UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 40-F
(CHECK ONE) |
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o | Registration statement pursuant to Section 12 of the Securities and Exchange Act of 1934 | |
OR |
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ý |
Annual Report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended: December 31, 2014
Commission File Number: 001-06665
TALISMAN ENERGY INC.
(Exact name of Registrant as specified in its charter)
Canada |
1311 (Primary standard industrial classification code number, if applicable) |
Not applicable (I.R.S. employer identification number, if applicable) |
Suite 2000, 888 - 3rd Street S.W.
Calgary, Alberta
Canada T2P 5C5
(403) 237-1234
(Address and telephone number of Registrant's principal executive office)
CT CORPORATION SYSTEM
111 Eighth Avenue, 13th Floor,
New York, NY 10011
(212) 894-8800
(Name, address (including zip code) and telephone number
(including area code) of agent for service in the United States)
Securities registered pursuant to Section 12(b) of the Act: |
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Title of each class: |
Name of each exchange on which registered: Toronto Stock Exchange New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
5.125% Notes due 2015
7.75% Notes due 2019
3.75% Notes due 2021
7.25% Debentures due 2027
5.75% Notes due 2035
5.85% Notes due 2037
6.25% Notes due 2038
5.50% Notes due 2042
For annual reports, indicate by check mark the information filed with this Form:
ý Annual Information Form |
ý Audited Annual Financial Statements |
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.
Common Shares: 1,036,166,028
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes ý |
No o |
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
Yes o |
No o |
The following documents, or the portions thereof indicated below, that are filed as exhibits to this Annual Report on Form 40-F, are incorporated herein by this reference.
This Form 40-F contains or incorporates by reference information that constitutes "forward-looking information" or "forward-looking statements" (collectively "forward-looking information") within the meaning of applicable securities legislation. Forward-looking information is included throughout the Annual Report on Form 40-F and the documents incorporated by reference herein including among other places: (1) in the Annual Information Form of the Registrant dated March 4, 2015 under the headings "General Development of the Business", "Description of the Business", "Corporate Responsibility and Environmental Protection", "Market for the Securities of the Company", "Legal Proceedings" and "Risk Factors"; and (2) in the Management's Discussion and Analysis of the Registrant dated March 4, 2015 under the headings "2014 Performance Highlights", and "Risk Factors". This forward-looking information includes, among others, statements regarding:
Statements concerning oil and gas reserves contained in the Annual Information Form (including Schedule "A" thereto), the Management's Discussion and Analysis and in Exhibit 99.8 to this Annual Report on Form 40-F may be deemed to be forward-looking information as they involve the implied assessment that the resources described can be profitably produced in the future. The Company priorities disclosed in this 40-F are objectives only and their achievement cannot be guaranteed.
The factors or assumptions on which the forward-looking information is based include: assumptions inherent in current guidance; projected capital investment levels; the flexibility of capital spending plans and the associated sources of funding; the successful and timely implementation of capital projects; the continuation of tax, royalty and regulatory regimes; ability to obtain regulatory and partner approval; commodity price and cost assumptions; and other risks and uncertainties described in the filings made by the Company with securities regulatory authorities. The Company believes the material factors, expectations and assumptions reflected in the forward-looking information are reasonable but no assurance can be given that these factors, expectations and assumptions will prove to be correct. Forward-looking information for periods past 2015 assumes escalating commodity prices. Closing of the Repsol transaction is subject to receipt of all certain regulatory approvals and contractual conditions.
Undue reliance should not be placed on forward-looking information. Forward-looking information is based on current expectations, estimates and projections that involve a number of risks which could cause actual results to vary and in some instances to differ materially from those anticipated by Talisman and described in the forward-looking information contained in this Form 40-F and the documents incorporated herein by reference. The material risk factors include, but are not limited to: the risks of the oil and gas industry, such as operational risks in exploring for, developing and producing crude oil and natural gas; risks and uncertainties involving geology of oil and gas deposits; risks associated with project management, project delays and/or cost overruns; uncertainty related to securing sufficient egress and access to markets; the uncertainty of reserves and resources estimates, reserves life and underlying reservoir risk; the uncertainty of estimates and projections relating to production, costs and expenses, including decommissioning liabilities; risks related to strategic and capital allocation decisions, including potential delays or changes in plans with respect to exploration or development projects or capital expenditures; fluctuations in oil and gas prices, foreign currency exchange rates, interest rates and tax or royalty rates; health, safety, security and environmental risks, including risks related to the possibility of major accidents; environmental regulatory and compliance risks, including with respect to greenhouse gases and hydraulic fracturing; uncertainties as to access to capital, including the availability and cost of credit and other financing, and changes in capital markets; risks in conducting foreign operations (for example, civil, political and fiscal instability and corruption); risks related to the attraction, retention and development of personnel; changes in general economic and business conditions; risks associated with completion of the Arrangement with Repsol; the possibility that government policies, regulations or laws may change or governmental approvals may be delayed or withheld; and results of the Company's risk mitigation strategies, including insurance and any hedging activities.
The foregoing list of risk factors is not exhaustive. Additional information on these and other factors which could affect the Registrant's operations or financial results or strategy are included: (1) under the heading "Risk Factors" in the Annual Information Form; (2) in the Report on Reserves Data by the Registrant's Internal Qualified Reserves Evaluator and in the Report of Management and Directors on Oil and Gas Disclosure, attached as schedules to the Annual Information Form; (3) under the heading "Risk Factors" in the Management's Discussion and Analysis; and (4) elsewhere in the Annual Information Form and Management's Discussion and Analysis. In addition, information is available in the Registrant's other reports on file with Canadian securities regulatory authorities and the United States Securities and Exchange Commission.
Forward-looking information is based on the estimates and opinions of the Registrant's management at the time the information is presented. The Registrant assumes no obligation to update forward-looking information should circumstances or management's estimates or opinions change, except as required by law.
The term "commerciality" is based upon the term as it is used in the Block CPE-6 licence (the "Licence"). A declaration of commerciality is a written declaration by the licensees to the state regulator that declares the licensees' unconditional decision to proceed with commercial exploration of a discovery. Upon filing a declaration of commerciality, a discovery becomes a commercial field under the terms of the Licence.
As used in the context of Talisman's Colombian assets, long-term testing indicates continuous well production going to market at the most recent weekly average. A permit for long-term testing is required for a well to produce oil until the permit for full field development has been granted.
NOTE TO UNITED STATES READERSDIFFERENCES IN UNITED STATES AND
CANADIAN REPORTING PRACTICES
The Registrant is permitted, under a multijurisdictional disclosure system adopted by the United States, to prepare this Annual Report in accordance with Canadian disclosure requirements, which are different from those of the United States. The Registrant prepares its financial statements, which are filed with this Annual Report on Form 40-F, in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board ("IFRS"), and they may be subject to Canadian auditing and auditor independence standards. IFRS differs in some significant respects from generally accepted accounting principles in the United States of America, and thus they may not be comparable to financial statements of United States companies.
Acquiring, holding or disposing of the Registrant's securities may subject you to tax consequences both in the United States and Canada. Tax consequences of acquiring, holding and disposing of the Registrant's securities are not described in this Annual Report on Form 40-F.
Information regarding the Registrant's internal control over financial reporting and disclosure controls and procedures is included in the Registrant's Management's Discussion and Analysis incorporated herein by reference. The Management Report on Internal Control over Financial Reporting is included in the Registrant's comparative audited Consolidated Financial Statements incorporated herein by reference.
The results of management's assessment of internal control over financial reporting were reviewed with the Audit Committee of the Registrant's Board of Directors. The Registrant's independent registered public accounting firm, Ernst & Young LLP, independently assessed the effectiveness of the Registrant's internal control over financial reporting. Ernst & Young LLP's attestation is located in the Independent Auditor's Report on Internal Controls under Standards of the Public Company Accounting Oversight Board (United States), which is incorporated by reference in this Annual Report on Form 40-F as part of Exhibit 99.7.
NOTICES PURSUANT TO REGULATION BTR
None.
The Registrant's Board of Directors is comprised of a majority of independent directors in accordance with the requirements of Sections 303A.01 and 303A.02 of the New York Stock Exchange Listed Company Manual ("NYSE Manual"). The Board of Directors has determined that all directors of Talisman are independent with the exception of Harold N. Kvisle, the President and Chief Executive Officer, and Henry W. Sykes. The Chairman of the Board and all Committee Chairs are independent.
The composition of the Board of Directors, including the independence of the Chairman, ensures that the Board has in place appropriate structures and procedures to ensure that the Board can function independently of management. After each regularly scheduled and special Board meeting, "non-management directors" (as that term is defined in the NYSE Manual) meet independently of management directors. Charles R. Williamson, the Chairman of the Board of Directors, serves as the presiding director at all meetings of the Board, including in camera sessions without management present.
The Board of Directors has established six standing committees: the Audit Committee, the Governance and Nominating Committee, the Human Resources Committee, the Health, Safety, Environment and Corporate Responsibility Committee, the Reserves Committee and the CEO Succession Committee. All committees are composed entirely of independent directors, with the exception of the Health, Safety, Environment and Corporate Responsibility Committee and the Reserves Committee which are composed of a majority of independent directors. The terms of
reference of the Board and its committees may be obtained from the Registrant's website at www.talisman-energy.com or upon request from: Investor Relations Department, Talisman Energy Inc., 2000, 888 3rd Street SW, Calgary, Alberta, T2P 5C5, or by email at: tlm@talisman-energy.com.
The Registrant operates under corporate governance practices that are consistent with the requirements of Section 303A.09 of the NYSE Manual. The Registrant's corporate governance practices also satisfy a substantial majority of the NYSE corporate governance listing standards applicable to US companies. A summary of the Registrant's corporate governance practices and a description of the material ways in which the Registrant's corporate governance practices differ from those applicable to US companies is at www.talisman-energy.com or upon request from: Investor Relations Department, Talisman Energy Inc., 2000, 888 3rd Street SW, Calgary, Alberta, T2P 5C5, or by email at: tlm@talisman-energy.com.
The Registrant has adopted a Code of Business Conduct and Ethics ("BCE Code"), which is applicable to all directors, officers and employees. A copy of the BCE Code can be obtained from the Registrant's website at www.talisman-energy.com or without charge, upon request from: Investor Relations Department, Talisman Energy Inc., 2000, 888 3rd Street S.W., Calgary, Alberta T2P 5C5, or by email at: tlm@talisman-energy.com.
AUDIT COMMITTEE FINANCIAL EXPERT
The Registrant's Board of Directors has determined that Michael T. Waites, a member of the Audit Committee, qualifies as an audit committee financial expert (as defined in paragraph (8)(b) of General Instruction B of Form 40-F) and is independent as defined by the NYSE Manual.
AUDIT COMMITTEE INFORMATION, AUDIT FEES, AUDIT-RELATED FEES, TAX FEES AND
ALL OTHER FEES
The Registrant has a separately designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the United States Securities Exchange Act of 1934, as amended (the "Exchange Act"), and which satisfies the requirements of Rule 10A-3 of the Exchange Act. The members of the Audit Committee are: Donald J. Carty, Thomas W. Ebbern, Michael T. Waites (Chair) and Charles M. Winograd.
The following information is included in Schedule "B" of the Registrant's Annual Information Form, which is incorporated herein by reference:
OFF-BALANCE SHEET TRANSACTIONS AND CONTRACTUAL OBLIGATIONS
Information regarding off-balance sheet transactions and contractual obligations of the Registrant is included in Management's Discussion and Analysis of the Registrant under the headings "Commitments and Off-Balance Sheet Arrangements" and "Risk Management" and in note 24 of the audited Consolidated Financial Statements of the Registrant, which are incorporated by reference in this Annual Report on Form 40-F.
Not applicable.
The Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities registered pursuant to Form 40-F; the securities in relation to which the obligation to file an Annual Report on Form 40-F arises; or transactions in said securities.
The Registrant has previously filed with the Commission a written consent to service of process and power of attorney on Form F-X. An amendment to such Form F-X is being filed concurrently with this Annual Report on Form 40-F to report a change of the Registrant's agent for service of process. Any change to the name or address of the Registrant's agent for service shall be communicated promptly to the Commission by amendment to the Form F-X referencing the file number of the Registrant.
SUPPLEMENTAL RESERVES INFORMATION
See Exhibit 99.8 for the Supplemental Reserves Information, which is included as an Exhibit to this Annual Report on Form 40-F.
Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this Annual Report to be signed on its behalf by the undersigned, thereto duly authorized.
Registrant: |
TALISMAN ENERGY INC. | |||
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By: |
/s/ ROBERT R. ROONEY |
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Name: | Robert R. Rooney | ||
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Title: | Executive Vice-President, Corporate |
Date: March 4, 2015
Exhibits
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Description
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99.1 |
Certifications of the Chief Executive Officer and Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. | |
99.2 |
Certifications of the Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002. | |
99.3 |
Consent of Ernst & Young LLP. | |
99.4 |
Consent of Mark Ireland, Internal Qualified Reserves Evaluator. | |
99.5 |
Annual Information Form of the Registrant dated March 4, 2015. | |
99.6 |
Management's Discussion and Analysis of the Registrant dated March 4, 2015. | |
99.7 |
Comparative Audited Consolidated Financial Statements of the Registrant, including notes thereto, together with Independent Auditors' Report thereon as at and for the year ended December 31, 2014, the Independent Auditors' Report on Internal Controls Under Standards of The Public Company Accounting Oversight Board (United States) as at December 31, 2014 and the Management Report on Internal Control over Financial Reporting. | |
99.8 |
Supplemental Reserves Information. |
I, Harold N. Kvisle, certify that:
March 4, 2015
By: |
/s/ HAROLD N. KVISLE |
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Name: |
Harold N. Kvisle | |||
Title: |
President and Chief Executive Officer |
I, Paul R. Smith, certify that:
March 4, 2015
By: |
/s/ PAUL R. SMITH |
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Name: |
Paul R. Smith | |||
Title: |
Executive Vice-President, Finance and Chief Financial Officer |
In connection with the annual report of Talisman Energy Inc. (the "Company") on Form 40-F for the fiscal year ended December 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Harold N. Kvisle, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
By: |
/s/ HAROLD N. KVISLE | |||
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Name: |
Harold N. Kvisle | |||
Title: |
President and Chief Executive Officer |
DATED at Calgary, Alberta, as of March 4, 2015.
In connection with the annual report of Talisman Energy Inc. (the "Company") on Form 40-F for the fiscal year ended December 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Paul R. Smith, Executive Vice-President, Finance and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
By: |
/s/ PAUL R. SMITH | |||
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Name: |
Paul R. Smith | |||
Title: |
Executive Vice-President, Finance and Chief Financial Officer |
DATED at Calgary, Alberta, as of March 4, 2015.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the use of our reports dated March 3, 2015 with respect to the consolidated financial statements of Talisman Energy Inc., which comprise the consolidated balance sheets as at December 31, 2014 and 2013, and the consolidated statements of income (loss), comprehensive income (loss), changes in shareholders' equity and cash flows for the years ended December 31, 2014, 2013 and 2012, and a summary of significant accounting policies and other explanatory information, and the effectiveness of internal control over financial reporting of Talisman Energy Inc. as at December 31, 2014, included in an exhibit to the Annual Report (Form 40-F) for the year ended December 31, 2014.
We also consent to the incorporation by reference in (i) the Registration Statement (Form S-8 No. 333-178449) pertaining to the Employee Stock Option Plan and Director Stock Option Plan of Talisman Energy Inc., (ii) the Registration Statement (Form S-8 No. 333-154924) pertaining to the Corporate Strategy Implementation Recognition Program of Talisman Energy Inc., (iii) the Registration Statement (Form S-8 No. 333-178450) pertaining to the Performance Share Unit Plan for Eligible Employees of Talisman Energy Inc. and its Affiliates, and (iv) the shelf Registration Statement (Form F-10 No. 333-195110), of our reports dated March 3, 2015, with respect to the consolidated financial statements of Talisman Energy Inc., which comprise the consolidated balance sheets as at December 31, 2014 and 2013, and the consolidated statements of income (loss), comprehensive income (loss), changes in shareholders' equity and cash flows for the years ended December 31, 2014, 2013 and 2012, and a summary of significant accounting policies and other explanatory information, and the effectiveness of internal control over financial reporting of Talisman Energy Inc. as at December 31, 2014, included in an exhibit to the Annual Report (Form 40-F) for the year ended December 31, 2014.
Signed "Ernst & Young LLP"
Calgary,
Canada
March 3, 2015
CONSENT OF INTERNAL QUALIFIED RESERVES EVALUATOR
Reference is made to my Report on Reserves Data dated March 3, 2015, included in the Annual Information Form of Talisman Energy Inc. for the year ended December 31, 2014 (the "AIF"), and to the references to my name in the AIF and elsewhere in the Company's Annual Report on Form 40-F to be filed with the United States Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended.
I consent to the incorporation by reference of my Report into this Annual Report on Form 40-F. I have no reason to believe that there are any misrepresentations in the information contained in this Annual Report on Form 40-F that were derived from my Report or that is within my knowledge as a result of the work I performed in connection with such Report.
I also consent to the incorporation by reference in the following Registration Statements:
of my Report on Reserves Data dated March 3, 2015 and to the references to my name in the AIF, which are incorporated by reference in this Annual Report on Form 40-F.
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By: |
/s/ MARK IRELAND |
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Name: | Mark Ireland | ||
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Title: | Internal Qualified Reserves Evaluator |
2014 |
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ANNUAL INFORMATION FORM |
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For the year ended December 31, 2014 March 4, 2015 |
TABLE OF CONTENTS
Page | ||
Introduction | 1 | |
Corporate Structure | 1 | |
General Development of the Business | 2 | |
Description of the Business | 4 | |
Reserves and Other Oil and Gas Information | 9 | |
Competitive Conditions | 9 | |
Corporate Responsibility and Environmental Protection | 10 | |
Employees | 11 | |
Description of Capital Structure | 11 | |
Market for the Securities of the Company | 14 | |
Directors and Officers | 16 | |
Audit Committee Information | 20 | |
Legal Proceedings | 20 | |
Risk Factors | 21 | |
Transfer Agents and Registrars | 29 | |
Interests of Experts | 29 | |
Advisories | 29 | |
Exchange Rate Information | 31 | |
Abbreviations | 32 | |
Material Contracts | 33 | |
Additional Information | 33 | |
Schedule A Reserves Data and Other Oil and Gas Information | 34 | |
Schedule B Audit Committee Information | 71 | |
This document is the Annual Information Form of Talisman Energy Inc. for the year ended December 31, 2014. All information in this Annual Information Form relating to assets owned or held by Talisman is as of December 31, 2014, unless otherwise indicated.
Unless the context indicates otherwise, references in this Annual Information Form to "Talisman" or the "Company" include, for reporting purposes only, the direct or indirect subsidiaries of Talisman Energy Inc., partnership interests held by Talisman Energy Inc. and its subsidiaries and Talisman's equity interests in Equion Energía Limited ("Equion") and Talisman Sinopec Energy UK Limited ("TSEUK") as noted below. Such use of "Talisman" or the "Company" to refer to these other legal entities, partnership interests and equity interests does not constitute a waiver by Talisman Energy Inc. or such entities or partnerships of their separate legal status, for any purpose.
Talisman has a 49% equity interest in Equion and a 51% equity interest in TSEUK. Effective January 1, 2013, Talisman adopted International Financial Reporting Standards ("IFRS") 11 Joint Arrangements which requires Talisman to account for its investments in Equion and TSEUK using the equity method of accounting. All reserves, production and other operating data reported herein as at and for the year ended December 31, 2014 which includes information relating to Equion and TSEUK, reflects Talisman's 49% equity interest in Equion and Talisman's 51% equity interest in TSEUK.
All dollar amounts in this Annual Information Form are presented in US dollars, except where otherwise indicated.
Information related to applicable exchange rates and abbreviations is located near the end of this Annual Information Form; information related to the presentation of reserves data and other oil and gas information is located in the Advisories and in Schedule "A". Please refer to the table of contents.
Readers are directed to the "Forward-Looking Information" section contained in the Advisories in this Annual Information Form.
CORPORATE STRUCTURE
Talisman Energy Inc. is a Canadian-based upstream oil and gas company. It is incorporated under the Canada Business Corporations Act and its registered and head office is located at Suite 2000, 888 3rd Street SW, Calgary, Alberta, T2P 5C5.
The following table lists the material operating subsidiaries owned directly or indirectly by Talisman, their jurisdictions of incorporation and the percentage of voting securities beneficially owned, controlled or directed by Talisman as at December 31, 2014.
Name of Subsidiary | Jurisdiction of Incorporation/Formation |
Percentage of Voting Securities Owned(1) |
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Talisman Energy Canada(2) | Alberta | 100% | ||
Talisman Energy USA Inc. | Delaware | 100% | ||
Talisman Alberta Shale Partnership | Alberta | 100% | ||
Talisman Energy Norge AS | Norway | 100% | ||
Talisman (Corridor) Ltd. | Barbados | 100% | ||
Talisman (Vietnam15-2/01) Ltd. | Alberta | 100% | ||
Talisman Malaysia Limited | Barbados | 100% | ||
Talisman Malaysia (PM3) Limited | Barbados | 100% | ||
Talisman (Algeria) B.V. | The Netherlands | 100% | ||
The above table does not include all of the subsidiaries of Talisman. The assets, sales and operating revenues of unnamed operating subsidiaries individually did not exceed 10% and, in the aggregate, did not exceed 20% of the total consolidated assets or total consolidated sales and operating revenues, respectively, of Talisman, as at and for the year ended December 31, 2014.
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 1
GENERAL DEVELOPMENT OF THE BUSINESS
General
Talisman's main business activities include exploration, development, production, transportation and marketing of crude oil, natural gas and natural gas liquids.
For the purposes of financial reporting, Talisman's 2014 activities were conducted in four geographic segments: North America, Southeast Asia, North Sea, and Other. The North America segment includes operations in Canada and the US. The Southeast Asia segment includes operations and exploration activities in Indonesia, Malaysia, Vietnam and Papua New Guinea, and non-operated production in Australia/Timor-Leste. The North Sea segment includes operations and exploration activities in the UK and Norway. As at year-end 2014, the Company also had non-operated production in Algeria, non-operated production and exploration activities in Colombia and exploration activities in the Kurdistan Region of Iraq. For ease of reference, activities in Algeria, Colombia, the Kurdistan Region of Iraq and Peru (which the Company is in the process of exiting), are referred to collectively as the "Other" geographic segment or "Rest of World", except where otherwise noted.
For operational purposes, Talisman has two core operating areas: the Americas and Asia-Pacific. This "General Development of the Business" section aligns with Talisman's two core operating areas. The remainder of this Annual Information Form aligns with Talisman's geographic segments for the purposes of financial reporting.
Three-Year History
Talisman Energy Inc. is an independent, upstream oil and gas company based in Canada. Formerly a subsidiary of BP plc, Talisman began independent operations in 1992 and built its portfolio of assets through a combination of exploration, development and acquisitions.
In September 2012, following a strategic review of the business, Talisman's Board of Directors ("Board") appointed Mr. Hal Kvisle as President and Chief Executive Officer of the Company. In October 2012, the Company publicly announced that it was focusing on total shareholder returns and near-term profitability; in particular, generating reliable cash flow per share growth. To achieve these goals, the Company set four new strategic priorities, as follows:
Talisman made significant progress against its four strategic priorities. Talisman focused on its two core areas: the Americas (comprising North America and Colombia) and Asia Pacific (comprising Southeast Asia and Algeria) and increased liquids and international natural gas production. Furthermore, Talisman met the target it set in March 2013 to realize $2 to 3 billion of proceeds over a 12- to 18-month period through the sale of non-core assets that were generating little or no short-term cash flow. Talisman also rationalized its portfolio over time; it decided to exit from Peru in 2012, exited Poland in 2013 and received government approval to withdraw from Sierra Leone in 2013.
Throughout 2013, the Company's senior management team, under the direction of Mr. Kvisle, conducted an in-depth review of the Company's strategy and business and reported regularly to the Board on the challenges and the progress of the review. In February 2014, the Company announced the planned disposition of an additional $2 billion of assets in the following 12 to 18 months, primarily focused on long-dated and/or capital intensive assets.
During 2014, the Company pursued various potential asset dispositions in furtherance of its disposition target, including transactions involving its Marcellus midstream assets, certain mature Canadian assets, its Duvernay assets (Canada) and assets in Norway and Kurdistan. Throughout this period, the Company encountered a challenging environment for the disposition of long-dated and capital intensive assets. Notwithstanding these challenges, Talisman completed the sale of 75% of its dry gas Montney position for C$1.5 billion to Progress Energy Canada Limited in 2014.
2015 Plans
The Company's 2015 plans as described in this Annual Information Form are based on the 2015 operating plan and budget that was reviewed and approved by the Board in December 2014 (the "2015 Plan"), prior to approving the corporate transaction with Repsol S.A. described below. The 2015 Plan was approved for a $2.7 billion capital activity program, based on prevailing commodity
2 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
prices in the fourth quarter of 2014. In response to the sustained low commodity price environment, the capital activity program was subsequently readjusted to target $2.1 billion a 30% reduction on 2014. Such capital reductions will include optimization work already underway in the UK and Norway; a more measured pace of development in Colombia; rig reductions in Canada, Marcellus and the Eagle Ford; and deferring a number of capital intensive projects in Asia-Pacific.
Repsol Transaction
On December 15, 2014, Talisman entered into an arrangement agreement ("Arrangement Agreement") with Repsol S.A. and an indirect wholly owned subsidiary of Repsol (collectively "Repsol"), providing for Repsol's acquisition of Talisman. Under the terms of the Arrangement Agreement, the acquisition is to be accomplished through a plan of arrangement ("Arrangement") under the Canada Business Corporations Act. If the Arrangement is completed, common shareholders will receive $8.00 for each common share that they own and preferred shareholders will receive C$25.00 plus accrued and unpaid dividends to the date of completion of the Arrangement for each preferred share that they own. The Arrangement Agreement provides that completion of the arrangement is subject to approval by two-thirds of the votes cast by holders of common shares at a special meeting of its shareholders, court approval of the Arrangement, and satisfaction or waiver of customary closing conditions, including applicable government and regulatory approvals.
Since the date the transaction with Repsol was announced, the following has occurred:
After completion of the Arrangement, Repsol may cause Talisman to change some of its current plans described in this Annual Information Form.
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 3
General
Talisman's aggregate production from its consolidated entities and equity investments for the year ended December 31, 2014 was 369 mboe/d, comprised of 43 mbbls/d of oil and liquids and 794 mmcf/d of gas from North America; 43 mbbls/d of oil and 510 mmcf/d of gas from Southeast Asia; 30 mbbls/d of oil and liquids and 20 mmcf/d of gas from the North Sea; and 24 mbbls/d of oil and liquids and 48 mmcf/d of gas from other areas. Approximately 38% of the Company's production is liquids and 62% is natural gas (on a 6 mcf:1 bbl equivalency basis).
