AFR.L Regulatory News (AFR)

Key risk

Description and impact

How we manage it

Operational risk

Field deliveryrisk

Field delivery risk applies to all phases of the E&P cycle from seismic acquisition through to production operations. At each phase the mitigating measures will be different. However, failure to control risks will lead to project delays, cost over-runs, high production costs, early field decommissioning and, ultimately, lower than expected reserves.

In 2014, Afren encountered operational delays which impacted the timing of production ramp-up at both Ebok, with the installation of the Ebok CFB extension facilities, and OML 26, due to the declaration of Force Majeure at the Forcados Terminal in Q1 2014. In January 2015, Afren announced its intention to review its strategic options in respect of the Barda Rash PSC, following disappointing operational performance at the field and an updated reserves assessment from RPS Energy.

The maintenance of good working relations with our Partners is also critical to field delivery. Without this we face potential delays to projects, issues with funding and disagreement on how best to develop our portfolio.

All operations are subject to risk reviews, to identify as early as possible any potential risks to success.

Our engineers analyse results from appraisal and development wells, and determine the appropriate course of action for the drilling programme and facility design.

We closely monitor all projects to ensure they go to plan and so we can take action to maintain progress.

We monitor project finances alongside their budget to minimise over-runs.

We monitor production operations closely to ensure we minimise unplanned downtime and control operating costs tightly.

We compare actual production regularly to forecast production.

We hold regular technical and operating meetings with our Partners to keep them fully appraised of developments and to get their input and agreement on key issues.

Explorationfailure

Exploration activities can be capital intensive and may involve a high degree of risk. Sustained exploration failure will affect the Group's growth potential.

Exploration assets are subject to a rigorous peer review process.

We evaluate exploration risk for each prospect by looking in detail at how to de-risk the key elements of the subsurface data, source rock, reservoir, trapping and seal mechanisms. We subsequently rank prospects and approve budgets.

Environmentalor safetyincidents

There is a continuing focus on preventing major pollution or loss of life due to failure of systems, equipment or human action.

We have implemented comprehensive EHSS management systems based on best industry practice, at both corporate and country level, with an annual independent audit programme to ensure effective implementation.

Afren oversees its contractors closely to ensure they accept and meet our EHSS standards.

Specific EHSS teams in each area of operation.

Contingency plans in place and tested regularly.

Unfulfilledwork or PSC obligations

Loss of production interest or exploration licence due to incomplete fulfilment of work or PSC obligations.

The operations, finance and legal teams jointly monitor compliance with licence obligations.

We maintain good, open working relationships with local governments in the countries of operation.

External risk

Geo-politicalrisk

The countries in which Afren operates continue to face political, socio‑economic uncertainties.

2014 saw particular problems with Boko Haram in northern Nigeria and the rise of Islamic State in Iraq. Whilst these issues received wide international media coverage our operations were not directly affected and we continue to monitor the situation closely.

2015 will see elections in Nigeria and we will be conducting a rigorous business risk assessment of the potential impacts that may arise.

Through close liaison in each relevant country, we monitor thesituation from the perspective of our safety and security.

Contingency plans in place and tested regularly.

Through our contacts in governments and industry, as well asthough specialist advisors, we continuously monitor and evaluatethe potential impacts on our business arising from changes in the geo-political environment.

Securityincidents

Afren continues to operate in regions where kidnapping, piracy and criminal attacks occur.

Security teams in each area of operation.

Rigorous security management programme.

Security risk assessments for each asset and operation.

Oil pricevolatility

Oil prices can fluctuate significantly.

In 2014, the Group hedged approximately 35% of production through the use of financial instruments.

In Q4 2014, we liquidated our hedge position, which benefited from the lower oil prices in the second half of the year, to generate cash.

Hostcommunityaction

Our operations both on and offshore have the potential for interruption by our host communities if relations are not well established.

We have continued our close relationships with our host communities and have seen no community action against our operations in 2014.

Afren has a tried and tested system for managing community affairs, which is applied to all operations.

Community affairs teams are in place where required.

Contingency plans in place and tested regularly.

Strategic risk

Bribery and corruption

As an international oil and gas operator, bribery and corruption represent an ongoing risk to our business.

We conducted a comprehensive anti-bribery and corruption risk assessment during 2014. This work was integrated into the review and update of the Code of Business Conduct that was completed towards the end of the year. The new Code was approved by the Board in December and all staff and contractors underwent on-line training and testing on the requirements of the Code.

We have established an independent whistle-blowing hotline to enable concerns about poor practice to be voiced without fear of reprisal.

We review and update specific Anti-Bribery and Corruption policies and procedures annually and quarterly respectively, to meet the stringent requirements of the UK Bribery Act as well as the UK Ministry of Justice Guidance.

We provide new starters and existing employees with training on anti‑bribery and corruption as part of the induction process and as an ongoing programme.

We provide quarterly updates to the Audit and Risk Committee regarding anti-bribery and corruption, including any whistle-blowing reports and their subsequent resolution.

Managementof growth

Management of growth is a reducing risk following the fall in oil price and the slowing of Company expansion.

All acquisitions are subject to thorough due diligence, to create an effective integration plan.

We design remuneration policies to incentivise, motivate and retain key employees as well as to attract new personnel as required.

Loss of key employees

Loss of knowledge and skills to the Group, in particular in countries of operation.

We consider succession planning Group-wide, taking into account the development of the executive and senior management.

We design remuneration policies to incentivise, motivate and retain key employees including Directors.

We set salaries and reward of senior executives, including Directors, at competitive levels using third party benchmarks.

Climatechange

Greenhouse gas (GHG) emissions contribute to climate change. Important stakeholders expect Afren to have a strategy and meaningful reduction targets (flaring represents over 50% of Afren's current GHG emissions).

Failure to address this issue risks reputational damage and issues with the Company's shareholders.

This also represents an opportunity for Afren to demonstrate a forward looking approach in comparison to its peers.

We recognise the potential impact that energy use and GHG have on climate change and to seek to reduce emissions associated with flaring:

We monitor energy use and ensure energy efficiency in all operations.

We monitor and report other atmospheric emissions.

We have developed and disclosed a comprehensive climate change strategy and will identify engineering solutions to reduce flaring and set flaring reduction targets for 2015.

Financial risk

Taxationand other

legislation changes

There is a risk that changes in tax regimes and other legislation may affect our financial results. As detailed in the financial statements, there are uncertainties surrounding the taxation treatment of marginal fields (see note 4.8: Contingent liabilities) and Pioneer status (see note 5.16: Post balance sheet events - Company and Group) in Nigeria.

Our financial and legal teams monitor current legislation and proposed changes and incorporate these into our working practices.

Maintenance of good, open working relationships with local authorities in the countries of operation.

Involvement with industry groups in the country of operation to discuss sector issues.

Treasury management

The availability of financing to maintain the ongoing operations of the business is key.

The Group is currently in the process of financial restructuring in orderto provide liquidity and improved financial stability for the Group's ongoing operations.