AFR.L Regulatory News (AFR)

Pelham Bell Pottinger (+44 20 7861 3232)

James Henderson

Mark Antelme

Key risk

Description and impact

How do we manage it?

OPERATIONAL RISK

Field delivery risk

·; 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 manifest itself as project delays, cost overruns, high production costs, early field decommissioning and ultimately lower than expected reserves.

·; 2012 saw an increase in seismic operations, with extensive surveys being undertaken in East Africa, and increased investment in the development of our assets in the Kurdistan region of Iraq, thereby increasing the potential impact on Afren of a failure to appropriately manage this risk.

·; There are risks associated with monetising our reserves in the Kurdistan region of Iraq, while ongoing discussions between the Kurdistan Regional Government and the Federal Government of Iraq continue. We will continue to monitor this situation in order to manage our risk profile accordingly.

·; All operations are subject to risk reviews to identify as early as possible potential risks to delivery. Risk assessments were conducted for all new seismic programmes in East Africa.

·; Our engineers analyse results from appraisal and development wells and determine the appropriate course of action in terms of drilling programme and facility design.

·; All projects are closely monitored to ensure the project delivers against plan and to enable actions to be taken to maintain progress.

·; Project finances are monitored against budget to minimise overruns.

·; Production operations are closely monitored to ensure that unplanned downtime is minimised and that operating costs are tightly controlled.

·; Actual production is regularly checked against the annual production forecast.

Exploration failure

·; Exploration activities can be capital intensive and may involve a high degree of risk. Sustained exploration failure will impact the growth and upside potential of the Group.

·; Exploration assets are subject to a rigorous peer review process.

·; Exploration risk is evaluated 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, etc. Prospects are subsequently ranked and budgets approved.

Environmental /

safety incidents

·; As Afren's activities expand there is a continuing focus on preventing major pollution and/or significant loss of life due to systems or equipment failure. We have implemented EHSS management systems based on best industry practice at both the corporate and country level.

·; Afren has a comprehensive EHSS management system with an annual independent audit programme to ensure effective implementation.

·; Dedicated EHSS teams in each area of operation.

·; Contingency plans in place and regularly tested.

Unfulfilled work/PSC obligations

·; Loss of production interest or exploration licence due to incomplete fulfillment of work or PSC obligations.

·; The operations, finance and legal teams jointly monitor the situation from an Afren safety and security perspective.

·; Maintenance of good open working relationships with local governments in the countries of operation.

EXTERNAL RISK

Geo-political risk

·; The countries in which Afren operates face political, socio-economic and legal uncertainties.

·; 2012 has seen political tensions in all of the areas in which we operate and these continue to be closely monitored to minimise the impact on our operations.

·; Ongoing monitoring and close liaison on the ground to monitor the situation from an Afren safety and security perspective.

·; Contingency plans in place and regularly tested.

Security incidents

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

·; Dedicated security teams in each area of operation.

·; Robust security management programme.

·; Security risk assessments for each asset and operation.

Host community action

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

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

·; Dedicated community affairs teams are in place where required.

·; Contingency plans in place and regularly tested.

Oil price volatility

·; Oil prices can fluctuate significantly.

·; The policy of the Group is to protect its minimum cash flow requirements in the context of a sustained downturn in oil prices.

·; The Group strategy to manage oil price risk is to hedge between 20-30% of the production curve by using financial instruments which allow the Group to protect the downside risk.

STRATEGIC RISK

Bribery and corruption

·; As an oil and gas operator working in Africa, bribery and corruption represent an ongoing risk to our business.

·; Afren has implemented a Code of Business Conduct across all its operations.

·; An independent whistle-blowing hotline has been established to enable concerns about poor practise to be voiced without the fear of reprisal.

·; Specific Anti-Bribery and Corruption policy and procedures are reviewed and updated annually and quarterly respectively to meet stringent requirements of the UK Anti-Bribery and Corruption legislation as well as the UK Ministry of Justice Guidance.

·; All new starters and existing employees are given specific training regarding Anti-Bribery and Corruption as part of the induction process and as an ongoing programme.

·; Quarterly updates are provided to the Audit and Risk Committee regarding Anti-Bribery and Corruption including any whistle-blowing reports and their subsequent resolution.

·; Audit and Risk Committee in place to review governance and internal controls.

·; Risk Management function working with key functions in the business.

Management of growth

·; Afren has grown steadily through 2012 and has established systems and processes appropriate for a larger organisation. Management of growth is now considered a reducing risk.

·; All acquisitions are subject to thorough due diligence in order to deliver an attractive integration plan.

·; Remuneration policies are designed to incentivise, motivate and retain key employees as well as to attract new personnel as and when required.

Loss of key employees

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

·; Intensified competition for human talent in Africa and the Middle East.

·; As the Company has expanded so has the strength and depth of senior management. Loss of key personnel reduces as a risk as Afren continues to grow, and is also mitigated by our remuneration policies.

·; Succession planning is considered on a Group-wide basis, taking into account the development of the executive and senior management.

·; Remuneration policies are designed to incentivise, motivate and retain key employees including Directors.

·; Salaries and reward of senior executives, including Directors, set at competitive levels using third-party benchmarks.

FINANCIAL RISK

Taxation and other legislation changes

·; There is a risk that future changes impact our profitability.

·; 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.

Treasury management

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

·; The Group continued to optimise its capital structure during 2012 to provide further financial flexibility to the Group's operational requirements.

·; The Group continues to manage its expenditure and monitor cash flows to ensure that future cash requirements are appropriately controlled.