North America
Talisman's North America operations are organized into two distinct businesses: Canada and United States. In this region, the Company has operations in the Edson (oil and gas production) and Chauvin (heavy oil production) areas, located in the Western Canadian Sedimentary Basin, primarily in Alberta, Canada; the Eagle Ford liquids-rich, shale gas play located in southeast Texas; and the Marcellus dry gas shale play located in northeast Pennsylvania. In 2014, North America production accounted for 47% of total Company production. As at December 31, 2014, Talisman operated approximately 80% of its North America production.
Canada
Talisman's Canadian assets are focused around liquids and gas in the Greater Edson area of Alberta, conventional heavy oil in the Chauvin area of Alberta/Saskatchewan and liquids-rich gas in Alberta's Duvernay play. In 2014, the Company completed the sale of its Montney play position in the Farrell Creek and Cypress areas of British Columbia. Talisman spent approximately $428 million to develop its assets in Canada in 2014, resulting in total production of 366 mmcfe/d (61 mboe/d). In 2015, the Company plans to continue to develop land positions in Greater Edson, Chauvin and Duvernay to advance these plays. The Company holds approximately 1.1 million net acres of land in Western Canada. Talisman's operations include four operated gas plants in the Edson area and an oil treatment facility in Chauvin.
Greater Edson
Talisman's Greater Edson assets are primarily located in the liquids and gas formations in the Edson area of Alberta. Talisman continued to develop its Greater Edson assets throughout 2014 with exploration and development spending of $220 million, resulting in total production of 234 mmcfe/d (39 mboe/d), which represents 63% of total Canada production. In total, 59 gross (36 net) wells were drilled in 2014. The Company holds approximately 519,000 net acres of land in Greater Edson.
In April 2014, the Company sold its deep gas assets located in the foothills of Monkman, British Columbia. In July 2014, the Company sold its Alberta/British Columbia foothills gas assets in the northern Alberta foothills and Ojay areas.
In 2012, Talisman entered into a seven-year agreement with Pembina Pipeline Corporation ("Pembina") for 150 mmcf/d of firm capacity at the Saturn Deep Cut facility, an enhanced natural gas liquids extraction facility built and operated by Pembina in the Wild River area of Alberta. The Saturn Deep Cut facility came onstream in October 2013. Incremental 2014 production through this facility helped contribute to the 95% increase in Greater Edson natural gas liquids volumes over the last year.
Chauvin
In the Chauvin area of Alberta/Saskatchewan, production for 2014 was 10,600 boe/d (95% heavy oil), which represents 17% of total Canada production. A total of 30 infill horizontal wells (22 producers and 8 injectors) were drilled in 2014. Approximately 135,000 net acres of land is held in the Chauvin area. The Company's operations in Chauvin provide stable heavy oil production.
Duvernay
In the liquids-rich Duvernay play in west-central Alberta, the Company currently holds interests in approximately 323,000 net acres of land. During 2014, Talisman drilled six horizontal wells in the Duvernay play. Total production in 2014 was 6 mmcfe/d (1 mboe/d), representing 2% of total Canada production.
Montney
In 2014, Talisman completed the sale of its Montney play position in the Farrell Creek and Cypress areas of British Columbia, 65 mmcfe/d of Farrell Creek production as of October 1, 2013, and C$800 million of remaining third party capital carry to Progress Energy Canada Ltd. for total cash consideration of C$1.5 billion. Talisman retained its Groundbirch and Saturn assets in the Montney play.
Lorraine/Utica
Talisman's Lorraine/Utica lands are located in the Quebec lowlands along the St. Lawrence River, where the Company holds 753,000 net acres. Talisman suspended operations in the region in 2011. In 2012, the Company fully impaired its Quebec
4 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
exploration and evaluation assets and recorded an after-tax impairment of $82 million when the Company determined that it would not commit capital in the foreseeable future toward exploration activities in Quebec.
United States
Talisman is involved in two shale gas plays in the United States a dry shale gas play in the Marcellus and a liquids-rich shale gas play in the Eagle Ford. In 2014, the Company spent approximately $914 million on these shale gas plays. Production from these plays totaled approximately 684 mmcfe/d (114 mboe/d) in 2014. In 2015, the Company will continue to develop land positions in the Marcellus and Eagle Ford shale plays to advance the plays.
Marcellus Shale
Talisman's interests in the Marcellus shale play are located in New York and Pennsylvania. Talisman's main area of focus in 2014 was in Pennsylvania, which will continue to be a focus of investment in 2015. At year-end, the Company's full year production in the Marcellus shale play averaged 461 mmcf/d (100% gas), which represents 45% of the Company's total North America production. In 2014, Marcellus development focused on building infrastructure to facilitate bringing wells onstream earlier than planned. In total, 30 gross (30 net) wells were drilled in 2014, the majority of which were drilled in the Friendsville area in conjunction with associated infrastructure build-out. The Company holds approximately 170,000 net acres of land in Pennsylvania.
In Pennsylvania, Talisman has midstream assets consisting of approximately 240 miles of gathering/transmission pipelines serviced by seven compression/gas dehydration facilities. The pipeline system has throughput capacity of 1.5 bcf/d. During 2014, these facilities delivered 507 mmcf/d into outlets on Tennessee Gas, Empire, Dominion Transmission and Corning Natural Gas pipelines. The New York midstream assets currently consist of approximately 195 miles of gathering/transmission pipelines and 7 compression/gas processing facilities with throughput capacity of 125 mmcf/d. During 2014, these facilities delivered 18 mmcf/d from Trenton Black River formation production to facilities on the Dominion Transmission and Corning Natural Gas pipelines. All of these systems currently gather mostly volumes from wells in which Talisman currently has a working interest, although additional capacity is available for future use by Talisman or third parties. Talisman currently holds approximately 625 mmcf/d of gas pipeline capacity from the Marcellus area.
In December 2014, the New York Governor's office announced that it was banning high volume hydraulic fracturing in New York, following the completion of a review conducted by the state's Department of Health. Also, in June 2014, the New York Supreme Court upheld the ability of local municipalities to ban hydraulic fracturing activities. The use of local ordinances (also known as "home rules") effectively bans oil and gas operations within the municipal jurisdictional boundary. Talisman has no immediate plans to drill in New York and will continue to monitor the pending regulatory changes applicable to future operations in New York.
Eagle Ford Shale
Talisman's interests in the Eagle Ford shale play are located in southeast Texas, where the Company now holds approximately 59,000 net acres of land. In 2013, Talisman transitioned operatorship of the eastern part of the play to Statoil pursuant to the South Texas Joint Development Agreement ("STJDA"). Talisman's strategy in this play is focused on developing areas with optimal liquid yields. At year-end, the Company's full year production averaged 35 mboe/d (30% natural gas liquids and 35% oil), which represents 20% of total North America production. In total, 69 gross (32 net) joint venture wells and 64 gross (4 net) third party non-operated wells were drilled in 2014. Pursuant to the STJDA, Talisman and Statoil plan to continue to develop the liquids-rich areas of the Eagle Ford play in 2015.
Southeast Asia
This region is referred to as "Southeast Asia" throughout this Annual Information Form to align with Talisman's geographic segments for the purposes of financial reporting. The Company also refers to this region as "Asia-Pacific", which includes Southeast Asia and Algeria and is considered one of Talisman's two core operating areas.
Southeast Asia delivers free cash flow and exposure to exploration upside. Talisman has interests in Indonesia, Malaysia, Vietnam, Australia/Timor-Leste and Papua New Guinea. In 2014, Southeast Asia production averaged 128 mboe/d, which accounted for approximately 35% of the Company's production worldwide. As at year-end 2014, Talisman operated approximately 45% of its Southeast Asia production.
Indonesia
Talisman's Indonesian assets include interests in production sharing contracts ("PSCs") at Corridor, Ogan Komering and Jambi Merang in South Sumatra and in the Tangguh LNG project in West Papua. Talisman also holds exploration acreage, including the Sakakemang and Andaman III PSC in South and North Sumatra, respectively. During the year, Talisman undertook two Joint Study Agreements for areas in South Sumatra which were completed by year-end. Talisman also has an indirect, 6% interest in the Grissik-to-Duri pipeline and the Grissik-to-Singapore pipeline which is used to transport gas from the Corridor PSC.
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 5
In 2014, Talisman sold its 7.5% interest in the Southeast Sumatra PSC to PT Pertamina Energi SES. Talisman also relinquished its interest in one of four PSCs in the Makassar Straits and expects to relinquish the remaining three in early 2015. In November 2014, Talisman entered into an agreement to farm-in to the East Jabung PSC for 51% and for operatorship; government approval is expected in 2015.
In the Corridor PSC, Talisman has a 36% non-operated interest in all but two of the producing fields, the exceptions being the Gelam and Suban fields, which are unitized with adjoining blocks where Talisman's unit interests are 30.96% and 32.4%, respectively.
The majority of Talisman's natural gas production from the Corridor block is currently sold under long-term sales agreements with PT Chevron Pacific Indonesia ("Chevron"), Gas Supply Pte. Ltd. ("GSPL") and PT Perusahaan Gas Negara (Persero), Tbk. ("PGN"). Gas sales from Corridor to PGN for their markets in West Java are sold under a long term contract with no associated transportation costs. The volume commitment based on daily contract quantity is approximately 424 bcf (net) over the remaining nine years life of the contract (2015-2023).
In 2014, net production from the Corridor PSC was approximately 59 mboe/d. Corridor production accounted for approximately 46% of Talisman's Southeast Asia production. In 2014, the Suban-14 well, the first in a minimum three well drilling program, was spud. The Suban-14 well is expected to be completed in early 2015, and Talisman plans to participate in additional Suban development wells throughout the year.
In 2014, production from the Company's 25% interest in the Jambi Merang PSC averaged 6 mboe/d (net). Talisman plans to sanction the Jambi Merang Phase 2 project in 2016, which will expand the current gas plant capacity and allow the production of additional liquids.
Talisman's share of production from the Tangguh LNG project contributed 5 mboe/d in 2014. Talisman plans to make a final investment decision on the Tangguh Expansion Project in 2016.
In 2014, Talisman participated in two development wells, one of which was still drilling at year-end, and one appraisal well in Indonesia. Talisman also completed an appraisal well earlier in the year, which had commenced drilling in late 2013.
In 2015, the Company will focus its activity in South Sumatra, which will include development drilling at Corridor and acquiring seismic in Sakakemang.
Malaysia
Talisman operates the Block PM-3 CAA PSC between Malaysia and Vietnam and associated production facilities and holds a 41% interest in the Block, with the exception of the Bunga Kekwa Sub-Block 8G-31 where Talisman holds a 35% interest as a result of an interim extension of this Sub-Block that was signed in 2014. In addition, Talisman holds a 60% interest in each of Block PM-305 and Block PM-314. In Block PM-3 CAA, Talisman operates facilities referred to as the "Southern Fields" and the "Northern Fields." Licenses in PM-3 CAA are currently subject to negotiations for renewal. A multi-well drilling program is ongoing at Block PM-3 CAA. In PM-3 CAA, seven development wells were successfully drilled and completed and one exploration well was drilled in 2014. Production from PM-3 CAA averaged 29 mboe/d (net) in 2014. Talisman plans to continue its development drilling program at Block PM-3 CAA in 2015.
Talisman holds a 70% working interest in exploration licences for SB-309 and SB-310, offshore Sabah in east Malaysia. Two of three commitment wells were drilled on Block SB-309 and the Company has been given approval for an 18-month extension to the exploration period with respect to Block SB-310. In 2015, Talisman plans to progress its exploration commitments on the blocks.
Talisman holds a 60% equity interest and operatorship of the Kinabalu Oil PSC, which is a mature offshore oilfield in the Malaysian Sabah Basin. In 2014, the Company successfully completed a six infill well program that commenced in 2013. Production from Kinabulu averaged 7 mboe/d in 2014. In 2015, the Company plans to continue progressing the Kinabalu redevelopment project, with sanction currently expected in mid-2015.
In 2014, Talisman's net share of production in Malaysia averaged 38 mboe/d, which accounted for approximately 30% of Talisman's total Southeast Asia production.
Vietnam
Talisman holds a 60% interest in Block 15-2/01 as a partner in the Thang Long Joint Operating Company ("JOC"), which operates the Block. Block 15-2/01 lies in the Cuu Long Basin, the predominant oil producing basin in Vietnam. The Company holds a 49% operated interest in Blocks 133 and 134, a 40% operated interest in Blocks 135 and 136, a 40% operated interest in Block 05-2/10, a 55% operated interest in Block 07/03, including the Red Emperor discovery, adjacent to Blocks 135 and 136 in the Nam Con Son Basin, and a 33% interest in Block 46-Cai Nuoc. In 2014, Talisman acquired an 80% operated interest in Blocks 146-147 and relinquished its 35% interest in Blocks 45 and 46/07.
6 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
Combined production from Talisman's interest in the HST/HSD project, situated in Block 15-2/01, and its interest in the adjacent TGT Unit, averaged 12 mboe/d in 2014, accounting for approximately 9% of Talisman's total Southeast Asia production.
The Company completed a 3D seismic program and drilled two successful exploration wells (including one sidetrack) in the Block 136 Red Emperor extension, adjacent to Talisman's fully appraised Red Emperor discovery in Block 07/03.
Talisman plans to continue appraising the Red Emperor extension and continue working towards sanctioning development of the CRD discovery on Block 07/03.
Australia/Timor-Leste
Talisman holds non-operated interests in the Laminaria (33%) and Corallina (40%) fields offshore Australia. The sale of the Company's 25% interest in the Kitan project (JPDA 06-105) to Hibiscus Petroleum Berhad is currently in progress and awaiting government approval. The sale is expected to close in 2015 with an effective date of January 1, 2014. Talisman's net production in Australia/Timor-Leste averaged 3 mboe/d in 2014.
Papua New Guinea
In Papua New Guinea ("PNG"), Talisman continues to progress its gas aggregation strategy with strategic partners Santos Ltd. and Mitsubishi Corporation and targets to aggregate two to four trillion cubic feet of gas in the Western Province. In 2014, Talisman successfully drilled two exploration wells in the western province and two development wells relating to the Stanley development. In 2015, Talisman plans to continue supporting its gas aggregation strategy through further exploration drilling and the acquisition of additional seismic.
North Sea
Talisman's North Sea business consists of Talisman's operations in Norway and Talisman's equity investment in TSEUK in the United Kingdom. In aggregate, Talisman's North Sea business delivered total production of 34 mboe/d in 2014.
Norway
In Norway, Talisman operates the Blane, Gyda, Rev, Yme and Varg fields with interests ranging from 18% to 70%. It also holds interests from 0.5% to 34% in a number of non-operated fields with associated production facilities and intrafield pipelines including Brage, Veslefrikk, Huldra, Brynhild and Tambar East.
In 2014, production in Norway averaged 17 mboe/d across nine fields, accounting for approximately 5% of the Company's production worldwide. The primary focus in Norway is oil, with oil and liquids contributing to 82% of Talisman's Norway production. First oil from the Brynhild field development commenced in December 2014. As at year-end 2014, Talisman operated approximately 55% of its Norway production.
In 2013, the Company reached an agreement with the Yme platform contractor to terminate the Yme project. The agreement commits the Yme licence partners to remove the Yme platform and transfer it to the platform contractor who will be responsible for further transportation and scrapping. The removal of the Yme platform is expected to occur in the summer of 2015.
In 2014, Talisman participated in three infill wells at Veslefrikk and Brage, and two wells in the Brynhild development project. Talisman also commenced gas export from the Varg field to the Armada platform on the United Kingdom continental shelf in February 2014.
During 2015, Talisman plans to participate in the drilling of the Snømus and Crossbill exploration wells and finish drilling six development wells.
United Kingdom
Talisman holds a 51% equity interest in TSEUK. The remaining 49% is held by Addax Petroleum UK Limited, a wholly owned subsidiary of the Sinopec Group. TSEUK is governed through its Executive Committee and Board of Directors. The Executive Committee, comprised of shareholder representatives, is the primary decision-making body for items beyond the authority limit of TSEUK's management team. TSEUK's Board of Directors, comprised of an equal number of shareholder representatives plus an independent director, is the decision-making body for items beyond the authority limit of the Executive Committee. As a shareholder, Talisman does not have control of the day-to-day operations of TSEUK.
TSEUK
Talisman's share of capital investment in exploration and development activities during 2014 was $607 million. Talisman's investment in TSEUK contributed 17 mboe/d, or approximately 5%, towards Talisman's 2014 worldwide production. At year-end, TSEUK operated approximately 81% of its production.
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 7
TSEUK's principal operating areas encompass a total of 42 fields in the UK, 32 of which are operated and ten of which are non-operated. TSEUK's working interests in fields range from 5% to 100%. TSEUK also has interests in a number of production facilities and pipelines, including a 100% interest in the Flotta Terminal. Pursuant to the TSEUK shareholders' agreement, Talisman agreed to spend up to $2.5 billion over five years (2012-2016), on projects that meet a prescribed economic threshold. Of this amount, Talisman expects to spend approximately $0.5 billion for each of the next two years.
During 2014, TSEUK continued to make progress on the Montrose Area Redevelopment project, which was sanctioned in 2012. The project is expected to be completed in 2016/2017 with peak production impact currently expected in 2018. 48% of the project was complete as at year-end. Also in 2014, commercial arrangements were agreed upon to continue Buchan production to 2017 and Blake production to 2019. The Seagull exploration well was drilled, with success to be determined in 2015. Production from the Golden Eagle Area Development was first received at the Flotta terminal in November 2014.
Throughout 2014, TSEUK was challenged with respect to asset downtime issues and declining production volumes. Lower production for the year was primarily driven by operational issues at Auk and Clyde, as well as an extended unplanned outage at Montrose and Arbroath.
A business improvement review of TSEUK was also completed in 2014, resulting in the creation of two distinct business divisions, Operations and Late Life Assets, as well as a new leadership team and a performance improvement program to focus on better value delivery.
In 2013, legislation was passed allowing the UK government to enter into Decommissioning Relief Deeds. The Decommissioning Relief Deeds provide contractual certainty for oil and gas companies with respect to entitlement to tax relief on future decommissioning activities and allows security for decommissioning costs posted under Decommissioning Security Agreements ("DSAs") to be posted on a post-tax basis. Tax relief is guaranteed to the extent of corporate taxes paid since 2002. TSEUK (including its predecessor) has paid $2.3 billion of corporate taxes since 2002. TSEUK has entered into a Decommissioning Relief Deed with the UK Government and will continue to negotiate with counterparties to amend all DSAs accordingly.
In 2015, TSEUK plans to drill a Cayley production well and to commission the Claymore Compression upgrade Unit.
Rest of World
Talisman's other interests as at December 31, 2014 include non-operated production and exploration activities in Colombia, non-operated production in Algeria and exploration activities in the Kurdistan Region of Iraq.
Colombia
This section describes Talisman's own operations in Colombia. Operations relating to Talisman's 49% interest in Equion, accounted for using the equity method, are described in a separate section below.
Talisman currently holds an interest in 4.3 million net acres (excluding the acreage owned by Equion) in Colombia and continues to have an active exploration program in the proven hydrocarbon basins of the Llanos and Putumayo heavy oil regions. Annualized 2014 production averaged 4 mboe/d, consisting of only oil and liquids production.
In November 2014, Talisman (45% non-operated working interest) and its co-participant (the operator) announced the presence of hydrocarbons in the Nueva Esperanza-1 exploratory well, located in Block CPO-9. Long-term production test of the well was approved by the regulator in early 2015. The Company obtained permission from the regulator to drill two appraisal wells along the same structural trend, the first of which reached total depth in January 2015. Two Akacias appraisal wells were completed in 2014 and put on long-term test. A field development plan for the Akacias development was submitted in March 2014 and the first phase consisting of ten development wells has been sanctioned. The corresponding environmental licence is expected to be awarded in the first half of 2015.
On Block CPE-6, Talisman (50% non-operated working interest) and its co-participant (the operator) drilled 11 appraisal wells and one water injector. Further flow testing and appraisal drilling is required prior to a decision on declaration of "commerciality"(1).
Due to security issues on Block CPE-8, a force majeure application was approved by the state regulator to suspend the Company's activities in the block until September 2015. The Company (50% operated working interest) and its co-participant propose to seek regulatory approval to transfer the remaining Block CPE-8 expenditure obligations to Block CPO-9.
Talisman was awarded a contract to explore and appraise the Putumayo 30 Block in 2014. An application to the regulator was submitted in November 2014 for a transfer of Talisman's 50% interest to a third party.
8 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
In the foothills region, rig release of the Huron-3 well in the Niscota Block occurred in 2014. In the El Porton Block, located near the Llanos foothills region, the Curiara-1 discovery was flow-tested. Results indicate limited resources, and the well will be abandoned in 2015.
Equion
Talisman holds a 49% equity interest in Equion. The remaining 51% interest is held by Ecopetrol. Equion currently holds upstream licences in a number of blocks and also holds equity and capacity interests, or both, in three pipelines. Annualized 2014 production averaged 17 mboe/d.
Equion made progress on the Piedemonte Expansion Project in 2014. Two wells were completed and three wells were drilling as at year-end. In addition, the first phase of the Floreña gas expansion started up in late 2014 and completion of the facility is expected to occur in 2015. Equion plans to drill up to three additional wells in 2015.
Algeria
Talisman holds a 35% non-operated interest in Block 405a under a PSC with Algeria's national oil company, Sonatrach. Through its participation in Block 405a, Talisman currently holds a 35% interest in the producing Greater Menzel Lejmat North ("MLN") fields and the Menzel Lejmat Southeast field, a 2% interest in the producing unitized Ourhoud field, and a 9% interest in the unitized EMK field produced through the El Merk facility. In 2014, there was no drilling activity. Production from the area averaged 12 mboe/d in 2014. Talisman's Algeria production is 100% liquids.
The Kurdistan Region of Iraq
Talisman has an interest in two blocks, Kurdamir and Topkhana, in the Kurdistan Region of Iraq covering approximately 119,000 acres (net to Talisman).
Talisman submitted a notice of withdrawal from the Joint Operating Agreement ("JOA") on the Kurdamir Block to its partner WesternZagros in December 2014 after determining that future investment in a capital constrained environment was unlikely. Talisman has informed the Kurdistan Regional Government ("KRG") of its JOA withdrawal notice and its intention to withdraw from the PSC. Discussions between Talisman, WesternZagros and the KRG are ongoing to determine the forward actions of withdrawal.
In the Topkhana Block, extensive well testing of the Tophkana-2 ("T-2") well was completed in 2014. The results indicate an oil interval based on pressure data but further drilling is required to understand this complex reservoir. The Company extended the second exploration sub-period to late 2015.
Other
In 2012, Talisman decided to discontinue operations in Peru and exit the country upon completion of all obligations. Talisman expects that it will take several years to complete all remediation obligations and post abandonment monitoring obligations on the seven blocks on which exploration was conducted.
RESERVES AND OTHER OIL AND GAS INFORMATION
Information on the Company's reserves and other oil and gas information, prepared in accordance with Canadian disclosure requirements, is set forth in Schedule A.
COMPETITIVE CONDITIONS
The oil and gas industry, both within North America and internationally, is highly competitive in all aspects of the business. The Company actively competes for the acquisition of properties, the exploration for and development of new sources of supply, the contractual services for oil and gas drilling and production equipment and services, the transportation and marketing of current production, and industry personnel. With respect to the exploration, development and marketing of oil and natural gas, the Company's competitors include major integrated oil and gas companies, numerous other independent oil and gas companies, individual producers and operators, and national oil companies. A number of the Company's competitors have financial and other resources substantially in excess of those available to the Company. In addition, oil and gas producers in general compete indirectly against others engaged in supplying alternative forms of energy, fuel and related products to consumers.
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 9
CORPORATE RESPONSIBILITY AND ENVIRONMENTAL PROTECTION
Corporate Policies
The Company has adopted a Code of Business Conduct and Ethics ("BCE Code") which is applicable to all directors, officers and employees of the Company. To monitor compliance with the BCE Code, certificates are required at least annually from all directors, worldwide employees and various consultants of the Company, which confirm compliance with the BCE Code or disclose any deviations therefrom. The Company requires annual online ethics training as part of the certificate of compliance process. Exceptions are required to be noted directly to the President and Chief Executive Officer, and supervisors are notified if employees do not complete their annual certifications. Disclosures contained in the certificates, as well as a status report on the percentage of directors, employees and various consultants who have completed their annual certification, are reported to the Audit Committee of the Board for consideration. The Governance and Nominating Committee of the Board reviews any requests for waivers from the BCE Code from executive officers and directors, and all material waivers from the BCE Code are required to be disclosed promptly to shareholders. No waivers from the BCE Code were granted for the benefit of the Company's directors or executive officers during the year ended December 31, 2014.
The Company values good faith actions in support of the BCE Code and will not tolerate retaliation of any kind as a result of good faith reporting by employees. Talisman requires that observed breaches of the BCE Code be reported to a supervisor or manager, a Vice President in the Legal Department, the Vice President, Internal Audit, an executive officer, or through the Company's Integrity Matters hotline.
Health, Safety and Environmental Protection
The Board of Directors and all executive officers oversee and are accountable for Talisman's health, safety, security, environment and operational performance. Talisman's Health, Safety, Environment and Corporate Responsibility ("HSECR") Committee of the Board and the Company's executive officers regularly review policies, management systems, internal controls, performance reports, significant issues, exposures and strategic initiatives in the area of health, safety and the environment ("HSE").
In 2013, Talisman introduced a new Global Standard for Safe Operations (the "Global Standard"), and associated mandatory practices, effective January 31, 2014. The Global Standard provides for a systematic approach to managing key risks related to occupational health, environment, personal safety and process safety.
The Global Standard defines Talisman's minimum expectations for safe operations in each of the following areas: leadership commitment and accountabilities; regulatory compliance; risk management; capability and training; contractor HSE management; asset design and construction; safe operations; operations and integrity management; management of change; emergency and crisis management; incident reporting, investigation and analysis; information and documentation; and reporting, assurance and review. At Talisman, respective country or business unit leaders are required to base the development and implementation of local management systems upon the Global Standard.
Safe operations in all Talisman activities form a core value of the Company. If operational results and safety ever come into conflict, Talisman employees and contractors are empowered and encouraged to choose safety over operational results. Talisman will support that choice. Talisman's safety culture is driven by strong commitment from senior management and safety accountability at all levels of the organization.
Talisman regularly reports to and consults with government agencies in its operating regions and submits to routine regulatory inspections. The Company also conducts environmental due diligence on applicable asset and corporate acquisitions to identify and properly account for pre-existing environmental liabilities.
10 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
EMPLOYEES
At December 31, 2014, Talisman's permanent staff complement (excluding employees of TSEUK and Equion) was 2,718, as set forth in the table below.
