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    Tullow Oil plc Annual Report and Accounts 2007 Meeting the challenge

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    Contents Group overview 2 What we do 6 Chairman’s statement Tullow is one of Europe’s leading By building on the progress made independent exploration and in 2007, Tullow has the potential to 2 What we do production companies. The Group more than double in size. As a Group, 4 Where we operate has a balanced portfolio of quality oil we have the ability and the appetite 6 Chairman’s statement and gas assets, across 23 countries to ensure we meet this challenge with an interest in 106 licences. and continue to deliver superior shareholder value. Directors’ report: Business review 8 Chief Executive’s review Tullow’s strategy is based on having a long-term view and continually 8 Chief Executive’s review investing to grow the value of the 12 Operations review business. This delivered again in 14 Africa 2007 with exceptional exploration success together with record 24 Europe production and cash flow. 30 South Asia 12 Operations review 34 Corporate responsibility 32 South America Continued growth will bring with it We provide sustainable support to new challenges and through case 34 Corporate and social responsibility studies on pages 18, 22, 28 and 36 local communities and work hard to 40 Finance review protect people and the environment. we show how we are meeting the 44 Risk factors challenges of successful partnership, 40 Finance review long-term growth, managing a mature With focused investment over basin and supporting education. the coming years, reserves and production have the potential to reach multiples of current levels. Directors’ report: Corporate governance 46 Board of Directors 48 Corporate governance Tullow is subject to a high degree of The Board’s overall objective is to regulation and stakeholder scrutiny provide strategic leadership, guidance 46 Board of Directors and it is paramount that the business and perspective to the business on 48 Corporate governance is effectively managed by the behalf of the shareholders. This year, Executive and governed by the Board. the Chairman provides a new and 57 Directors’ remuneration report personal introduction to Corporate 67 Other statutory information Governance which includes Board performance and development, Tullow’s governance structure and planning for the future. Financial statements 117 Shareholder information 121 Senior management Following the resolution passed at We continue to invest in the best last year’s Annual General Meeting, talent to ensure we remain a great 68 Statement of Directors’ responsibilities Tullow wrote to all shareholders place to work with a strong and 69 Independent auditors’ report explaining the new electronic versatile team. Tullow’s exciting and 70 Group financial statements communication arrangements and visible success has been a key factor consulted with shareholders to see in attracting top people. 99 Independent auditors’ report how they now wished to interact with 100 Parent company financial statements the Group. This year nearly 7,000 124 Glossary shareholders will receive this annual The oil and gas industry uses many 109 Five year financial summary report by e-delivery, which has technical terms. For ease of use 110 Licence interests and understanding we have included significantly reduced the number 116 Reserves summary of printed documents, leading to some of the key terms on this page a reduction in the environmental in a summary glossary. A full Supplementary information impact of waste paper. glossary can be found on page 124. 117 Shareholder information 118 Additional shareholder information 121 Senior management 122 Contacts 123 Index 124 Glossary Summary glossary Go online at: http://annualreport bbl Barrel KPI Key Performance Indicator 2007.tullowoil.com boe Barrels of oil equivalent LTI Lost Time Incident boepd Barrels of oil equivalent per day LTIFR LTI Frequency Rate measured in bopd Barrels of oil per day LTIs per million hours worked CSR Corporate and Social Responsibility mmbbl Million barrels EHS Environment, Health and Safety mmboe Millions of barrels of oil equivalent EPS Early Production System mmscfd Millions of standard cubic feet per day FPSO Floating Production, Storage and PSC Production Sharing Contract Offtake vessel TSR Total Shareholder Return

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    2007 was an exceptional year for Tullow. The Group recorded its largest ever discovery, the Jubilee field offshore Ghana, continued its successful exploration in Uganda, and generated record production, sales revenue, operating cashflow and growth in reserves and resources. Tullow is capable of growing substantially in the coming years and has the strategy, the assets and the team to achieve this. The outlook for 2008 and beyond is extremely promising. 2007 Results summary • The financial performance of the Group overall was solid, including record operating cashflow before working capital of £474 million. • African assets have transformed the Group, driven by exceptional discoveries and strong production growth, up 21% to 40,300 boepd. • The UK delivered broadly stable production, two new field developments and a successful gas discovery. • South Asia reported a 143% increase in average production from gas field developments in Pakistan and Bangladesh. Key financial highlights Sales revenue (£ million) 2007 sales revenue Operating profit (£ million) Operating profit before increased by 10% as a exploration activities 2007 262.2 639 result of increased sales 2007 189 declined 28% due to volumes and higher oil increased depreciation 2006 579 prices, offset by weaker 2006 263 charges, partly offset by 2005 445 UK gas prices. 2005 199 production growth and strong oil prices. Profit before tax (£ million) Increased finance costs Operating cash flow (£ million) Record operating cash and recognition of a loss flow before working 2007 114 on hedging significantly 2007 474 capital facilitated impacted profit before £370 million capital 2006 263 tax, which declined 57% 2006 447 investment in the 2005 179 to £114 million. 2005 309 Group’s exploration and development activities. Basic earnings per share (p) The decline in basic Dividend per share (p) The Board has a high earnings per share level of confidence in 2007 7.1 reflects lower UK gas 2007 6.0 the Group and its future prices and increased profit potential and has 2006 24.2 depreciation charges, 2006 5.5 proposed a 14% increase 2005 17.5 exploration write-offs 2005 4.0 in the final dividend. and interest charges. For further information on our results see the Finance review on page 40 to 43. Tullow Oil plc Annual Report and Accounts 2007 1

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    Group overview What we do Tullow Oil plc is one of Europe’s largest independent exploration and production companies and operates a versatile and balanced worldwide portfolio of quality oil and gas assets, managed by a team with excellent technical, commercial and financial skills. Production and development Our producing assets performed strongly during 2007, driving Group output to 73,100 boepd. 2008 has the potential to be another transformational year as we prepare to develop and operate the world-class Jubilee field in Ghana. Tullow has a high quality, diverse portfolio of production and development assets. Over the last few years the Group has developed a strong track record of reserves and production growth and has delivered material value. Tullow is now entering a new phase in its development, operating major projects in both Ghana and Uganda that individually have the potential to more than double current reserves and production. 73,100 boepd +13% 2007 Working interest production Jim McCann with Marathon representative on Tchatamba platform in Gabon Exploration 2007 was an extraordinary year for Tullow’s exploration team with an overall success rate of 56% across our global exploration programme and the discovery of the Jubilee field, offshore Ghana, the Group’s largest oil discovery to date. Tullow’s exploration strategy is to build on the success of recent years, focusing on four core plays where our track record is strongest. Geology is considered over geography as a fundamental principle in Tullow’s exploration strategy and only the best prospects are targeted after rigorous technical and commercial evaluation. Exploration is undertaken via efficient regional campaigns, capitalising on success with material acreage positions. Six campaigns are currently ongoing. 551mmboe +9% Total reserves and resources Nabors 221 Rig in Uganda 2 Tullow Oil plc Annual Report and Accounts 2007

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    2008 Challenges • To establish the commerciality of the Group’s portfolio • To work with our partners to sanction the development of the of discoveries including assets in Mauritania, Ghana, Jubilee field in Ghana to ensure we achieve first oil in 2010 Uganda and the UK. from the first phase of field development. • To focus on achieving the full potential of Tullow’s current • To commence the development of reserves in Uganda through portfolio, which represents an excellent opportunity to an Early Production System (EPS). The EPS will allow Uganda transform the Group’s reserve and production profile. to start its first ever oil production in 2009 providing essential oil product and an important new power supply to the region. Outlook • To successfully implement a programme of development The Group expects to drill over 20 development wells and infill wells in the UK Southern North Sea, Africa and in 2008 with production expected to average between South Asia. 70,000 and 74,000 boepd. Working interest production by oil and gas (boepd) Working interest production by core area (boepd) 2007 40,900 32,200 2007 40,300 28,500 4,300 2006 33,420 31,300 2006 33,420 29,530 1,770 2005 36,420 22,030 2005 33,620 24,420 410 • Oil • Gas • Africa • Europe • South Asia 2008 Challenges • To efficiently deliver the high impact exploration campaigns • To successfully complete the exploratory appraisal programme in Uganda, Ghana, India, Mauritania and French Guiana, to extend the Jubilee field and to target additional high impact where considerable gross upside potential exists. prospects in the region. The potential exists to increase • To continue new ventures activity to build additional Jubilee resources from 170 million barrels to more than campaigns for 2010 and beyond. 1.3 billion barrels. • To fully evaluate the prospects in Blocks 1, 2 and 3A in the Outlook Lake Albert Rift Basin, Uganda and to exceed the reserves Tullow expects to drill over 30 exploration wells threshold to justify investment in a development and during the year, combining a mix of lower impact, near export pipeline. infrastructure prospects with high impact opportunities. Total reserves and resources by oil and gas (mmboe) Total reserves and resources by core area (mmboe) 2007 294 257 2007 464 67 20 2006 204 303 2006 406 80 21 2005 114 244 2005 248 91 19 • Oil • Gas • Africa • Europe • South Asia Tullow Oil plc Annual Report and Accounts 2007 3

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    Group overview Where we operate 2007 Business summary Tullow has a balanced portfolio of exploration and production assets with interests in 106 licences across 23 countries in four core areas. The largest core area is Africa, which represents over 50% of Tullow’s production and sales revenue and more than 80% of the Group’s reserves and resources. Tullow focuses on gas exploration and production in the UK, has a growing South Asia business and has recently gained interests in South America with high impact exploration potential. Africa 2007 saw Tullow achieve record African production from its operations in Côte d’Ivoire, Congo (Brazzaville), Equatorial Guinea, Gabon and Mauritania. The Group also has an extensive African exploration portfolio. 01 Angola 10 02 Cameroon* 03 Congo (Brazzaville)* 12 04 Congo (DRC) 05 Côte d’Ivoire 05 06 Equatorial Guinea 08 02 07 Gabon 14 06 08 Ghana 07 03 04 09 Madagascar 13 10 Mauritania 11 Namibia 12 Senegal 01 13 Tanzania 09 14 Uganda 11 Key: Exploration = Development = Production = Note: *Tullow has agreed the sale of its assets in these countries. Working interest production 73,100 boepd Reserves and resources 551 mmboe Revenue £639 million • Oil 57% • Oil 53% • Oil 58% • Gas 43% • Gas 47% • Gas 39% • Tariff 3% • Africa 55% • Africa 84% • Africa 58% • Europe 39% • Europe 12% • Europe 41% • South Asia 6% • South Asia 4% • South Asia 1% 4 Tullow Oil plc Annual Report and Accounts 2007

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    > For more information visit www.tullowoil.com/tlw/operations Europe South Asia Tullow’s European production comes from The Group has gas production its gas assets in the UK Southern North Sea. from Pakistan and Bangladesh Recently acquired exploration licences and high impact exploration in Portugal and the Netherlands provide acreage in India. 03 longer-term growth opportunities. 01 Bangladesh 01 01 Netherlands 02 India 02 02 Portugal 03 Pakistan 03 United Kingdom 03 01 04 South America 03 02 Tullow is focused on applying its West African geological expertise to similar plays in this region. 01 Falkland Islands* 02 French Guiana 03 Suriname 04 Trinidad and Tobago 02 01 Note: *Tullow withdrew from the Falkland Islands in August 2007. Acreage overview Region Licences Acreage (sq km) Africa 50 144,076 Europe 39 14,773 South Asia 12 40,004 South America 5 41,367 Total 106 240,220 Drilling activities Region Exploration/Appraisal wells Discoveries Development wells Africa 8 5 77 Europe 3 1 3 South Asia – – 1 South America 5 3 – Total 16 9 81 Tullow Oil plc Annual Report and Accounts 2007 5

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    Group overview Chairman’s statement Record production, cashflow and exploration success in 2007, supported by strong oil pricing, create a platform for Tullow to continue to grow rapidly over the coming years. Meeting the challenge 2007 was a year of many firsts for Tullow including our largest oil discovery ever and entry into the FTSE 100 Index. Our business has grown rapidly in recent years and our success is the result of consistent application of a balanced strategy that combines strong operational focus with a commitment to investment in our exploration portfolio. Of course, continued growth will also bring with it new challenges and risks, and we recognise that our strategy and business management must be sufficiently flexible to adapt to changing circumstances, emerging opportunities and occasional failures. We believe that Tullow has unique advantages that will enable us to achieve our objectives in each of our core areas: • Our UK gas business is mature and requires carefully targeted investment in order to maintain production and extend the life of assets and related infrastructure. We have consistently proven our ability to apply an innovative commercial and operational approach to maximise asset value; • In Africa, we have established an outstanding acreage portfolio and made a number of extremely exciting discoveries. We are focused on rapid growth and commercialisation of our interests, most importantly in Ghana and Uganda, and have more than doubled our team in the Cape Town office to achieve this; • In South Asia, growing operated production and exciting high impact exploration provide the potential for rapid growth in a region with ever-increasing energy demand; and • Our recently acquired South American portfolio provides an opportunity to apply our extensive knowledge of the geoglogy of West Africa to analogous and less explored basins and prospects across the Atlantic. 6 Tullow Oil plc Annual Report and Accounts 2007

