quoted share price at the end of the fi nancial period
Supplemental Information (unaudited)
| Proved and probable oil reserves |
Total Mbbl |
UK Mbbl |
France Mbbl |
Netherlands Mbbl |
Tunisia Mbbl |
Norway Mbbl |
Indonesia Mbbl |
Russia Mbbl |
|---|---|---|---|---|---|---|---|---|
| 1 January 2009 | 189,056 | 77,048 | 26,438 | 94 | 362 | 53,888 | 9,548 | 21,678 |
| Changes during the year | ||||||||
| - acquisitions | – | – | – | – | – | – | – | – |
| - sales | -5,974 | – | – | – | – | – | – | -5,974 |
| - revisions | 684 | 440 | -3,227 | -29 | 394 | 730 | -698 | 3,074 |
| - extensions and discoveries | 50,246 | – | – | – | – | 50,246 | – | – |
| - production | -12,932 | -3,743 | -1,249 | -2 | -495 | -4,678 | -875 | -1,890 |
| 31 December 2009 | 221,080 | 73,745 | 21,962 | 63 | 261 | 100,186 | 7,975 | 16,888 |
| 2010 | ||||||||
| Changes during the year | ||||||||
| - acquisitions | – | – | – | – | – | – | – | – |
| - sales | -80,175 | -72,933 | – | – | – | – | -7,242 | – |
| - revisions | 26,653 | – | 1,509 | 25 | 625 | 23,368 | – | 1,126 |
| - extensions and discoveries | – | – | – | – | – | – | – | – |
| - production | -10,477 | -812 | -1,161 | -2 | -372 | -6,076 | -733 | -1,321 |
| 31 December 2010 | 157,081 | – | 22,310 | 86 | 514 | 117,478 | – | 16,693 |
| Proved and probable | Total | UK | Netherlands | Norway | Indonesia | |||
| gas reserves | MMscf1 | MMscf | MMscf | MMscf | MMscf | |||
| 1 January 2009 | 189,429 | 30,610 | 25,426 | 99,650 | 33,743 | |||
| Changes during the year | ||||||||
| - acquisitions | – | – | – | – | – | |||
| - sales | – | – | – | – | – | |||
| - revisions | -8,554 | -3 | -988 | -7,985 | 422 | |||
| - extensions and discoveries | 34,797 | – | – | 34,797 | – | |||
| - production | -6,933 | – | -4,541 | -2,299 | -93 | |||
| 31 December 2009 | 208,739 | 30,607 | 19,897 | 124,163 | 34,072 | |||
| 2010 | ||||||||
| Changes during the year | ||||||||
| - acquisitions | – | – | – | – | – | |||
| - sales | -32,108 | -30,607 | – | – | -1,501 | |||
| - revisions | 9,582 | – | 5,859 | 9,459 | -5,736 | |||
| - extensions and discoveries | – | – | – | – | – | |||
| - production 31 December 2010 |
-8,780 177,433 |
– – |
-4,530 21,226 |
130,298 | -3,324 | -926 25,909 |
1 The Company has used a factor of 6,000 to convert one scf to one boe.
Of the total proved and probable oil and gas reserves at 31 December 2010, 33 Mbbl are attributable to non-controlling shareholders of other subsidiaries of the Group.
The reserves as at 31 December 2010 have been certifi ed by Gaff ney, Cline & Associates.
| Bank/Broker | Analyst | Contact |
|---|---|---|
| ABG Sundal Collier | Anders Holte | [email protected] |
| Bank of America Merrill Lynch | Alejandro Demichelis | [email protected] |
| BMO Capital Markets | Christopher Brown | [email protected] |
| Carnegie | Joakim Kindahl | [email protected] |
| Cheuvreux | Joakim Ahlberg | [email protected] |
| Collins Stewart | Gordon Gray | [email protected] |
| Credit Suisse | Tao Ly | [email protected] |
| DnB NOR Markets | Espen Hennie | [email protected] |
| Enskilda Securities | Julian Beer | [email protected] |
| GMP | Peter Nicol | [email protected] |
| Goldman Sachs | Christophor Jost | [email protected] |
| Handelsbanken | Anne Gjøen / Daniel Råvik | [email protected] / dara04@ handelsbanken.no |
| Macquarie Securities Group | Mark Wilson | [email protected] |
| Nordea | Christian Kopfer | [email protected] |
| Pareto | Thomas Aarrestad | [email protected] |
| Swedbank Markets | Ola Sodermark | [email protected] |
| Öhman Fondkomission | Oskar Tuwesson | [email protected] |
Lundin Petroleum will publish the following interim reports:
» 4 May 2011 Three month report (January – March 2011) » 5 May 2011 AGM 2011 » 3 August 2011 Six month report (January – June 2011) » 2 November 2011 Nine month report (January – September 2011) » February 2012 Year End report 2011
The reports are available on Lundin Petroleum's website, www. lundin-petroleum.com in Swedish and English directly after public announcement.