Permanent Staff Complement(1) as at December 31, 2014 |
|||
North America | 1,576 | (2) | |
North Sea | 220 | ||
Southeast Asia | 806 | ||
Latin America | 82 | ||
Rest of World(3) | 34 | ||
Total | 2,718 | ||
DESCRIPTION OF CAPITAL STRUCTURE
Share Capital
The Company's authorized share capital consists of an unlimited number of Common Shares without nominal or par value and an unlimited number of first and second preferred shares. The outstanding shares consist of Common Shares and Cumulative Redeemable Rate Reset First Preferred Shares, Series 1 ("Series 1 First Preferred Shares"), all of which are fully paid and non-assessable.
Common Shares
Holders of Common Shares are entitled to receive notice of and to attend all annual and special meetings of shareholders. Each Common Share carries with it the right to one vote. Subject to the rights of holders of other classes of shares of the Company who are entitled to receive dividends in priority to or rateable with the Common Shares, the Board of Directors may, in its sole discretion, declare dividends on the Common Shares to the exclusion of any other class of shares of the Company. In the event of liquidation, dissolution or winding up of the Company or any other distribution of assets of the Company among its shareholders for the purpose of winding up its affairs, and subject to the rights of other classes of shares on a priority basis, the holders of Common Shares are entitled to participate rateably in any distribution of any assets of the Company.
First and Second Preferred Shares
The first preferred shares are issuable in one or more series, each series consisting of the number of shares and having the designation, rights, privileges, restrictions and conditions as are determined before issue by the Board of Directors of the Company. Each series of first preferred shares would rank on par with the first preferred shares of every other series with respect to declared or accumulated dividends and return of capital. In addition, the first preferred shares are entitled to a preference over the second preferred shares and the Common Shares with respect to the payment of dividends and the distribution of assets of the Company in the event of liquidation, dissolution or winding up of the Company. Except as required by law, the first preferred shares are not entitled to receive notice of meetings of shareholders. The first preferred shares are only entitled to voting rights if determined by the Board of Directors prior to the issuance of any series and if the Company fails to pay dividends on that series for a period in excess of 12 months.
The second preferred shares are issuable in one or more series, each series consisting of the number of shares and having the designation, rights, privileges, restrictions and conditions as are determined before issue by the Board of Directors of the Company. Each series of second preferred shares would rank on a parity with the second preferred shares of every other series with respect to declared or accumulated dividends and return of capital. In addition, the second preferred shares are entitled to a preference over the Common Shares with respect to the payment of dividends and the distribution of assets of the Company in the event of liquidation, dissolution or winding up of the Company. Except as required by law, the second preferred shares are not entitled to receive notice of meetings of shareholders. The second preferred shares are only entitled to voting rights if determined by the Board of Directors prior to the issuance of any series and if the Company fails to pay dividends on that series for a period in excess of 12 months.
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 11
Series 1 and Series 2 First Preferred Shares
The holders of the outstanding Series 1 First Preferred Shares are entitled to receive, if, as and when declared by the Board, fixed cumulative preferential cash dividends for the initial period from the date of issue to December 31, 2016, at an annual rate of $1.05 per share, payable quarterly on the last day of March, June, September and December in each year. For each five-year period after the initial period, the holders of Series 1 First Preferred Shares are entitled to receive fixed cumulative preferential cash dividends, payable quarterly on the last day of March, June, September and December in each year, in the amount per share determined by multiplying $25.00 by one-quarter of the sum of the yield on a five-year Government of Canada bond 30 days prior to the start of such period and 2.77%. The Series 1 First Preferred Shares are redeemable by the Company in whole or in part on or after December 31, 2016 and on December 31 in every fifth year thereafter, by the payment of $25.00 per share plus all accrued and unpaid dividends. The holders of the Series 1 First Preferred Shares are not entitled to any voting rights unless dividends on the Series 1 First Preferred Shares are in arrears to the extent of eight quarterly dividends. Until all arrears of dividends have been paid, holders of Series 1 First Preferred Shares will be entitled to one vote in respect of each Series 1 First Preferred Share held with respect to resolutions to elect directors. In the event of the liquidation, dissolution or winding up of the Company, the holders of the Series 1 First Preferred Shares shall be entitled to receive $25.00 per share plus all accrued and unpaid dividends thereon, in preference over the Common Shares or any shares ranking junior to the Series 1 First Preferred Shares. The holders of the Series 1 First Preferred Shares are not entitled to any voting rights unless dividends on the Series 1 First Preferred Shares are in arrears to the extent of eight quarterly dividends. Until all arrears of dividends have been paid, holders of Series 1 First Preferred Shares will be entitled to one vote in respect of each Series 1 First Preferred Share held with respect to resolutions to elect directors.
The holders of the Series 1 First Preferred Shares have the right to convert all or any of their shares into an equal number of Cumulative Redeemable Rate Reset First Preferred Shares, Series 2 of the Company ("Series 2 First Preferred Shares"), subject to certain conditions, on December 31, 2016 and on December 31 in every fifth year thereafter. The holders of the Series 2 First Preferred Shares will be entitled to receive, if, as and when declared by the Board, quarterly floating rate cumulative preferential cash dividends payable on the last day of March, June, September and December in each year in the amount per share determined by multiplying $25.00 by the sum of the average yield (expressed as an annual rate) of the 90-day Government of Canada treasury bill rate, available 30 days before the start of the quarter, and 2.77% and further multiplying that product by a fraction, the numerator of which is the actual number of days in the quarter and the denominator of which is the number of days in the applicable year. The holders of Series 2 First Preferred Shares will have the right to convert all or any of their shares into an equal number of Series 1 First Preferred Shares, subject to certain conditions, on December 31, 2021 and on December 31 in every fifth year thereafter. The Series 2 First Preferred Shares are also redeemable by the Company in whole or in part at different prices depending on the time of redemption. Other than the different dividend rights, redemption rights and conversion rights attached thereto, the Series 1 First Preferred Shares and Series 2 First Preferred Shares are identical in all material respects.
Ratings
The following information relating to the Company's credit ratings is provided as it relates to the Company's financing costs, liquidity and cost of operations. Specifically, credit ratings impact the Company's ability to obtain short-term and long-term financing and the cost of such financings. A negative change in the Company's ratings outlook or any downgrade in the Company's current investment-grade credit ratings by its rating agencies, particularly below investment grade, could adversely affect its cost of borrowing and/or access to sources of liquidity and capital. In addition, changes in credit ratings may affect the Company's ability to enter into, or the associated costs of entering into, hedging transactions or other ordinary course contracts on acceptable terms, and a decline in the credit ratings or outlook may require the Company to post collateral or post additional collateral under certain of its contracts. The Company believes its credit ratings will allow it to continue to have access to the capital markets, as and when needed, at a reasonable cost of funds.
The following table outlines the ratings assigned to the Company by credit rating agencies as of December 31, 2014.
Standard & Poor's Rating Services ("S&P") |
Moody's Investors Services ("Moody's") |
Fitch Rating Services ("Fitch") |
DBRS Limited ("DBRS") |
||||||
Senior Unsecured/Long-Term Rating | BBB- | Baa3 | BBB- | BBB (under review |
) |
||||
US Commercial Paper/Short-Term Rating | A-3 | P-3 | F3 | | |||||
Series 1 First Preferred Shares | P-3 | | BB | Pfd-3 | |||||
Outlook/Trend | Stable | Negative | Stable | ||||||
Credit ratings are intended to provide investors with an independent measure of the credit quality of an issue of securities and are indicators of the likelihood of payment and of the capacity of a company to meet its financial commitment on the rated obligation in
12 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
accordance with the terms of the rated obligation. The ratings agencies regularly evaluate the Company, and their ratings of the Company's securities are based on a number of factors not entirely within the Company's control, including conditions affecting the oil and gas industry generally, and the wider state of the economy. The credit ratings assigned to the Company's senior unsecured long-term debt securities, the Company's US commercial paper ("US Commercial Paper") and Series 1 Preferred Shares are not recommendations to purchase, hold or sell the securities and may be revised or withdrawn entirely at any time by a rating agency. Credit ratings may not reflect the potential impact of all risks or the value of these securities. In addition, real or anticipated changes in the rating assigned to the securities will generally affect the market value of the securities. There can be no assurance that any rating will remain in effect for any given period of time or that any rating will not be revised or withdrawn entirely by a rating agency in the future if, in its judgment, circumstances so warrant.
S&P's credit ratings are on a long-term debt rating scale that ranges from AAA to D, representing the range from highest to lowest quality of such securities rated. The ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories. The BBB rating category is the fourth highest of the eleven major ratings categories used by S&P. According to S&P's rating system, debt securities rated BBB- are considered the lowest investment grade by market participants.
S&P's credit rating for short-term issues range from A-1 to D, representing the range from highest to lowest quality of such securities rated. According to S&P, a short-term obligation rated A-3 exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
S&P's preferred share scale ranges from P1 to C, representing the range from highest to lowest quality of such securities rated. The ratings can be modified by "high," "mid" or "low" grades which indicate relative standing within the major rating categories. According to the S&P rating system, securities rated P-3 exhibit adequate protection parameters and are less vulnerable to non-payment than other speculative issues.
Moody's long-term debt credit ratings are on a scale that ranges from Aaa to C, representing the range from least credit risk to greatest credit risk of such securities rated. Moody's applies numerical modifiers 1, 2 and 3 in each generic rating classification from Aa through Caa in its long-term debt rating system. The modifier 1 indicates that the issue ranks in the higher end of its generic rating category, the modifier 2 indicates a mid-range ranking and the modifier 3 indicates that the issue ranks in the lower end of that generic rating category. According to the Moody's rating system, debt securities rated within the Baa category are subject to moderate credit risk. They are considered medium grade and, as such, may possess certain speculative characteristics.
Moody's short-term debt ratings are on a scale of P-1 to NP, representing the range from least credit risk to greatest credit risk of such securities rated. Short-term ratings are opinions of the ability of issuers to honour short-term financial obligations, typically with an original maturity not exceeding 13 months. According to Moody's rating system, issuers rated P-3 have an acceptable ability to repay short-term obligations.
Fitch's long-term debt credit ratings are on a scale that ranges from AAA to RD/D, representing the range from highest to lowest quality of such securities rated. The BBB rating category is the fourth highest of the eleven major ratings categories used by Fitch. According to Fitch's rating scale, obligations rated BBB are of good credit quality, expectations of default risk are low and the capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity. The modifiers "+" or "-" may be appended to a rating to denote relative status within major rating categories.
Fitch does not have ratings categories specifically applicable to preferred shares; it rates the securities of an entity generally on a scale ranging from a high of AAA to a low of D. The modifiers "+" or "-" may be appended to a rating to denote relative status within major rating categories. Securities rated BB indicate that business or financial flexibility exists which could support the servicing of financial commitments in the event of adverse changes in business or economic conditions over time.
Fitch's short-term credit ratings are on a scale that ranges from F1 to D, representing the range from highest to lowest quality of such securities rated. According to Fitch's rating scale, obligations rated F3 are of fair credit quality and have adequate intrinsic capacity for timely payment of financial commitments.
DBRS' credit ratings are on a long-term debt rating scale that ranges from AAA to D, representing the range from highest to lowest quality of such securities rated. Each rating category between AA and B is denoted by subcategories "high" and "low" to indicate the relative standing of a credit within a particular rating category. The absence of either a "high" or "low" designation indicates that the rating is in the "middle" of the category. The BBB rating category is the fourth highest of the ten major ratings categories used by DBRS. According to DBRS' rating system, long-term debt securities rated BBB are of adequate credit quality. The capacity for the payment of financial obligations is considered acceptable, but entities so rated may be vulnerable to future events.
DBRS' preferred share rating scale ranges from Pfd-1 to D, representing the range from highest to lowest quality of such securities rated. Each rating category is denoted by the subcategories "high" and "low".
The absence of either a "high" or a "low" designation indicates that the rating is in the "middle" of the category. According to DBRS, preferred shares with a Pfd-3 rating are of adequate credit quality and correspond to companies whose long-term debt is rated in the higher end of the BBB category.
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 13
MARKET FOR THE SECURITIES OF THE COMPANY
The Common Shares of the Company are listed on the Toronto Stock Exchange ("TSX") and New York Stock Exchange under the trading symbol TLM. The Company's Series 1 First Preferred Shares are listed on the TSX under the trading symbol TLM.PR.A. The Company's UK£250 million 6.625% Notes are listed on the London Stock Exchange.
Trading Price and Volume
The following sets out the high and low prices and the volumes of trading for the Company's Common Shares and Series 1 First Preferred Shares (as traded on the TSX) for the periods indicated.
Common Shares
Year | Month | High (C$) | Low (C$) | Volume | ||||
2014 | January | 13.13 | 11.86 | 48,253,314 | ||||
February | 12.17 | 11.33 | 33,277,961 | |||||
March | 11.62 | 10.76 | 47,772,617 | |||||
April | 12.06 | 10.91 | 38,445,355 | |||||
May | 12.07 | 11.00 | 53,963,099 | |||||
June | 11.75 | 10.96 | 50,894,481 | |||||
July | 11.99 | 10.48 | 64,495,195 | |||||
August | 11.98 | 10.84 | 41,278,098 | |||||
September | 11.18 | 9.60 | 42,747,318 | |||||
October | 9.77 | 6.85 | 86,601,154 | |||||
November | 7.33 | 5.15 | 59,443,068 | |||||
December | 9.14 | 3.96 | 248,710,838 | |||||
Series 1 First Preferred Shares
Year | Month | High (C$) | Low (C$) | Volume | ||||
2014 | January | 22.94 | 22.19 | 208,049 | ||||
February | 23.15 | 22.17 | 181,549 | |||||
March | 23.37 | 22.07 | 157,167 | |||||
April | 23.49 | 22.56 | 104,827 | |||||
May | 24.60 | 23.14 | 158,634 | |||||
June | 24.30 | 22.80 | 131,808 | |||||
July | 24.64 | 23.66 | 191,997 | |||||
August | 24.59 | 24.01 | 107,326 | |||||
September | 24.48 | 21.00 | 131,626 | |||||
October | 22.60 | 18.93 | 227,431 | |||||
November | 20.70 | 18.40 | 487,214 | |||||
December | 24.25 | 14.69 | 1,007,523 | |||||
Prior Sales
In 2014, Talisman did not grant any options relating to its Common Shares under its Employee Stock Option Plan nor issue any Common Shares or First Preferred Shares.
Dividends
In 2014, the Company paid aggregate dividends on Talisman's Common Shares totaling US$0.27 per share, unchanged from the aggregate dividends paid by the Company in 2013. In 2014, quarterly dividends were paid on March 31, June 30, September 30 and December 31, 2014. While a quarterly dividend is the Company's current practice, Talisman does not have a specific dividend policy and the declaration of dividends is at the sole discretion of its Board of Directors. In addition, pursuant to the Arrangement Agreement Talisman entered into with Repsol, Talisman's Board of Directors is permitted to declare and pay aggregate cash dividends of
14 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
US$0.18 per common share prior to closing of the Arrangement, including the dividend of US$0.0675 per Common Share that was declared and paid on December 31, 2014. However, no determination has been made by the Board of Directors in regard to such dividend and there is no assurance that such a dividend will be declared.
In 2014, the Company paid dividends on Talisman's Series 1 First Preferred Shares totaling C$1.05 per Series 1 First Preferred Share, which reflects a quarterly dividend rate of C$0.2625 per Series 1 First Preferred Shares. See also "Description of Capital Structure First and Second Preferred Shares."
Talisman confirms that all dividends paid to shareholders in 2014 are "eligible dividends" pursuant to provisions of the Income Tax Act (Canada). Furthermore, all dividends to be paid in 2015 and subsequent years will be eligible dividends for such purposes.
Talisman paid the following semi-annual and quarterly dividends on its Common Shares over the last three years:
Date(1) | Rate Per Common Share |
|
June 29, 2012 | US$0.135 | |
September 28, 2012 | US$0.0675 | |
December 31, 2012 | US$0.0675 | |
March 28, 2013 | US$0.0675 | |
June 28, 2013 | US$0.0675 | |
September 30, 2013 | US$0.0675 | |
December 31, 2013 | US$0.0675 | |
March 31, 2014 | US$0.0675 | |
June 30, 2014 | US$0.0675 | |
September 30, 2014 | US$0.0675 | |
December 31, 2014 | US$0.0675 | |
Talisman paid the following quarterly dividends on its Series 1 First Preferred Shares since their issuance on December 13, 2011:
Date | Rate Per Series 1 First Preferred Share |
||
April 2, 2012 | C$0.3136 | (1) | |
July 3, 2012 | C$0.2625 | ||
October 1, 2012 | C$0.2625 | ||
December 31, 2012 | C$0.2625 | ||
April 1, 2013 | C$0.2625 | ||
July 2, 2013 | C$0.2625 | ||
September 30, 2013 | C$0.2625 | ||
December 31, 2013 | C$0.2625 | ||
March 31, 2014 | C$0.2625 | ||
June 30, 2014 | C$0.2625 | ||
September 30, 2014 | C$0.2625 | ||
December 31, 2014 | C$0.2625 | ||
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 15
Information is given below with respect to each of the current directors and officers of the Company. The term of office of each director expires at the end of the next annual meeting of shareholders.
Directors
The directors of the Company are elected annually. The following table sets out the name, city, province or state and country of residence, year first elected or appointed to the Board of Directors, principal occupation within the past five years or more, educational qualifications and other current directorships of each of the directors of the Company as at March 1, 2015.
Name, City, Province or State and Country of Residence |
Year First Became Director of the Company |
Present Principal Occupation or Employment (including all officer positions currently held with the Company), Principal Occupation or Employment for the Past Five Years or More, Educational Qualifications, Other Current Public Company Directorships or Directorships in Non-Public Companies, Organizations or other Entities that Require a Significant Time Commitment | ||
Christiane Bergevin(2)(4) Age: 52(9) Montreal, Quebec Canada |
2009 | Christiane Bergevin has been the Executive Vice-President, Desjardins Group Partnerships and Business Development, Office of the President, of Desjardins Group (Canadian financial cooperative institution) since
September 2013. From August 2009 to September 2013, she was the Executive Vice-President, Strategic Partnerships, Office of the President, of Desjardins Group. Prior to that, she was Senior Vice-President and General Manager, Corporate
Projects, with SNC-Lavalin Group Inc. ("SNC-Lavalin") (engineering and construction firm). For the 18 years prior to that, Ms. Bergevin held executive finance positions with various SNC-Lavalin subsidiaries, including as President of
SNC-Lavalin Capital Inc., its project finance advisory arm, between 2001 and 2008. Ms. Bergevin holds a Bachelor of Commerce degree (with distinction) from McGill University and graduated from the Wharton School of Business Advanced
Management Program. In 2013, she was awarded the ICD.D designation by the Institute of Corporate Directors. Current public company directorships(7): Yamana Gold Inc. Other current directorships(8): QTrade Financial Group, The Canadian Chamber of Commerce |
||
Donald J. Carty, O.C.(1)(3)(6) Age: 68(9) Dallas, Texas United States |
2009 | Donald Carty served as Vice Chairman and Chief Financial Officer of Dell Inc. (global computer systems and services company) from January 2007 until mid-2008. From 1998 to 2003, he was the Chairman and Chief
Executive Officer of AMR Corp. and American Airlines (airline transportation company). Prior to that, Mr. Carty served as President of AMR Airline Group and American Airlines. Mr. Carty was the President and Chief Executive Officer of
Canadian Pacific Airlines (airline transportation company) from March 1985 to March 1987. Mr. Carty holds an undergraduate degree and an Honorary Doctor of Laws from Queen's University and a Master's degree in Business Administration
from Harvard University. Mr. Carty is an Officer of the Order of Canada. Current public company directorships(7): Canadian National Railway Co. Other current directorships(8): Porter Airlines Inc., Virgin America Airlines, Research Now Group, Inc. |
||
Jonathan Christodoro(3)(5) Age: 38(9) Paramus, New Jersey United States |
2013 | Jonathan Christodoro has served as a Managing Director of Icahn Capital LP (private investment firm) since July 2012. Prior to that, Mr. Christodoro served in various investment and research roles at
P2 Capital Partners, LLC, Prentice Capital Management, LP, S.A.C. Capital Advisors, LP and Morgan Stanley (financial/investment firms). Mr. Christodoro holds an MBA from the University of Pennsylvania's Wharton School of
Business with Distinction and a B.S. in Applied Economics and Management Magna Cum Laude with Honors Distinction in Research from Cornell University. Mr. Christodoro also served in the United States Marine Corps. Current public company directorships(7): Enzon Pharmaceuticals, Inc., Herbalife Ltd., Hologic, Inc. Other current directorships(8): None. |
||
16 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
Thomas W. Ebbern(1)(5) Age: 56(9) Calgary, Alberta Canada |
2013 | Thomas Ebbern has been Chief Financial Officer of North West Upgrading Inc. (bitumen refining company) since January 2012. He was formerly Managing Director, Investment Banking, of Macquarie Capital Markets
Canada Ltd., a subsidiary of Macquarie Group Limited. Prior to that he was Managing Director of Tristone Capital Inc., an energy advisory firm that was acquired by Macquarie. He began his career as a geophysicist with Gulf Canada in 1982.
Mr. Ebbern holds a Bachelor of Science degree in Geological Engineering from Queen's University and a Master of Business Administration from the Richard Ivey School of Business at the University of Western Ontario. Current public company directorships(7): None Other current directorships(8): Wellspring Calgary, Palisade Capital Management Ltd., Kootenay Capital Management Corp. |
||
Harold N. Kvisle Age: 62(9) Calgary, Alberta Canada |
2010 | Harold Kvisle was appointed President and CEO of the Company on September 10, 2012. Mr. Kvisle was President and Chief Executive Officer of TransCanada Corporation (pipeline and power company) or its predecessor
TransCanada PipeLines Limited from May 2001 until his retirement in June 2010. Prior to his employment with TransCanada, Mr. Kvisle was President of Fletcher Challenge Energy Canada (oil and gas company) from 1990 to 1999.
Mr. Kvisle has worked in the oil and gas industry since 1975 and in the utilities and power industries since 1999. Mr. Kvisle holds a Bachelor of Science with Distinction in Engineering from the University of Alberta and a Master of
Business Administration from the University of Calgary. Current public company directorships(7): ARC Resources Ltd., Northern Blizzard Resources Inc. Other current directorships(8): Nature Conservancy of Canada |
||
Brian M. Levitt(2)(3)(6) Age: 67(9) Lac Brome, Quebec Canada |
2013 | Brian Levitt is Chairman of the Board of The Toronto-Dominion Bank and Vice-Chair of Osler, Hoskin & Harcourt LLP (law firm). Mr. Levitt joined Osler in 1976. In 1991, he became President and was
subsequently named CEO of Imasco Limited (a Canadian consumer products and services company). Imasco was sold in 2000 and Mr. Levitt returned to Osler in 2001. Mr. Levitt holds a law degree from the University of Toronto, where he also
completed his Bachelor of Applied Science degree in Civil Engineering. Current public company directorships(7): The Toronto Dominion Bank, Domtar Corporation Other current directorships(8): Montreal Museum of Fine Arts Board, C.D. Howe Institute, Fednav Limited |
||
Samuel J. Merksamer(2)(6) Age: 34(9) Harrison, New York United States |
2013 | Samuel Merksamer has been employed by Icahn Capital LP (private investment firm) since 2008 and is currently a Managing Director. Prior to that, Mr. Merksamer was an analyst at Airlie Opportunity Capital
Management (hedge fund management company). Mr. Merksamer received an A.B. in Economics from Cornell University. Current public company directorships(7): Hertz Global Holdings, Inc., Transocean Ltd., Hologic, Inc., Navistar International Corporation, CVR Energy, Inc. Other current directorships(8): CVR Refining GP, LLC, Ferrous Resources Limited |
||
Lisa A. Stewart(3)(5) Age: 57(9) Houston, Texas United States |
2009 | Lisa Stewart is the Executive Chairman and Chief Investment Officer of Sheridan Production Partners (oil and gas production company) a company she founded in September 2006. Prior to that, Ms. Stewart was
President of El Paso Exploration & Production (natural gas producer) from February 2004 to August 2006. Prior to her time at El Paso, Ms. Stewart worked for Apache Corporation for 20 years beginning in 1984 in a number of
capacities. Her last position with Apache was Executive Vice-President of Business Development and E&P Services. Ms. Stewart holds a Bachelor of Science in Petroleum Engineering from the University of Tulsa, where she is a member of the
College of Engineering and Natural Sciences Hall of Fame. She is also a member of the Society of Petroleum Engineers and Independent Petroleum Association of America (IPAA). Current public company directorships(7): None Other current directorships(8): Sheridan Production Partners, CASA Exploration, LLC |
||
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 17
Henry W. Sykes(4)(5) Age: 56(9) Calgary, Alberta Canada |
2013 | Henry Sykes was President and a director of MGM Energy Corp. (oil and gas company) from January 2007 until June 2014. Prior to that, he was President of ConocoPhillips Canada from 2001 to 2006 and Executive
Vice President, Business Development at Gulf Canada Resources Limited from 2001 to 2002. Prior to his senior management roles in the oil and gas industry, Mr. Sykes spent 16 years at Bennett Jones LLP, where he specialized in
securities and mergers and acquisitions law and served as a member of the firm's executive committee. Mr. Sykes has a Bachelor of Arts (Economics) degree from McGill University and a Bachelor of Laws degree from the University of Toronto. Current public company directorships(7): Parallel Energy Trust, Veresen Inc. Other current directorships(8): Ferus Inc., Ferus LNG Inc., Arts Commons, Arctic Institute of North America, ZYN The Wine Market |
||
Peter W. Tomsett(3)(4) Age: 57(9) Vancouver, British Columbia Canada |
2009 | Peter Tomsett was the President and Chief Executive Officer of Placer Dome Inc. (mining company) from September 2004 to January 2006. Mr. Tomsett was with Placer Dome for 20 years in a number of
capacities. Prior to becoming President and Chief Executive Officer, he was Executive Vice-President of Placer Dome Asia Pacific and Africa. Mr. Tomsett graduated with a Bachelor of Engineering in Mining Engineering from the University of
New South Wales and a Master of Science in Mineral Production Management from Imperial College in London. Current public company directorships(7): Silver Standard Resources Inc., Acacia Mining plc. Other current directorships(8): None |
||
Michael T. Waites(1)(5) Age: 61(9) Vancouver, British Columbia Canada |
2011 | Michael Waites was President and Chief Executive Officer of Finning International Inc. (heavy equipment dealer and service company) from May 2008 until his retirement from Finning in May 2013. Prior to that,
Mr. Waites was Executive Vice President and Chief Financial Officer of Finning. He also served as a member of the board of directors of Finning for three years prior to his appointment as Executive Vice President and Chief Financial Officer.