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    The challenges we’ve met so far Oil field acquisition Acquisition of UK Acquisition of Oil discovered Hardman Resources World class oil and redevelopment gas business Energy Africa in Uganda Acquisition discovery in Ghana 1997 2001 2004 2005 2006 2007 Acquisition of a stake Mature infrastructure Major expansion in Major oil province Hardman acquired for Offshore Jubilee in the abandoned hubs and associated Africa with US$570 established in the US$1.1 billion. Enhanced field discovered with Espoir field, Côte gas fields purchased million acquisition Lake Albert Rift acreage position and potential to more than d’Ivoire. Utilising for £201 million adding 14 producing Basin with eight out control in Uganda, double Tullow’s reserves. modern 3D seismic from BP. Significant fields and 37 of eight hydrocarbon added full-cycle business Field appraisal and secondary recovery production and reserve exploration licences. discoveries made to in Mauritania and programme and techniques, the field growth achieved Strong organic date. Potential to broadened our worldwide development planning returned to production through exploration, production and transform Tullow’s exploration portfolio. already commenced. in 2002 and has since development and reserves growth reserves base. produced 49 mmbbls. further acquisitions. subsequently achieved. Year-end share price (pence sterling) 139 77 153 270 398 652 Attracting and retaining a quality team to our long-term ability to conduct our During 2007 the Board engaged We have always given a high priority to business and run our projects. PricewaterhouseCoopers LLP to recruitment and retention of a strong undertake a performance review of the Proper assumption of our responsibilities, and versatile team. Although we are part operation and conduct of the Board and which is our goal, can also have a very of an industry where skills shortages and to provide specific feedback to individual positive impact on regional employment adverse demographics have been a major Directors. This review will be a valuable and economic progress and helps to challenge in recent years, Tullow’s visible input in continuing to ensure the Tullow establish a positive working partnership success and growth have been a key Board provides the optimal level of with local communities, regardless of advantage in attracting top people and strategic guidance, executive support the success or failure of our exploration. today Tullow has over 350 employees. and appropriate challenge over the coming years. Our highly skilled technical team have Governing effectively experience operating in all the major Tullow has been a listed company since oil and gas play types around the Looking ahead 1987. We entered the FTSE All-Share world. Their skills are fundamental to By building on the progress made in 2007 Index upon registration as a UK Company maintaining a comprehensive knowledge we have the potential to more than double in December 2000, and proudly became of the regions and geological basins the size of Tullow over the coming years. a member of the FTSE 100 Index in where we operate, and evaluating This is no small task but I believe we have September 2007. Overall, Tullow is emerging opportunities important the opportunity and the ability – but most subject to a high degree of regulation and importantly the appetite – to ensure for the future of our business. stakeholder scrutiny and it is paramount Tullow meets this challenge and continues Our growth has also meant that Tullow that the business is effectively managed to deliver superior shareholder value. has increasingly been able to provide by the Executive and governed by the structured career and personal Board. The maintenance of an open and I would like to thank shareholders for development through international regular dialogue with all shareholders their support and our employees for their secondment, short-term assignments and and market participants is also accorded commitment over 2007 and I look forward individually tailored training programmes. a high priority. A detailed Corporate to reporting to you on our progress in Governance Report is on page 48 to 56 2008 and beyond. We believe that this focus on employee development, along with stimulating of this report, including a new introduction work, competitive remuneration and and overview by me. equity participation will allow Tullow to In December 2007 Rohan Courtney retired continue to meet the staffing challenges from the Board of Tullow, having served Pat Plunkett that our industry and business face. as a director for over 14 years, including Chairman 14 years as Chairman of the Audit Operating responsibly Committee and seven years as Senior Tullow’s business involves very significant Independent Director. On behalf of the numbers of people and is equipment Board I would like to thank Rohan for intensive. Our operations, particularly his immense contribution to Tullow drilling campaigns, have a very visible over this period. physical presence and are frequently in remote areas. Our exploration and Following Rohan’s departure, Steven development programmes are planned McTiernan has been appointed as the and executed to minimise the negative Senior Independent Director, and David impacts of our activities, and to assist Williams has become Chairman of the local communities wherever possible. Audit Committee. In addition Clare An excellent example of this is our Spottiswoode has been appointed as Groupwide initiative to contribute to Chair of the Remuneration Committee. children’s education, which during 2007 Finally we have commenced a process assisted over 7,000 children in seven to identify and appoint an additional countries where we conduct business. non-executive Director during 2008 and Corporate Social Responsibility is critical will report on progress in due course. Tullow Oil plc Annual Report and Accounts 2007 7

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    Directors’ report: Business review Chief Executive’s review Tullow’s strategy is based on having a long-term view and continually investing to increase the value of our business, a strategy which delivered again for us in 2007. Remarkable exploration success The highlight of 2007 for Tullow was undoubtedly the remarkable success of the Group’s exploration and appraisal programmes in Ghana and Uganda. In Ghana, the discovery of the Jubilee field and subsequent success with the Odum exploration well provide a high degree of confidence that Tullow may have uncovered not just a world-class discovery but also a material new oil province in which we are the dominant acreage holder. Our priority for 2008 will be to rapidly appraise the Jubilee field while also testing some of the more significant regional exploration prospects. In parallel, the field partnership is working on plans for a phased development of the field targeting first oil for 2010. A high-capability semi-submersible drilling rig has been contracted for a period of up to five years. In Uganda, Tullow achieved continued success in the Lake Albert Rift Basin and in 2007 invested over US$100 million (£50 million) in exploration and appraisal activities. The knowledge and confidence generated by our success to date has led to a plan to invest over US$200 million (£100 million) in 2008. The programme, which will include onshore and offshore drilling, seismic surveys and the anticipated sanction of an EPS, has the potential to more than double Tullow’s worldwide reserve base and make a material long-term contribution to Uganda’s economy. Strong portfolio performance Tullow achieved record production levels during 2007, with average daily output of 73,100 boepd, 13% ahead of 2006 levels. This production generated operating cashflow before working capital movements of £474 million, enabling the rapid progress of development, exploration and appraisal programmes across our core areas, particularly in Africa which accounted for 64% of capital investment during the year. 8 Tullow Oil plc Annual Report and Accounts 2007

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    Oil prices Oil price Tullow realised oil prices Gas prices Gas price Tullow realised gas prices 100 100 80 75 US$/bbl p/therm 60 50 46 p/therm US$63/bbl 37 p/therm US$52/bbl 40 25 US$43/bbl 34 p/therm US$34/bbl 23 p/therm 20 0 2004 2005 2006 2007 2004 2005 2006 2007 Solid financial results pricing represents an excellent backdrop a region with many potential geological While underlying operational performance to Tullow’s ongoing investment plans. similarities to areas of North Africa and operating cash generation were at where Tullow has existing acreage, As is the nature of our industry, record levels, reported financial results skills and expertise. unfortunately not all our activities in have been impacted by lower UK gas 2007 were successful. The failure of the prices, higher depreciation charges, South Asia Kudu–8 well in Namibia was a particular increased exploration write-offs and Production from Tullow’s Asian business disappointment for both Tullow and its higher interest charges. In particular, has increased steadily in recent years partners. Although more technical work is the disappointing performance of the and this trend continued in 2007 with required to determine the most appropriate Chinguetti field in Mauritania has led production from the Chachar field in future work programme, we remain to a write-down of £27 million in carrying Pakistan commencing in August. In committed to Kudu and are optimistic value, while unsuccessful drilling on the Bangladesh, the Bangora field continued regarding the potential for additional Kudu-8 well in Namibia and in the UK to perform strongly and further expansion gas to be discovered in the region. North Sea accounts for over 50% of our of facilities and production is planned for total exploration write-off for the year. 2008, while in India, steady progress was Europe made on prospect selection for a Our balance sheet remains strong and as In the UK, production of 171 mmscfd multi-well 2008 drilling campaign in the a signal of our confidence in the business during 2007 was similar to 2006 levels. onshore CB-ON/1 Block. During 2008, we have increased our final dividend of In the first half of the year a comparatively Tullow will seek to develop its Asian 2007 to 4.0 pence per share, an increase mild winter, combined with perceived business through high impact exploration, of almost 15% on the 2006 level. oversupply in the UK gas market, led ongoing production optimisation, potential to a period of uncertainty and weak Post year-end portfolio management new ventures and portfolio management. gas pricing. initiatives will result in a very significant profit on disposal, which will be recognised Against this background, Tullow’s continual South America in our 2008 results, following the anticipated portfolio analysis and overriding focus on Tullow added a new region of operations completion of the relevant transactions. value over volume of production was clearly to its business in 2007 when a portfolio evident as we redirected investment in of South American licences was secured Africa favour of more attractive international through the completion of the acquisition Our African business continues to grow exploration and appraisal programmes. of Hardman Resources. South America rapidly and highlights for the year, along has many geological and operational However, as the year progressed and with the exploration success in Ghana similarities to Tullow’s existing interests longer-term UK gas pricing trends and Uganda, include the exceptional in West Africa, with the additional benefit became more favourable and visible, performance of the Okume development that large areas remain underexplored. Tullow committed funds to selected and Ceiba field in Equatorial Guinea, During 2007 Tullow participated in development and high-graded exploration where gross production recently exceeded exploration campaigns in Suriname projects. An excellent example of this 115,000 bopd, and the ongoing successful and French Guiana, as well as considering strategy was the Kelvin project, which infill drilling programme in the a number of new venture opportunities, came on stream in October 2007. In Espoir field, Côte d’Ivoire. The strength most notably in Trinidad and Tobago. addition to exhibiting strong production of these assets more than offsets the performance during the peak winter The principal activity planned for 2008 is impact of disappointing production and period, the Kelvin facilities represent a the drilling of the high impact Matamata reserve performance from the Chinguetti valuable hub for future gas developments prospect in French Guiana, scheduled field in Mauritania. in the Caister Murdoch System (CMS) for the third quarter, 2008. area, including the adjacent K4 and Increased production allowed Tullow nearby Harrison discoveries. to benefit from the ongoing positive trend in global oil pricing. We believe During 2007, we built on our existing that the underlying fundamentals position in the UK Southern North Sea by remain strong and that oil prices will extending Tullow’s presence into the less remain over US$80/bbl for the remainder explored Dutch sector. In February 2007 of the decade at least. While costs have Tullow was awarded an operated interest also increased in recent years, strong in three large blocks offshore Portugal, Tullow Oil plc Annual Report and Accounts 2007 9

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    Directors’ report: Business review Chief Executive’s review continued Adapting to a changing industry retain maximum flexibility to allocate Operating safely and with sensitivity The continued strength of oil and gas capital between exploration and appraisal, While we always aim for a perfect safety pricing over recent years has changed and production and development based on record, the nature and operational the dynamics of our business and the available funds and quality of opportunities. complexity of oil and gas activities means nature of competition within our industry. that this is not always possible to achieve. A clear example of this strategy in action Larger companies are increasingly cash was our decision in late 2007 to consider During 2007 Tullow personnel and rich and opportunity constrained, while the disposal of Tullow’s interest in the attractive industry fundamentals have contractors performed over five million M’Boundi field in Congo (Brazzaville). This hours of operated activity spread across also introduced new participants who are field, in which Tullow had a non-operated competing for acquisition opportunities eight countries. These operations varied 11% interest, accounted for approximately and new ventures. In parallel, governments from 2D and 3D seismic surveys and 5% of 2007 sales volumes. Recent are increasingly proposing licence terms drilling in Uganda to offshore seismic transactions had led to a consolidation which limit the potential for return or of ownership and the transfer of surveys in French Guiana and significant discourage active investment in exploration. operatorship to a major oil company, production and development drilling These issues, combined with the intense thereby limiting Tullow’s ability to operations on the Schooner and Ketch demand for rigs and related oilfield contribute to decision making or fields in the UK Southern North Sea. services and equipment mean that future plans. The sale of this asset In 2007, our Lost Time Incident Frequency effective capital management and in early 2008 for a total consideration Rate (LTIFR) increased to 1.95 per million allocation are critical. of US$435 million (£218 million) has hours worked (2006: 0.81). This is a provided Tullow with significant financial We continually review our portfolio in flexibility and will enable us to accelerate disappointing outcome and is in contrast relation to Tullow’s long-term strategy. investment across the remainder of our to the steady improvements in safety Our aim is to build strong positions in business. Further portfolio management performance we have reported in core areas, to consolidate niche positions is under active consideration as we recent years. In response to this we in developing regions and to dispose of seek to reallocate our financial and have launched a number of training, assets of lower materiality or where we human resources to assets that are process and operational initiatives on cannot achieve meaningful operational more material to the Group’s a groupwide basis with the objective of influence or control. We also seek to long-term business. materially improving the 2008 outcome. Our vision To be the leading global exploration and production company and to deliver at least 20% TSR each year. Our strategy Balancing our risks Tullow has a long-term perspective on developing the Maintaining our growth will bring with it new challenges business. We plan in advance, execute consistently, review and risks, which we recognise are an everyday part of doing regularly and maintain financial and operational flexibility. business. To continue to prosper, Tullow is required on We have a clear strategy to deliver sustainable profitable an ongoing basis to identify, manage and mitigate a wide growth into the future, which includes: range of strategic, operational, financial and external risks. • Capital and resource allocation to high value opportunities; Many of these risks are addressed through the • Maintaining a balanced portfolio of quality assets; application of Tullow’s strategy. However, external risks such as those arising from the actions of our • Targeted production and reserves and resources growth; competitors, the volatile nature of oil and gas pricing • Development growth through new ventures, licensing and the diverse nature and location of operations are and acquisitions; not directly controllable. • Organic growth through infill programmes; Wherever possible we seek to mitigate our exposure • Strong social and community support delivering to these risks through a clear framework of sustainable development; management and communications that incorporates • Working safely and minimising impacts on financial, production and exploration management, the environment; the three key strategic pillars of the Group. • Having a structure with open dialogue across This year we have outlined in more detail the risks the Group; and that Tullow faces and what we do to manage and mitigate these on pages 44 and 45 of this report. • Ongoing investment in people and organisational structure. 10 Tullow Oil plc Annual Report and Accounts 2007

