Annual Report & Accounts

SALAMANDER ENERGY plc

ANNUAL REPORT AND ACCOUNTS

31 DECEMBER 2016

COMPANY NUMBER: 05934263

Strategic Report

Introduction

This Strategic Report has been prepared solely to provide additional information to shareholders to assess the Company’s strategies and the potential for those strategies to succeed.

The Strategic Report contains certain forward-looking statements. These statements are made by the Directors in good faith based on the information available to them up to the time of their approval of this report and such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.

The Directors, in preparing this Strategic Report, have complied with s414C of the Companies Act 2006.

This Strategic Report has been prepared for the Group as a whole and therefore gives greater emphasis to those matters which are significant to Salamander Energy PLC and its subsidiary undertakings when viewed as a whole.

The Strategic Report discussed the following areas:

Fair review of the business

Review of the business is discussed in the following sections:

• Operational review
• Financial review

Operational review

Highlights

During 2016 we have invested in additional facilities at the Bualuang field to improve the production capacity of the infrastructure; brought the Kerendan gas field onstream diversifying our production base; and continued to build the prospect inventory to provide drilling options for 2017/2018. As we look ahead through 2017 we will continue to invest in both Bualuang and Kerendan to increase the cash generation of the asset base. This is expected to lead to a higher cash flow as compared to 2016.

Bualuang, Thailand (20.9 MMbo 2P, 17.8 MMbo net 2C)
Our strategy for managing the Bualuang field is to maximise cash flow through safe, reliable and cost-efficient production operations, combined with the appropriate capital deployment to further develop contingent resources. Bualuang is currently the most cash-generative asset in the Ophir production portfolio. In 2016, it generated $58 million of cash from average daily production of 8,700 bopd.

Our main focus at Bualuang during the year was to complete a water debottlenecking project that increased water handling capability by 50% to enable an increase in production and, consequently, cash generation.

The water debottlenecking project cost a total of $21 million and is expected to increase the NPV10 of the field by $83 million with investment payback approximately 12-18 months after completion.

As we look forward, the key challenge at Bualuang is how we create further value and increase the cash generation of the field. The ocean bottom node 3D seismic data, acquired in 2015 to image under the platform, was processed and interpreted in 2016 and is key to determining how we unlock additional value from the field.

In 2017, we will complete a small infill drilling programme consisting of two development wells. This will see old well stock recycled to target new locations with the goal to grow production by around 1,400 bopd. The investment in this programme will be c. $12 million and is expected to add $23 million to the NPV10 of the project and payback within 12 months.

We will also drill a further well targeting prospective resource in the Bualuang field.

We are also in the final technical and commercial analysis stage of the opportunity to expand the production capacity at Bualuang by the installation of a simple, low-cost platform. Additional well slots will enable the targeting of locations to convert prospective and contingent resources to reserves. We expect to be in a position to make an FID on the next phase of development in 2Q 2017.

Kerendan, Indonesia (15.9 MMboe 2P, 60.3 MMboe net 2C)
The primary challenge at Kerendan now that the field is producing, is to seek innovative ways to monetise the 457 Bcf of gross 2C contingent resource not covered by the initial gas sales agreement (GSA).The field produced at an average of768 boepd over the period in 2016 that it was producing, but is expected to ramp up to full contract volume of closer to 20 MMscfd in 2017, providing additional cash flows. The off taker contracted to take 16 MMscfd from 11 January 2016 and, under the take or pay provision in the GSA, a receivable of $17 million has been accrued. This was settled in full in February 2017.A significant step forward in monetising the additional 2C resource in the Kerendan area occurred in late 2016 with SKKMigas approving the West Kerendan-1expansion plan.

This will allow an additional 40 Bcf to be monetised that will grow production by 7 MMscfd from 2019. Making further progress on the monetisation of the 457 Bcf of gross contingent resource, not covered by the first GSA, is an area of focus for 2017. Safe completion of the onshore 3D seismic acquisition programme, forecast to complete in Q4 2017, is a key step on this pathway. These data will allow for better definition of the Kerendan field to give greater certainty around resource volumes, which should ultimately lead to SKKMigas approving the sale of additional gas volumes.

Sinphuhorm (7 MMboe 2P, 21.3 MMboe net 2C)
Gas production from Sinphuhorm was 10% ahead of budget at 1,900 boepd. This was principally as a result of the poor performance from the competing hydropower sector.

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