Prior to joining Finning in May 2006, Mr. Waites was Executive Vice President and Chief Financial Officer at Canadian Pacific Railway (railway and logistics company) since July 2000, and was also Chief Executive Officer
U.S. Network of Canadian Pacific Railway. Previously, he was Vice President and Chief Financial Officer at Chevron Canada Resources (integrated oil and gas company). Mr. Waites holds a Bachelor of Arts (Honours) in Economics from the
University of Calgary, a Master of Business Administration from Saint Mary's College of California, and a Master of Arts, Graduate Studies in Economics from the University of Calgary. He has also completed the Executive Program at The University of
Michigan Business School. Current public company directorships(7): Hudbay Minerals Inc., Western Forest Products Inc. Other current directorships(8): Remcan Projects Limited |
||
Charles R. Williamson(2)(6) Age: 66(9) Sonoma, California United States |
2006 | Charles Williamson was the Executive Vice-President of Chevron Corporation (integrated oil and gas company) from August 2005 until his retirement in December 2005. From 2001 to 2005, he was Chairman and Chief
Executive Officer of Unocal Corporation ("Unocal") (oil and gas exploration and development company) and held various executive positions within Unocal, including Executive Vice President, International Energy Operations and Group Vice President,
Asia Operations prior to 2001. Dr. Williamson holds a Bachelor of Arts degree in Geology, a Master of Science degree in Geology and a Doctorate in Geology. Current public company directorships(7): Weyerhaeuser Company, PACCAR Inc. Other current directorships(8): Greyrock Energy Inc. |
||
18 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
Charles M. Winograd(1)(2) Age: 67(9) Toronto, Ontario Canada |
2009 | Charles (Chuck) Winograd is Senior Managing Partner of Elm Park Credit Opportunities Fund (mid-market lending limited partnership). He is also President of Winograd Capital Inc. (external consulting and private
investments firm). From 2001 to 2008, Mr. Winograd was Chief Executive Officer of RBC Capital Markets (investment bank). When RBC Dominion Securities (investment bank) acquired Richardson Greenshields in 1996, Mr. Winograd became
Deputy Chairman and a director. He was appointed to the position of President and Chief Operating Officer of RBC Dominion Securities in 1998. Mr. Winograd held several executive postings in Richardson Greenshields (privately owned
investment dealer) from 1971 until becoming President and Chief Executive Officer in 1987 and Chairman and Chief Executive Officer in 1991. Mr. Winograd holds a Master of Business Administration degree from the University of Western Ontario and
is a Chartered Financial Analyst (CFA). Current public company directorships(7): RioCan Real Estate Investment Trust, TMX Group Inc. Other current directorships(8): Pathways to Education Canada, Sinai Health System, James Richardson & Sons, Limited |
||
Samuel Merksamer, currently a director of the Corporation, was a director of Dynegy Inc., a power generation company, from March 2011 to October 2012. He was appointed in anticipation of Dynegy Inc.'s financial restructuring and was a director when it filed for Chapter 11 bankruptcy protection until it emerged from bankruptcy.
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 19
Officers
The following table sets out the name, city, province and country of residence and office held for each of the executive officers of the Company as at March 1, 2015.
Name and Province or State and Country of Residence |
Office | |
Harold N. Kvisle(1) Calgary, Alberta, Canada |
President and Chief Executive Officer | |
Paul R. Smith(2) Calgary, Alberta, Canada |
Executive Vice-President, Finance and Chief Financial Officer | |
A. Paul Blakeley(3) Singapore |
Executive Vice-President, Asia-Pacific | |
Robert R. Rooney(4) Calgary, Alberta, Canada |
Executive Vice-President, Corporate | |
Paul Warwick(5) Aberdeen, Scotland, United Kingdom |
Executive Vice-President, Europe-Atlantic | |
Shareholdings of Directors and Executive Officers
As of January 31, 2015, the aforementioned directors and executive officers of the Company, as a group, beneficially owned, directly or indirectly, or exercised control or direction over 879,544 Common Shares of the Company, representing 0.08% of the issued and outstanding Common Shares on January 31, 2015, and 300 Series 1 First Preferred Shares, representing less than 1% of the issued and outstanding Series 1 First Preferred Shares.
Conflicts of Interest
Certain directors of the Company and its subsidiaries are associated with other reporting issuers or other corporations, which may give rise to conflicts of interest. In accordance with the Canada Business Corporations Act, directors and officers of the Company are required to disclose to the Company the nature and extent of any interest that they have in a material contract or material transaction, whether made or proposed, with the Company, if the director or officer is: (a) a party to the contract or transaction; (b) is a director or an officer, or an individual acting in a similar capacity, of a party to the contract or transaction; or (c) has a material interest in a party to the contract or transaction. Furthermore, each director is expected to act in good faith and recuse himself or herself from such portions of Board or Board committee meetings involving any conflict between the director and the Company.
As described in "Corporate Responsibility and Environmental Protection," Talisman has adopted the BCE Code, which applies to all directors, officers, employees and contractors of Talisman and its subsidiaries. As required by the BCE Code, individuals representing Talisman must not enter into outside activities, including business interests or other employment that might interfere with or be perceived to interfere with their performance at Talisman. In addition, Talisman officers, employees and contractors are required to abide by an internal Conflict of Interest in Employment Policy.
AUDIT COMMITTEE INFORMATION
Information concerning the Audit Committee of the Company, as required by National Instrument 52-110, is provided in Schedule B to this Annual Information Form.
LEGAL PROCEEDINGS
From time to time, Talisman is the subject of litigation arising out of the Company's operations. Damages claimed under such litigation, including the litigation discussed below, may be material or may be indeterminate and the outcome of such litigation may materially impact the Company's financial condition or results of operations. While Talisman assesses the merits of each lawsuit and defends itself accordingly, the Company may be required to incur significant expenses or devote significant resources to defend itself against such litigation. None of these claims are currently expected to have a material impact on the Company's financial position.
20 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
Talisman is exposed to a number of risks inherent in exploring for, developing and producing crude oil and natural gas. This section describes the important risks and other matters that could cause actual results of Talisman to differ materially from those reflected in forward-looking statements and that could affect the trading price of the Company's outstanding securities. The risks described below may not be the only risks Talisman faces, as Talisman's business and operations may also be subject to risks that Talisman does not yet know of, or that Talisman currently believes are immaterial. Events or circumstances described below could materially and adversely affect Talisman's business, financial condition, results of operations or cash flow and the trading price of Talisman's securities could decline. The risks described below are interconnected, and more than one of these risks could materialize simultaneously or in short sequence if certain events or circumstances described below actually occur. The following risk factors should be read in conjunction with the other information contained herein and in the Consolidated Financial Statements and the related notes.
Risks Relating to the Repsol Transaction
Termination of the Arrangement Agreement
Repsol has the right to terminate the Arrangement Agreement in certain circumstances. Accordingly, there is no certainty that the Arrangement Agreement will not be terminated by Repsol before the completion of the plan of arrangement. If the Arrangement Agreement is terminated, there is no guarantee that a transaction could be negotiated with an alternative party. Failure to complete the plan of arrangement could materially negatively impact the price of Talisman's Common Shares and Preferred Shares.
Conditions Precedent and Requirement for Regulatory Approvals
The completion of the Arrangement is subject to a number of conditions precedent, some of which are outside of the control of the parties to the Arrangement Agreement, including receipt of certain regulatory approvals. There can be no certainty, nor can the parties to the Arrangement Agreement provide any assurance, that these conditions will be satisfied or, if satisfied, when they will be satisfied. Moreover, a substantial delay in obtaining satisfactory approvals could result in the Arrangement not being completed. If the Arrangement is not completed for any reason, there are risks that the announcement of the Arrangement and the dedication of substantial resources of the Company to the completion thereof could have a negative impact on the Company's current business relationships (including with future and prospective employees, customers, distributors, suppliers and partners) and could have a material adverse effect on the current and future operations, financial condition and prospects of the Company. In addition, failure to complete the Arrangement for any reason could materially negatively impact the trading price of the common shares and preferred shares of the Company.
Credit, Liquidity and Access to Capital
Talisman's financial performance and cash flow is highly sensitive to the prevailing prices of crude oil, natural gas liquids and natural gas, which fluctuate in response to a variety of factors beyond the Company's control. A substantial and extended decline in the prices of crude oil, natural gas liquids or natural gas could negatively impact the Company's liquidity and/or credit ratings, adversely affect the Company's ability to comply with covenants under denominated long-term notes and credit facilities, and/or affect the Company's ability to pay dividends. See also "Risk Factors Volatility of Crude Oil, Natural Gas Liquids and Natural Gas Prices."
Future development of the Company's business may be dependent on its ability to obtain additional capital, including, but not limited to, debt and equity financing. An inability to access capital could affect the Company's ability to make future capital expenditures and to fund its capital, operating and financing commitments. The Company's ability to obtain additional capital is dependent on, among other things, interest in investments in the energy industry in general and interest in the Company's securities in particular.
The volatility of credit markets can result in market conditions that may restrict timely access and limit the Company's ability to secure and maintain cost-effective financing on acceptable terms and conditions. In addition, if any lender under Talisman's syndicated bank credit facility does not fund its commitment, the Company's liquidity may be reduced by an amount up to the aggregate amount of such lender's commitment. See also "Risk Factors Counterparty Credit Risk."
The credit rating agencies regularly evaluate the Company, and their ratings of the Company's securities are based on a number of factors not entirely within the Company's control, including conditions affecting the oil and gas industry generally, and the wider state of the economy. There can be no assurance that one or more of the Company's credit ratings will not be downgraded. A reduction in any of the Company's current investment-grade credit ratings to below investment grade could adversely affect the cost and availability of borrowing, and access to sources of liquidity and capital. In addition, the Company relies on access to letters of credit in the normal course of business in order to support some of its operations. For example, with respect to Talisman's North Sea operations, the Company relies on access to letters of credit facilities which entitle a bank to demand cash at any time to cover the full amount of any letter of credit issued with respect to UK decommissioning obligations. There can be no assurance that the Company will be able to obtain the necessary letters of credit or repay the full amount of a letter of credit upon demand. See also "Risk Factors Capital Allocation and Project Decisions."
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 21
Volatility of Crude Oil, Natural Gas Liquids and Natural Gas Prices
Talisman's financial performance is highly sensitive to the prevailing prices of crude oil, natural gas liquids and natural gas. Fluctuations in these prices could have a material adverse effect on the Company's operations and financial condition, the value of its liquids and natural gas reserves and its level of expenditure for liquids and gas exploration and development. Prices for liquids and natural gas fluctuate in response to changes in the supply of and demand for liquids and natural gas, market uncertainty and a variety of additional factors that are largely beyond the Company's control. Oil prices are largely determined by international supply and demand. Factors which affect crude oil prices include the actions of the Organization of Petroleum Exporting Countries, world economic conditions, government regulation, political stability throughout the world, the availability of alternative fuel sources, technological advances affecting energy production and consumption, and weather conditions. About 58% of the natural gas prices realized by Talisman are affected primarily by North American supply and demand, weather conditions and prices of alternative sources of energy. The remaining 42% of natural gas prices realized by Talisman are in markets outside of North America, primarily in Southeast Asia. These other prices are largely determined by long-term contracts that are linked to international oil and/or oil equivalent prices. The development of crude oil and natural gas discoveries in offshore areas and the development of shale gas plays are particularly dependent on the outlook for liquids and natural gas prices because of the large amount of capital expenditure required for development prior to commencing production.
A substantial and extended decline in the prices of liquids and/or natural gas could result in delay or cancellation of drilling, development or construction programs, and curtailment in production and/or unutilized long-term transportation commitments, all of which could have a material adverse impact on the Company. The amount of cost oil required to recover Talisman's investment and costs in various PSCs is dependent on commodity prices, with higher commodity prices resulting in the booking of lower oil and gas reserves net of royalties. Moreover, changes in commodity prices may result in the Company making downward adjustments to the Company's estimated reserves. If this occurs, or if the Company's estimates of production or economic factors change, accounting rules may require the Company to impair, as a non-cash charge to earnings, the carrying value of the Company's oil and gas properties. The Company is required to perform impairment tests on oil and gas properties whenever events or changes in circumstances indicate that the carrying value of properties may not be recoverable. To the extent such tests indicate a reduction of the estimated useful life or estimated future cash flows of the Company's oil and gas properties, the carrying value may not be recoverable and, therefore, an impairment charge will be required to reduce the carrying value of the properties to their estimated fair value. The Company may incur impairment charges in the future, which could materially affect the Company's results of operations in the period incurred.
Capital Allocation and Project Decisions
Talisman's long-term financial performance is sensitive to the capital allocation decisions taken and the underlying performance of the projects undertaken. Capital allocation and project decisions are undertaken after assessing reserve and production projections, capital and operating cost estimates and applicable fiscal regimes that govern the respective government take from any project. All of these factors are evaluated against common commodity pricing assumptions and the relative risks of projects. These factors are used to establish a relative ranking of projects and capital allocation, which is then calibrated to ensure the debt and liquidity of the Company is not compromised. However, material changes to project outcomes and deviation from forecasted assumptions, such as production volumes and rates, realized commodity price, cost or tax and/or royalties, could have a material impact on the Company's cash flow and financial performance as well as assessed impacts of impairments on Talisman's assets. Adverse economic and/or fiscal conditions could impact the prioritization of projects and capital allocation to these projects, which in turn could lead to adverse effects such as asset under investment, asset performance impairments or land access expiries.
Uncertainties around some of Talisman's projects could result in changes to the Company's capital allocation or its spend target being exceeded. The Company cannot be certain that funding, if needed, will be available to the extent required or on acceptable terms. To the extent that asset sales are necessary to fund capital requirements, Talisman's ability to sell assets is subject to market interest. If Talisman is unable to access funding when needed on acceptable terms, the Company may not be able to fully implement its business plans, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on Talisman's business, financial condition, cash flows, and results of operations. See also "Risk Factors Credit, Liquidity and Access to Capital " and "Risk Factors Interest Rates."
Project Delivery
Talisman manages a variety of projects, including exploration and development projects and the construction or expansion of facilities and pipelines. Project delays may impact expected revenues and project cost overruns could make projects uneconomic. Talisman's ability to complete projects depends upon numerous factors, many of which are beyond the Company's control. These factors include the level of direct control by Talisman since many of the projects in which Talisman is involved are not operated by Talisman, and timing and project management control are the responsibility of the operator. See also "Risk Factors Non-Operatorship and Partner Relations." The global demand for project resources can impact the access to appropriately competent contractors and construction yards as well as to raw products, such as steel. Typical execution risks include the availability of seismic data, the availability of
22 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
processing capacity, the availability and proximity of pipeline capacity, the availability of drilling and other equipment, the ability to access lands, weather, unexpected cost increases, accidents, the availability of skilled labour, including engineering and project planning personnel, the need for government approvals and permits, and regulatory matters. Subsurface challenges can also result in additional risk of cost overruns and scheduling delays if conditions are not typical of historical experiences. Talisman utilizes materials and services which are subject to general industry-wide conditions. Cost escalation for materials and services may be unrelated to commodity price changes and may continue to have a significant impact on project planning and economics. Talisman operates in challenging, environmentally hostile climates, such as Papua New Guinea, where logistical costs can be materially impacted by seasonal and occasionally unanticipated weather patterns. Contracts where work has been placed under a lump sum arrangement are subject to additional challenges related to scheduling, reputation and relationship management with the Company's coventurers.
Ability to Find, Develop or Acquire Additional Reserves
The Company's future success depends largely on its ability to find and develop, or acquire, additional oil and gas reserves that are economically recoverable. Hydrocarbons are a limited resource, and Talisman is subject to increasing competition from other companies, including national oil companies. Exploration and development drilling may not result in commercially productive reserves and, if production begins, reservoir performance may be less than projected. Successful acquisitions require an assessment of a number of factors, many of which are uncertain. These factors include recoverable reserves, development potential, future oil and gas prices, operating costs and potential environmental and other liabilities. Such assessments are inexact and their accuracy is inherently uncertain. If a high impact prospect identified by the Company fails to materialize in a given year, the Company's multi-year exploration and/or development portfolio may be compromised. See also "Risk Factors Volatility of Crude Oil, Natural Gas Liquids and Natural Gas Prices". The recent decline in commodity prices, if sustained, may result in promising exploration and development projects being deemed uneconomic. Continued failure to achieve anticipated reserve and resource addition targets may result in the Company's withdrawal from an area, which in turn may result in a writedown of any associated reserves and/or resources for that area.
Hedging Activities
Talisman uses derivative instruments to hedge a portion of the Company's expected production so as to manage the impact of fluctuations in crude oil and natural gas prices on the Company's results of operations and cash flow. Fluctuations in crude oil and gas prices could have a material effect on the volatility of the Company's earnings. To the extent that Talisman engages in hedging activities to protect itself against commodity price declines, Talisman may be prevented from fully realizing the benefits of increases in crude oil and natural gas prices above the prices established by the Company's hedging contracts. See also "Risk Factors Volatility of Crude Oil, Natural Gas Liquids and Natural Gas Prices." When considered appropriate, the Company may also use currency swaps to manage fluctuations in exchange rates and interest rate swaps to manage Talisman's exposure to interest rate changes through the Company's borrowings. See also "Risk Factors Exchange Rate Fluctuations" and "Risk Factors Interest Rates."
In addition, Talisman's hedging portfolio may expose it to financial losses in certain circumstances, such as the recognition of certain mark-to- market gains and losses on derivative instruments. The fair value of the Company's natural gas and crude oil, exchange rate or interest rate derivative instruments can fluctuate significantly between periods.
Uncertainty of Reserves Estimates
The process of estimating oil and gas reserves is complex and involves a significant number of assumptions in evaluating available geological, geophysical, engineering and economic data. In addition, the process requires future projections of reservoir performance and economic conditions; therefore, reserves estimates are inherently uncertain. Since all reserves estimates are, to some degree, uncertain, reserves classification attempts to qualify the degree of uncertainty involved.
Since the evaluation of reserves involves the evaluator's interpretation of available data and projections of price and other economic factors, estimates of the economically recoverable oil and natural gas reserves attributable to any particular group of properties, the classification of such reserves based on estimated uncertainty, and the estimates of future net revenue or future net cash flows prepared by different evaluators or by the same evaluators at different times may vary substantially.
Each year, Talisman prepares evaluations of all of its reserves internally. Initial estimates of reserves are often based upon volumetric calculations and analogy to similar types of reservoirs, rather than actual well data and performance history. Estimates based on these methods generally are less certain than those based on actual performance. The Company may adjust its estimates and classification of reserves and future net revenues or cash flows based on results of exploration and development drilling and testing, additional performance history, prevailing oil and gas prices, and other factors, many of which are beyond the Company's control. As new information becomes available, subsequent evaluations of the same reserves may continue to have variations in the estimated reserves, some of which may be material. In addition, Talisman's actual production, taxes, and development and operating expenditures with respect to its reserves will likely vary from such estimates and such variances could be material.
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 23
Operational Risks
Major Incident, Major Spill / Loss of Well Control
Oil and gas drilling and producing operations are subject to many risks, including the risk of fire, explosions, mechanical failure, pipe or well cement failure, well casing collapse, pressure or irregularities in formations, chemical and other spills, unauthorized access to hydrocarbons, accidental flows of oil, natural gas or well fluids, sour gas releases, contamination, vessel collision, structural failure, loss of buoyancy, storms or other adverse weather conditions and other occurrences. If any of these should occur, Talisman could incur legal defence costs and remedial costs and could suffer substantial losses due to injury or loss of life, human health risks, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, unplanned production outage, cleanup responsibilities, regulatory investigation and penalties, increased public interest in Talisman's operational performance and suspension of operations. The Company's horizontal and deep drilling activities involve greater risk of mechanical problems than vertical and shallow drilling operations.
Talisman maintains insurance that contemplates both first and third party exposures for Talisman's onshore and offshore operations globally. There is no assurance that this insurance will be adequate to cover all losses or exposures to liability. The Company believes that its coverage is aligned with customary industry practices and in amounts and at costs that Talisman believes to be prudent and commercially practicable. While Talisman believes these policies are customary in the industry, they do not provide complete coverage against all operating risks. In addition, the Company's insurance does not cover penalties or fines that may be assessed by a governmental authority. A loss not fully covered by insurance could have a material adverse effect on the Company's financial position, results of operations and cash flows. The insurance coverage that the Company maintains may not be sufficient to cover every claim made against Talisman in the future. In addition, a major incident could impact Talisman's reputation in such a way that it could have a material adverse effect on the Company's business.
Talisman operates and drills wells in both mature producing areas such as the UK, Norway and North America and in several remote areas in multiple countries. In 2014, Talisman carried out drilling operations in the Kurdistan Region of Iraq, Papua New Guinea and Colombia. The Company may seek new leases and/or drill in similar environments in the future.
Health Hazards and Personal Safety Incidents
The employee and contractor personnel involved in exploration and production activities and operations of the Company are subject to many inherent health and safety risks and hazards, which could result in occupational illness or health issues, personal injury, and loss of life, facility quarantine and/or facility and personnel evacuation. For example, employees and contractors are subject to the possibility of loss of containment. This could lead to exposure to the release of high pressure materials as well as collateral shrapnel from piping or vessels which could result in personal injury and loss of life.
Security Incident
Talisman's operations may be adversely affected by security-related incidents which are not within the control of the Company, such as war (external and internal conflicts) and remnants of war, sectarian violence, civil unrest, criminal acts, terrorism and abductions in locations where Talisman operates. Security-related incidents may include allegations of human rights abuse associated with the provision of security to Talisman operations. In particular, the Company faces increased security risks in the Kurdistan Region of Iraq, Colombia, Peru, Papua New Guinea and Algeria within Talisman's current portfolio. A significant security incident could result in the deferral of or termination of Company activity within the impacted areas of operations, thus adversely impacting execution of the Company's business strategy (e.g., delaying exploration and development, causing a halt to production or forcing exit strategy processes), which could adversely affect Talisman's financial condition.
Regulatory Approvals/Compliance and Changes to Laws and Regulations
Talisman's exploration and production operations are subject to extensive regulation at many levels of government, including municipal, state, provincial and federal governments, in the countries where Talisman operates and are subject to interruption or termination by governmental and regulatory authorities based on environmental or other considerations. Moreover, Talisman has incurred and will continue to incur costs in the Company's efforts to comply with the requirements of environmental, safety and other regulations. Further, the regulatory environment in the oil and gas industry could change in ways that Talisman cannot predict and that might substantially increase the Company's costs of compliance and, in turn, materially and adversely affect the Company's business, results of operations and financial condition.
Failure to comply with the applicable laws or regulations may result in significant increases in costs, fines or penalties and even shutdowns or losses of operating licences or criminal sanctions. If regulatory approvals or permits required for operations are delayed or not obtained, Talisman could experience delays or abandonment of projects, decreases in production and increases in costs. This could result in an inability of the Company to fully execute its strategy and adverse impacts on its financial condition. See also "Risk Factors Fiscal Stability" and "Risk Factors Socio-Political Risks."
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Changes to existing laws and regulations or new laws could have an adverse effect on Talisman's business by increasing costs, impacting development schedules, reducing revenue and cash flow from natural gas and oil sales, reducing liquidity or otherwise altering the way Talisman conducts business. There have been various proposals to enact new, or amend existing, laws and regulations relating to greenhouse gas ("GHG") emissions, hydraulic fracturing (including associated additives, water use, induced seismicity, and disposal) and shale gas development generally. For example, in Colombia, the high level of oil and gas activity in the country has resulted in significant delays in the granting of the required environmental licences. These delays may result in reduced near-term production. See also "Risk Factors Environmental Risks."
Talisman continues to monitor and assess any new policies, legislation, regulations and treaties in the areas where the Company operates to determine the impact on Talisman's operations. Governmental organizations unilaterally control the timing, scope and effect of any currently proposed or future laws, regulations or treaties, and such enactments are subject to a myriad of factors, including political, monetary and social pressures. Talisman acknowledges that the direct and indirect costs of such laws, regulations and treaties (if enacted) could materially and adversely affect the Company's business, results of operations and financial condition.
Fiscal Stability
Governments may amend or create new legislation that could impact the Company's operations and that could result in increased capital, operating and compliance costs. Moreover, Talisman's operations are subject to various levels of taxation in the countries where the Company operates. Federal, provincial, and state income tax rates or incentive programs relating to the oil and gas industry in the jurisdictions where the Company operates may in the future be changed or interpreted in a manner that could materially affect the economic value of the respective assets. For example, the US Congress has been considering a revision of the immediate deduction currently available for drilling costs.
Stakeholder Opposition
Talisman's planned activities may be adversely affected if there is strong community opposition to its operations. For example, local community concerns in parts of Colombia, the Kurdistan Region of Iraq and Papua New Guinea could potentially result in development and production delays in those operations. There is also heightened public concern regarding hydraulic fracturing in parts of North America, such as New York, which could materially affect the Company's shale operations. In some circumstances, this risk of community opposition may be higher in areas where Talisman operates alongside indigenous communities who may have additional concerns regarding land ownership, usage or claim compensation.
Socio-Political Risks
The Company's operations may be adversely affected by political or economic developments or social instability in the jurisdictions in which it operates, which are not within the control of Talisman, including, among other things, a change in crude oil, natural gas liquids or natural gas pricing policy and/or related regulatory delays, the risks of war, terrorism, abduction, expropriation, nationalization, renegotiation or nullification of existing concessions and contracts, a change in taxation policies, economic sanctions, the imposition of specific drilling obligations, the imposition of rules relating to development and abandonment of fields, access to or development of infrastructure, jurisdictional boundary disputes, and currency controls. As a result of continuing evolution of an international framework for corporate responsibility and accountability for international crimes, the Company could also be exposed to potential claims for alleged breaches of international law, health, safety and environmental regulations, and other human rights-based litigation risk. Numerous countries in which the Company is active, including, but not limited to, the Kurdistan Region of Iraq, Colombia, Vietnam, Algeria and Indonesia, have been subject to recent economic or political instability, disputes and social unrest, and military or rebel hostilities. The potential deterioration of socio-political security situations (i.e. political instability and/or disputes) poses increased risk, which may result in the cessation of operations as well as the delay in payment or exports; for example, in the Kurdistan Region of Iraq with respect to the negotiation of Iraq Federal Oil and Gas Law, and in Vietnam and Malaysia with respect to China's claim over disputed waters in the East Sea. In addition, Talisman regularly evaluates opportunities worldwide, and may in the future engage in projects or acquire properties in other nations that are experiencing economic or political instability, social unrest, military hostilities or United Nations, US or other international sanctions. Some of the foregoing government actions may lead to political or reputational pressures on the Company from non-governmental organizations, home governments and investors.
Non-Operatorship and Partner Relations
Some of Talisman's projects are conducted in joint venture environments where Talisman has a limited ability to influence or control operations or future development, safety and environmental standards, and amount of capital expenditures. Companies which operate these properties may not necessarily share Talisman's health, safety and environmental standards or strategic or operational goals or approach to partner relationships, which may result in accidents, regulatory noncompliance, project delays or unexpected future costs, all of which may affect the viability of these projects and Talisman's standing in the external market.