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    +66% Total shareholder return (TSR) 2007 262.2 66 2007 has been an exceptional 2006 49 year contributing to a three 2005 79 year TSR of 443% To enhance our planning and risk a transformational step change to our assessment we monitor near misses business. Our key priorities for 2008 are and high potential incidents as well as to appraise both the Jubilee field in Ghana participating in industry surveys and forums. and the Lake Albert Rift Basin in Uganda, while also testing the significant exploration Ultimately, however, strong safety performance is facilitated by clear potential of our wider portfolio. Tullow leadership and individual responsibility has the capability to grow substantially and every single Tullow employee and in the coming years and I believe we have contractor has both the authority and the strategy, the assets and the team to obligation to stop any operation that achieve this. The outlook for 2008 and might be considered unsafe at any time. beyond is extremely promising. Meeting the challenge of transformational change These are very exciting and challenging Aidan Heavey times for Tullow. Exceptional exploration Chief Executive Officer success, and strong production in 2007, have created an opportunity to deliver Key performance indicators (KPIs) Every year each business unit is set performance targets that are based on and support Tullow’s strategy. Tullow is organised into four core areas and seven business units. These business units have annual performance targets which link directly into and are aligned with our growth strategy and how we measure and maintain our strong progress. In total, across the Group, we look at some 25 metrics in areas such as health and safety, the environment and financial performance. The table below lists the Group’s KPIs, which the Board regularly reviews to maintain their appropriateness. In 2008, we will be adding another KPI which focuses on our people performance, to ensure that we continue to attract and retain top quality staff, particularly in an industry where human resources are scarce. On page 34 and 40 of this report you will find additional information on both the financial and non-financial metrics we use to assess the ongoing progress of the business. KPIs 2007 2006 Change Lost Time Incident Frequency Rate (LTIFR) 1.95 0.81 +142% Production (boepd) 73,100 64,720 +13% Reserve and resource replacement (%) 434 173 +261% Cash operating costs per boe (£) 5.05 4.74 + 7% Operating cashflow before working capital (£m) 473.8 446.7 +6% TSR (%) 66 49 +17% Tullow Oil plc Annual Report and Accounts 2007 11

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    Directors’ report: Business review Operations review Tullow manages its exploration activities and production business in an integrated manner with a clear focus on value. We seek material positions in assets where our technical and operational skills can make a real difference. Production and development “In recent years we have focused on delivering value from Tullow’s growing portfolio and have made significant investments in building our team and enhancing operating capability.” Paul McDade, Chief Operating Officer Our producing assets performed strongly during 2007, driving Group output to 73,100 boepd, up 13%. This allowed Tullow to capitalise on oil prices that at times approached record levels. Our production rates in Africa were particularly encouraging, led by the Okume development in Equatorial Guinea. In the UK, investment was redirected in favour of international programmes in response to gas market conditions. This meant that UK production remained broadly stable. As we grow, we continue to focus on ensuring that our resources, both human and financial, are being applied in the optimum manner to the best opportunities. Exploration “Our exploration success has opened up new geological plays with significant upside potential.Our focus is now on the appraisal of these regions while maintaining an active exploration and new ventures programme to generate the next phase of growth.” Angus McCoss, Exploration Director From an exploration perspective, our discoveries in Ghana and Uganda have created a step change in Tullow’s outlook and we will now focus resources on appraisal and further regional exploration campaigns. Our exploration goal in Uganda is to build on the 100% exploration success rate to date and to drill the remaining prospect inventory as quickly and effectively as possible. In Ghana we are primarily focused on appraising beyond the proven Jubilee field, which has ultimate upside potential of 1.3 billion barrels. Not all of our campaigns were successful and the outcome of the Kudu-8 well, offshore Namibia, was disappointing. Although the well found gas, reservoir quality would not support commercial flow rates. 12 Tullow Oil plc Annual Report and Accounts 2007

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    2007 Working interest production 2007 Capital investment 2007 Exploration success rate +13% £370million 56% Future production growth Longer-term ambitions Following the discovery of the Jubilee field in Ghana, we 2008 will be another busy year for Tullow as we move are formulating plans for an extensive operated appraisal towards sanction of the Jubilee field development in Ghana, and development drilling campaign and the initiation of continue to explore, appraise and develop the significant the first phase of development with first production potential of the Lake Albert Rift Basin in Uganda and targeted for 2010. optimally exploit the asset portfolio. Tullow has, over recent years, prepared for the challenges these important The completion of the acquisition of Hardman Resources projects will bring by steadily building the organisational in early 2007, provided us with an opportunity to experience and knowledge required to control and consolidate our position in Uganda, take operational successfully execute projects of this scale and diversity. control of the critical Block 2 and define the pace of investment. During the year we conducted a successful The delivery of value from these world-class projects appraisal programme, commenced work on an EPS will provide not only an opportunity for us to leverage and are moving towards first oil in 2009. from the long-term investment in our team but also the opportunity to build new skills within the Elsewhere we continue to rank our many investment organisation to support our longer-term ambitions. opportunities and invest in the high-graded production and development projects to ensure continued production growth from our existing assets. Exploration portfolio Exploration focus For Tullow, geology outranks geography and our Our focus is maintained on developing our experience in our exploration portfolio comprises a healthy blend of risk core geological plays which are ‘Salt Basins’, ‘Stratigraphic profiles. Low risk, high return, prospects are prioritised Traps’, ‘Rift Basins’ and ‘Fold Belts’. Although Tullow found in the drilling schedule to realise value early. Higher a rare giant field in Ghana, ever fewer of these exceptional risk prospects are targeted with technologies and traps remain undrilled and many are unavailable as they methodologies which aim to reduce the technical risk are held by the oil majors or national oil companies. and determine the appropriate level of investment or Tullow’s niche, therefore, is exploring our core geological portfolio management action. plays for commercially viable prospects in the scale of Tullow provides challenging professional development a few tens, to a few hundreds, of millions of barrels of opportunities for its technical staff. In doing so, we oil equivalent. are able to attract, retain and inspire world-class The upper end of this scale represents a rich set of exploration talent. Our explorationists are opportunities for Tullow, and the Group is particularly fundamentally prospectors and deploy leading well skilled and organised to meet the challenge edge seismic and other physical technologies of continuing to grow through exploration. in their quest to discover oil and gas. Our global exploration leadership team assures technical quality, portfolio high-grading and financial discipline. Tullow Oil plc Annual Report and Accounts 2007 13

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    Directors’ report: Business review Operations review: Africa Tullow’s African assets have transformed the Group’s business in the last 12 months, driven by exceptional exploration success in Ghana and Uganda and strong production growth, particularly in Equatorial Guinea. 2007 Statistics 40,300 boepd Working interest production Mauritania 464 mmboe Total reserves and resources Senegal £372 million Cameroon Sales revenue Ghana Côte d’Ivoire Uganda Equatorial Guinea Gabon Congo (DRC) £237 million Congo (Brazzaville) Capital investment Tanzania Angola Namibia Madagascar > For more information visit www.tullowoil.com Key producing assets Producing field 2007 Working interest Country Activities (Tullow %) production (boepd) Congo (Brazzaville) M’Boundi (11%)1 5,130 Côte d’Ivoire Espoir (21.33%) 6,280 Equatorial Guinea Ceiba (14.25%) 6,090 Okume Complex (14.25%) 5,240 Gabon Etame/ Avouma (7.5%) 1,530 Niungo (40%) 5,380 Tchatamba (25%) 5,250 Others (3.75% – 40%) 2,580 Mauritania Chinguetti (19.01%) 2,820 Activities in other countries Angola , Congo (DRC) , Cameroon 2 , Ghana , Madagascar , Namibia , Senegal , Tanzania , Uganda Notes: 1 Tullow has agreed the sale of this asset to Korea National Oil Company. 2 Tullow has agreed the sale of its Cameroon assets to MOL. Key: Exploration = Development = Production = 14 Tullow Oil plc Annual Report and Accounts 2007

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    2007 Highlights Based on the technical work undertaken • Production averaged 40,300 boepd, 21% above 2006 levels; • World class oil discovery offshore to date, the proven recoverable resources of the field are estimated at 170 million barrels, which exceeds the commercial 2010 First oil from the first phase of the threshold for development. The ultimate Ghana; over one billion barrels of Jubilee development is targeted for upside potential of the discovery is now upside potential; 2010 with Tullow as field operator. estimated to be in excess of one billion • 100% success in Uganda with four barrels and an accelerated appraisal discoveries; significant programme programme targeting early development in progress to appraise billion barrel of this asset is under way. A high Capital investment (£ million) potential; and resolution 3D/4D survey of over 900 sq km covering the entire structure was 2007 262.2 237 • Strong production growth from the conducted in late 2007 to assist in Equatorial Guinea assets, which 2006 143 exceeded 115,000 bopd gross building a detailed field model. Up to five 2005 133 production in January 2008. appraisal wells are also planned for the field in 2008 using two of the rigs under Market environment contract. The purpose of these wells is Tullow has been active in Africa for to prove up the resources and to provide additional information to assist in Working interest production (boepd) over 20 years. Since its first development project in Senegal in 1987 the Group has development. The first appraisal well, 2007 262.2 40,300 developed strong relationships and gained Mahogany-2, commenced in March 2008. 2006 33,420 valuable commercial and geological Development options are currently being experience in basins across the continent. assessed by the partners, with Tullow 2005 33,620 In the last five years Tullow has built on as the field operator. With the support this experience and has rapidly expanded of the Government of Ghana, a phased in Africa through acquisitions, licensing development is planned with a first oil rounds and successful exploration. target of 2010. Screening studies indicate The Group now has production of over that the development scheme is likely to Uganda 40,000 boepd from five countries, has involve FPSO facilities highly suited to Tullow’s exploration in the Lake Albert interests in 50 exploration and production fast-track development. In February 2008, Rift Basin continues to yield material licences and plans to drill approximately Tullow contracted a fifth generation success, with all four wells drilled in 2007 20 exploration wells in 2008. semi-submersible rig, the Eirik Raude, encountering oil. The knowledge and for up to five years of development confidence generated by our success to Ghana drilling, scheduled to start in late 2008. date have led to an aggressive campaign Tullow has interests in three exploration The Jubilee field discovery has opened for 2008 which includes drilling, seismic blocks in Ghana – Shallow Water Tano, up a new hydrocarbon province, in which surveys and the anticipated sanction of an Deepwater Tano and West Cape Three Tullow has established a commanding EPS. Overall, this programme is targeting Points. One well was drilled in each block position and plans to drill further significant oil resources with the ultimate during 2007. These were the first wells in exploration wells in 2008. The first well aim of exceeding the threshold required an extensive regional exploration campaign was drilled in February 2008 on the Odum for full development and export to across the West Africa Transform Margin prospect in the West Cape Three Points international markets via a pipeline to and yielded exceptional results. block. The well encountered a 60 metre Mombasa. Following Tullow’s successful In the deepwater Tano Basin, the exploration campaign in the onshore oil column which, located only 13 km Mahogany-1 well was drilled on the West Kaiso-Tonya region of Block 2, the Group from the Jubilee field, is considered Cape Three Points block in June, followed is now working closely with the Ugandan a commercial discovery. Further high by the Hyedua-1 well on the adjacent Government to commence production impact prospects have been identified in Deepwater Tano block in August. Both from the region via an EPS in late 2009. the deepwater region and at least two of wells intersected excellent quality stacked A successful appraisal programme, these, Teak and Tweneboa, are planned reservoir sandstones with very significant comprising 3D seismic acquisition and for drilling within the next 12 months. net hydrocarbon pay. Logging and three appraisal wells, was completed in pressure test results suggest that the In addition to the deep water programme, December. The data collected are now discoveries form a large continuous Tullow is committed to drilling two wells being integrated into the subsurface accumulation across the two licences. on the Shallow Water Tano licence. The evaluation to support the sanction of In total these discoveries encountered first well was drilled in September 2007 the EPS in the second quarter of 2008. combined hydrocarbon columns of but was unsuccessful and was plugged and The planned EPS will produce 4,000 bopd 361 metres of light, sweet oil and make abandoned. The second well is planned for to a new-build processing and power this a world class discovery which was 2008 and is to target a geological play generation facility to supply the local subsequently named the Jubilee field. similar to the Odum discovery. area with oil product and power. Tullow Oil plc Annual Report and Accounts 2007 15

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    Directors’ report: Business review Operations review: Africa continued Recent onshore drilling activity has Congo (Brazzaville) CI-103 and CI-105, were secured to focused on the high impact Ngassa well In Congo (Brazzaville), Tullow is a complement the existing production targeting the largest structure in the partner in the M’Boundi field. During from CI-26. basin with upside potential of 800 million 2007, 12 producers and 14 water The CI-26 licence contains the producing barrels. The well commenced in injectors were drilled and the field East and West Espoir fields. Gross November 2007 using the Nabors 221 rig averaged 46,500 bopd gross production. production from East Espoir averaged but drilling difficulties resulted in the well ENI became operator of the field during 20,000 boepd and total production from being suspended in February 2008 at 2007 and has commenced an active both fields is expected to be maintained a depth of 1,635 metres. The substantial reservoir management programme at approximately 30,000 boepd gross primary and secondary oil objectives designed to optimise long-term production during 2008. remain undrilled and it is now planned to field recovery. drill Ngassa from an alternative location. A two-year FPSO upgrade programme The M’Boundi field has made a significant Both onshore and offshore options are commenced in September 2007 and is contribution to the organic growth of the being considered. expected to be completed by the end of Group’s production and reserves but 2009. In conjunction with an anticipated In the onshore Butiaba region of Block 2 is now entering a new phase in its East Espoir 2009 infill drilling campaign, and Block 1, numerous prospects have development at a time when Tullow is also this upgrade should increase liquid been identified on the recently acquired looking to reallocate capital resources to and gas handling capacity and ensure 2D seismic. A light rig, the OGEC 750, has projects where it has more material optimum drainage and reservoir been contracted and a drilling campaign participation and influence. In January recovery from both reservoirs. of approximately eight wells commenced 2008, Tullow therefore announced the in March 2008 with the drilling of the Taitai sale of its interest to the Korea National Current activity on Tullow’s exploration prospect. This campaign has gross upside Oil Company (KNOC) for a total cash licences is focused on identifying the potential of more than a billion barrels. consideration of US$435 million highest quality prospects for drilling (£218 million). The deal is subject to in 2009 and 2010 and includes the In Block 3A the Kingfisher prospect was partner pre-emption and approval from acquisition and processing of large drilled and tested in early 2007. The well the Government. The transaction is volumes of high quality 3D seismic data. intersected three significant oil-bearing expected to complete by mid 2008. intervals and tested a total of 14,000 bopd. The well did not reach the primary Equatorial Guinea target, a prospect with 300 million barrel The Okume Complex in Equatorial Guinea upside potential. Following the acquisition achieved first oil ahead of schedule in of 3D seismic over the structure, which December 2006. Since then, 22 wells has also identified a number of additional have been drilled and production offshore prospects, the Kingfisher-2 performance, particularly from the Elon appraisal well is expected to commence field, has exceeded expectations. In 2008, in the second quarter of 2008. The Nabors the complex is expected to achieve an 221 rig is in the process of being average annual gross production of over mobilised from the Ngassa drill site. 60,000 bopd and an injection rate in excess of 100,000 bwpd. Work is also at an advanced stage to contract a rig to drill the offshore On the Ceiba field, four wells were prospects in Blocks 3A and Block 2. drilled in 2007 and gross annual In addition to Ngassa and Kingfisher, the production averaged 44,000 bopd. offshore Pelican prospect in Block 3A, Production from both Okume and Ceiba recently covered by 3D seismic, is looking is blended and exported via the Ceiba particularly encouraging with amplitude Floating Production Storage and Offtake anomalies potentially indicative of vessel [FPSO] and in January 2008, Reserves and resources (mmboe) hydrocarbons. It is expected that the first gross oil production through the offshore well will spud in early 2009. processing facilities exceeded 2007 262.2 464 115,000 bopd for the first time. 2006 406 Tullow also has interests in two 2005 248 prospective blocks on the Congo (DRC) Côte d’Ivoire side of the Lake Albert Rift Basin, adjacent In Côte d’Ivoire Tullow has exploration, to the Group’s Ugandan acreage. Tullow is development and production interests in currently awaiting a Presidential Decree six offshore blocks. This acreage forms on these blocks before any exploration part of the West African Transform Sales revenue (£ million) work can commence and the full potential Margin in which Tullow has enjoyed 2007 262.2 372 of this acreage can be realised. The significant success with the discovery validity of the award of these licences is of the Jubilee field opening up a new 2006 268 currently being disputed by the Congolese geological play. The region has been 2005 265 Oil Ministry; this is being vigorously identified as a key area for Tullow and defended by Tullow and its partner. during 2007 three new licences, CI-102, 16 Tullow Oil plc Annual Report and Accounts 2007