The Annual General Meeting (AGM) is held within six months from the close of the fi nancial year. All shareholders who are registered in the shareholders' registry and who have duly notifi ed their intention to attend the AGM may do so and vote in accordance with their level of shareholding. Shareholders may also attend the AGM through a proxy and the shareholder shall in such a case issue a written and dated proxy. A proxy form is available on the website www.lundin-petroleum.com.
Lundin Petroleum's AGM of the shareholders is to be held on Thursday, 5 May 2011 at 13.00 (Swedish time). Location: Spegelsalen, Grand Hotel, Södra Blasieholmshamnen 8 in Stockholm.
Shareholders wishing to attend the meeting shall:
When registering please indicate your name, social security number/ company registration number, registered shareholding, address and day time telephone number.
Shareholders whose shares are registered in the name of a nominee must temporarily register the shares in their own names in the shareholders' register to be able to attend the meeting and exercise their voting rights. Such registration must be eff ected by Friday 29 April 2011.
| bbl | Barrel (1 barrel = 159 litres) |
|---|---|
| bcf | Billion cubic feet (1 cubic foot = 0.028 m3 ) |
| Bn | Billion |
| boe | Barrels of oil equivalents |
| boepd | Barrels of oil equivalents per day |
| bopd | Barrels of oil per day |
| Bn boe | Billion barrels of oil equivalents |
| Mbbl | Thousand barrels (in Latin mille) |
| Mbo | Thousand barrels of oil |
| Mboe | Thousand barrels of oil equivalents |
| Mboepd | Thousand barrels of oil equivalents per day |
| MMbo | Million barrels of oil |
| MMboe | Million barrels of oil equivalents |
| MMbpd | Million barrels per day |
| MMbopd | Million barrels of oil per day |
| Mcf | Thousand cubic feet |
| Mcfpd | Thousand cubic feet per day |
| MMscf | Million standard cubic feet |
| MMscfd | Million standard cubic feet per day |
| MMbtu | Mllion British thermal units |
| CHF | Swiss Franc |
|---|---|
| EUR | Euro |
| GBP | British Pound |
| NOK | Norwegian Kroner |
| RUR | Russian Rouble |
| SEK | Swedish Kroner |
| USD | US Dollar |
| TCHF | Thousand CHF |
| TSEK | Thousand SEK |
| TUSD | Thousand USD |
| MSEK | Million SEK |
| MUSD | Million USD |
Certain statements made and information contained herein constitute "forward-looking information" (within the meaning of applicable Canadian securities legislation). Such statements and information (together, "forward looking statements") relate to future events or the Company's future performance, business prospects or opportunities. Forward-looking statements include, but are not limited to, statements with respect to estimates of reserves and or resources, future production levels, future capital expenditures and their allocation to exploration and development activities, future drilling and other exploration and development activities, ultimate recovery of reserves or resources are based on forecasts of future results, estimates of amounts not yet determinable and assumptions of management.
All statements other than statements of historical fact may be forward-looking statements. Statements concerning proven and probable reserves and resource estimates may also be deemed to constitute forward-looking statements and refl ect conclusions that are based on certain assumptions that the reserves and resources can be economically exploited. Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as "seek", "anticipate", "plan", "continue", "estimate", "expect", "may", "will", "project", "predict", "potential", "targeting", "intend", "could", "might", "should", "believe" and similar expressions) are not statements of historical fact and may be "forward-looking statements". Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to diff er materially from those anticipated in such forward-looking statements. No assurance can be given that these expectations and assumptions will prove to be correct and such forward-looking statements should not be unduly relied upon. These statements speak only as on the date of this annual report and the Company does not intend, and does not assume any obligation, to update these forward-looking statements, except as required by applicable laws. These forward-looking statements involve risks and uncertainties relating to, among other things, operational risks (including exploration and development risks), productions costs, availability of drilling equipment and access, reliance on key personnel, reserve estimates, health, safety and environmental issues, legal risks and regulatory changes, competition, geopolitical risk, fi nancial risks. These risks and uncertainties are described in more detail under the heading "Risk Factors" and elsewhere in this this annual report. Readers are cautioned that the foregoing list of risk factors should not be construed as exhaustive. Actual results may diff er materially from those expressed or implied by such forward-looking statements. Forward looking statements included in this new release are expressly qualifi ed by this cautionary statement.
This annual report contains certain estimates relating to contingent and prospective resources. The recovery and production estimates of the Company's contingent and prospective resources provided herein are only estimates and there is no guarantee that the estimated contingent and prospective resources will be developed or recovered. Actual contingent and prospective resources may be greater than or less than the estimates provided here. There is no certainty that any portion of prospective resources will be discovered. There is no certainty that it will be commercially viable for the Company to produce any portion of the contingent resources or, if discovered, the prospective resources, on any of its properties.
Lundin Petroleum AB (publ) Hovslagargatan 5 SE-111 48 Stockholm Sweden Telephone: 46-8-440 54 50 Telefax: 46-8-440 54 59 E-mail: [email protected]
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