Talisman is also dependent on other working interest co-participants of these projects to fund their contractual share of the capital expenditures. If these co-participants are unable to fund their contractual share of, or do not approve, the capital expenditures, the
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 25
co-participants may seek to defer programs, resulting in strategic misalignments and a delay of a portion of development of Talisman's programs, or the co-participants may default such that projects may be delayed and/or Talisman may be partially or totally liable for their share.
Some of Talisman's projects involve transition of operatorship as part of a joint venture, which requires a significant amount of effort and coordination. Successful handover of the operations to the partners is dependent on Talisman's ability to maintain equal governance and active involvement in the operations.
Litigation
From time to time, Talisman is the subject of litigation arising out of the Company's operations. Specific disclosure of current legal proceedings, and the risks associated with current proceedings and litigation generally, are disclosed under the heading "Legal Proceedings."
Exchange Rate Fluctuations
Results of operations are affected primarily by the exchange rates between the US$, the C$, UK£ and NOK. These exchange rates may vary substantially. Most of the Company's revenue is received in or is referenced to US$ denominated prices (including the Company's Consolidated Financial Statements, which are presented in US$), while the majority of Talisman's expenditures are denominated in US$, C$, UK£ and NOK. A change in the relative value of the US$ against the C$ or the UK£ would also result in an increase or decrease in Talisman's C$ or UK£ denominated debt, as expressed in US$, and the related interest expense. Talisman is also exposed to fluctuations in other foreign currencies.
Environmental Risks
General
All phases of Talisman's oil and natural gas business are subject to environmental regulation pursuant to a variety of laws and regulations in the countries where Talisman does business. These laws and regulations may require the acquisition of a permit before operations commence, restrict the types, quantities and concentration of substances that can be released into the environment in connection with the Company's drilling and production activities, limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas, and impose substantial liabilities for pollution that may result from the Company's operations. Talisman's business is subject to the trend toward increased rigour in regulatory compliance and civil or criminal liability for environmental matters in certain regions (e.g., Canada, the United States and the European Union). Compliance with environmental legislation can require significant expenditures, and failure to comply with environmental legislation may result in the assessment of administrative, civil and criminal penalties, the cancellation or suspension of regulatory permits, the imposition of investigatory or remedial obligations or the issuance of injunctions restricting or prohibiting certain activities. Under existing environmental laws and regulations, Talisman could be held strictly liable for the remediation of previously released materials or property contamination resulting from its operations, regardless of whether those operations were in compliance with all applicable laws at the time they were performed. Regulatory delays, legal proceedings and reputational impacts from an environmental incident could result in a material adverse effect on the Company's business. Increased stakeholder concerns and regulatory actions regarding shale gas development could lead to third party or governmental claims, and could adversely affect the Company's business and financial condition. Although Talisman currently believes that the costs of complying with environmental legislation and dealing with environmental civil liabilities will not have a material adverse effect on the Company's financial condition or results of operations, there can be no assurance that such costs will not have such an effect in the future.
Hydraulic Fracturing
Public concern has been expressed over the potential impact of hydraulic fracturing operations, including water aquifer contamination; other qualitative and quantitative effects on water resources as large quantities of water are used and injected fluids either remain underground or flow back to the surface to be collected, treated and disposed; and the potential for fracturing activities to induce seismic events. Regulatory authorities in certain jurisdictions have announced initiatives in response to such concerns. Federal, provincial, state, and local legislative and regulatory initiatives relating to hydraulic fracturing, as well as governmental reviews of such activities, could result in increased costs, additional operating restrictions or delays, and adversely affect Talisman's production. Public perception of environmental risks associated with hydraulic fracturing can further increase pressure to adopt new laws, regulation or permitting requirements, or lead to regulatory delays, legal proceedings and/or reputational impacts. Any new laws, regulations or permitting requirements regarding hydraulic fracturing could lead to operational delay, increased operating costs, and third party or governmental claims. They could also increase the Company's costs of compliance and doing business as well as delay the development of hydrocarbon (natural gas and oil) resources from shale formations, which may not be commercial without the use of hydraulic fracturing.
Due to the adoption of legal restrictions in New York, or if legal restrictions are adopted in other areas where Talisman is currently conducting or in the future plans to conduct operations, Talisman may incur additional costs to comply with such requirements that
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may be significant in nature, experience delays or curtailment in the pursuit of exploration, development, or production activities, and perhaps even be precluded from the drilling of wells. In addition, if hydraulic fracturing becomes more regulated, the Company's fracturing activities could become subject to additional permitting requirements and result in permitting delays as well as potential increases in costs. Restrictions on hydraulic fracturing could also reduce the amount of oil and natural gas that the Company is ultimately able to produce from its reserves.
Greenhouse Gas Emissions
Talisman is subject to various GHG emissions-related legislation. Current GHG emissions legislation does not result in material compliance costs, but compliance costs may increase in the future and may impact the Company's operations and financial results. Talisman operates in jurisdictions with existing GHG legislation (e.g., UK, Norway, United States and Canada, notably Alberta and British Columbia) as well as in regions which currently do not have GHG emissions legislation and jurisdictions where GHG emissions legislation is emerging or is subject to change. Talisman monitors GHG legislative developments in all areas that the Company operates. Potential new or additional GHG legislation, and associated compliance costs, may have a material impact on the Company.
Environmental and Decommissioning Liabilities
Talisman is involved in the operation and maintenance of facilities and infrastructure in difficult and challenging areas, including offshore, deepwater, jungle and desert environments. Despite Talisman's implementation of health, safety and environmental standards, there is a risk that accidents or regulatory non-compliance can occur, the outcomes of which, including remedial work or regulatory intervention, cannot be foreseen or planned for. Talisman expects to incur site restoration costs over a prolonged period as existing fields are depleted. The Company provides for decommissioning liabilities in its annual Consolidated Financial Statements in accordance with IFRS. Additional information regarding decommissioning liabilities is set forth in the notes to the annual Consolidated Financial Statements. The process of estimating decommissioning liabilities is complex and involves significant uncertainties concerning the timing of the decommissioning activity; legislative changes; technological advancement; regulatory, environmental and political changes; and the appropriate discount rate used in estimating the liability. Any change to these assumptions could result in a change to the decommissioning liabilities to which Talisman is subject. In Talisman's North Sea operations, changes in these assumptions would potentially have a significant impact on the Company's decommissioning liabilities because of the assessed size of these future costs. Any changes to decommissioning estimates influence the value of letters of credit to be provided pursuant to the decommissioning security agreements. There can be no assurances that the cost estimates and decommissioning liabilities are materially correct and that the liabilities will occur when predicted. In addition, Talisman is often jointly and severally liable for the decommissioning costs associated with Talisman's various operations and could, therefore, be required to pay more than its net share.
Attraction, Retention and Development of Personnel
Successful execution of the Company's plans is dependent on Talisman's ability to attract and retain talented personnel who have the skills necessary to deliver on the Company's strategy and maintain safe operations. This includes not only key talent at a senior level, but also individuals with the professional and technical skill sets critical for Talisman's business, particularly geologists, geophysicists, engineers, accountants and other specialists. As labour demand remains high and a greater percentage of the population reaches retirement age, retention concerns are also heightened. In North America, Talisman competes for talent in two very competitive markets Calgary and Houston. If the Company is unable to attract and retain highly qualified petrotechnical people in these markets, its ability to deliver may be significantly compromised. In addition, in the North Sea, high project activity has compounded competition for labour, posing an increased retention risk. In Asia, energy demand driven by economic growth has resulted in higher levels of activity in the sector and created strong competition for skilled technical staff. National oil companies and joint venture activities may also impose requirements to develop their national talent, increase secondee assignments, and employ local nationals.
Information Systems
Many of Talisman's business processes depend on the availability, capacity, reliability and security of the Company's information technology ("IT") infrastructure and Talisman's ability to expand and continually update this infrastructure in response to the Company's changing needs. The Company's IT systems are increasingly integrated in terms of geography, number of systems, and key resources supporting the delivery of IT systems. The performance of Talisman's key suppliers is critical to ensure appropriate delivery of key services. Any failure to manage, expand and update the Company's IT infrastructure, any failure in the extension or operation of this infrastructure, or any failure by the Company's key resources or service providers in the performance of their services could materially and adversely harm Talisman's business.
The ability of the IT function to support Talisman's business in the event of a disaster such as fire, flood or loss/denial of any of the Company's DataCentres or major office locations and Talisman's ability to recover key systems from unexpected interruptions cannot be fully tested and there is a risk that, if such an event actually occurs, the business continuity plan may not be adequate to immediately address all repercussions of the disaster. In the event of a disaster affecting a DataCentre or key office location, key systems may be unavailable for a number of days, leading to inability to perform some business processes in a timely manner.
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 27
In addition, the increasing risk of information security breaches, including more sophisticated attempts often referred to as advanced persistent threats, requires Talisman to continually improve its ability to detect and prevent such occurrences. Disruption of critical IT services, or breaches of information security, could have a negative effect on Talisman's operational performance and earnings, as well as on the Company's reputation.
Egress and Gas & Liquids Buyers
As increasing volumes of natural gas and liquids are brought onstream by Talisman and others, transportation and processing infrastructure capacity may, at times, be exceeded before capacity additions become available. In such an event, there is a risk that the transportation and/or processing of some of the Company's production may be restricted or delayed until pipeline connection or infrastructure additions are complete. For example, Colombia's oil export infrastructure generally continues to operate close to or at capacity, pending capacity additions which are at various stages of commissioning, approval and/or construction. Talisman and Equion currently have access to sufficient capacity in the key Ocensa pipeline allowing access to the Coveñas terminal and international markets. In addition, Equion has access to Oleoducto de Colombia, a parallel line from Vasconia to Coveñas. As Talisman's production in Colombia grows, the Company may not be able to secure sufficient upstream pipeline access into the Ocensa pipeline as soon as it is required. If Talisman is unable to negotiate access to additional upstream pipeline capacity or to employ trucking as an alternative, Talisman's production may be restricted or delayed and/or netbacks may be reduced on a portion of Talisman's production. In the Eagle Ford play, Talisman has acquired sufficient access to infrastructure for both liquids and gas for the near and medium term. Ensuring that Talisman holds sufficient transportation capacity to take gas supplies from the Marcellus area, which has seen a significant growth in production, to areas with liquid markets is critical to ensuring the ability to flow production on an unrestricted basis as well as to maximize the value for Talisman's production. Another associated risk will be the availability and diversity of contract and credit-enabled buyers. Should Talisman be unable to secure access to infrastructure and qualified buyers for its production, the Company could face reduced production and/or materially lower prices on some portion of production, which in turn could adversely affect the Company's operating results.
Interest Rates
The Company is exposed to interest rate risk principally by virtue of its borrowings. Borrowing at floating rates exposes Talisman to short-term movements in interest rates. Borrowing at fixed rates exposes Talisman to reset risk associated with debt maturity. Most of the Company's debt is issued at fixed interest rates; therefore, the Company's main exposure to changes in interest rates would occur in respect of short-term investments or borrowings in the event that substantial cash balances are invested in or owed to the Company.
Counterparty Credit Risk
In the normal course of business, Talisman enters into contractual relationships with counterparties in the energy industry and other industries, including suppliers and coventurers and counterparties to commodity sale/purchase agreements, interest rate hedging, foreign exchange hedging and commodity derivative arrangements. If such counterparties do not fulfil their contractual obligations or settle their liabilities to the Company, the Company may suffer losses, may have to proceed on a sole risk basis, may have to forgo opportunities or may have to relinquish leases or blocks. The Company also has credit risk arising from cash and cash equivalents held with banks and financial institutions. While the Company maintains a risk management system that limits exposures to any one counterparty, losses due to the failure by counterparties to fulfil their contractual obligations may adversely affect Talisman's financial condition.
Competitive Risk
The global oil and gas industry is highly competitive. Talisman faces significant competition and many of the Company's competitors have resources in excess of Talisman's available resources. The Company actively competes for the acquisition of properties, the exploration for and development of new sources of supply, the contractual services for oil and gas drilling and production equipment and services, the transportation and marketing of current production, and industry personnel, including, but not limited to, geologists, geophysicists, engineers and other specialists that enable the business. Many of Talisman's competitors have the ability to pay more for seismic and lease rights in crude oil and natural gas properties and exploratory prospects. They can define, evaluate, bid for and purchase a greater number of properties and prospects than Talisman's financial or human resources permit. If the Company is not successful in the competition for oil and gas reserves or in the marketing of production, Talisman's financial condition and results of operations may be adversely affected. Many of the Company's competitors have resources substantially greater than Talisman's and have established positions in countries in which Talisman may seek new entry and, as a consequence, the Company may be at a competitive disadvantage. Typically during times of high commodity prices or increased industry activity, drilling and operating costs will also increase. These competitive forces may also lead to an overall increase in costs, which could have a negative impact on the Company's financial results.
28 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
Corruption & Fraud
Talisman's operations are governed by the laws of many jurisdictions, which generally prohibit bribery and other forms of corruption. Talisman requires all employees to participate in ethics awareness training, which includes Talisman's policies against giving or accepting money or gifts in certain circumstances. Despite the training and policies, it is possible that Talisman, or some of its employees or contractors, could be charged with bribery or corruption. If Talisman is found guilty of such a violation, which could include a failure to take effective steps to prevent or address corruption by its employees or contractors, Talisman could be subject to onerous penalties. A mere investigation itself could lead to significant corporate disruption, high legal costs and forced settlements (such as the imposition of an internal monitor). In addition, bribery allegations or bribery or corruption convictions could impair Talisman's ability to work with governments or non-governmental organizations. Such convictions or allegations could result in the formal exclusion of Talisman from a country or area, national or international lawsuits, government sanctions or fines, project suspension or delays, reduced market capitalization, reputational impacts and increased investor concern.
TRANSFER AGENTS AND REGISTRARS
Computershare Trust Company of Canada, at 600, 530 8th Avenue SW, Calgary, Alberta, T2P 3S8, along with its US co-transfer agent, Computershare Trust Company N.A., is the transfer agent and registrar for the Common Shares and the Series 1 First Preferred Shares of the Company. Computershare Trust Company of Canada also acts as trustee for various public debt securities. JPMorgan Chase Bank N.A., London Branch (now The Bank of New York Mellon, pursuant to bulk novation orders granted on April 3, 2007 and July 1, 2008), One Canada Square, London, UK, E14 5AL, acts as trustee for the 6.625% unsecured notes listed on the London Stock Exchange. Union Bank N.A., 120 S. San Pedro Street, Suite 400, Los Angeles, California, 90012, acts as trustee for various public debt securities. The Company has not retained transfer agents for any other outstanding securities.
INTERESTS OF EXPERTS
Talisman's auditors are Ernst & Young LLP, Chartered Accountants, Ernst & Young Tower, 1000, 440 2nd Avenue SW, Calgary, Alberta, T2P 5E9. Ernst & Young LLP is independent in accordance with the Rules of Professional Conduct as outlined by the Institute of Chartered Accountants of Alberta.
Mr. Mark Ireland, an employee of Talisman, has provided the report on reserves data, included in Schedule "A" to this Annual Information Form, in his capacity as Talisman's Internal Qualified Reserves Evaluator. Mr. Ireland owns less than 1% of the outstanding Common Shares.
ADVISORIES
Forward-Looking Information
This Annual Information Form contains or incorporates by reference information that constitutes "forward-looking information" or "forward-looking statements" (collectively "forward-looking information") within the meaning of applicable securities legislation. Forward-looking information is included throughout this Annual Information Form, including among other places, under the headings "General Development of the Business," "Description of the Business," "Corporate Responsibility and Environmental Protection," "Market for the Securities of the Company," "Legal Proceedings" and "Risk Factors." This forward-looking information includes, but is not limited to, statements regarding:
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 29
The Company priorities disclosed in the Annual Information Form are objectives only and their achievement cannot be guaranteed.
Statements concerning oil and gas reserves contained in this Annual Information Form in Schedule "A" and elsewhere may be deemed to be forward-looking information as they involve the implied assessment that the resources described can be profitably produced in the future.
The factors or assumptions on which the forward-looking information is based include: assumptions inherent in current guidance; projected capital investment levels; the flexibility of capital spending plans and the associated sources of funding; the successful and timely implementation of capital projects; the continuation of tax, royalty and regulatory regimes; ability to obtain regulatory and partner approval; commodity price and cost assumptions; and other risks and uncertainties described in the filings made by the Company with securities regulatory authorities. The Company believes the material factors, expectations and assumptions reflected in the forward-looking information are reasonable but no assurance can be given that these factors, expectations and assumptions will prove to be correct. Forward-looking information for periods past 2015 assumes escalating commodity prices. Closing of the Repsol transaction is subject to receipt of certain regulatory approvals and contractual conditions.
Undue reliance should not be placed on forward-looking information. Forward-looking information is based on current expectations, estimates and projections that involve a number of risks which could cause actual results to vary, and, in some instances, to differ materially from those anticipated by Talisman and described in the forward-looking information contained in this Annual Information Form. The material risk factors include, but are not limited to:
The foregoing list of risk factors is not exhaustive. Additional information on these and other factors which could affect the Company's operations or financial results or strategy are included under the heading "Risk Factors" and elsewhere in this Annual Information Form. In addition, information is available in the Company's other reports on file with Canadian securities regulatory authorities and the SEC.
Forward-looking information is based on the estimates and opinions of the Company's management at the time the information is presented. The Company assumes no obligation to update forward-looking information should circumstances or management's estimates or opinions change, except as required by law.
30 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
The term "commerciality" is based upon the term as it is used in the Block CPE-6 licence (the "Licence"). A declaration of commerciality is a written declaration by the licensees to the state regulator that declares the licensees' unconditional decision to proceed with commercial exploration of a discovery. Upon filing a declaration of commerciality, a discovery becomes a commercial field under the terms of the Licence.
As used in the context of Talisman's Colombian assets, long-term testing indicates continuous well production going to market at the most recent weekly average. A permit for long-term testing is required for a well to produce oil until the permit for full field development has been granted.
Oil and Gas Information
All references to reserves volumes in this Annual Information Form are to reserves volumes estimated in accordance with Canadian disclosure standards.
Talisman makes reference to production volumes throughout this Annual Information Form. Where not otherwise indicated, such production volumes are stated on a gross basis, which means they are stated prior to the deduction of royalties and similar payments.
Natural gas is converted to a barrel of oil equivalent (boe) at the ratio of six thousand cubic feet (mcf) to one barrel (bbl) of oil. Oil is converted to natural gas equivalent (mcfe) at the ratio of one bbl to six mcf of natural gas. The boe and mcfe measures may be misleading, particularly if used in isolation. A boe conversion ratio of six mcf to one bbl and an mcfe conversion ratio of one bbl to six mcfe are based on an energy equivalence conversion method primarily applicable at the burner tip and do not represent a value equivalence at the wellhead.
EXCHANGE RATE INFORMATION
Except where otherwise indicated, all dollar amounts in this Annual Information Form are stated in US dollars ("US$" or "$"). The following table sets forth the Canada/US exchange rates on the last trading day of the years indicated as well as the high, low and average rates for such years. The high, low and average exchange rates for each year were identified or calculated from spot rates in effect on each trading day during the relevant year. The exchange rates shown are expressed as the number of Canadian dollars ("C$") required to purchase one US$. These exchange rates are based on those published on the Bank of Canada's website as being in effect at approximately noon on each trading day (the "Bank of Canada noon rate").
Year ended December 31 | ||||||
2014 | 2013 | 2012 | ||||
Year-end | 1.1601 | 1.0636 | 0.9949 | |||
High | 1.0614 | 0.9839 | 0.9710 | |||
Low | 1.1643 | 1.0697 | 1.0418 | |||
Average | 1.1045 | 1.0299 | 0.9996 | |||
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 31
The abbreviations used in this Annual Information Form have the following meanings:
bbl | barrel | |
bbls | barrels | |
bbls/d | barrels per day | |
bcf | billion cubic feet | |
bcfe | billion cubic feet equivalent | |
boe | barrels of oil equivalent | |
bopd | barrels of oil per day | |
boe/d | barrels of oil equivalent per day | |
mbbls | thousand barrels | |
mboe/d | thousand barrels oil equivalent per day | |
mcf | thousand cubic feet | |
mcfe | thousand cubic feet equivalent | |
mmbbls | million barrels | |
mmbbls/d | million barrels per day | |
mmboe | million barrels of oil equivalent | |
mmcf/d | million cubic feet per day | |
mmcfe/d | millions of cubic feet equivalent per day | |
tcf | trillion cubic feet | |
C$ | Canadian dollar | |
COGEH | Canadian Oil and Gas Evaluation Handbook | |
HH | Henry Hub | |
IFRS | International Financial Reporting Standards | |
IQRE | Internal Qualified Reserves Evaluator | |
JOC | Joint Operating Company | |
km | kilometre | |
LNG | Liquefied Natural Gas | |
NGL | Natural Gas Liquids | |
UK | United Kingdom | |
UK£ | Pound sterling | |
US | United States of America | |
US$ or $ | United States dollar | |
WTI | West Texas Intermediate |
32 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
MATERIAL CONTRACTS
The only material contract the Company entered into during the last completed financial year was the Arrangement Agreement entered into on December 15, 2014 among Repsol S.A., an indirect wholly-owned subsidiary of Repsol S.A., and Talisman, providing for the acquisition of Talisman. Under the terms of the Arrangement Agreement, the acquisition is to be accomplished through a plan of arrangement pursuant to the Canada Business Corporations Act.
ADDITIONAL INFORMATION
Additional information related to the Company, including the information incorporated by reference herein, may be found on SEDAR at www.sedar.com and on Edgar at www.sec.gov.
Additional information, including directors' and officers' remuneration and indebtedness, principal holders of the Company's securities and securities authorized for issuance under equity compensation plans, is contained in the Company's Management Proxy Circular for its most recent annual meeting of security holders that involved the election of directors. Additional financial information is provided in the Company's audited Consolidated Financial Statements for the year ended December 31, 2014 and related annual Management's Discussion and Analysis.
Copies of the Company's annual documents may be obtained from Talisman's website at www.talisman-energy.com or upon request from: Investor Relations Department, Talisman Energy Inc., 2000, 888 3rd Street SW, Calgary, Alberta, T2P 5C5, email: tlm@talisman-energy.com.
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 33
SCHEDULE A RESERVES DATA AND OTHER OIL AND GAS INFORMATION
Table of Contents
Page | ||
Introduction | 35 | |
Internal Evaluation | 35 | |
Reserves Data and Other Oil and Gas Information | 36 | |
Report on Reserves Data by Talisman's Internal Qualified Reserves Evaluator | 69 | |
Report of Management and Directors on NI 51-101 Reserves Data and Other Information | 70 | |
34 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
As a Canadian public company, Talisman is subject to the disclosure requirements of National Instrument NI 51-101 ("NI 51-101") of the Canadian Securities Administrators, which applies to the disclosure of reserves and other oil and gas information. The disclosure in this Schedule A has been prepared in compliance with the annual disclosure requirements of NI 51-101. Certain reserves and other oil and gas information prepared in accordance with US standards is contained in the Company's annual report on Form 40-F for the fiscal year ended December 31, 2014 filed with the SEC.
Talisman's investments in Equion and TSEUK are accounted for using the equity method of accounting. NI 51-101 currently requires that, in such circumstances, Talisman's share of the reserves and future net revenues of Equion and TSEUK be disclosed separately from Talisman's reserves and future net revenue. Accordingly, in a number of the tables which follow, information is first provided in respect of Talisman Energy Inc. and its subsidiaries which are consolidated for financial reporting purposes (under the heading "Consolidated Entities") and then in respect of Equion and TSEUK (under the heading "Equity Investments"). All information in respect of Equion and TSEUK reflects Talisman's 49% equity interest in Equion and 51% equity interest in TSEUK. Unless otherwise indicated, all references in this Schedule to Talisman's reserves include the reserves attributable to its equity investments in Equion and TSEUK. The reserves for Equion and TSEUK were evaluated internally by Talisman in the same manner as the consolidated reserves for Talisman, as described below.
INTERNAL EVALUATION
Talisman's oil and gas reserves are evaluated internally. Talisman has obtained an exemption from NI 51-101 that exempts Talisman from the requirement under NI 51-101 to have its reserves evaluated or audited by independent reserves evaluators. The following discussion is provided pursuant to the requirements of the exemption.
Talisman understands that the purpose of the requirement under NI 51-101 for the involvement of independent qualified evaluators or auditors is to ensure that disclosure of reserves information reflects the conclusions of qualified professionals applying consistent standards and that such conclusions are not affected by adverse influences. Talisman believes that using independent evaluators or auditors would not materially enhance the reliability of its reserves estimates in light of the expertise of its internal reserves evaluation personnel and the controls applied during its reserves evaluation process. Talisman believes that its internal resources are at least as extensive as, if not greater than, those which would be assigned by any independent evaluators or auditors engaged by the Company, and that its internal staff's knowledge of and experience with the Company's reserves enable the Company to prepare an evaluation at least equivalent to that of any independent evaluator or auditor.
As at December 31, 2014, the Company's internal reserves evaluation staff included more than 130 persons with full-time or part-time responsibility relating to participation in Talisman's reserves process, of whom 20 were "qualified reserves evaluators" for purposes of NI 51-101. The qualified reserves evaluators have an average of approximately 11 years of relevant experience in evaluating reserves. The Company's internal reserves evaluation management personnel are responsible for reserves evaluation management and are directly involved in evaluating reserves and/or overseeing the reserves evaluation process. The Company has appointed an Internal Qualified Reserves Evaluator ("IQRE") who is responsible for the preparation and validation of the Company's reserves evaluations and the submission to the Company's Board of Directors of reports thereon and reports directly to the President and Chief Executive Officer in that role. The Company's IQRE is Mark Ireland, a graduate of Pennsylvania State University with B.S. and M.S. degrees in Petroleum Engineering. Mr. Ireland has more than 30 years of petroleum engineering experience internationally and in North America. He is a professional engineer registered in both Texas and Alberta and is a member of the Society of Petroleum Engineers and the Society of Petroleum Evaluation Engineers.
Talisman has adopted a corporate policy that prescribes procedures and standards to be followed in preparing its reserves data. The following summarizes Talisman's current process for preparing and approving its publicly disclosed reserves data.
All of Talisman's reserves are evaluated annually. Talisman employs qualified, competent, experienced engineers to ensure consistently high levels of professionalism in the estimation of its reserves data. Technical, cost and economic assumptions underpinning reserves estimates are documented to provide a clear audit trail.