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    Ghana Tullow Oil plc Annual Report and Accounts 2007 17

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    Operations review: Africa case study Meeting the challenge of long-term growth Inside remote operating vehicle (ROV) control cabin on the Belford Dolphin offshore Ghana World-class discovery in Ghana Since the late 1990s, through our interest in the Espoir field, Tullow has had an interest in the West Africa Transform Margin, the geological trend that extends from Côte d’Ivoire to Ghana. To exploit our geological knowledge and expertise in the region, Tullow has expanded its interests there, acquiring interests in eight licences over the last three years. Through opportunistic transactions with both the government and partners in adjacent blocks, three licences were acquired in Ghana during 2006. The three blocks contained both marginal discoveries and acreage with significant exploration potential. The Mahogany prospect, a stratigraphic trap, had been identified on the existing 3D seismic data and was the first prospect to be drilled. Stratigraphic traps are subtle, have considerable upside potential and are not as intensely explored for as structural traps. They are not easy to identify and they require a determined effort to target. A strong track record from exploration in Europe, Africa and South Asia and our integrated approach give Tullow the confidence to tackle these significant exploration opportunities which are one of our core plays. By applying our expertise in stratigraphic traps, integrating both continental scale, regional geology and detailed local geological knowledge, the Mahogany and Hyedua prospects stood out as strong candidates for drilling and resulted in the Jubilee discovery in 2007. Appraisal and development work has already commenced on the field and a parallel appraisal programme is under way to determine its significant upside potential. The same skills applied during the discovery of Jubilee are now being applied to the rest of the West Africa Transform Margin where further upside potential exists. This work has already yielded a success with the Odum discovery, another stratigraphic trap in a new play fairway. Drilling on additional prospects such as Teak and Tweneboa is planned for the next 12 months. Our success in Ghana arose through the focused application of geological expertise, proactive business development and strong working relationships with government and partners. We expect this success to result in first production from the Jubilee field in 2010, a significant step for Tullow that will make a major contribution to the Ghanaian economy. Jubilee field recoverable reserves potential P90 – 170 million barrels P50 – 480 million barrels P10 – 1,380 million barrels Previous page: Rig worker attaching riser tensioner wires on drillship offshore Ghana This page: Belford Dolphin drillship on location at Mahogany-1 well offshore Ghana 18 Tullow Oil plc Annual Report and Accounts 2007

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    Tullow Oil plc Annual Report and Accounts 2007 19

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    Directors’ report: Business review Operations review: Africa continued Mauritania and Senegal Onal and Ebouri, expected to come on well. However, interpretation of wireline Tullow’s completion of the acquisition stream, offsetting natural decline on the logs and data from cores indicated of Hardman Resources in early 2007 existing fields and thereby sustaining that the reservoir would not flow at provided the Group with exposure to average production above 14,000 bopd. commercial rates and the well was eight licences including the producing plugged and abandoned. On the onshore Niungo field, a five well Chinguetti field. development drilling programme was The result of the Kudu-8 well was a Chinguetti field production declined completed in March 2007. The field disappointment for both Tullow and its gradually through the year to approximately averaged 5,400 bopd net to Tullow for the partners in the project. Although more 12,000 bopd gross by year-end. This was year and potential for further infill drilling technical work is required to determine well below expectations and, following a is currently being evaluated. the most appropriate future work review of reservoir performance, ultimate programme, we remain committed to The offshore Tchatamba field is recoverable reserves have been the Kudu project and optimistic as to significant for Tullow, yielding an average significantly downgraded. the potential for additional gas to be of 5,200 bopd net to the Group in 2007 and discovered in the region. The 2007 work programme included plans are in place to improve field uptime the drilling of the C-18 infill well at the and enhance production in 2008. Angola beginning of the year and interpretation In the Etame field area the Avouma Seismic reprocessing of data from Block of data from the high density 3D and 4D satellite field came on stream in 1/06, offshore Angola, is in progress using seismic surveys conducted in March. January 2007 and is currently producing the latest technology. This exercise will Utilising this data, work is now planned at 10,000 bopd. FPSO modifications and assist in the appraisal of the existing to commence in April 2008 to drill at least the addition of production from the Ebouri Pitangueira and Bananeira discoveries two new infill wells and to undertake satellite field should increase gross and will be instrumental in locating the remedial work which should increase oil production from the Etame area, from first two wells to be drilled in early 2009. production in existing wells. 22,000 to 25,000 bopd during 2008. During 2007 Tullow has been considering Cameroon In late 2006, Tullow acquired interests in development options for Banda and other In early 2007, following a comprehensive a package of licences comprising three discoveries. Banda is primarily a gas analysis of the remaining prospectivity producing fields and back-in rights to a discovery with a thin oil rim, and has been in the Ngosso concession offshore further nine licences. These assets used for disposal of produced gas from Cameroon, Tullow took a decision to performed well through 2007 with the Chinguetti by way of a gas injection well. dispose of this asset. A Sale and Purchase Tsiengui, Obangue and Oba fields now Tullow has been investigating several Agreement was signed with the Hungarian accounting for over 1,000 barrels of approaches for commercialising the gas, company MOL in November 2007. Tullow’s daily production in Gabon and are and plans to drill the first appraisal well expected to be producing approximately on the structure in April 2008. 2008 Outlook 2,000 bopd net to Tullow by the end of 2008. Tullow plans to invest over £325 million The 2007 exploration work programme Tullow’s only exploration well in Gabon in its African business during 2008. focused on the assessment of Tullow’s in 2007 was M’Pano-1 in the Nziembou Approximately 35% of this will be spent expanded portfolio covering both licence adjacent to the Niungo field. The on the exploration, appraisal and Cretaceous and Tertiary plays with the well found excellent quality reservoir but development programme in the Group’s aim of selecting prospects for a drilling was dry. An extension of the exploration Ghanaian acreage with the aim of campaign which commenced in February licence has been requested. approving a phased field development in 2008 with the Khop well in Block 6. This 2008. Activities in Uganda will focus on well is targeting Cretaceous reservoir Namibia accelerated exploration and appraisal intervals, and is potentially more material In 2007, Tullow farmed down its interest of the Butiaba area along with project than the shallower Miocene plays in the Kudu field from 90% to 70% and sanction and the commencement of EPS previously drilled in the region. drilled a key appraisal well in the east development work and the drilling of the State of the art seismic acquisition and of the Kudu area. high impact Kingfisher well. processing will allow Tullow to drill Agreement was reached in April to sell deeper wells targeting these plays. In Elsewhere in Africa, ongoing seismic a 20% interest in the Kudu gas field to 2008 this work includes a 3D seismic surveys and technical work are likely to Itochu Corporation. Under the agreement, survey straddling the border between lead to 2009 drilling in Tanzania, Itochu agreed to pay 40% of the cost of Block 1 in Mauritania and the St. Louis Madagascar, Mauritania, Angola and the Kudu-8 appraisal well and to make block in Senegal as well as the Gabon. 2008 production for Africa is further payments conditional on the reprocessing of seismic data acquired expected to average approximately ultimate volume of reserves developed. across Blocks 2 and 7. 42,000 boepd, before accounting for the In September, the Kudu-8 appraisal well M’Boundi field disposal, which is expected Gabon was drilled to test the Kudu East reservoir to be completed by mid-year 2008. Production from Tullow’s Gabon assets in within the Greater Kudu field area. The 2007 averaged 14,800 bopd net and is well encountered gas bearing sands that currently over 15,000 bopd. The outlook were thicker and cleaner than similar for 2008 is positive, with two new fields, sands intersected in the nearby Kudu-5 20 Tullow Oil plc Annual Report and Accounts 2007

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    Uganda Tullow Oil plc Annual Report and Accounts 2007 21

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    Operations review: Africa case study Meeting the challenge of successful partnership Hennie Steyn (centre) at meeting in Kampala office, Uganda Billion barrel potential in the Lake Albert Rift Basin Tullow gained an interest in the Lake Albert Rift Basin in 2004 through its acquisition of Energy Africa. Since 2006, the Group has drilled nine wells, has expanded its exposure to the region with the completion of the acquisition of Hardman Resources and is now in the midst of an extensive exploration campaign. Lake Albert is located in the north west of Uganda and the remoteness of the region provides many challenges. Operationally, access to the land-locked region is either by small aircraft or by road, and major supplies are trucked 1,300 km to the site from Kenya. Commercially, the distance of the acreage from developed world oil markets means that any future development will depend on the discovery of a sufficient reserve base to justify major pipeline and infrastructure investments. While these create risks, the potential reward is huge as the region has billion barrel potential. To understand the ultimate potential of the region, it is vital to have a basin-wide approach with cooperation between participants and the Government. This enables all parties to share knowledge and equipment, coordinate activities in a cost-effective manner and progress an optimal exploration, development and production plan for the region. Our work in Uganda has been assisted by our geological understanding of other rift basins such as those in India, Madagascar and the UK. Through this, as well as our support of a specialist study group in Calgary, we have identified rift basins as one of our core play types and are applying our knowledge in our day-to-day operations in and around Lake Albert. We have made remarkable progress to date. All wells drilled have found oil, and test results have been outstanding. Encouraged by this, we have embarked on a major campaign of drilling and seismic acquisition across all of our licences. Our ultimate objective is to achieve Uganda’s first oil production in 2009 through an early production system [EPS] and, ultimately, to establish a long-term business in East Africa. This will bring major changes to Lake Albert, and in cooperation with local elders and regional authorities, we are already supporting the communities where we work in the areas of education, health, sanitation and lake safety as part of our long-term commitment to the region. Capital investment in Uganda (£ million) 2008 114 2007 67 2006 23 2005 6 0 15 30 45 60 75 90 105 120 Actual Forecast Previous page: Operating rig tongs on Ngassa-1 well in Uganda This page: Dan Marlow in discussions with BGP representative during seismic operations in Block 2, Uganda 22 Tullow Oil plc Annual Report and Accounts 2007

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    Tullow Oil plc Annual Report and Accounts 2007 23

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    Directors’ report: Business review Operations review: Europe 2007 was a successful year for Tullow in Europe. Despite a volatile gas market and lower capital allocation, results were strong, with fields developed, a successful gas discovery and licences added in two new provinces. 2007 Statistics 28,500 boepd Working interest production United Kingdom 67 mmboe Total reserves and resources Netherlands £259 million Sales revenue £116 million Capital investment Portugal > For more information visit www.tullowoil.com Key producing assets Producing fields 2007 Working interest Country-area Activities (Tullow %) production (boepd) UK – CMS Area CMS fields 15,600 Boulton (9.5%) CMS III (14.1%) Kelvin (22.5%) Ketch (100%) Munro (15%) Murdoch (34%) Schooner (90.35%) UK – Thames-Hewett Area Thames-Hewett fields 12,900 Gawain (50%) Hewett (51.69%) Horne & Wren (50%) Orwell (100%) Thames (66.67%) Thurne (86.96%) Activities in other countries Netherlands , Portugal Key: Exploration = Development = Production = 24 Tullow Oil plc Annual Report and Accounts 2007

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    2007 Highlights During 2007, first gas was achieved • Production averaged 171 mmscfd, 4% below record 2006 levels; • Two new gas fields, Thurne and Kelvin, from the Tullow-operated Thurne field in August at a gross rate of 50 mmscfd. The development plan for the Wissey 100% success rate maintained in the discovery in block 53/4d was sanctioned brought on production; CMS area with the discovery in May 2007 and first gas is planned for of the Harrison gas field. • Wissey field development sanctioned August 2008 at a gross rate of 70 mmscfd. with first gas planned in 2008; The Horne & Wren fields continued to produce above expectation through 2007. • Continued exploration success in the CMS area with the Harrison gas To further extend the economic life of the Capital investment (£ million) discovery; Thames infrastructure, Tullow is currently 2007 116 evaluating the potential of infill wells on • Migration of activity into Dutch sector existing Thames area fields. 2006 164 with award of acreage covering the 2005 64 entire carboniferous play extension; Hewett Complex • Six blocks awarded in January 2007 Since taking over operatorship of the in the 24th Licensing Round; and Hewett Complex and Bacton Terminal in 2003, Tullow has successfully enhanced • Natural gas and carbon dioxide storage Working interest production (boepd) field production, extended the life of the under consideration for the Hewett field facilities and significantly reduced 2007 262.2 28,500 to greatly extend economic life. operating costs. 2006 29,530 Market environment In 2007, Tullow undertook a project to 2005 24,420 In Europe Tullow’s producing assets convert the Hewett complex to an are focused on gas in the UK Southern unmanned facility which will be controlled North Sea where the Group has remotely from the Bacton terminal. established a strong portfolio of production, Optimisation of staffing, logistics and development and exploration assets maintenance is expected to yield cost around two key infrastructure hubs, savings which will extend the economic Thames-Hewett and the CMS. Tullow has life of this asset regardless of any new added significant value to this business gas production. and continues to actively manage its An exploration well on the Doris prospect portfolio through targeted exploration spudded in January 2008 but was and development programmes and cost unsuccessful. Tullow also plans to drill reduction initiatives. a development well in mid-2008 in the In 2007 Tullow averaged 171 mmscfd Hewett main field. In the event of success, from the UK portfolio, similar to 2006. first gas could be achieved in late 2008. During the first half of the year a In addition to activities to extend comparatively mild winter combined production life, Tullow is also investigating with perceived oversupply in the UK the potential longer term use of Hewett gas market led to a period of extreme reservoirs and infrastructure for both uncertainty and weak pricing. As the year natural gas and carbon dioxide storage. progressed and longer-term pricing As part of these projects, Tullow is trends became more favourable, Tullow planning to enter the Government made funds available to invest in selected sponsored Carbon Capture and Storage development and high-graded exploration Competition this year as a partner in projects with a focus on value rather than two separate consortia. One will be growth in production. Tullow expects this led by E.ON UK plc and the other by trend to continue in 2008. RWE npower plc. Under the partnership’s proposal, Hewett would act as the major Thames-Hewett area carbon sink for disposal and long-term Over the last seven years, Tullow has storage of carbon dioxide flue gases steadily grown its asset base in the produced from coal-fired power stations Thames-Hewett area through acquisition, to be built in the region in the next five to development of marginal fields and third 10 years. Both natural gas and carbon party tariff business. The Group has dioxide storage are seen as viable schemes developed a reputation as an efficient, for extended use of the infrastructure low cost operator with a track record of after gas production ceases. extending the life of mature fields. In 2007 Tullow’s net production from these assets averaged 77 mmscfd. Tullow Oil plc Annual Report and Accounts 2007 25

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    Directors’ report: Business review Operations review: Europe continued CMS Area In addition, Tullow acquired operated Production from the CMS Area averaged interests in Netherlands Blocks L12a, 94 mmscfd for the year, slightly less L12b and L15b, where interesting than 2006, reflecting natural decline. prospectivity has been recognised However, first gas was produced from the in the Permian reservoir section. Kelvin field in November, boosting overall CMS production which by year-end was Activity in 2008 in relation to this over 120 mmscfd net to Tullow. new acreage will largely be seismic reprocessing and interpretation in The strong performance from the preparation for an integrated Netherlands Kelvin field has meant a key focus for drilling campaign in 2009. 2008 will be the sanction of the adjacent K4 and nearby Harrison discoveries for Central North Sea simultaneous development via the Tullow participated in two high risk/high existing Kelvin and CMS infrastructure. impact exploration wells in the Central The redevelopment of the Schooner and North Sea in 2007. Both wells, on the Ketch fields continued in 2007 with first Peveril and Acer prospects, were dry gas from the Ketch-9 well in July at an and were plugged and abandoned. initial gross rate of 22 mmscfd. The well also appraised the southwest flank of the 24th Licensing round field, proving up an area of undepleted Tullow was awarded six new blocks in gas reserves that provide an attractive both the Hewett and CMS areas in the potential development opportunity. 24th Licensing Round, five of these as operator. All blocks lie in our core Other opportunities in the area include Southern North Sea area. infill drilling on the existing fields and plans are well advanced for a further well Portugal on the Boulton field in the second quarter In February 2007, Tullow was awarded of 2008. Further infill wells in the region three blocks in the undrilled Alentejo are also being considered. Basin off the southwest coast of Portugal. Tariff revenue from the CMS system This frontier exploration acreage offers provides a steady cashflow for the Group. a range of play types consistent with New third party business in the CMS Tullow’s core exploration expertise. system came on stream in 2007 with A detailed seismic infill programme the completion of the Cavendish project. across the acreage is planned for 2008, Several new third party developments in and a 3,000 km 2D seismic survey is the area are also close to sanction and scheduled to commence during the may provide a source of future revenue. second quarter of 2008. The Carboniferous is a core UK play for Tullow, as evidenced by the eight consecutive discoveries in the CMS area. Positive outlook The Group has an active programme for its European assets in 2008 with two Seven Tullow has expanded its interests Capitalising on our success in this play, exploration/appraisal wells, completion in the Carboniferous play by gaining we seized the opportunity to extend our of development of the Wissey field, and up seven blocks in the Dutch sector. activities into the Dutch sector. to three infill development wells planned Netherlands on its UK Southern North Sea acreage. In the Netherlands, Carboniferous There will be a significant programme Reserves and resources (mmboe) prospectivity remains highly of seismic acquisition and processing under-explored and, by comparison to through the year to evaluate the potential 2007 67 the adjacent UK acreage, the prospects of the Dutch and Portuguese acreage. 2006 80 are materially bigger. Tullow made its first entry into the province in 2007 with The Group has also entered Hewett in 2005 91 the award of a 10% non-operated interest the Government’s Carbon Capture and in Block E13 and a 100% interest in the Storage competition in 2008 with the aim Epidote discovery. of significantly extending the life of the infrastructure once production ceases. Sales revenue (£ million) In July 2007, Tullow also made applications for five new blocks in the 2007 259 Epidote area. Three of these blocks 2006 have been awarded to Tullow, and we 307 anticipate acquiring an operated position 2005 180 in the additional two blocks via post-award licence assignments. 26 Tullow Oil plc Annual Report and Accounts 2007

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    United Kingdom Tullow Oil plc Annual Report and Accounts 2007 27

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    Operations review: Europe case study Meeting the challenge of a mature basin Dave Malony and Charlie Taylor discussing cementing operations on the Wissey well offshore UK Extending the life of Southern North Sea fields Since entering the Southern North Sea in 2000 and assuming operatorship of the Hewett/Bacton complex three years later, Tullow has been actively pursuing ways in which to prolong the life of these and other assets in our portfolio. Our strategy is threefold: Continually improve operational efficiency 2007 saw a move towards investment in remote operations of the Hewett platforms. Through de-manning of the offshore installations, centralised control systems and optimised logistics we will not only realise significant cost savings in future years but also reduce the exposure of our personnel working offshore. Targeted incremental investment Our technical teams have developed a deep knowledge of the subsurface environment. With the infrastructure approaching the end of its productive life, Tullow has identified a number of infill and near field investment opportunities. The resulting drilling and development campaign commenced in the third quarter of 2007 and is expected to deliver significant value both in terms of new gas production and an extension to the economic life of the area. Explore future opportunities ‘Beyond Gas’ As the focus sharpens on ways of reducing and mitigating the impact of human activity on the climate, Tullow has been working with government, industry and NGOs to assess opportunities to contribute to the reduction of Carbon Dioxide emissions. The re-use of the Hewett main reservoir as a permanent, safe store for carbon dioxide is being studied in detail and could provide a significant contribution to the UK’s climate change targets. The Hewett/Bacton infrastructure is strategically well placed, consequently we have also focused activity on developing commercial gas storage opportunities utilising these assets. Thames-Hewett Area gross incremental production (mmscfd) 2007 44 90 2006 59 76 2005 69 37 2004 86 2003 58 0 20 40 60 80 100 120 140 Portfolio acquired in 2001 Tullow developments Previous page: Rig floor during Wissey well offshore UK This page: Hewett Field Satellite Platform in block 52/5a offshore UK 28 Tullow Oil plc Annual Report and Accounts 2007

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    Directors’ report: Business review Operations review: South Asia During 2007 Tullow’s South Asia business reported good production growth, delivered two development projects and established a high impact exploration campaign in India. 2007 Statistics 4,300 boepd Working interest production 20 mmboe Total reserves and resources £8 million Sales revenue Pakistan Bangladesh £10 million Capital investment India > For more information visit www.tullowoil.com Key producing assets Producting fields 2007 Working interest Country Activities (Tullow %) production (boepd) Bangladesh Bangora – Lalmai (30%) 3,260 Pakistan Chachar 1 (75%) 750 Sara/Suri (38.18%) 290 Notes: 1Production commenced in August 2007. Activities in other countries India Reserves and resources (mmboe) Sales revenue (£ million) 2007 20 2007 8 2006 21 2006 4 2005 19 2005 1 Key: Exploration = Development = Production = 30 Tullow Oil plc Annual Report and Accounts 2007

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    2007 Highlights Pakistan • Net production averaged 4,300 boepd, 143% above 2006 levels; • Gross production from Bangora The Chachar field came on stream in August 2007 with gas being processed on site and delivered to the Guddu power 150 mmboe Four-well exploration campaign in station. Production commenced at a rate in Bangladesh stable at 70 mmscfd, India to commence in 2008 targeting of 23 mmscfd from three wells, two of upgrade to 120 mmscfd ongoing; a gross upside of 150 mmboe. which have dual completions. Further • First gas from the Chachar field in wells and workovers are planned for 2008 Pakistan achieved in August 2007; and to increase production from the field. • Delineation of CB-ON/1 exploration Compression facilities were successfully Capital investment (£ million) drilling prospects in India in advance installed at Sara and Suri in May 2007, 2007 10 of an active drilling campaign in 2008. increasing production to approximately 6 mmscfd and extending the productive 2006 26 Market environment life of the field. 2005 5 Tullow has established a strong position On the Kohat exploration block, we in South Asia and is involved in exploration, have completed seismic processing and development and production activities in interpretation and selected two drilling Bangladesh, Pakistan and India. prospects. The drill site for the first well Working interest production (boepd) The Asian economy has witnessed has been constructed but operations have 2007 4,300 unprecedented economic growth over been delayed as a consequence of the the past few years, leading to steadily security situation in Pakistan. The 2006 1,770 increasing demand for energy. We view Government of Pakistan has granted 2005 410 South Asia as an area with significant a one-year extension to the licence and further growth potential, and are we now plan to commence drilling in currently focusing attention on new the latter part of 2008. business opportunities in the region. Exploration activities elsewhere in 2008 Outlook Pakistan have also been affected by 2008 will be a year of active portfolio Bangladesh access problems and the Government management, production growth and 2007 marked a step change in Tullow’s has granted an extension on the Bannu exciting exploration activity in South Asia. operations in Block 9 in Bangladesh. West block. However, progress was A high impact multi-well exploration The Bangora-5 well, drilled in February, made on the Kalchas exploration block drilling programme is planned in India tested at a gross maximum rate of and planning is under way for seismic and extensive exploration activities are 73 mmscfd. This well was tied back in operations in the area during 2008. planned for Pakistan and Bangladesh. April 2007 and thereafter the field has Production is expected to continue been producing at the 70 mmscfd Tullow is currently reviewing its to grow, averaging approximately capacity of the processing facility. long-term strategy in respect of its Pakistan 5,600 boepd in 2008. business which may potentially result in a The second phase of development is disposal of this asset during 2008. currently under way, involving a further upgrade of the processing capacity to India 120 mmscfd. This should allow gross field The main focus for Tullow in India during production to be increased to in excess 2007 was on CB-ON/1. Following the of 100 mmscfd by the end of 2008 and acquisition and processing of data from provide capacity for further infill drilling. the initial 2D seismic programme an Elsewhere in Bangladesh, a three-year additional 415 km of 2D data was acquired extension has been secured for offshore and processed towards the end of 2007. exploration Blocks 17&18, and the This focused on firming up a number of Government of Bangladesh approved leads in the northern part of the block. the assignment of a 60% interest to Total. A drilling programme has been agreed The exploration programme resumed in for four wells and three contingent wells the last quarter of 2007 with an extensive to test a number of different plays on the bathymetry survey in the Bay of Bengal. block. A drilling rig has been secured A focused 3D seismic survey will follow and the first well of the campaign is now in the first quarter of 2008. planned for the second quarter of 2008. Tullow Oil plc Annual Report and Accounts 2007 31

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    Directors’ report: Business review Operations review: South America Tullow made steady progress in South America in 2007 with the integration of the Hardman portfolio, the pursuit of new business opportunities and preparation for drilling the high impact Matamata prospect in 2008. 2007 Statistics Trinidad & Tobago 5 Licences Suriname French Guiana 3 Successful wells 5 Wells drilled £5 million Capital investment Falkland Islands* > For more information visit www.tullowoil.com Activities by country Country Activities Falkland Islands* French Guiana Suriname Trinidad and Tobago Note: *Tullow withdrew from the Falkland Islands in August 2007. Key: Exploration = Development = Production = 32 Tullow Oil plc Annual Report and Accounts 2007