Talisman conducts formal reviews during the reserves estimation process to ensure the reasonableness, completeness and accuracy of input data; the appropriateness of the technical subsurface methodology; the full understanding of reserves movements; and the correct use of reserves classifications. All reserves estimates are reviewed and approved by the respective Executive Vice-President of the operating area to which the reserves relate and then submitted to the Company's executive operating committee, comprised of the President and Chief Executive Officer, the Executive Vice-Presidents and certain Senior Vice-Presidents of the Company, for review and approval. In addition, the IQRE conducts a separate review to ensure the effectiveness of the disclosure controls and that the reserves estimates are free from material misstatement. The reserves data and the reports of the IQRE thereon are then reviewed by the Reserves Committee of the Board of Directors. The Reserves Committee and the IQRE have independent access to each other. Once approved by the Reserves Committee, the reserves data is submitted to the Board of Directors for final approval.
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 35
Notwithstanding that Talisman is exempt from the independent evaluator requirements of NI 51-101, Talisman obtains annual independent audits of its reserves estimates for some of its properties on a rotating basis. Over the past four years, these rotational independent audits have covered, in aggregate, properties which, at December 31, 2014, represent approximately 77% of the Company's proved plus probable reserves (on a boe basis) as at December 31, 2014. At the time of the audits, these audits have not revealed any material discrepancies in the reserves reported at such time using the standards in effect at the time of the audit. Talisman's IQRE oversees the preparation of the independent audits. Talisman maintains a Reserves and Resources Data Policy and Procedures Manual, which it updates as appropriate and on a periodic basis. Talisman also conducts periodic internal audits of the procedures, records and controls relating to the preparation of reserves data. Accordingly, Talisman considers the reliability of its internally generated reserves data to be not materially less than would be afforded by the independent evaluator requirements of NI 51-101.
RESERVES DATA AND OTHER OIL AND GAS INFORMATION
The effective date of the reserves data and other oil and gas information in this section is December 31, 2014 and the preparation date is March 3, 2015.
It should not be assumed that the estimates of future net revenues presented in the tables below represent the fair market value of the reserves. There is no assurance that the forecast prices and costs assumptions will be attained and variances could be material. The recovery and reserves estimates on the Company's properties provided herein are estimates only and there is no guarantee that the estimated reserves will be recovered. Actual reserves may be greater than or less than the estimates provided herein.
In accordance with NI 51-101, the estimates of reserves and future net revenue set forth below are based on forecast prices and costs.
Definitions of the various terms used in the following tables are set forth under "Definitions" below. In certain of the tables set forth below, the columns may not add due to rounding.
36 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
Reserves Estimates (Forecast Prices and Costs)(1)
Light Oil (mmbbls) |
Heavy Oil (mmbbls) |
Shale Oil (mmbbls) |
Shale Gas (bcf) |
Non-Shale Natural Gas (bcf) |
Natural Gas Liquids (mmbbls) |
||||||||||||||||||||
Year ended December 31, 2014 | Gross | Net | Gross | Net | Gross | Net | Gross | Net | Gross | Net | Gross | Net | |||||||||||||
CONSOLIDATED ENTITIES | |||||||||||||||||||||||||
Canada | |||||||||||||||||||||||||
Proved Developed Producing | 3.2 | 2.7 | 24.6 | 22.0 | | | 26.1 | 23.0 | 405.2 | 385.0 | 24.4 | 20.0 | |||||||||||||
Proved Developed Non-Producing | 0.4 | 0.3 | | | | | 0.2 | 0.2 | 3.0 | 2.8 | 0.2 | 0.1 | |||||||||||||
Proved Undeveloped | | | 0.1 | 0.1 | | | 2.6 | 2.5 | 31.4 | 30.1 | 2.1 | 1.9 | |||||||||||||
Total Proved | 3.6 | 3.0 | 24.7 | 22.1 | | | 28.9 | 25.7 | 439.6 | 417.9 | 26.7 | 22.0 | |||||||||||||
Total Probable | 1.3 | 1.0 | 7.3 | 6.1 | | | 12.0 | 10.7 | 150.2 | 142.0 | 10.2 | 8.1 | |||||||||||||
Total Proved Plus Probable | 4.9 | 4.0 | 32.0 | 28.2 | | | 40.9 | 36.4 | 589.8 | 559.9 | 36.9 | 30.1 | |||||||||||||
United States | |||||||||||||||||||||||||
Proved Developed Producing | | | | | 5.8 | 4.4 | 1,108.7 | 929.6 | 29.0 | 24.6 | 27.6 | 20.7 | |||||||||||||
Proved Developed Non-Producing | | | | | | | 132.9 | 113.1 | | | 0.4 | 0.3 | |||||||||||||
Proved Undeveloped | | | | | 6.3 | 4.8 | 800.5 | 665.4 | | | 26.9 | 20.1 | |||||||||||||
Total Proved | | | | | 12.1 | 9.2 | 2,042.1 | 1,708.1 | 29.0 | 24.6 | 54.9 | 41.1 | |||||||||||||
Total Probable | | | | | 2.2 | 1.7 | 826.1 | 694.4 | 9.5 | 8.1 | 13.1 | 9.9 | |||||||||||||
Total Proved Plus Probable | | | | | 14.3 | 10.9 | 2,868.2 | 2,402.5 | 38.5 | 32.7 | 68.0 | 51.0 | |||||||||||||
North Sea(2) | |||||||||||||||||||||||||
Proved Developed Producing | 3.2 | 3.2 | | | | | | | 6.8 | 6.8 | 0.8 | 0.8 | |||||||||||||
Proved Developed Non-Producing | | | | | | | | | | | | | |||||||||||||
Proved Undeveloped | | | | | | | | | | | | | |||||||||||||
Total Proved | 3.2 | 3.2 | | | | | | | 6.8 | 6.8 | 0.8 | 0.8 | |||||||||||||
Total Probable | 6.1 | 6.1 | | | | | | | 15.9 | 15.9 | 1.7 | 1.7 | |||||||||||||
Total Proved Plus Probable | 9.3 | 9.3 | | | | | | | 22.7 | 22.7 | 2.5 | 2.5 | |||||||||||||
Southeast Asia(3) | |||||||||||||||||||||||||
Proved Developed Producing | 22.1 | 15.4 | | | | | | | 804.9 | 580.0 | 7.8 | 3.6 | |||||||||||||
Proved Developed Non-Producing | 0.5 | 0.2 | | | | | | | 46.4 | 33.3 | 0.3 | 0.2 | |||||||||||||
Proved Undeveloped | 0.9 | 0.8 | | | | | | | 444.4 | 298.7 | 3.0 | 1.0 | |||||||||||||
Total Proved | 23.5 | 16.4 | | | | | | | 1,295.7 | 912.0 | 11.1 | 4.8 | |||||||||||||
Total Probable | 73.6 | 52.1 | | | | | | | 723.0 | 510.9 | 6.3 | 2.7 | |||||||||||||
Total Proved Plus Probable | 97.1 | 68.5 | | | | | | | 2,018.7 | 1,422.9 | 17.4 | 7.5 | |||||||||||||
Latin America(4) | |||||||||||||||||||||||||
Proved Developed Producing | | | 4.7 | 3.7 | | | | | | | | | |||||||||||||
Proved Developed Non-Producing | | | | | | | | | | | | | |||||||||||||
Proved Undeveloped | | | 4.5 | 3.5 | | | | | | | | | |||||||||||||
Total Proved | | | 9.2 | 7.2 | | | | | | | | | |||||||||||||
Total Probable | | | 15.9 | 12.3 | | | | | | | | | |||||||||||||
Total Proved Plus Probable | | | 25.1 | 19.5 | | | | | | | | | |||||||||||||
Other(5) | |||||||||||||||||||||||||
Proved Developed Producing | 14.2 | 7.4 | | | | | | | | | 2.1 | 1.1 | |||||||||||||
Proved Developed Non-Producing | 0.6 | 0.3 | | | | | | | | | | | |||||||||||||
Proved Undeveloped | | | | | | | | | | | | | |||||||||||||
Total Proved | 14.8 | 7.7 | | | | | | | | | 2.1 | 1.1 | |||||||||||||
Total Probable | 14.2 | 7.1 | | | | | | | | | 0.3 | 0.2 | |||||||||||||
Total Proved Plus Probable | 29.0 | 14.8 | | | | | | | | | 2.4 | 1.3 | |||||||||||||
TOTAL CONSOLIDATED ENTITIES | |||||||||||||||||||||||||
Proved Developed Producing | 42.7 | 28.7 | 29.3 | 25.7 | 5.8 | 4.4 | 1,134.8 | 952.6 | 1,245.9 | 996.4 | 62.7 | 46.2 | |||||||||||||
Proved Developed Non-Producing | 1.5 | 0.8 | | | | | 133.1 | 113.3 | 49.4 | 36.1 | 0.9 | 0.6 | |||||||||||||
Proved Undeveloped | 0.9 | 0.8 | 4.6 | 3.6 | 6.3 | 4.8 | 803.1 | 667.9 | 475.8 | 328.8 | 32.0 | 23.0 | |||||||||||||
Total Proved | 45.1 | 30.3 | 33.9 | 29.3 | 12.1 | 9.2 | 2,071.0 | 1,733.8 | 1,771.1 | 1,361.3 | 95.6 | 69.8 | |||||||||||||
Total Probable | 95.2 | 66.3 | 23.2 | 18.4 | 2.2 | 1.7 | 838.1 | 705.1 | 898.6 | 676.9 | 31.6 | 22.6 | |||||||||||||
Total Proved Plus Probable | 140.3 | 96.6 | 57.1 | 47.7 | 14.3 | 10.9 | 2,909.1 | 2,438.9 | 2,669.7 | 2,038.2 | 127.2 | 92.4 | |||||||||||||
EQUITY INVESTEES | |||||||||||||||||||||||||
TSEUK | |||||||||||||||||||||||||
Proved Developed Producing | 7.7 | 7.6 | | | | | | | 2.3 | 2.3 | 0.1 | 0.1 | |||||||||||||
Proved Developed Non-Producing | | | | | | | | | | | | | |||||||||||||
Proved Undeveloped | 10.9 | 10.9 | | | | | | | 22.7 | 22.7 | | | |||||||||||||
Total Proved | 18.6 | 18.5 | | | | | | | 25.0 | 25.0 | 0.1 | 0.1 | |||||||||||||
Total Probable | 57.2 | 57.1 | | | | | | | 29.5 | 29.5 | | | |||||||||||||
Total Proved Plus Probable | 75.8 | 75.6 | | | | | | | 54.5 | 54.5 | 0.1 | 0.1 | |||||||||||||
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 37
Equion | |||||||||||||||||||||||||
Proved Developed Producing | 8.0 | 6.4 | | | | | | | 56.2 | 44.9 | 2.0 | 1.6 | |||||||||||||
Proved Developed Non-Producing | | | | | | | | | | | | | |||||||||||||
Proved Undeveloped | 2.6 | 2.1 | | | | | | | | | | | |||||||||||||
Total Proved | 10.6 | 8.5 | | | | | | | 56.2 | 44.9 | 2.0 | 1.6 | |||||||||||||
Total Probable | 4.8 | 3.8 | | | | | | | 4.6 | 3.6 | 0.1 | 0.1 | |||||||||||||
Total Proved Plus Probable | 15.4 | 12.3 | | | | | | | 60.8 | 48.5 | 2.1 | 1.7 | |||||||||||||
TOTAL EQUITY INVESTEES | |||||||||||||||||||||||||
Proved Developed Producing | 15.7 | 14.0 | | | | | | | 58.5 | 47.2 | 2.1 | 1.7 | |||||||||||||
Proved Developed Non-Producing | | | | | | | | | | | | | |||||||||||||
Proved Undeveloped | 13.5 | 13.0 | | | | | | | 22.7 | 22.7 | | | |||||||||||||
Total Proved | 29.2 | 27.0 | | | | | | | 81.2 | 69.9 | 2.1 | 1.7 | |||||||||||||
Total Probable | 62.0 | 60.9 | | | | | | | 34.1 | 33.1 | 0.1 | 0.1 | |||||||||||||
Total Proved Plus Probable | 91.2 | 87.9 | | | | | | | 115.3 | 103.0 | 2.2 | 1.8 | |||||||||||||
TOTAL TALISMAN(6) | |||||||||||||||||||||||||
Proved Developed Producing | 58.4 | 42.7 | 29.3 | 25.7 | 5.8 | 4.4 | 1,134.8 | 952.6 | 1,304.4 | 1,043.6 | 64.8 | 47.9 | |||||||||||||
Proved Developed Non-Producing | 1.5 | 0.8 | | | | | 133.1 | 113.3 | 49.4 | 36.1 | 0.9 | 0.6 | |||||||||||||
Proved Undeveloped | 14.4 | 13.8 | 4.6 | 3.6 | 6.3 | 4.8 | 803.1 | 667.9 | 498.5 | 351.5 | 32.0 | 23.0 | |||||||||||||
Total Proved | 74.3 | 57.3 | 33.9 | 29.3 | 12.1 | 9.2 | 2,071.0 | 1,733.8 | 1,852.3 | 1,431.2 | 97.7 | 71.5 | |||||||||||||
Total Probable | 157.2 | 127.2 | 23.2 | 18.4 | 2.2 | 1.7 | 838.1 | 705.1 | 932.7 | 710.0 | 31.7 | 22.7 | |||||||||||||
Total Proved Plus Probable | 231.5 | 184.5 | 57.1 | 47.7 | 14.3 | 10.9 | 2,909.1 | 2,438.9 | 2,785.0 | 2,141.2 | 129.4 | 94.2 | |||||||||||||
38 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
Net Present Value of Future Net Revenue(1)
Before Deducting Income Taxes Discounted At |
After Deducting Income Taxes Discounted At(2) |
||||||||||||||||||||
Year ended December 31, 2014 | 0% | 5% | 10% | 15% | 20% | 0% | 5% | 10% | 15% | 20% | |||||||||||
CONSOLIDATED ENTITIES | |||||||||||||||||||||
Canada | |||||||||||||||||||||
Proved Developed Producing | (193.4 | ) | 1,045.0 | 988.5 | 853.1 | 743.1 | (263.7 | ) | 1,011.4 | 971.4 | 844.0 | 738.0 | |||||||||
Proved Developed Non-Producing | 11.6 | 16.0 | 13.8 | 11.8 | 10.3 | 6.0 | 12.6 | 11.7 | 10.5 | 9.4 | |||||||||||
Proved Undeveloped | 79.6 | 48.1 | 26.5 | 11.9 | 2.0 | 57.8 | 34.9 | 18.2 | 6.6 | (1.4 | ) | ||||||||||
Total Proved | (102.2 | ) | 1,109.1 | 1,028.8 | 876.8 | 755.4 | (199.9 | ) | 1,058.9 | 1,001.3 | 861.1 | 746.0 | |||||||||
Total Probable | 1,109.4 | 547.8 | 331.8 | 228.1 | 170.0 | 873.4 | 424.1 | 259.8 | 182.7 | 139.8 | |||||||||||
Total Proved Plus Probable | 1,007.2 | 1,656.9 | 1,360.6 | 1,104.9 | 925.4 | 673.5 | 1,483.0 | 1,261.1 | 1,043.8 | 885.8 | |||||||||||
United States | |||||||||||||||||||||
Proved Developed Producing | 3,154.0 | 2,559.3 | 2,034.8 | 1,680.5 | 1,435.9 | 3,116.3 | 2,538.6 | 2,022.4 | 1,672.5 | 1,430.5 | |||||||||||
Proved Developed Non-Producing | 417.0 | 286.5 | 215.5 | 172.3 | 143.4 | 406.1 | 280.1 | 211.3 | 169.5 | 141.4 | |||||||||||
Proved Undeveloped | 1,879.6 | 1,033.2 | 541.1 | 256.5 | 83.1 | 1,808.8 | 993.0 | 515.8 | 239.5 | 71.0 | |||||||||||
Total Proved | 5,450.6 | 3,879.0 | 2,791.4 | 2,109.3 | 1,662.4 | 5,331.2 | 3,811.7 | 2,749.5 | 2,081.5 | 1,642.9 | |||||||||||
Total Probable | 2,943.9 | 1,132.0 | 533.9 | 276.3 | 142.2 | 2,048.6 | 846.3 | 429.1 | 232.5 | 121.5 | |||||||||||
Total Proved Plus Probable | 8,394.5 | 5,011.0 | 3,325.3 | 2,385.6 | 1,804.6 | 7,379.8 | 4,658.0 | 3,178.6 | 2,314.0 | 1,764.4 | |||||||||||
North Sea(3) | |||||||||||||||||||||
Proved Developed Producing | (336.9 | ) | (258.9 | ) | (202.1 | ) | (160.1 | ) | (128.3 | ) | 927.9 | 395.8 | 147.4 | 31.9 | (20.1 | ) | |||||
Proved Developed Non-Producing | | | | | | | | | | | |||||||||||
Proved Undeveloped | | | | | | | | | | | |||||||||||
Total Proved | (336.9 | ) | (258.9 | ) | (202.1 | ) | (160.1 | ) | (128.3 | ) | 927.9 | 395.8 | 147.4 | 31.9 | (20.1 | ) | |||||
Total Probable | 67.0 | 107.1 | 123.2 | 126.7 | 123.4 | 23.8 | 84.7 | 111.3 | 120.1 | 119.6 | |||||||||||
Total Proved Plus Probable | (269.9 | ) | (151.8 | ) | (78.9 | ) | (33.4 | ) | (4.9 | ) | 951.7 | 480.5 | 258.7 | 152.0 | 99.5 | ||||||
Southeast Asia(4) | |||||||||||||||||||||
Proved Developed Producing | 4,811.6 | 4,011.6 | 3,434.6 | 3,002.5 | 2,669.1 | 2,942.0 | 2,465.6 | 2,120.9 | 1,862.0 | 1,661.5 | |||||||||||
Proved Developed Non-Producing | 73.6 | 66.9 | 61.0 | 55.9 | 51.4 | 64.4 | 58.4 | 53.2 | 48.6 | 44.6 | |||||||||||
Proved Undeveloped | 2,553.2 | 1,836.3 | 1,378.9 | 1,069.4 | 850.2 | 1,454.0 | 1,032.8 | 763.9 | 582.1 | 453.6 | |||||||||||
Total Proved | 7,438.4 | 5,914.8 | 4,874.5 | 4,127.8 | 3,570.7 | 4,460.4 | 3,556.8 | 2,938.0 | 2,492.7 | 2,159.7 | |||||||||||
Total Probable | 4,432.8 | 2,954.7 | 2,050.5 | 1,464.7 | 1,068.2 | 2,677.6 | 1,737.0 | 1,159.9 | 786.8 | 535.9 | |||||||||||
Total Proved Plus Probable | 11,871.2 | 8,869.5 | 6,925.0 | 5,592.5 | 4,638.9 | 7,138.0 | 5,293.8 | 4,097.9 | 3,279.5 | 2,695.6 | |||||||||||
Latin America(5) | |||||||||||||||||||||
Proved Developed Producing | 66.2 | 57.2 | 50.3 | 44.8 | 40.5 | 60.2 | 52.3 | 46.2 | 41.3 | 37.4 | |||||||||||
Proved Developed Non-Producing | | | | | | | | | | | |||||||||||
Proved Undeveloped | 46.9 | 36.9 | 29.4 | 23.7 | 19.2 | 47.1 | 36.8 | 29.2 | 23.4 | 18.9 | |||||||||||
Total Proved | 113.1 | 94.1 | 79.7 | 68.5 | 59.7 | 107.3 | 89.1 | 75.4 | 64.7 | 56.3 | |||||||||||
Total Probable | 302.7 | 232.8 | 182.9 | 146.5 | 119.2 | 279.2 | 215.1 | 169.2 | 135.6 | 110.5 | |||||||||||
Total Proved Plus Probable | 415.8 | 326.9 | 262.6 | 215.0 | 178.9 | 386.5 | 304.2 | 244.6 | 200.3 | 166.8 | |||||||||||
Other(6) | |||||||||||||||||||||
Proved Developed Producing | 474.0 | 401.9 | 347.9 | 306.3 | 273.5 | 343.3 | 296.6 | 261.2 | 233.6 | 211.5 | |||||||||||
Proved Developed Non-Producing | 21.6 | 18.5 | 16.1 | 14.2 | 12.7 | 15.4 | 13.5 | 11.9 | 10.6 | 9.6 | |||||||||||
Proved Undeveloped | | | | | | | | | | | |||||||||||
Total Proved | 495.6 | 420.4 | 364.0 | 320.5 | 286.2 | 358.7 | 310.1 | 273.1 | 244.2 | 221.1 | |||||||||||
Total Probable | 454.2 | 341.6 | 264.4 | 209.9 | 170.2 | 275.7 | 207.4 | 160.6 | 127.5 | 103.4 | |||||||||||
Total Proved Plus Probable | 949.8 | 762.0 | 628.4 | 530.4 | 456.4 | 634.4 | 517.5 | 433.7 | 371.7 | 324.5 | |||||||||||
TOTAL CONSOLIDATED ENTITIES | |||||||||||||||||||||
Proved Developed Producing | 7,975.5 | 7,816.1 | 6,654.0 | 5,727.1 | 5,033.8 | 7,126.0 | 6,760.3 | 5,569.5 | 4,685.3 | 4,058.8 | |||||||||||
Proved Developed Non-Producing | 523.8 | 387.9 | 306.4 | 254.2 | 217.8 | 491.9 | 364.6 | 288.1 | 239.2 | 205.0 | |||||||||||
Proved Undeveloped | 4,559.3 | 2,954.5 | 1,975.9 | 1,361.5 | 954.5 | 3,367.7 | 2,097.5 | 1,327.1 | 851.6 | 542.1 | |||||||||||
Total Proved | 13,058.6 | 11,158.5 | 8,936.3 | 7,342.8 | 6,206.1 | 10,985.6 | 9,222.4 | 7,184.7 | 5,776.1 | 4,805.9 | |||||||||||
Total Probable | 9,310.0 | 5,316.0 | 3,486.7 | 2,452.2 | 1,793.2 | 6,178.3 | 3,514.6 | 2,289.9 | 1,585.2 | 1,130.7 | |||||||||||
Total Proved Plus Probable | 22,368.6 | 16,474.5 | 12,423.0 | 9,795.0 | 7,999.3 | 17,163.9 | 12,737.0 | 9,474.6 | 7,361.3 | 5,936.6 | |||||||||||
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 39
EQUITY INVESTEES | |||||||||||||||||||||
TSEUK | |||||||||||||||||||||
Proved Developed Producing | (485.6 | ) | (206.2 | ) | (91.3 | ) | (40.7 | ) | (16.5 | ) | (188.4 | ) | (61.6 | ) | (10.8 | ) | 10.7 | 20.2 | |||
Proved Developed Non-Producing | (5.9 | ) | (2.7 | ) | (1.4 | ) | (0.8 | ) | (0.6 | ) | (3.2 | ) | (1.6 | ) | (0.9 | ) | (0.6 | ) | (0.4 | ) | |
Proved Undeveloped | 26.8 | 53.3 | 38.9 | 16.2 | (5.4 | ) | 10.8 | 9.5 | (8.1 | ) | (27.2 | ) | (43.7 | ) | |||||||
Total Proved | (464.7 | ) | (155.6 | ) | (53.8 | ) | (25.3 | ) | (22.5 | ) | (180.8 | ) | (53.7 | ) | (19.8 | ) | (17.1 | ) | (23.9 | ) | |
Total Probable | (317.5 | ) | 13.9 | 76.3 | 60.0 | 25.0 | 337.2 | 311.6 | 238.3 | 167.4 | 109.2 | ||||||||||
Total Proved Plus Probable | (782.2 | ) | (141.7 | ) | 22.5 | 34.7 | 2.5 | 156.4 | 257.9 | 218.5 | 150.3 | 85.3 | |||||||||
Equion | |||||||||||||||||||||
Proved Developed Producing | 440.1 | 400.2 | 367.1 | 339.1 | 315.3 | 374.8 | 340.0 | 311.1 | 286.8 | 266.0 | |||||||||||
Proved Developed Non-Producing | | | | | | | | | | | |||||||||||
Proved Undeveloped | 61.7 | 48.0 | 36.8 | 27.8 | 20.4 | 35.0 | 24.1 | 15.4 | 8.2 | 2.5 | |||||||||||
Total Proved | 501.8 | 448.2 | 403.9 | 366.9 | 335.7 | 409.8 | 364.1 | 326.5 | 295.0 | 268.5 | |||||||||||
Total Probable | 285.7 | 250.6 | 222.0 | 198.4 | 178.5 | 172.7 | 151.3 | 133.7 | 119.3 | 107.3 | |||||||||||
Total Proved Plus Probable | 787.5 | 698.8 | 625.9 | 565.3 | 514.2 | 582.5 | 515.4 | 460.2 | 414.3 | 375.8 | |||||||||||
TOTAL EQUITY INVESTEES | |||||||||||||||||||||
Proved Developed Producing | (45.5 | ) | 194.0 | 275.8 | 298.4 | 298.8 | 186.4 | 278.4 | 300.3 | 297.5 | 286.2 | ||||||||||
Proved Developed Non-Producing | (5.9 | ) | (2.7 | ) | (1.4 | ) | (0.8 | ) | (0.6 | ) | (3.2 | ) | (1.6 | ) | (0.9 | ) | (0.6 | ) | (0.4 | ) | |
Proved Undeveloped | 88.5 | 101.3 | 75.7 | 44.0 | 15.0 | 45.8 | 33.6 | 7.3 | (19.0 | ) | (41.2 | ) | |||||||||
Total Proved | 37.1 | 292.6 | 350.1 | 341.6 | 313.2 | 229.0 | 310.4 | 306.7 | 277.9 | 244.6 | |||||||||||
Total Probable | (31.8 | ) | 264.5 | 298.3 | 258.4 | 203.5 | 509.9 | 462.9 | 372.0 | 286.7 | 216.5 | ||||||||||
Total Proved Plus Probable | 5.3 | 557.1 | 648.4 | 600.0 | 516.7 | 738.9 | 773.3 | 678.7 | 564.6 | 461.1 | |||||||||||
TOTAL TALISMAN(7) | |||||||||||||||||||||
Proved Developed Producing | 7,930.0 | 8,010.1 | 6,929.8 | 6,025.5 | 5,332.6 | 7,312.4 | 7,038.7 | 5,869.8 | 4,982.8 | 4,345.0 | |||||||||||
Proved Developed Non-Producing | 517.9 | 385.2 | 305.0 | 253.4 | 217.2 | 488.7 | 363.0 | 287.2 | 238.6 | 204.6 | |||||||||||
Proved Undeveloped | 4,647.8 | 3,055.8 | 2,051.6 | 1,405.5 | 969.5 | 3,413.5 | 2,131.1 | 1,334.4 | 832.6 | 500.9 | |||||||||||
Total Proved | 13,095.7 | 11,451.1 | 9,286.4 | 7,684.4 | 6,519.3 | 11,214.6 | 9,532.8 | 7,491.4 | 6,054.0 | 5,050.5 | |||||||||||
Total Probable | 9,278.2 | 5,580.5 | 3,785.0 | 2,710.6 | 1,996.7 | 6,688.2 | 3,977.5 | 2,661.9 | 1,871.9 | 1,347.2 | |||||||||||
Total Proved Plus Probable | 22,373.9 | 17,031.6 | 13,071.4 | 10,395.0 | 8,516.0 | 17,902.8 | 13,510.3 | 10,153.3 | 7,925.9 | 6,397.7 | |||||||||||
40 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
Elements of Future Net Revenue
(Undiscounted) ($ Millions)
Year ended December 31, 2014 | Revenue | Royalties | Operating Costs |
Development Costs |
Abandonment and Reclamation Costs |
Future Net Revenue Before Income Taxes |
Income Taxes(1) |
Future Net Revenue After Income Taxes |
||||||||||
CONSOLIDATED ENTITIES | ||||||||||||||||||
Canada | ||||||||||||||||||
Proved | 5,606.9 | 602.1 | 2,542.6 | 348.8 | 2,215.6 | (102.2 | ) | 97.7 | (199.9 | ) | ||||||||
Proved Plus Probable | 8,078.2 | 937.2 | 3,484.5 | 413.1 | 2,236.2 | 1,007.2 | 333.7 | 673.5 | ||||||||||
United States | ||||||||||||||||||
Proved | 14,220.9 | 2,598.0 | 3,824.2 | 1,532.6 | 815.5 | 5,450.6 | 119.4 | 5,331.2 | ||||||||||
Proved Plus Probable | 21,330.9 | 3,835.8 | 6,077.9 | 2,096.3 | 926.4 | 8,394.5 | 1,014.7 | 7,379.8 | ||||||||||
North Sea | ||||||||||||||||||
Proved | 354.8 | | 228.8 | 37.8 | 425.1 | (336.9 | ) | (1,264.8 | ) | 927.9 | ||||||||
Proved Plus Probable | 1,110.8 | | 573.9 | 123.9 | 682.9 | (269.9 | ) | (1,221.6 | ) | 951.7 | ||||||||
Southeast Asia | ||||||||||||||||||
Proved | 15,438.8 | 4,814.9 | 2,474.5 | 486.3 | 224.7 | 7,438.4 | 2,978.0 | 4,460.4 | ||||||||||
Proved Plus Probable | 29,938.3 | 9,127.3 | 5,682.2 | 2,523.9 | 733.7 | 11,871.2 | 4,733.2 | 7,138.0 | ||||||||||
Latin America | ||||||||||||||||||
Proved | 714.7 | 159.3 | 410.5 | 25.9 | 5.9 | 113.1 | 5.8 | 107.3 | ||||||||||
Proved Plus Probable | 2,052.5 | 467.7 | 1,066.0 | 88.5 | 14.5 | 415.8 | 29.3 | 386.5 | ||||||||||
Other | ||||||||||||||||||
Proved | 1,440.9 | 695.6 | 231.8 | | 17.9 | 495.6 | 136.9 | 358.7 | ||||||||||
Proved Plus Probable | 2,846.1 | 1,415.5 | 393.3 | 64.0 | 23.5 | 949.8 | 315.4 | 634.4 | ||||||||||
TOTAL CONSOLIDATED ENTITIES | ||||||||||||||||||
Proved | 37,777.0 | 8,869.9 | 9,712.4 | 2,431.4 | 3,704.7 | 13,058.6 | 2,073.0 | 10,985.6 | ||||||||||
Proved Plus Probable | 65,356.8 | 15,783.5 | 17,277.8 | 5,309.7 | 4,617.2 | 22,368.6 | 5,204.7 | 17,163.9 | ||||||||||
EQUITY INVESTEES | ||||||||||||||||||
TSEUK | ||||||||||||||||||