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    2007 Highlights Suriname • Successful bidder in two key Trinidad and Tobago blocks; • Execution of Production Sharing PSCs for the onshore Uitkijk and Coronie blocks were formally executed in February 2007. The blocks have One billion The high impact Matamata well a total area of 3,351 sq km and lie Contracts (PSCs) for two onshore in French Guiana is planned for adjacent to the country’s main Suriname blocks; 2008 and has a one billion barrel producing oil field, Tambaredjo. upside potential. • Five exploration wells drilled in Exploration drilling in the Uitkijk Block Suriname, three encountering oil; commenced in July, and a five well drilling • CSEM survey over the large campaign was completed during July New ventures Matamata prospect; and and August. Oil was encountered in three The Group has assessed a number of new of the wells. The commercial viability opportunities over the course of the year. • Divestment of the non-core and the forward programme for these In doing so, Tullow has pre-qualified as Falkland Islands assets. prospects are currently being evaluated. a deep-water operator for Brazil’s Ninth Market environment Exploration Round and is also currently Trinidad and Tobago evaluating data for possible participation Tullow gained its interests in French In 2007, Tullow was the successful bidder in the forthcoming Barbados bid round. Guiana, Suriname, Trinidad and Tobago for two blocks in the Sixth Trinidad and the Falkland Islands through the Exploration Licensing Round and was 2008 Outlook Hardman Resources acquisition. The awarded offshore Block 2(ab) and the 2008 will be an exciting year for the region is a prolific but underexplored oil onshore Guayaguayare Block. Commercial Group’s South American business as it and gas province with a diverse set of negotiations for PSCs for both blocks are looks to expand through new ventures, opportunities from near-infrastructure in progress. It is anticipated that portfolio management, licence rounds plays in Suriname to true wildcat high negotiations will complete in the first half and exploration. The key areas of interest impact prospects in French Guiana. The of 2008 and that initial seismic acquisition this year will be the drilling of the high region is recognised as having great will commence at the beginning of 2009. impact Matamata prospect, the potential and Tullow is now applying its skills and expertise, developed through Offshore Block 2(ab), is approximately completion of the Trinidad PSC many years of exploration in West Africa, to 1,600 sq km in area and lies in shallow negotiations and potential entry into new these very similar plays across the Atlantic. water off the east coast of Trinidad and is South American oil and gas provinces. on trend with a number of producing oil French Guiana and gas fields, notably BHP Billiton’s Tullow holds a 77.5% interest in the Angostura development. Tullow, as extensive (35,200 sq km) Guyane Maritime operator, jointly bid with Centrica to each licence which covers all of the prospective gain a 32.5% interest in the block. The acreage offshore French Guiana. The remaining working interest will be held licence is in a proven hydrocarbon basin by the state oil company, Petrotrin. but is underexplored with only two wells The 1,192 sq km Guayaguayare Block, drilled to date, the most recent in 1978. contains both onshore and offshore Since 2001, 2D and 3D seismic data have areas and lies in the southeast of been acquired along with the reprocessing Trinidad adjacent to a number of of existing 2D seismic. This new data has producing oil fields. Tullow bid alone highlighted the presence of a very large on this block and will likely consider structural prospect, Matamata, along farming out a portion of the interest with numerous additional structural prior to any major investment. and stratigraphic leads. Falkland Islands The Matamata prospect is an At the beginning of 2007, Tullow held Albian prospect, in a water depth of a 22.5% interest in seven offshore 1,200 metres, with upside potential of production licences covering up to a billion barrels. At the end of approximately 14,500 sq km to the south 2007, Gaz de France executed a Control and east of the Falkland Islands. The Source Electromagnetic (CSEM) survey outstanding Phase I work commitments over the structure and Tullow, as (2D seismic acquisition and a sea-bed Operator, is now advancing plans for logging survey) were completed during first exploration drilling in the latter part the first part of the year, but in light of of 2008. Tullow is also looking to reduce the non-core nature of these assets, its capital exposure on this forthcoming and potential major forward drilling deep-water well and will most likely farm expenditures, Tullow transferred its down its interest in this licence before the interests in all seven licences to the well is drilled. operator, Falklands Oil and Gas Ltd. Tullow Oil plc Annual Report and Accounts 2007 33

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    Directors’ report: Business review Corporate and social responsibility At Tullow, Corporate and Social Responsibility (CSR) is a core value. As part of our culture we support the communities where we work and protect people and the environment. A clear link We prioritise our support for carefully Growing support Good CSR helps us develop a political selected projects, which can be as basic In 2007, we were involved in 120 projects and community profile that supports as the provision of clean water through across 19 countries and our discretionary our business and strategic objectives. to programmes aimed at socio-economic spend was US$0.9 million (£0.5 million) Our focus is on delivering the most change. Where we have long-term on social and community development appropriate CSR activities to ensure we operations we have a greater opportunity projects, compared to US$0.5 million achieve the best outcome. Our CSR and to engage in longer-term CSR activities (£0.3 million) in 2006. Environment, Health and Safety (EHS) such as assisting schools and building Some of the many new projects we were policies, which are reviewed annually by birthing centres. However, in the early involved in included drilling water wells the Board and signed off by Aidan Heavey, exploration phase we typically focus on in Uganda and Ghana, donating funds to Tullow’s Chief Executive, describe our short-term, stand-alone projects such emergency relief efforts for children in core values and formalise our long as the distribution of mosquito nets. Sudan and flood relief in Bangladesh and standing commitment to these areas. We operate in numerous countries where the construction of a shelter home for CSR in Tullow is embedded in our core EHS standards are either not yet in abused children in Cape Town. We also business processes and aligned to our place or not enforced. It is under these retained our commitment to numerous ‘Working with Communities’ initiative, circumstances that we must meet the long-term projects including ECOFAC which encompasses all our community gorilla conservation in Central Africa, challenge of developing programmes based activities. Noluthandu School for the Deaf which provide social and community in Cape Town, assistance to local schools Tullow’s CSR Committee manages support, but which also drive in Bangladesh and support for the our growing support for community improvements in EHS awareness and communities local to our UK operations. sponsorship programmes and provides help to create a culture which minimises guidance to those responsible for CSR. risk to people. To assist in fully utilising our 2008 discretionary budget of US$2 million Key EHS metrics (£1 million) for social and community 2007 2006 2005 development, we have made a number of key changes: Groupwide Lost Time Incident (LTI) 10 5 3 • We refined our internal communication to ensure regular monitoring and Lost Time Incident Frequency Rate (LTIFR) 1.95 0.81 0.82 management of the budget spend; High Potential Incident (HIPO) 29 3 2 • We improved communication and Total Recordable Incidents (TRI) 65 74 11 clarity around the allocation of funding Total Recordable Incident Frequency Rate (TRIFR) 12.7 12.1 3 with a formal arrangement to assess Hours worked (millions) 5.1 6.1 3.7 and approve projects; and Oil and chemical spills 1 2 2 • We recruited a CSR Advisor to facilitate the approvals process, report monthly UK only to the CSR committee and assist budget EUETS C02 emissions (tonnes) 190,508 215,407 258,407 holders with their project selection UK Produced water quantity (m3) 6,920.1 9,725.4 7,871.9 and analysis. UK Total oil in produced water (tonnes) 0.2125 0.1624 – Water usage (m ) 3 31,899 18,678 29,200 2007 new Group figures Production water usage (m3) 39,496 Full production emissions (tonnes CO2) 204,961 All drilling emissions (tonnes CO2) 23,597 All well test emissions (tonnes CO2) 11,667 34 Tullow Oil plc Annual Report and Accounts 2007

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    South Asia Tullow Oil plc Annual Report and Accounts 2007 35

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    Corporate and social responsibility case study Meeting the challenge of supporting education Gordon Phillips at the Gopalnagar High School, Bangladesh Delivering longer term socio-economic benefits Across the Group in 2007 we spent over US$239,000 (£120,000) on educational initiatives. In developing countries, education ensures longer term socio-economic benefits for the population, thereby building stronger and more self sustaining communities. In many cases the most common need is for basic facilities ranging from individual desks and learning equipment through to construction of the school itself. Improved education provides additional opportunities to the younger generation and this in turn will enable Tullow and others to recruit locally trained personnel, thereby building further skills and delivering additional benefits to the community. In Uganda, Tullow-constructed facilities support in excess of 800 students. In Pakistan, we supported over 1,600 students with books, stationery and school bags. In Bangladesh, our efforts helped over 5,000 children in 10 schools. We provided education and sports equipment, school uniforms, book bags and furnishings according to their specific needs. In developed countries, Tullow focuses on advancing student knowledge and understanding of the industry and for the last two years we have engaged with Year 7 (aged 11 to 12 years old) of Norbury School in London, addressing a wide range of industry related constructive and challenging questions. 2007 by category 2007 by length of commitment • Working with • On-going 66% communities 50% • One-off 34% • Other 29% • Education 14% • Conservation 7% Previous page: Visit to Gopalnagar East primary school, Bangladesh This page: Visit by Tullow CSR team to Nabipur primary school, Bangladesh 36 Tullow Oil plc Annual Report and Accounts 2007

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    Directors’ report: Business review Corporate and social responsibility continued A challenging year for health and safety Overall the 2007 outcome is in contrast appropriate standards and controls where It was a challenging year for health and to the steady improvement in safety local legislation is less developed. Key to safety at some of our operations and this performance we have had in recent years setting these standards is the preparation impacted on overall results for key health and is unacceptable. We have already of Environmental and Social Impact and safety performance indicators. We taken significant steps to meet the Assessments (ESIA) and linking these to are disappointed by the increase in LTIs challenge of improving our results and management programmes that address across our operations with 10 LTIs in through positive leadership from Senior the environmental risk of our planned 2007, raising our LTIFR to 1.95 per million Management plan to return to top quartile activities. Our focus on ESIAs has been industry performance in 2008. extensive and in Uganda, for example, we hours worked. There was also a have carried out numerous assessments significant increase in the number of A strong environmental performance across the Kaiso-Tonya valley including HIPOs reported which cannot be wholly Our environmental performance over the reworking existing assessments where explained by a revision of accident and year has been good with no significant we felt key environmental issues had not incident reporting. Paying specific been fully addressed. incidents and only a single spill of attention to HIPOs is a way of identifying 10 barrels in Uganda. We also saw a 12% key learnings and creates the opportunity Better reporting reduction in CO2 emissions covered by the to implement improvements before an EU Emissions Trading Scheme (EUETS) Previously, reported data has been mainly actual incident occurs. reinforcing the benefits of the Bacton for UK operated assets and while these plant rationalisation programme for are still the most significant contributors In 2007, we had two examples of excellent which we received the Business in the we recognised the need to reflect our health and safety performance within the Community ‘Big Tick’ award in 2007. widening operational base and to expand Group. Our Bangora facility in Bangladesh the reach of our environmental metrics. completed its first year of production with Over the course of 2007 the A mid-year review of environmental data zero LTIs and Lüderitz, our temporary environmental performance of our was undertaken in 2007, to set logistics base in Namibia, operated operated activities complied with an appropriate corporate reporting through the full well programme for over increasingly diverse range of regulatory requirements. Group production, drilling 200 days without an LTI. regimes, and we continued to set our own and well test data have been collated for 1 2 Tullow people Last year, we spoke about being a great place to work and an employer of choice in the industry. In 2007, we decided to test this by entering our London Head Office in the annual ‘Best Companies to Work For’ competition for the first time. The Best Companies organisation was set up six years ago to identify the drivers of sustainable business performance. Their research shows that the key is ‘workplace engagement’ and they set about developing an academically rigorous methodology to measure the levels of workplace engagement in companies. The Best Companies Accreditation Scheme recognises those organisations that have achieved high levels in key areas. The accreditation is a year-round reminder 3 of an organisation’s performance according to eight key factors. These factors are significant as they are defined through survey results, and therefore by employees themselves, as critical factors in workplace engagement. 1. Linda Biribonwa, Environmental Adviser in Uganda 2. Leigh Reeder, Well Services Supervisor in the UK 3. Declan Byrne, John Doherty, Joe Mongan, Geophysical Technology Group in the Dublin office 38 Tullow Oil plc Annual Report and Accounts 2007

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    the first time, offering a greater The 2007 data in the EHS key metrics understanding of our contribution table on page 34 are taken from the data Find out more about to emissions of greenhouse gases. set that will be assured in the 2007 CSR Tullow Oil and CSR This is the first step in benchmarking Report, which will be published in Our 2007 CSR Report will be available our performance. May this year. in May and for further information on Throughout 2008 we will continue Furthermore, we plan to widen assurance our CSR activities you can also visit to expand the scope of our coverage over the next two years. > www.tullowoil.com/tlw/cr data collation to develop an even more comprehensive view of the Group’s Outlook for 2008 environmental performance. Our focus for the immediate future is Tullow Oil plc Corporate and social responsibility report 2007 on restoring a strong health and safety External assurance performance, building fully representative How are we Over the last two years we have steadily environmental data and increasing our meeting the challenge? improved the overall level, quality and social and community spending to detail of the data we report in our CSR targeted levels. Our goals for 2008 are Report. One common issue in feedback challenging and we look forward to from stakeholders is external assurance achieving them. of the CSR Report, to provide greater confidence in the data being reported and verification of the robustness of Tullow’s internal data collation and calculation processes. In response we have commenced a three-year programme with Deloitte & Touche LLP to give assurance on Tullow’s EHS data at Group level for 2007. The factors are: • Leadership – how employees feel about the senior Tullow achieved 3-Star status on the first attempt, managers’ and the company’s values; which is the highest possible award status. Only 15% of companies who entered this year achieved this, • My manager – how employees feel about and so we are naturally proud of this result. communicate with their direct manager; However, while we do appreciate that this is a just • Personal growth – what employees feel about training snapshot in time we have set the standard now and and their future prospects; must work hard to ensure that we maintain this • Wellbeing – how employees feel about pressure through feedback and engagement across Tullow. at work and work life balance; This is one of the challenges we face as we grow into • My team – feelings towards their immediate a larger, more diverse Group operating major colleagues and how well they work together; projects in many different countries. • Giving something back – the extent to which In response, we will continue to recruit the best employees feel their organisation has a positive talent into the organisation and keep people at the impact on society; top of the agenda to ensure we remain a great • My company – the level of engagement employees place to work. have for their job and the organisation; and • Fair Deal – how happy employees are with their pay and benefits. Tullow Oil plc Annual Report and Accounts 2007 39

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    Directors’ report: Business review Finance review During 2007, Tullow focused on allocating resources to assets which will drive future growth. Our financial strategy supports our long-term business objectives. During 2007, Tullow’s business reached a effectively allocate capital across the new level of scale in terms of production, remainder of our business. operating cashflow, market value and future growth potential. Total shareholder Strong production and pricing return in 2007 was 66% (2006: 49%), Working interest production averaged placing Tullow in the top quartile of its peer 73,100 boepd, 13% ahead of 2006. group. Over the three-year period from Sales volumes averaged 62,600 boepd, 2005 to 2007, Tullow’s total shareholder representing an increase of 9%. As a return has been in excess of 440%. result of increased sales volumes and higher oil price, offset by the weaker UK Overall, results for the year were solid. gas price, 2007 revenue increased by 10% However, a 19% decline in realised gas to £639.2 million (2006: £578.8 million). price, which represents 40% of revenue, The bulk of production growth came impacted our performance and this, from our African oil portfolio, which combined with increased depreciation represented 55% of total output and and interest charges and exploration 58% of Group revenue. This was driven write-offs, meant that basic earnings per by an exceptional performance from share declined 71% to 7.1 pence per share. the Okume development and the Ceiba Our financial strategy is to maintain field in Equatorial Guinea and a first financial flexibility to support the Group’s year of production for Tullow from the significant appraisal and development Chinguetti field following the completion programmes in Ghana and Uganda and of the Hardman acquisition. Key financial metrics 2007 2006 Change Production (boepd, working interest basis) 73,100 64,720 +13% Sales volume (boepd) 62,600 57,300 +9% Realised oil price per bbl (US$) 62.7 52.2 +20% Realised gas price (pence per therm) 37.3 46.2 -19% Cash operating costs per boe (£)1 5.05 4.74 +7% Operating cashflow before working capital per boe (£) 17.77 18.76 -5% Net debt (£m) 479.5 122.1 +293% Interest cover (times) 10.4 24.0 -13.6 2 Gearing (%) 67 16 +51% TSR (%) 66 49 +17% 1. Cash operating costs are cost of sales excluding depletion, depreciation and amortisation and under/over lift movements. 2. Gearing is net debt divided by net assets. 40 Tullow Oil plc Annual Report and Accounts 2007

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    Gas production from South Asia also rose (2006: £16.6 million) from its UK Total dividend distribution significantly, due to new production from infrastructure interests. the Chachar field in Pakistan in August and continuing strong performance from the Bangora field in Bangladesh. Gas Disciplined cost management offset by higher depreciation £97million Since 2003 Tullow has returned production from Europe of 171 mmscfd Underlying cash operating costs, which (28,500 boepd) showed a modest decline exclude depletion and amortisation and £97 million to shareholders in the from 2006 levels. movements on under/overlift, amounted form of dividends. Over the same to £134.7 million (£5.05/boe). These costs period the Group has shown a total Oil prices continued to be strong throughout shareholder return of over 700%. were 7% above 2006 levels, principally the year and Tullow’s realised oil price due to upward cost pressures in oil and after hedging was US$62.7/bbl gas services and in our UK business. (2006: US$52.2/bbl), an increase of 20%. Tullow’s oil production sold at an average Depreciation, depletion and amortisation discount of 3% to Brent during the year before impairment charges for the year made during the year and also the need (2006: 5% discount). amounted to £203.0 million (£7.61/boe). to establish an appropriate resource pool This represents a 19% increase over to fulfil our long-term growth objectives. Whilst oil pricing was positive, UK As a result, underlying general and 2006, principally as a result of a higher gas price realisations fell by 19% to administrative costs have increased by depreciation charge on UK assets, and 37.3p/therm (2006: 46.2p/therm). 43% to £26.2 million (2006: £18.3 million). the addition to Tullow’s portfolio in Following a period of exceptional pricing, The total general and administrative costs early 2007 of the Chinguetti field where particularly in early 2006, new sources charge of £31.6 million also includes a performance was significantly below of supply and a mild winter combined to charge of £5.4 million in respect of the expectations, leading to a 25% increase significantly reduce gas price in the first Group’s share-based incentive schemes in depreciation rates above initial half of 2007 and despite strengthening (2006: £4.2 million). estimates. In addition we have recognised prices in the second half, the average an impairment charge of £13.8 million UK day ahead gas spot price for 2007 Exploration write-off (£0.48/boe) on Chinguetti, which is due was 29.7p/therm. Tullow’s UK gas Exploration costs written off were to the ultimate recoverable commercial hedge programme proved highly effective £64.2 million (2006: £32.5 million), in reserves being downgraded by 50%. during 2007, contributing approximately accordance with the Group’s ‘successful 7.6p/therm to the Group’s realised price, Tullow continued to invest in people efforts’ accounting policy, which requires amounting to an additional £39 million during 2007 increasing average staff that all costs associated with unsuccessful to Group revenue. The Group also numbers by 33% to 277 people, due to the exploration are written off to the Income recorded tariff income of £17.5 million significant increase in investments being Statement. Of this write-off £51.1 million Operating cashflow and capital investment (£million) 500 Capital investment Exploration £474 million +6% Operating cashflow Production and development Tullow demonstrated strong cashflow growth in 2007 which 400 Operating cashflow enabled us to continue our aggressive growth in capital investment. During 2007, approximately 48% of our investment was allocated to production and development 300 assets, with the balance invested in our exploration portfolio. The success of our 2007 exploration programme has led to major appraisal and development programmes in 2008. Our 200 assets in Ghana and Uganda will together account for over 50% of expenditure during the year. 100 0 2005 2006 2007 Tullow Oil plc Annual Report and Accounts 2007 41

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    Directors’ report: Business review Finance review continued is principally associated with unsuccessful The Group’s hedge position as at 5 March 2008 can be summarised as follows: exploration activities in the UK, Gabon, Ghana, Namibia and new ventures/pre- Hedge position licence costs and a recent decision 2008 2009 2010 to relinquish Blocks 107 and 108 in Oil Côte d’Ivoire. The remaining £13.1 million Volume – bopd 19,293 11,000 2,000 is in relation to a downgrade of Chinguetti contingent resources as Current Price Hedge - US$/bbl 70.9 63.4 89.4 at 31 December 2007. In addition to the Gas impairment charge set out above, this Volume – mmscfd 81.0 38.7 12.3 brings the total charge associated with Current Price Hedge - p/therm 50.1 50.4 54.1 Chinguetti to £26.9 million. Operating profit Operating profit before exploration Gearing, financing costs (2006: 3.5 pence per share). This brings activities amounted to £253.3 million and interest cover the total payout in respect of 2007 to (2006: £295.1 million), a decrease of The net interest charge for the year was 6.0 pence per share (2006: 5.5 pence 14%, due to the increased depreciation £45.6 million (2006: £15.0 million) and per share). The dividend will be paid on charges, partly offset by production reflects the significantly increased levels 21 May 2008 to shareholders on the growth and strong oil prices. of net debt during 2007 following the register on 18 April 2008. completion of the Hardman Resources Derivative instruments acquisition in January. In addition the Strong cashflow and capital investment Tullow continues to undertake hedging amortisation of finance costs associated Increased production and the strong activities as part of the ongoing with the US$1 billion Bridge Facility oil price environment led to record management of its business risk and to negotiated to effect this transaction and operating cashflow before working capital protect the availability of cashflow for a reduced level of interest capitalisation movements of £473.8 million (2006: reinvestment in capital programmes in relation to development assets has £446.7 million), 6% ahead of 2006. which are driving business growth. also contributed to this increase. This cashflow facilitated investment of Hedges undertaken in respect of 2008 approximately £370 million in exploration combined with portfolio management At 31 December 2007, Tullow had net debt of £479.5 million (2006: £122.1 million), and development activities, payment of provide downside protection on revenue an increased final 2006 dividend and of over £300 million, representing which was approximately one times the Group’s operating cashflow before servicing of the increased debt facilities. approximately 70% of planned 2008 working capital movements for the year. Tullow currently plans a total 2008 capital capital investment. Interest cover has reduced to 10.4 times investment of approximately £440 million, At 31 December 2007, the Group’s (2006: 24.0 times) however both overall with Tullow’s Africa activities accounting derivative instruments had a debt levels and interest costs remain very for approximately 75% of this anticipated negative mark to market value of comfortable in the context of the Group’s investment. In addition to our 2008 £158.0 million (2006: £21.0 million). overall production profile, recent portfolio commitments we are planning for the Of this, £136.9 million relates to a management transactions and future future, as evidenced by the US$700 negative mark-to-market on oil growth opportunities. million (£350 million) contract on behalf contracts, the majority relating to of the Jubilee field partners for the hedges acquired as part of the Taxation Eirik Raude rig as part of the Ghana acquisition of Energy Africa in 2004 The tax charge of £61.6 million development programme, which is and £21.1 million relating to a negative (2006: £105.9 million) relates to the Group’s mark-to-market on gas contracts. North Sea, Gabonese, Equatorial Guinea targeting first oil in 2010. and Mauritanian activities and represents While all of the Group’s commodity Effective portfolio management 54% of the Group’s profit before tax (2006: derivative instruments currently The exploration and appraisal investments 40%). After adjusting for exploration costs qualify for hedge accounting, a charge of planned for 2008 will drive future growth and movements associated with overlift £29.3 million (2006: credit of £15.7 million) and as we seek to prioritise our allocation balances, the Group’s underlying effective has been recognised in the income of capital, we have identified a number tax rate is 34% (2006: 35%). statement for 2007. Of this charge of interests which are not central £23.4 million relates to oil and gas to our longer-term strategy. As at Dividend hedges while the balance of the charge 31 December 2007, our interest of 40% in The Board has a high level of confidence comprises £5.9 million relating to the in the Group’s business and future profit the Ngosso permit in Cameroon and our Group’s foreign exchange derivatives potential, as well as a strategy of interest of 11% in the M’Boundi field in associated with the acquisition of maintaining capital discipline through Congo (Brazzaville) have been classified Hardman Resources. periods of strong oil and gas pricing. as ‘assets held for sale’ in accordance Consequently the Board has proposed with IFRS 5 – Non-Current Assets Held for a final dividend of 4.0 pence per share Sale and Discontinued Operations. Both 42 Tullow Oil plc Annual Report and Accounts 2007

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    transactions are expected to complete acquired assets and liabilities was activity in Ghana and the ongoing in 2008 for a total consideration of undertaken in accordance with the programmes in the Albertine Rift basin US$480 million (£240 million) with the provisions of IFRS 3 – Business in Uganda. With focused investment M’Boundi sale still being subject to Combinations. The final total fair value in appraisal and development over the partner pre-emption. The disposals are attributed to the transaction amounts to coming years, reserves and production also subject to government approvals. £759.4 million, comprising £595.2 million have the potential to reach multiples of The Group expects to recognise a very of consideration and associated costs and current levels. substantial profit on these disposals in an additional £164.2 million of deferred A successful phased development in the 2008 financial statements. tax uplift in accordance with IAS 12 – Ghana and the achievement of commercial Income Taxes. The successful completion of portfolio volumes for pipeline export in Uganda management efforts announced year will materially extend the Group’s reserve Accounting policies to date will halve Tullow’s net debt at life and financial profile. In anticipation UK listed companies are required to 31 December 2007 and provide substantial of this we are evaluating long-term comply with the European regulation additional cash resources for investment financing options with the support of to report consolidated statements that in key assets. These transactions also our bank syndicate. conform to International Financial indicate the inherent value of Tullow’s Reporting Standards (IFRS). The Group’s While the global credit environment asset portfolio at a time where many significant accounting policies and has been challenging in recent months, players in our industry are becoming details of the significant accounting operating fundamentals in the oil and increasingly opportunity constrained. judgements and critical accounting gas industry remain strong and there The Board will continue to actively estimates are disclosed within the continues to be encouraging bank support monitor the Group’s portfolio and consider notes to the financial statements where for transactions involving exploration and asset divestments or acquisitions as appropriate on pages 73 to 76. Other than production companies. appropriate to ensure shareholder value the mandatory adoption of IFRS 7 – Our financial strategy must support is maximised and resources allocated in Financial Instruments: Disclosures, which these plans by ensuring sufficient funds the most effective manner. increased the disclosure requirements are allocated to our growth assets, by in respect of financial instruments, maintaining an appropriate level of Hardman Resources the Group has not made any material gearing and financial risk and by acquisition completion changes to its accounting policies in constantly analysing our portfolio to The Hardman acquisition was completed the year ended 31 December 2007. ensure our asset mix is aligned with our on 10 January 2007 with the payment of long-term business strategy. £334.9 million and the issue of 65 million Financial strategy and outlook shares to Hardman shareholders. A final During 2007 the value of Tullow’s business review of the fair value allocation to the was transformed by successful exploration Investor Relations Shareholder analysis 2007 was an active year for Tullow’s Investor Relations, with significant positive newsflow March 2008 by segment and the Group’s entrance into the FTSE100 leading to increased investor interest. During • Institutions 83% the year Senior Management participated in over 250 investor meetings in 11 countries, • African interests 11% presented at over 20 conferences and hosted • Retail investors 4% an investor trip to Uganda for sell-side analysts. • Directors 2% Tullow is now covered by 22 sell-side analysts and has a broad shareholder base across the UK, Europe and North America. March 2008 by geography We always welcome shareholder queries so please feel free to contact Chris Perry, the • UK 70% Head of Investor Relations by email on • Europe 20% chris.perry@tullowoil.com. • North America 8% • Asia 2% Tullow Oil plc Annual Report and Accounts 2007 43