Proved | 1,961.3 | 6.3 | 923.7 | 468.4 | 1,027.6 | (464.7 | ) | (283.9 | ) | (180.8 | ) | |||||||
Proved Plus Probable | 7,789.3 | 9.8 | 4,827.4 | 1,529.4 | 2,204.9 | (782.2 | ) | (938.6 | ) | 156.4 | ||||||||
EQUION | ||||||||||||||||||
Proved | 1,072.4 | 214.9 | 243.9 | 93.1 | 18.7 | 501.8 | 92.0 | 409.8 | ||||||||||
Proved Plus Probable | 1,484.8 | 297.3 | 286.2 | 95.1 | 18.7 | 787.5 | 205.0 | 582.5 | ||||||||||
TOTAL EQUITY INVESTEES | ||||||||||||||||||
Proved | 3,033.7 | 221.2 | 1,167.6 | 561.5 | 1,046.3 | 37.1 | (191.9 | ) | 229.0 | |||||||||
Proved Plus Probable | 9,274.1 | 307.1 | 5,113.6 | 1,624.5 | 2,223.6 | 5.3 | (733.6 | ) | 738.9 | |||||||||
TOTAL TALISMAN(2) | ||||||||||||||||||
Proved | 40,810.7 | 9,091.1 | 10,880.0 | 2,992.9 | 4,751.0 | 13,095.7 | 1,881.1 | 11,214.6 | ||||||||||
Proved Plus Probable | 74,630.9 | 16,090.6 | 22,391.4 | 6,934.2 | 6,840.8 | 22,373.9 | 4,471.1 | 17,902.8 | ||||||||||
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 41
Future Net Revenue by Production Group(1)
Reserves Category | Production Group | Future Net Revenue Before Income Taxes (Discounted at 10%/year) ($ Millions) |
Per Unit | ||
CONSOLIDATED ENTITIES | |||||
Proved Reserves | |||||
Light Oil | 975.3 | $21.65/bbl | |||
Non-Shale Natural Gas | 4,357.5 | $2.46/mcf | |||
Natural Gas Liquids | 1,438.1 | $15.04/bbl | |||
Shale Gas | 1,481.8 | $0.72/mcf | |||
Shale Oil | 380.4 | $31.57/bbl | |||
Heavy Oil | 303.1 | $8.91/bbl | |||
Proved Plus Probable | |||||
Light Oil | 2,787.5 | $19.85/bbl | |||
Non-Shale Natural Gas | 5,215.8 | $1.95/mcf | |||
Natural Gas Liquids | 1,685.3 | $13.25/bbl | |||
Shale Gas | 1,953.9 | $0.67/mcf | |||
Shale Oil | 404.7 | $28.42/bbl | |||
Heavy Oil | 375.9 | $6.57/bbl | |||
EQUITY INVESTEES | |||||
Proved Reserves | |||||
Light Oil | 410.2 | $14.05/bbl | |||
Non-Shale Natural Gas | (68.3 | ) | -$0.84/mcf | ||
Natural Gas Liquids | 8.3 | $3.97/bbl | |||
Shale Gas | | $0.00/mcf | |||
Shale Oil | | $0.00/bbl | |||
Heavy Oil | | $0.00/bbl | |||
Proved Plus Probable | |||||
Light Oil | 800.6 | $8.78/bbl | |||
Non-Shale Natural Gas | (165.1 | ) | -$1.43/mcf | ||
Natural Gas Liquids | 12.9 | $5.63/bbl | |||
Shale Gas | | $0.00/mcf | |||
Shale Oil | | $0.00/bbl | |||
Heavy Oil | | $0.00/bbl | |||
42 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
Reconciliation of Changes in Reserves
Continuity of Gross Proved Reserves
Year ended December 31, 2014 | Light Oil (mmbbls) |
Heavy Oil (mmbbls) |
Shale Oil (mmbbls) |
Shale Gas (bcf) |
Non-Shale Gas (bcf) |
NGL (mmbbls) |
||||||||
CONSOLIDATED ENTITIES | ||||||||||||||
Canada | ||||||||||||||
At December 31, 2013 | 3.2 | 33.5 | 0.1 | 539.9 | 693.0 | 30.3 | ||||||||
Discoveries | | | | | | | ||||||||
Extensions & Improved Recovery | 1.4 | 0.1 | | 12.2 | 68.7 | 4.7 | ||||||||
Acquisitions | | | | | | | ||||||||
Dispositions | | | | (509.9 | ) | (196.7 | ) | (1.4 | ) | |||||
Technical Revisions | (0.5 | ) | (5.3 | ) | (0.1 | ) | (3.6 | ) | (24.6 | ) | (1.3 | ) | ||
Economic Revisions | | (0.2 | ) | | (0.1 | ) | (21.7 | ) | (1.8 | ) | ||||
Production(1) | (0.5 | ) | (3.4 | ) | | (9.6 | ) | (79.1 | ) | (3.8 | ) | |||
At December 31, 2014 | 3.6 | 24.7 | | 28.9 | 439.6 | 26.7 | ||||||||
United States | ||||||||||||||
At December 31, 2013 | | | 9.1 | 1,943.9 | 32.0 | 42.7 | ||||||||
Discoveries | | | | | | | ||||||||
Extensions & Improved Recovery | | | 4.7 | 467.0 | | 15.8 | ||||||||
Acquisitions | | | | | | | ||||||||
Dispositions | | | | (1.5 | ) | | | |||||||
Technical Revisions | | | 1.1 | 57.3 | 6.6 | 3.1 | ||||||||
Economic Revisions | | | (0.9 | ) | (230.6 | ) | (3.2 | ) | (0.4 | ) | ||||
Production(1) | | | (1.9 | ) | (194.0 | ) | (6.4 | ) | (6.3 | ) | ||||
At December 31, 2014 | | | 12.1 | 2,042.1 | 29.0 | 54.9 | ||||||||
North Sea(2) | ||||||||||||||
At December 31, 2013 | 8.5 | | | | 16.6 | 1.8 | ||||||||
Discoveries | | | | | | | ||||||||
Extensions & Improved Recovery | | | | | | | ||||||||
Acquisitions | | | | | | | ||||||||
Dispositions | | | | | | | ||||||||
Technical Revisions | (0.9 | ) | | | | 0.7 | (0.2 | ) | ||||||
Economic Revisions | (0.2 | ) | | | | (2.5 | ) | (0.6 | ) | |||||
Production(1) | (4.2 | ) | | | | (8.0 | ) | (0.2 | ) | |||||
At December 31, 2014 | 3.2 | | | | 6.8 | 0.8 | ||||||||
Southeast Asia | ||||||||||||||
At December 31, 2013 | 35.9 | | | | 1,559.9 | 17.5 | ||||||||
Discoveries | 0.8 | | | | | | ||||||||
Extensions & Improved Recovery | 1.8 | | | | 43.5 | | ||||||||
Acquisitions | | | | | | | ||||||||
Dispositions | (1.9 | ) | | | | (10.0 | ) | | ||||||
Technical Revisions | 3.0 | | | | (74.5 | ) | (1.5 | ) | ||||||
Economic Revisions | (3.5 | ) | | | | (35.2 | ) | (2.4 | ) | |||||
Production(1) | (12.6 | ) | | | | (188.0 | ) | (2.5 | ) | |||||
At December 31, 2014 | 23.5 | | | | 1,295.7 | 11.1 | ||||||||
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 43
Latin America(3) | ||||||||||||||
At December 31, 2013 | | 2.9 | | | | | ||||||||
Discoveries | | | | | | | ||||||||
Extensions & Improved Recovery | | 5.5 | | | | | ||||||||
Acquisitions | | | | | | | ||||||||
Dispositions | | | | | | | ||||||||
Technical Revisions | | 2.1 | | | | | ||||||||
Economic Revisions | | | | | | | ||||||||
Production(1) | | (1.3 | ) | | | | | |||||||
At December 31, 2014 | | 9.2 | | | | | ||||||||
Other | ||||||||||||||
At December 31, 2013 | 20.9 | | | | | 2.3 | ||||||||
Discoveries | | | | | | | ||||||||
Extensions & Improved Recovery | | | | | | | ||||||||
Acquisitions | | | | | | | ||||||||
Dispositions | | | | | | | ||||||||
Technical Revisions | (1.4 | ) | | | | | 0.0 | |||||||
Economic Revisions | (0.5 | ) | | | | | | |||||||
Production(1) | (4.2 | ) | | | | | (0.2 | ) | ||||||
At December 31, 2014 | 14.8 | | | | | 2.1 | ||||||||
TOTAL CONSOLIDATED ENTITIES | ||||||||||||||
At December 31, 2013 | 68.5 | 36.4 | 9.2 | 2,483.8 | 2,301.5 | 94.6 | ||||||||
Discoveries | 0.8 | | | | | | ||||||||
Extensions & Improved Recovery | 3.2 | 5.6 | 4.7 | 479.2 | 112.2 | 20.5 | ||||||||
Acquisitions | | | | | | | ||||||||
Dispositions | (1.9 | ) | | | (511.4 | ) | (206.7 | ) | (1.4 | ) | ||||
Technical Revisions | 0.2 | (3.2 | ) | 1.0 | 53.7 | (91.8 | ) | 0.1 | ||||||
Economic Revisions | (4.2 | ) | (0.2 | ) | (0.9 | ) | (230.7 | ) | (62.6 | ) | (5.2 | ) | ||
Production(1) | (21.5 | ) | (4.7 | ) | (1.9 | ) | (203.6 | ) | (281.5 | ) | (13.0 | ) | ||
At December 31, 2014 | 45.1 | 33.9 | 12.1 | 2,071.0 | 1,771.1 | 95.6 | ||||||||
44 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
EQUITY INVESTMENTS | ||||||||||||||
TSEUK | ||||||||||||||
At December 31, 2013 | 66.6 | | | | 33.1 | 0.3 | ||||||||
Discoveries | | | | | | | ||||||||
Extensions & Improved Recovery | (0.1 | ) | | | | (0.1 | ) | | ||||||
Acquisitions | | | | | | | ||||||||
Dispositions | | | | | | | ||||||||
Technical Revisions | (0.5 | ) | | | | 1.0 | (0.1 | ) | ||||||
Economic Revisions | (41.5 | ) | | | | (8.5 | ) | (0.1 | ) | |||||
Production(1) | (5.9 | ) | | | | (0.5 | ) | | ||||||
At December 31, 2014 | 18.6 | | | | 25.0 | 0.1 | ||||||||
Equion | ||||||||||||||
At December 31, 2013 | 12.4 | | | | 73.0 | 1.2 | ||||||||
Discoveries | | | | | | | ||||||||
Extensions & Improved Recovery | 0.8 | | | | | 1.1 | ||||||||
Acquisitions | | | | | | | ||||||||
Dispositions | | | | | | | ||||||||
Technical Revisions | 0.6 | | | | (2.1 | ) | | |||||||
Economic Revisions | 0.1 | | | | 0.6 | | ||||||||
Production(1) | (3.3 | ) | | | | (15.3 | ) | (0.3 | ) | |||||
At December 31, 2014 | 10.6 | | | | 56.2 | 2.0 | ||||||||
TOTAL EQUITY INVESTEES | ||||||||||||||
At December 31, 2013 | 79.0 | | | | 106.1 | 1.5 | ||||||||
Discoveries | | | | | | | ||||||||
Extensions & Improved Recovery | 0.7 | | | | (0.1 | ) | 1.1 | |||||||
Acquisitions | | | | | | | ||||||||
Dispositions | | | | | | | ||||||||
Technical Revisions | 0.1 | | | | (1.1 | ) | (0.1 | ) | ||||||
Economic Revisions | (41.4 | ) | | | | (7.9 | ) | (0.1 | ) | |||||
Production(1) | (9.2 | ) | | | | (15.8 | ) | (0.3 | ) | |||||
At December 31, 2014 | 29.2 | | | | 81.2 | 2.1 | ||||||||
TOTAL TALISMAN | ||||||||||||||
At December 31, 2013 | 147.5 | 36.4 | 9.2 | 2,483.8 | 2,407.6 | 96.1 | ||||||||
Discoveries | 0.8 | | | | | | ||||||||
Extensions & Improved Recovery | 3.9 | 5.6 | 4.7 | 479.2 | 112.1 | 21.6 | ||||||||
Acquisitions | | | | | | | ||||||||
Dispositions | (1.9 | ) | | | (511.4 | ) | (206.7 | ) | (1.4 | ) | ||||
Technical Revisions | 0.3 | (3.2 | ) | 1.0 | 53.7 | (92.9 | ) | (0.0 | ) | |||||
Economic Revisions | (45.6 | ) | (0.2 | ) | (0.9 | ) | (230.7 | ) | (70.5 | ) | (5.3 | ) | ||
Production(1) | (30.7 | ) | (4.7 | ) | (1.9 | ) | (203.6 | ) | (297.3 | ) | (13.3 | ) | ||
At December 31, 2014 | 74.3 | 33.9 | 12.1 | 2,071.0 | 1,852.3 | 97.7 | ||||||||
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 45
Continuity of Gross Probable Reserves
Year ended December 31, 2014 | Light Oil (mmbbls) |
Heavy Oil (mmbbls) |
Shale Oil (mmbbls) |
Shale Gas (bcf) |
Non-Shale Gas (bcf) |
NGL (mmbbls) |
|||||||
CONSOLIDATED ENTITIES | |||||||||||||
Canada | |||||||||||||
At December 31, 2013 | 0.6 | 3.3 | | 146.4 | 340.6 | 10.1 | |||||||
Discoveries | | | | | | | |||||||
Extensions & Improved Recovery | 0.7 | 0.3 | | 4.6 | 12.5 | 1.6 | |||||||
Acquisitions | | | | | | | |||||||
Dispositions | | | | (139.1 | ) | (134.0 | ) | (0.3 | ) | ||||
Technical Revisions | 0.1 | 3.7 | | 0.0 | (49.4 | ) | (0.1 | ) | |||||
Economic Revisions | (0.1 | ) | | | 0.1 | (19.5 | ) | (1.1 | ) | ||||
Production(1) | | | | | | | |||||||
At December 31, 2014 | 1.3 | 7.3 | | 12.0 | 150.2 | 10.2 | |||||||
United States | |||||||||||||
At December 31, 2013 | | | 4.3 | 912.6 | 18.3 | 18.6 | |||||||
Discoveries | | | | | | | |||||||
Extensions & Improved Recovery | | | 0.4 | 180.8 | | 2.8 | |||||||
Acquisitions | | | | | | | |||||||
Dispositions | | | | (0.9 | ) | | | ||||||
Technical Revisions | | | (1.8 | ) | 2.4 | (6.5 | ) | (7.8 | ) | ||||
Economic Revisions | | | (0.7 | ) | (268.8 | ) | (2.3 | ) | (0.5 | ) | |||
Production(1) | | | | | | | |||||||
At December 31, 2014 | | | 2.2 | 826.1 | 9.5 | 13.1 | |||||||
North Sea(2) | |||||||||||||
At December 31, 2013 | 6.9 | | | | 24.0 | 2.5 | |||||||
Discoveries | | | | | | | |||||||
Extensions & Improved Recovery | 0.9 | | | | 0.9 | 0.1 | |||||||
Acquisitions | | | | | | | |||||||
Dispositions | | | | | | | |||||||
Technical Revisions | (1.3 | ) | | | | (2.2 | ) | 0.0 | |||||
Economic Revisions | (0.4 | ) | | | | (6.8 | ) | (0.9 | ) | ||||
Production(1) | | | | | | | |||||||
At December 31, 2014 | 6.1 | | | | 15.9 | 1.7 | |||||||
Southeast Asia | |||||||||||||
At December 31, 2013 | 54.7 | | | | 661.6 | 6.8 | |||||||
Discoveries | 24.8 | | | | | | |||||||
Extensions & Improved Recovery | (1.8 | ) | | | | (36.7 | ) | (0.1 | ) | ||||
Acquisitions | | | | | | | |||||||
Dispositions | (0.9 | ) | | | | | | ||||||
Technical Revisions | (6.8 | ) | | | | 95.7 | 0.5 | ||||||
Economic Revisions | 3.6 | | | | 2.4 | (0.9 | ) | ||||||
Production(1) | | | | | | | |||||||
At December 31, 2014 | 73.6 | | | | 723.0 | 6.3 | |||||||
46 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
Latin America(3) | |||||||||||||
At December 31, 2013 | | 1.7 | | | | | |||||||
Discoveries | | | | | | | |||||||
Extensions & Improved Recovery | | 13.9 | | | | | |||||||
Acquisitions | | | | | | | |||||||
Dispositions | | | | | | | |||||||
Technical Revisions | | 0.3 | | | | | |||||||
Economic Revisions | | | | | | | |||||||
Production(1) | | | | | | | |||||||
At December 31, 2014 | | 15.9 | | | | | |||||||
Other | |||||||||||||
At December 31, 2013 | 12.0 | | | | | 0.3 | |||||||
Discoveries | | | | | | | |||||||
Extensions & Improved Recovery | | | | | | | |||||||
Acquisitions | | | | | | | |||||||
Dispositions | | | | | | | |||||||
Technical Revisions | 2.2 | | | | | | |||||||
Economic Revisions | | | | | | | |||||||
Production(1) | | | | | | | |||||||
At December 31, 2014 | 14.2 | | | | | 0.3 | |||||||
TOTAL CONSOLIDATED ENTITIES | |||||||||||||
At December 31, 2013 | 74.2 | 5.0 | 4.3 | 1,059.0 | 1,044.5 | 38.3 | |||||||
Discoveries | 24.8 | | | | | | |||||||
Extensions & Improved Recovery | (0.2 | ) | 14.2 | 0.4 | 185.4 | (23.3 | ) | 4.4 | |||||
Acquisitions | | | | | | | |||||||
Dispositions | (0.9 | ) | | | (140.0 | ) | (134.0 | ) | (0.3 | ) | |||
Technical Revisions | (5.8 | ) | 4.0 | (1.8 | ) | 2.4 | 37.6 | (7.4 | ) | ||||
Economic Revisions | 3.1 | | (0.7 | ) | (268.7 | ) | (26.2 | ) | (3.4 | ) | |||
Production(1) | | | | | | | |||||||
At December 31, 2014 | 95.2 | 23.2 | 2.2 | 838.1 | 898.6 | 31.6 | |||||||
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 47
EQUITY INVESTMENTS | |||||||||||||
TSEUK | |||||||||||||
At December 31, 2013 | 54.3 | | | | 29.1 | 0.2 | |||||||
Discoveries | | | | | | | |||||||
Extensions & Improved Recovery | | | | | | | |||||||
Acquisitions | 0.6 | | | | | | |||||||
Dispositions | | | | | | | |||||||
Technical Revisions | (6.1 | ) | | | | (4.1 | ) | (0.1 | ) | ||||
Economic Revisions | 8.4 | | | | 4.5 | (0.1 | ) | ||||||
Production(1) | | | | | | | |||||||
At December 31, 2014 | 57.2 | | | | 29.5 | | |||||||
Equion | |||||||||||||
At December 31, 2013 | 4.2 | | | | | | |||||||
Discoveries | | | | | | | |||||||
Extensions & Improved Recovery | 1.0 | | | | 4.6 | | |||||||
Acquisitions | | | | | | | |||||||
Dispositions | | | | | | | |||||||
Technical Revisions | (0.4 | ) | | | | | 0.1 | ||||||
Economic Revisions | | | | | | | |||||||
Production(1) | | | | | | | |||||||
At December 31, 2014 | 4.8 | | | | 4.6 | 0.1 | |||||||
TOTAL EQUITY INVESTEES | |||||||||||||
At December 31, 2013 | 58.5 | | | | 29.1 | 0.2 | |||||||
Discoveries | | | | | | | |||||||
Extensions & Improved Recovery | 1.0 | | | | 4.6 | | |||||||
Acquisitions | 0.6 | | | | | | |||||||
Dispositions | | | | | | | |||||||
Technical Revisions | (6.5 | ) | | | | (4.1 | ) | | |||||
Economic Revisions | 8.4 | | | | 4.5 | (0.1 | ) | ||||||
Production(1) | | | | | | | |||||||
At December 31, 2014 | 62.0 | | | | 34.1 | 0.1 | |||||||
TOTAL TALISMAN | |||||||||||||
At December 31, 2013 | 132.7 | 5.0 | 4.3 | 1,059.0 | 1,073.6 | 38.5 | |||||||
Discoveries | 24.8 | | | | | | |||||||
Extensions & Improved Recovery | 0.8 | 14.2 | 0.4 | 185.4 | (18.7 | ) | 4.4 | ||||||
Acquisitions | 0.6 | | | | | | |||||||
Dispositions | (0.9 | ) | | | (140.0 | ) | (134.0 | ) | (0.3 | ) | |||
Technical Revisions | (12.3 | ) | 4.0 | (1.8 | ) | 2.4 | 33.5 | (7.4 | ) | ||||
Economic Revisions | 11.5 | | (0.7 | ) | (268.7 | ) | (21.7 | ) | (3.5 | ) | |||
Production(1) | | | | | | | |||||||
At December 31, 2014 | 157.2 | 23.2 | 2.2 | 838.1 | 932.7 | 31.7 | |||||||
48 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
Continuity of Gross Proved Plus Probable Reserves
Year ended December 31, 2014 | Light Oil (mmbbls) |
Heavy Oil (mmbbls) |
Shale Oil (mmbbls) |
Shale Gas (bcf) |
Non-Shale Gas (bcf) |
NGL (mmbbls) |
||||||||
CONSOLIDATED ENTITIES | ||||||||||||||
Canada | ||||||||||||||
At December 31, 2013 | 3.8 | 36.8 | 0.1 | 686.3 | 1,033.6 | 40.4 | ||||||||
Discoveries | | | | | | | ||||||||
Extensions & Improved Recovery | 2.1 | 0.4 | | 16.8 | 81.2 | 6.3 | ||||||||
Acquisitions | | | | | | | ||||||||
Dispositions | | | | (649.0 | ) | (330.7 | ) | (1.7 | ) | |||||
Technical Revisions | (0.4 | ) | (1.6 | ) | (0.1 | ) | (3.6 | ) | (74.0 | ) | (1.4 | ) | ||
Economic Revisions | (0.1 | ) | (0.2 | ) | | | (41.2 | ) | (2.9 | ) | ||||
Production(1) | (0.5 | ) | (3.4 | ) | | (9.6 | ) | (79.1 | ) | (3.8 | ) | |||
At December 31, 2014 | 4.9 | 32.0 | | 40.9 | 589.8 | 36.9 | ||||||||
United States | ||||||||||||||
At December 31, 2013 | | | 13.4 | 2,856.5 | 50.3 | 61.3 | ||||||||
Discoveries | | | | | | | ||||||||
Extensions & Improved Recovery | | | 5.1 | 647.8 | | 18.6 | ||||||||
Acquisitions | | | | | | | ||||||||
Dispositions | | | | (2.4 | ) | | | |||||||
Technical Revisions | | | (0.7 | ) | 59.7 | 0.1 | (4.7 | ) | ||||||
Economic Revisions | | | (1.6 | ) | (499.4 | ) | (5.5 | ) | (0.9 | ) | ||||
Production(1) | | | (1.9 | ) | (194.0 | ) | (6.4 | ) | (6.3 | ) | ||||
At December 31, 2014 | | | 14.3 | 2,868.2 | 38.5 | 68.0 | ||||||||
North Sea(2) | ||||||||||||||
At December 31, 2013 | 15.4 | | | | 40.6 | 4.3 | ||||||||
Discoveries | | | | | | | ||||||||
Extensions & Improved Recovery | 0.9 | | | | 0.9 | 0.1 | ||||||||
Acquisitions | | | | | | | ||||||||
Dispositions | | | | | | | ||||||||
Technical Revisions | (2.2 | ) | | | | (1.5 | ) | (0.2 | ) | |||||
Economic Revisions | (0.6 | ) | | | | (9.3 | ) | (1.5 | ) | |||||
Production(1) | (4.2 | ) | | | | (8.0 | ) | (0.2 | ) | |||||
At December 31, 2014 | 9.3 | | | | 22.7 | 2.5 | ||||||||
Southeast Asia | ||||||||||||||
At December 31, 2013 | 90.6 | | | | 2,221.5 | 24.3 | ||||||||
Discoveries | 25.6 | | | | | | ||||||||
Extensions & Improved Recovery | | | | | 6.8 | (0.1 | ) | |||||||
Acquisitions | | | | | | | ||||||||
Dispositions | (2.8 | ) | | | | (10.0 | ) | | ||||||
Technical Revisions | (3.8 | ) | | | | 21.2 | (1.0 | ) | ||||||
Economic Revisions | 0.1 | | | | (32.8 | ) | (3.3 | ) | ||||||
Production(1) | (12.6 | ) | | | | (188.0 | ) | (2.5 | ) | |||||
At December 31, 2014 | 97.1 | | | | 2,018.7 | 17.4 | ||||||||
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 49
Latin America(3) | ||||||||||||||
At December 31, 2013 | | 4.6 | | | | | ||||||||
Discoveries | | | | | | | ||||||||
Extensions & Improved Recovery | | 19.4 | | | | | ||||||||
Acquisitions | | | | | | | ||||||||
Dispositions | | | | | | | ||||||||
Technical Revisions | | 2.4 | | | | | ||||||||
Economic Revisions | | | | | | | ||||||||
Production(1) | | (1.3 | ) | | | | | |||||||
At December 31, 2014 | | 25.1 | | | | | ||||||||
Other | ||||||||||||||
At December 31, 2013 | 32.9 | | | | | 2.6 | ||||||||
Discoveries | | | | | | | ||||||||
Extensions & Improved Recovery | | | | | | | ||||||||
Acquisitions | | | | | | | ||||||||
Dispositions | | | | | | | ||||||||
Technical Revisions | 0.8 | | | | | 0.0 | ||||||||
Economic Revisions | (0.5 | ) | | | | | | |||||||
Production(1) | (4.2 | ) | | | | | (0.2 | ) | ||||||
At December 31, 2014 | 29.0 | | | | | 2.4 | ||||||||
TOTAL CONSOLIDATED ENTITIES | ||||||||||||||
At December 31, 2013 | 142.7 | 41.4 | 13.5 | 3,542.8 | 3,346.0 | 132.9 | ||||||||
Discoveries | 25.6 | | | | | | ||||||||
Extensions & Improved Recovery | 3.0 | 19.8 | 5.1 | 664.6 | 88.9 | 24.9 | ||||||||
Acquisitions | | | | | | | ||||||||
Dispositions | (2.8 | ) | | | (651.4 | ) | (340.7 | ) | (1.7 | ) | ||||
Technical Revisions | (5.6 | ) | 0.8 | (0.8 | ) | 56.1 | (54.2 | ) | (7.3 | ) | ||||
Economic Revisions | (1.1 | ) | (0.2 | ) | (1.6 | ) | (499.4 | ) | (88.8 | ) | (8.6 | ) | ||
Production(1) | (21.5 | ) | (4.7 | ) | (1.9 | ) | (203.6 | ) | (281.5 | ) | (13.0 | ) | ||
At December 31, 2014 | 140.3 | 57.1 | 14.3 | 2,909.1 | 2,669.7 | 127.2 | ||||||||
EQUITY INVESTMENTS | ||||||||||||||
TSEUK | ||||||||||||||
At December 31, 2013 | 120.9 | | | | 62.2 | 0.5 | ||||||||
Discoveries | | | | | | | ||||||||
Extensions & Improved Recovery | (0.1 | ) | | | | (0.1 | ) | | ||||||
Acquisitions | 0.6 | | | | | | ||||||||
Dispositions | | | | | | | ||||||||
Technical Revisions | (6.6 | ) | | | | (3.1 | ) | (0.2 | ) | |||||
Economic Revisions | (33.1 | ) | | | | (4.0 | ) | (0.2 | ) | |||||
Production(1) | (5.9 | ) | | | | (0.5 | ) | | ||||||
At December 31, 2014 | 75.8 | | | | 54.5 | 0.1 | ||||||||
50 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
Equion | ||||||||||||||
At December 31, 2013 | 16.6 | | | | 73.0 | 1.2 | ||||||||
Discoveries | | | | | | | ||||||||
Extensions & Improved Recovery | 1.8 | | | | 4.6 | 1.1 | ||||||||
Acquisitions | | | | | | | ||||||||
Dispositions | | | | | | | ||||||||
Technical Revisions | 0.2 | | | | (2.1 | ) | 0.1 | |||||||
Economic Revisions | 0.1 | | | | 0.6 | | ||||||||
Production(1) | (3.3 | ) | | | | (15.3 | ) | (0.3 | ) | |||||
At December 31, 2014 | 15.4 | | | | 60.8 | 2.1 | ||||||||
TOTAL EQUITY INVESTEES | ||||||||||||||
At December 31, 2013 | 137.5 | | | | 135.2 | 1.7 | ||||||||
Discoveries | | | | | | | ||||||||
Extensions & Improved Recovery | 1.7 | | | | 4.5 | 1.1 | ||||||||
Acquisitions | 0.6 | | | | | | ||||||||
Dispositions | | | | | | | ||||||||
Technical Revisions | (6.4 | ) | | | | (5.2 | ) | (0.1 | ) | |||||
Economic Revisions | (33.0 | ) | | | | (3.4 | ) | (0.2 | ) | |||||
Production(1) | (9.2 | ) | | | | (15.8 | ) | (0.3 | ) | |||||
At December 31, 2014 | 91.2 | | | | 115.3 | 2.2 | ||||||||
TOTAL TALISMAN | ||||||||||||||
At December 31, 2013 | 280.2 | 41.4 | 13.5 | 3,542.8 | 3,481.2 | 134.6 | ||||||||
Discoveries | 25.6 | | | | | | ||||||||
Extensions & Improved Recovery | 4.7 | 19.8 | 5.1 | 664.6 | 93.4 | 26.0 | ||||||||
Acquisitions | 0.6 | | | | | | ||||||||
Dispositions | (2.8 | ) | | | (651.4 | ) | (340.7 | ) | (1.7 | ) | ||||
Technical Revisions | (12.0 | ) | 0.8 | (0.8 | ) | 56.1 | (59.4 | ) | (7.4 | ) | ||||
Economic Revisions | (34.1 | ) | (0.2 | ) | (1.6 | ) | (499.4 | ) | (92.2 | ) | (8.8 | ) | ||
Production(1) | (30.7 | ) | (4.7 | ) | (1.9 | ) | (203.6 | ) | (297.3 | ) | (13.3 | ) | ||
At December 31, 2014 | 231.5 | 57.1 | 14.3 | 2,909.1 | 2,785.0 | 129.4 | ||||||||
At the end of 2014, Talisman's proved plus probable reserves totaled 1.38 billion boe. The Company added (discoveries, additions, and extensions) approximately 208 million boe (135 million boe proved), offset by negative technical revisions of 19 million boe, negative economic revisions of 143 million boe, and divestments of 170 million boe.