  • Page 46

    Directors’ report: Business review Risk factors Our rapid growth brings many opportunities but also new challenges. Effective risk management is a critical part of our strategy, business objectives and day to day activities. Clear risk identification Appropriate policies and procedures The table opposite sets out the key risks Detailed procedures have been developed facing Tullow, their potential impact and to support risk management across the mitigation strategies developed. Risks activities of the Group and the application are grouped into four main categories: and consistency of these procedures is strategic; financial; operational; and regularly reviewed by the Group’s Internal external. Effective risk management Audit function. In addition the Group has is critical to achieving our strategic also successfully applied for external objectives and protecting our people certification of critical processes such and reputation. Tullow manages and as International Standards Organisation mitigates its risks by maintaining a (ISO) 14001 certification for environmental balanced portfolio, through compliance management in the UK, Ireland, South with the terms of its licences and Africa and Bangladesh and ISO 9001 application of policies and procedures quality certification for our UK gas appropriate for an international oil and receiving and processing terminal. The gas company of its size and scale and review process for each standard involves through the recruitment and retention of an assessment of the management of skilled personnel throughout its business. material risks and business and operational controls employed to mitigate such risks. Comprehensive risk management systems The Directors have ultimate responsibility Tullow has a systematic approach to for the effectiveness of the Group’s risk risk identification and management and management activities and internal undertakes both ‘top-down’ (driven by control processes. Any system of internal the Board) and ‘bottom-up’ (originating control can provide only reasonable, and from the business units and operations) not absolute, assurance that material processes facilitated by the Group’s financial irregularities will be detected or Internal Audit Function under the ultimate that the risk of failure to achieve business supervision of the Audit Committee. The objectives is eliminated. The Board’s Board, through the Audit Committee, objective is to ensure Tullow has completed a review of internal controls appropriate systems in place for the and risk management. No significant identification and management of risks. gaps or weaknesses were identified as part of the 2007 review. Clear targets and responsibility The Board’s strategic risk identification process feeds into the annual strategy review as part of the overall annual planning cycle. Annual objectives and targets covering production, development and exploration are established for each business unit with the identification, management and reporting of risk as an integral part of the process. Tullow recognises that risk is inherent across its operations, and all activities with a potential corporate or business impact are subject to an appropriate review to ensure that risks can be mitigated and controlled. 44 Tullow Oil plc Annual Report and Accounts 2007

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    Risk description and potential impact Mitigation Strategic risk Ineffective or poorly executed strategy fails to create shareholder value. Ineffective mix of oil and gas interests Spread of oil and gas interests across diverse geographical locations. Insufficient portfolio balance Annual formal review and validation of strategy by the Board. Organic and acquisition-led growth Consistent investment appraisal process and Board approval for acquisitions. Inefficient capital allocation Comprehensive annual budgeting process covering all expenditure approved by the Board. Effectively managing capital allocation. Ineffective management processes Policies and procedures appropriate for Tullow’s size and scale. Loss of key staff/succession planning Remuneration policies to attract and retain staff and specific staff development and training policies implemented. Financial risk Asset performance and excessive leverage results in the Group being unable to meet its financial obligations. Excessive or inappropriate debt Access to competitive financing. Conservative approach to debt/equity financing. Maintain financial flexibility by portfolio management. Inadequate or excessive hedging Hedging strategy agreed by the Board utilises a mix of physical and derivative products appropriate to Tullow’s size and production base. Underperforming assets Portfolio spread reduces dependence on a single asset. Regular asset financial performance reporting. Industry cost inflation Rigorous contracting procedures with competitive tendering. Mis-priced corporate acquisitions Consistent investment appraisal and Board approval for acquisitions. Uninsured events Comprehensive insurance programme. Operational risk Operational event impacts staff, contractors, communities or the environment leading to loss of reputation and/or revenue. EHS incident EHS standards set and monitored regularly across the Group. Security incident Integrated Management System covers day to day operational risks. Crisis management system implemented. Key development failure Technical, financial and Board approval for all projects and progress reports. Failure to secure equipment, services Rigorous contract and procurement procedures. Comprehensive and resources long-term planning to resource key projects. Corruption or reputation risk Consistent ethical standards established and documented. Corporate and Social Responsibility Social and community programmes. Social and ethical policies. Sustained exploration failure Exploration process validates programmes prior to Board approval. Hostile acquisition Robust defence strategies against hostile acquisitions. Effective investor engagement and ongoing communications programmes. External Risks The overall external political, industry or market environment may negatively impact on the Group’s ability to independently manage and grow its business. Political risk and fiscal change Developing successful relationships with governments and communities. Lack of control of key assets Joint venturing with partners and governments. Corporate governance failings Regular review of compliance requirements. Shareholder sentiment Active engagement with the investor community. Oil and gas price volatility Hedging strategy agreed by the Board. Tullow Oil plc Annual Report and Accounts 2007 45

  • Page 48

    Directors’ report: Corporate governance Board of Directors 1 2 3 4 5 6 1. Patrick Plunkett 4. Angus McCoss Chairman (Age 57) Exploration Director (Age 46) Pat Plunkett joined the Board as a non-executive Director in Angus McCoss was appointed to the Board in December 2006. 1998 and was appointed non-executive Chairman in 2000. He is He joined Tullow in April 2006 as General Manager Exploration. also Chairman of the Nominations Committee and a member of A geologist; he has 20 years of wide-ranging exploration experience, the Remuneration Committee. Mr Plunkett is an accountant with working primarily with Shell in Africa, Europe, China, South America over thirty years’ experience in the financial services sector and is and the Middle East. He has held a number of senior positions within a former director of the Irish Stock Exchange. He managed the Shell including Americas Regional Vice President Exploration and stockbroking and corporate finance businesses of ABN AMRO ultimately as the General Manager of Exploration throughout Bank in Ireland from 1993 to 1998. Since then he has been providing onshore and offshore Nigeria. strategic advice and non-executive director services to a number of private companies. 5. Paul McDade Chief Operating Officer (Age 44) 2. Aidan Heavey Paul McDade was appointed to the Board in March 2006. Mr McDade Chief Executive Officer (Age 55) joined Tullow in 2001 and was appointed Chief Operating Officer A founding Director and shareholder of the Company, Aidan Heavey following the Energy Africa acquisition in 2004, having previously has played a key role in the development of Tullow from its formation managed Tullow’s UK gas business. An engineer with over 20 years’ in 1985 to its current international status as a leading independent oil experience, he has worked in various operational, commercial and and gas exploration and production group. A Chartered Accountant, management roles with Conoco, Lasmo and ERC. He has broad he previously held roles in the airline and engineering sectors in international experience having worked in the UK North Sea, Latin Ireland. He is a member of the Nominations Committee. America, Africa and South East Asia and holds degrees in Civil Engineering and Petroleum Engineering. Aidan is a director of Traidlinks, an Irish-based charity established to develop and promote enterprise and diminish poverty in the 6. Graham Martin developing world, particularly Africa. General Counsel and Company Secretary (Age 54) A solicitor, Graham Martin joined Tullow as Legal and Commercial 3. Tom Hickey Director in 1997 from Vinson & Elkins, a leading international law Chief Financial Officer (Age 39) practice, where he was a partner. Prior to that, he was a partner in A Chartered Accountant, Tom Hickey was appointed Chief Financial Dickson Minto WS, a UK corporate law firm. He has over 25 years’ Officer and to the Board in 2000. Prior to joining Tullow he was an experience of UK and international corporate and energy transactions. Associate Director of ABN AMRO Corporate Finance (Ireland) Limited, He has been the principal legal adviser to Tullow since its formation which he joined in 1995. In this role, he advised public and private in 1985 and was appointed to his current position as General Counsel companies in a wide range of industry sectors in the areas of fund in 2004. He recently also assumed the role of Company Secretary. raising, stock exchange requirements, mergers and acquisitions, flotations and related transactions. He is a non-executive director of Ikon Science Limited, a specialist geological software company in which Tullow has a minority equity stake, and of PetroNeft Resources plc, an Irish oil and gas company with development interests, principally in Russia. 46 Tullow Oil plc Annual Report and Accounts 2007

  • Page 49

    7 8 9 10 11 7. Matthew O’Donoghue* 10. David Bamford General Manager Projects (Age 63) Non-Executive Director (Age 61) Matthew O’Donoghue was appointed to the Board as Operations David Bamford was appointed as a non-executive Director Director in 1998 having joined Tullow in 1987 as General Manager in July 2004. Mr Bamford is a member of the Audit, in Senegal. An engineer, he has over 35 years’ experience in the oil Nominations and Remuneration Committees. With and gas exploration sector and held a number of senior roles with a PhD in Geological Sciences from the University of Schlumberger Wireline, working in Europe, Africa and the Middle Birmingham, he has had over 23 years’ exploration East. A core member of the original team that has developed the experience with BP where he was Chief Geophysicist Group’s business and international operating capability. He was from 1990 to 1995, General Manager for West Africa appointed to his current position in 2004. from 1995 to 1998, and acted as Vice President, Exploration, directing BP's global exploration 8. Clare Spottiswoode CBE programme, from 2001 to 2003. He is a non-executive Non-Executive Director (Age 55) Director of Paras Limited, a specialist oil and gas Clare Spottiswoode was appointed as a non-executive Director in industry consulting firm. 2002. She is Chairman of the Remuneration Committee and a member of the Audit and Nominations Committees. A mathematician and 11. David Williams – Non-Executive Director an economist by training, Ms Spottiswoode began her career in the Non-Executive Director (Age 62) Treasury before starting her own software company. Between 1993 David Williams was appointed as a non-executive and 1998 she was Director General of Ofgas, the UK gas regulator. Director in 2006. He is Chairman of the Audit She is Chairman of Gas Strategies Limited, and also a non-executive Committee and a member of the Nominations Director of Bergesen ASA. In November 2006, she became the and Remuneration Committees. A Chartered Policyholder Advocate for Aviva plc. Previously, she was Deputy Accountant, he brings a wealth of public company Chairman of British Energy from 2002 to 2007. In 1999, she was experience to Tullow from many years with Bunzl awarded a CBE for services to the Gas industry, and also holds plc where he was Finance Director, until he retired an Honorary Doctorate of Social Sciences from Brunel University. in 2006, and prior to that as Finance Director of Tootal Group plc. He is a non-executive Director, 9. Steven McTiernan and also the Senior Independent Director of each Senior Independent Director (Age 56) of Taylor Wimpey plc and Mondi plc. He is also Steven McTiernan was appointed as a non-executive Director a non-executive Director of Meggit PLC and in 2002 and was appointed Senior Independent Director on DP World Limited, a Dubai quoted company. 1 January 2008. He is a member of the Audit, Nominations and Mr Williams was a non-executive director of Remuneration Committees. Mr McTiernan began his career as The Peninsular and Oriental Steam Navigation a petroleum engineer, working with BP, Amoco and Mesa in the Company until its acquisition in 2006. Middle East and the UK. In 1979, he joined Chase Manhattan Bank, where he became Senior Vice-President and head of the bank’s energy group based in New York. From 1996 to 2001 he held senior energy-related positions at NatWest Markets and then CIBC World Markets. He is currently principal of Sandown Energy Consultants Limited, a natural resources advisory firm based in London. *On 31 March 2008, following the dating of this report on 11 March 2008, Matthew O’Donoghue retired from the Board with immediate effect. Tullow Oil plc Annual Report and Accounts 2007 47

  • Page 50

    Directors’ report: Corporate governance Corporate governance Board performance Achievements Looking ahead to 2008 • Audit Committee New Chairman • Supervise and guide the management appointed and relevant financial of Tullow’s first operated deepwater experience of Committee strengthened. development project in Ghana. • Nominations Committee New Senior • New non-executive Director to be appointed Independent Director appointed. to replace Rohan Courtney who retired in December 2007. • Remuneration Committee New Chairman appointed and comprehensive review of • Seek shareholder approval to changes Executive Director remuneration undertaken. to long-term incentive arrangements to encourage long-term performance. • Board Evaluation Comprehensive Board performance review undertaken with • Outcomes from 2007 Board performance support from external facilitator. review to be addressed. The growth that Tullow has experienced, in recent years, allied of how the Board and its Committees operate, the nature to the extremely dynamic nature of the oil and gas exploration of the work they undertake and their responsibilities. Ahead and production business, means that the Group has changed of that, however, I would like to provide a more personal significantly over the period since I became Chairman in 2000. overview of activities during 2007. At that time, Tullow was an Irish registered company with 99 Audit Committee employees, producing 2,800 bopd and active in fewer than 10 The increasing scale and complexity of Tullow’s business, countries worldwide. We had 5,000 shareholders and the total allied to the continual evolution of Accounting Standards and capital investment for the year was £16 million. The year-end corporate reporting requirements means that an effective Audit oil price was $22.75. Committee is an essential part of our corporate governance. While the business has been transformed on a number of The Tullow Audit Committee has a wide-ranging role, and occasions since, the overall objective of the Board remains in addition to normal meetings with external auditors also unchanged – this is to provide strategic leadership, guidance reviews the Group’s internal audit programme, risk and perspective to the business on behalf of shareholders. management processes, internal control environment and In doing this, the Board must ensure that the risks and whistle-blowing provisions. During 2008, the Committee will rewards of the business are properly managed through meet the Group’s independent reserve auditors, the Group’s different phases of the industry cycle, assess the most Chief Information Officer, Head of Tax and Well Engineering appropriate balance between organic and acquisition-led Manager. The Audit Committee is now chaired by David growth and constantly evaluate and challenge strategy Williams, who has over 30 years’ financial experience, most to ensure it remains appropriate and relevant to the recently as Finance Director of Bunzl plc from 1992 to 2006. Group’s business as it becomes progressively larger David is also a member of a number of other audit committees and more complex. and his skills and experience are already proving invaluable In practice, this governance and stewardship obligation to the Committee and Executive of the business. requires individual Directors and the Board to regularly Nominations Committee evaluate our performance and identify areas where The role of the Nominations Committee is critical in ensuring improvements can be made or new opportunities exist. It also that Tullow’s Board composition and balance supports both our requires Directors to maintain a high degree of awareness business ambitions and best practice in the area of corporate of the wider industry environment and the potential impact governance. Following the retirement of Rohan Courtney at the on Tullow of the actions of peers and competitors. end of 2007, the Committee is currently active in seeking an additional non-executive Director. Steven McTiernan was The majority of Tullow Board business is conducted through appointed to the role of Senior Independent Director following regular meetings (there were ten Board meetings during 2007) Rohan’s retirement . with other matters also dealt with by the Audit, Nominations and Remuneration Committees. In addition there is frequent Remuneration Committee dialogue between the Executive Directors and the non- The principal objective of the Remuneration Committee is to executive Directors between meetings.The full Corporate develop and maintain a remuneration strategy that ensures Governance Statement on pages 50 to 56 presents a review Executive Directors and senior management are rewarded 48 Tullow Oil plc Annual Report and Accounts 2007

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