Undeveloped Reserves
The following tables set forth, by product type, the volumes of gross proved undeveloped reserves and gross probable undeveloped reserves that were first attributed as reserves in each of the most recent three financial years. The tables do not include volumes of proved undeveloped and probable undeveloped reserves first attributed in years prior to 2010 because such information is not available to the Company.
Undeveloped reserves are those reserves where a significant expenditure (for example, when compared to the cost of drilling a well) is required to render them capable of production. Undeveloped reserves may be booked to projects that have both proved (high certainty) and probable (less certain, but expected to be recovered) reserves, and some projects that have only probable reserves. The following table presents the first attributed undeveloped reserve additions for the past four years.
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 51
Proved Undeveloped Reserves(1)
Light Oil (mmbbls) |
Heavy Oil (mmbbls) |
Shale Oil (mmbbls) |
Shale Gas (bcf) |
Non-Shale Natural Gas (bcf) |
Natural Gas Liquids (mmbbls) |
|||
CONSOLIDATED ENTITIES | ||||||||
Prior Years | 47.0 | 1.2 | 5.5 | 1,576.6 | 314.1 | 19.0 | ||
2012 | 11.4 | | 3.7 | 206.5 | 54.0 | 10.2 | ||
2013 | 2.6 | | 1.3 | 533.6 | 41.0 | 19.8 | ||
2014(2) | 4.5 | 0.1 | 3.0 | 220.9 | 29.8 | 6.3 | ||
EQUITY INVESTEES | ||||||||
Prior Years | | | | | | | ||
2012 | | | | | | | ||
2013 | 2.2 | | | | 1.4 | | ||
2014(3) | 0.8 | | | | | | ||
TOTAL TALISMAN | ||||||||
2014(4) | 5.3 | 0.1 | 3.0 | 220.9 | 29.8 | 6.3 | ||
Probable Undeveloped Reserves(1)
Light Oil (mmbbls) |
Heavy Oil (mmbbls) |
Shale Oil (mmbbls) |
Shale Gas (bcf) |
Non-Shale Natural Gas (bcf) |
Natural Gas Liquids (mmbbls) |
|||
CONSOLIDATED ENTITIES | ||||||||
Prior Years | 69.1 | 0.5 | 0.9 | 833.0 | 183.4 | 9.3 | ||
2012 | 5.4 | | 0.7 | 44.3 | 11.2 | 2.1 | ||
2013 | 15.7 | | 0.6 | 289.4 | 130.0 | 10.0 | ||
2014(2) | 38.8 | 0.3 | 0.4 | 186.8 | 17.7 | 2.9 | ||
EQUITY INVESTEES | ||||||||
Prior Years | | | | | | | ||
2012 | | | | | | | ||
2013 | 0.2 | | | | | | ||
2014(3) | 1.0 | | | | 4.6 | | ||
TOTAL TALISMAN | ||||||||
2014(4) | 39.8 | 0.3 | 0.4 | 186.8 | 22.3 | 2.9 | ||
As at December 31, 2014, Talisman's proved undeveloped reserves were 273 mmboe and proved plus probable undeveloped reserves were 576 mmboe. These values represent 31% and 42% of Talisman's total proved and total proved plus probable reserves respectively. Talisman plans to develop 93% of proved and 89% of proved plus probable reserves within the next five years.
52 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
Future Development Costs(1)
The following tables set forth the development costs ($ millions) deducted in the estimation of future net revenue.
Canada |
United States |
North Sea |
||||||||||
CONSOLIDATED ENTITIES | Proved | Proved Plus Probable |
Proved | Proved Plus Probable |
Proved | Proved Plus Probable |
||||||
Year | ||||||||||||
2015 | 59.7 | 76.5 | 350.5 | 460.9 | 31.5 | 84.7 | ||||||
2016 | 36.8 | 36.8 | 351.7 | 536.8 | 2.3 | 9.1 | ||||||
2017 | 51.7 | 59.4 | 273.5 | 317.7 | 2.0 | 13.3 | ||||||
2018 | 13.1 | 31.6 | 326.4 | 507.5 | 2.0 | 9.5 | ||||||
2019 | 11.2 | 45.1 | 116.3 | 155.8 | | 5.2 | ||||||
Remainder | 176.3 | 163.7 | 114.2 | 117.6 | | 2.1 | ||||||
Total: Undiscounted | 348.8 | 413.1 | 1,532.6 | 2,096.3 | 37.8 | 123.9 | ||||||
Southeast Asia |
Latin America |
Other |
||||||||||
Year | Proved | Proved Plus Probable |
Proved | Proved Plus Probable |
Proved | Proved Plus Probable |
||||||
2015 | 182.4 | 260.3 | 15.0 | 15.0 | | 6.9 | ||||||
2016 | 117.0 | 471.7 | 10.9 | 53.0 | | 15.3 | ||||||
2017 | 53.5 | 610.3 | | 20.5 | | 24.0 | ||||||
2018 | 27.7 | 416.3 | | | | 2.5 | ||||||
2019 | 12.8 | 197.6 | | | | 2.2 | ||||||
Remainder | 92.9 | 567.7 | | | | 13.1 | ||||||
Total: Undiscounted | 486.3 | 2,523.9 | 25.9 | 88.5 | | 64.0 | ||||||
TSEUK |
Equion |
|||||||
EQUITY INVESTEES | Proved | Proved Plus Probable |
Proved | Proved Plus Probable |
||||
Year | ||||||||
2015 | 130.2 | 312.3 | 76.5 | 78.5 | ||||
2016 | 93.7 | 323.3 | 8.8 | 8.8 | ||||
2017 | 91.5 | 266.2 | 3.0 | 3.0 | ||||
2018 | 86.3 | 182.0 | 3.8 | 3.8 | ||||
2019 | 29.8 | 124.5 | 1.0 | 1.0 | ||||
Remainder | 36.9 | 321.1 | | | ||||
Total: Undiscounted | 468.4 | 1,529.4 | 93.1 | 95.1 | ||||
Talisman expects to fund future development from internally generated cash flow, existing cash balances, debt financing and the proceeds of farm-out arrangements. The only costs of funding future development is the interest associated with debt financing. The interest associated with debt financing is not included in the reserves and future revenue estimates and would reduce reserves and future net revenue to some degree depending on the funding source utilized. Talisman does not expect that interest or other funding costs would make the development of any property uneconomic.
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 53
Pricing Assumptions
The pricing assumptions used in the preparation of the estimates of reserves and related future net revenue are set forth below. By 2018, oil prices are assuming a long-term estimate of $85.00/bbl Brent crude oil in real 2015 dollars, and, by 2019, gas prices are assuming a long term estimate of $4.29/mmbtu Nymex in real 2015 dollars.
Oil(1) |
Natural Gas |
Natural Gas Liquids |
|||||||||||
Year | USA WTI Cushing Oklahoma (US$/bbl) |
Canada Western Canadian Select Hardisty Heavy (C$/bbl) |
UK Dated Brent(4) (US$/bbl) |
Indonesia Minas ICP (US$/bbl) |
USA(2) Henry Hub (US$/mmbtu) |
Canada(3) AECO-C (C$/gj) |
UK IPE M-1(5) (P/therm) |
Canada Edmonton Propane (C$/bbl) |
Inflation Rates %/year |
Exchange Rate (US$ equal) C$1.00 |
Exchange Rate (US$ equal) UK £1.00 |
||
2015 | 65.00 | 53.30 | 70.00 | 70.96 | 3.50 | 3.31 | 60.00 | 20.63 | 0.86 | 1.55 | |||
2016 | 75.00 | 61.50 | 80.00 | 81.23 | 4.00 | 3.77 | 60.50 | 28.25 | 2.5% | 0.88 | 1.55 | ||
2017 | 85.00 | 69.70 | 90.00 | 91.50 | 4.25 | 4.04 | 61.00 | 37.00 | 2.5% | 0.88 | 1.60 | ||
2018 | 86.54 | 70.96 | 91.54 | 93.08 | 4.50 | 4.31 | 61.00 | 37.77 | 2.5% | 0.88 | 1.60 | ||
2019 | 88.83 | 72.84 | 93.83 | 95.43 | 4.73 | 4.56 | 60.00 | 38.91 | 2.5% | 0.88 | 1.60 | ||
Thereafter | +2.5%/yr | +2.5%/yr | +2.5%/yr | +2.5%/yr | +2.5%/yr | +2.5%/yr | +2.5%/yr | +2.5%/yr | +2.5%/yr | ||||
Weighted average historical prices for the year ended December 31, 2014, with respect to Talisman's consolidated entities, were $95.71/bbl for light oil, $71.80/bbl for heavy oil, $4.09/mcf for shale gas, $7.11/mcf for natural gas and $47.15/bbl for natural gas liquids.
54 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
Developed Reserves are those reserves that are expected to be recovered from existing wells and installed facilities or, if facilities have not been installed, that would involve a low expenditure (for example, when compared to the cost of drilling a well) to put the reserves on production.
Developed Non-Producing Reserves are those reserves that either have not been on production, or have previously been on production but are shut-in, and the date of resumption of production is unknown.
Developed Producing Reserves are those reserves that are expected to be recovered from completion intervals open at the time of the estimate. These reserves may be currently producing or, if shut-in, they must have previously been on production, and the date of resumption of production must be known with reasonable certainty.
Gross Reserves are Talisman's working interest (operating or non-operating) share before deduction of royalties and without including any royalty interests of Talisman.
Heavy Oil is oil that qualifies for royalties specific to heavy oil, in a jurisdiction that has a royalty regime specific to heavy oil; or is oil with a density between 10 to 22.3 degrees API (as that term is defined by the American Petroleum Institute), in a jurisdiction that has no royalty regime specific to heavy oil.
Light Oil is a mixture consisting mainly of pentanes and heavier hydrocarbons that exist in the liquid phase in reservoirs and remains liquid at atmospheric pressure and temperature. Light Oil may contain small amounts of sulphur and other non-hydrocarbons but does not include liquids obtained from the processing of natural gas.
Natural Gas Liquids are those hydrocarbon components that can be recovered from natural gas as liquids, including, but not limited to, ethane, propane, butanes, pentanes plus, condensate and small quantities of non- hydrocarbons.
Net Reserves are Talisman's working interest (operating or non- operating) share after deduction of royalty obligations, plus Talisman's royalty interests in reserves.
Non-Shale Natural Gas is a mixture of lighter hydrocarbons that exist either in the gaseous phase or in solution in light oil in reservoirs but are gaseous at atmospheric conditions, but which excludes shale. Natural gas may contain sulphur or other non-hydrocarbon compounds.
Probable Reserves are those additional reserves that are less certain to be recovered than proved reserves. It is equally likely that the actual remaining quantities recovered will be greater or less than the sum of the estimated proved plus probable reserves.
Proved Reserves are those reserves that can be estimated with a high degree of certainty to be recoverable. It is likely that the actual remaining quantities recovered will exceed the estimated proved reserves.
Shale Gas is derived from shales and similar low permeability formations and is typically developed with horizontal drilling and multi-stage fracture stimulations. It is a mixture of lighter hydrocarbons that exist either in the gaseous phase or in solution in shale oil in reservoirs but are gaseous at atmospheric conditions. Shale gas may contain sulphur or other non- hydrocarbon compounds. In this Annual Information Form, reserves reported under the Shale Gas product type include reserves in the Marcellus, Montney, Eagle Ford and Duvernay plays.
Shale Oil is derived from shale and is a mixture consisting mainly of pentanes and heavier hydrocarbons that exist in the liquid phase in reservoirs and remains liquid at atmospheric pressure and temperature. Shale Oil may contain small amounts of sulphur and other non-hydrocarbons but does not include liquids obtained from the processing of natural gas.
Undeveloped Reserves are those reserves expected to be recovered from known accumulations where a significant expenditure (for example, when compared to the cost of drilling a well) is required to render them capable of production. They must fully meet the requirements of the reserves classification (proved, probable, possible) to which they are assigned.
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 55
Wells
The following table sets forth the number of Talisman's producing and non- producing wells as at December 31, 2014.
Oil Wells |
Natural Gas Wells |
|||||||||||||||
Producing |
Non-Producing(1) |
Producing |
Non-Producing(1) |
|||||||||||||
Year ended December 31, 2014 | Gross(2) | Net(2) | Gross(2) | Net(2) | Gross(2) | Net(2) | Gross(2) | Net(2) | ||||||||
CONSOLIDATED ENTITIES | ||||||||||||||||
Alberta | 1,183.0 | 950.5 | 296.0 | 197.3 | 1,542.0 | 858.4 | 291.0 | 152.9 | ||||||||
British Columbia | | | 4.0 | 0.2 | 31.0 | 10.3 | 37.0 | 17.5 | ||||||||
Saskatchewan | 34.0 | 32.4 | 19.0 | 15.0 | 10.0 | 6.2 | 33.0 | 17.0 | ||||||||
Quebec | | | | | | | 11.0 | 8.6 | ||||||||
Northwest Territories | | | | | 3.0 | | 9.0 | | ||||||||
Yukon | | | | | | | 1.0 | | ||||||||
Total Canada | 1,217.0 | 982.9 | 319.0 | 212.5 | 1,586.0 | 874.9 | 382.0 | 196.0 | ||||||||
Texas | 76.0 | 34.2 | 12.0 | 4.6 | 418.0 | 188.6 | 89.0 | 37.0 | ||||||||
New York | | | | | 73.0 | 64.4 | 28.0 | 17.0 | ||||||||
Pennsylvania | | | | | 457.0 | 381.6 | 58.0 | 37.0 | ||||||||
Total United States | 76.0 | 34.2 | 12.0 | 4.6 | 948.0 | 634.6 | 175.0 | 91.0 | ||||||||
Norway | 60.0 | 23.6 | 28.0 | 12.1 | 4.0 | 0.0 | 7.0 | 2.8 | ||||||||
Indonesia | 89.0 | 35.3 | 152.0 | 58.0 | 49.0 | 13.1 | 24.0 | 6.8 | ||||||||
Malaysia | 89.0 | 40.3 | 10.0 | 4.5 | 31.0 | 12.8 | 6.0 | 2.5 | ||||||||
Australia/Timor-Leste | 7.0 | 2.2 | 9.0 | 2.9 | | | | | ||||||||
Vietnam | 24.0 | 3.8 | 5.0 | | | | | | ||||||||
Papua New Guinea | | | | | | | 14.0 | 6.3 | ||||||||
Colombia(3) | 14.0 | 6.8 | 12.0 | 5.3 | | | | | ||||||||
Algeria | 118.0 | 13.7 | 3.0 | 0.1 | | | | | ||||||||
Kurdistan Region of Iraq | | | 3.0 | 0.7 | | | 2.0 | 0.5 | ||||||||
Total Other | 401.0 | 125.6 | 222.0 | 83.6 | 84.0 | 25.9 | 53.0 | 18.9 | ||||||||
TOTAL CONSOLIDATED ENTITIES | 1,694.0 | 1,142.7 | 553.0 | 300.7 | 2,618.0 | 1,535.4 | 610.0 | 305.9 | ||||||||
EQUITY INVESTMENTS | ||||||||||||||||
TSEUK | 140.0 | 36.2 | 201.0 | 67.4 | 1.0 | 0.1 | 1.0 | 0.5 | ||||||||
Equión | 46.0 | 6.8 | 25.0 | 2.9 | | | 1.0 | 0.2 | ||||||||
TOTAL EQUITY INVESTMENTS | 186.0 | 43.0 | 226.0 | 70.3 | 1.0 | 0.1 | 2.0 | 0.8 | ||||||||
TOTAL TALISMAN(4) | 1,880.0 | 1,185.7 | 779.0 | 371.0 | 2,619.0 | 1,535.5 | 612.0 | 306.7 | ||||||||
For further information, please refer to the "Description of the Business" section of this Annual Information Form.
56 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
Properties with no Attributed Reserves
The following table sets out Talisman's land holdings with no attributed reserves at December 31, 2014:
Properties with no Attributed Reserves (thousand acres)(1) |
||||
Gross | Net | |||
CONSOLIDATED ENTITIES | ||||
Canada(2) | 6,701.6 | 4,191.7 | ||
United States(2) | 387.2 | 321.2 | ||
North Sea (Norway)(3) | 743.1 | 363.8 | ||
Southeast Asia(4) | 29,964.7 | 17,142.0 | ||
Latin America(5) | 8,845.9 | 4,246.2 | ||
Other(6) | 310.0 | 136.3 | ||
TOTAL CONSOLIDATED ENTITIES | 46,952.6 | 26,401.2 | ||
EQUITY INVESTMENTS | ||||
TSEUK | 564.7 | 176.6 | ||
Equion | | | ||
TOTAL EQUITY INVESTMENTS | ||||
TOTAL TALISMAN(7) | 47,517.3 | 26,577.8 | ||
Work commitments, categorized as seismic acquisition, geophysical studies or well commitments (land and/or licence commitments), exist in all of Talisman's geographic areas except Canada and the United States where there are no comparable work commitments for any of the lands held. In Canada and the United States, the Company's ultimate ability to retain land typically requires drilling activity and/or proof of productivity. In other regions in which the Company operates, the result of not fulfilling a land or licence commitment could result in the loss of a title document or imposition of a penalty. Talisman's total work commitments with respect to its consolidated entities for the next two years are estimated to be $644.8 million.
The estimated net acres of properties with no attributed reserves (thousand acres) that are expected to expire in 2015 are as follows: Canada 47.1, United States 25.6, Norway 2.6.
Forward Contracts
Future commitments to buy, sell, exchange, process and transport oil or gas of the Company are described under note 24 entitled "Contingencies and Commitments" in the audited Consolidated Financial Statements of the Company for the year ended December 31, 2014, which is incorporated herein by reference.
Abandonment and Reclamation Costs
In estimating abandonment and reclamation costs, management develops a number of possible abandonment scenarios to which probabilities are assigned based on management's reasonable judgment. Estimates of abandonment costs are subject to uncertainty associated with the method, timing and extent of future retirement activities.
With respect to Talisman's consolidated entities, Talisman's estimated total future abandonment and reclamation costs as at December 31, 2014, net of estimated salvage value, were $1.6 billion discounted at 10% ($3.1 billion undiscounted at current prices). The abandonment and reclamation costs expected to be incurred which are not deducted in estimating the total proved plus probable future net revenue at forecast prices and costs amounted to $600 million discounted at 10% ($785 million undiscounted at current prices) for consolidated subsidiaries, and $1,000 million discounted at 10% ($1,775 million undiscounted at current prices) for Talisman's equity investments. The Company also has an obligation for abandonment of the above-surface Yme structure in Norway for $186 million undiscounted at current prices. This obligation will be funded using a payment of $470 million (Talisman share $282 million) from the platform contractor to the Yme license partners (including Talisman), $409 million (Talisman share
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 57
$245 million) of which was originally deposited into an escrow account for this purpose. Talisman expects to incur abandonment and reclamation costs in respect of 4,074.5 net wells. With respect to its consolidated entities, Talisman expects to pay approximately $694 million of total abandonment and reclamation costs in the next three financial years, in total.
Costs Incurred
The following table summarizes the capital expenditures made by Talisman on oil and natural gas properties for the year ended December 31, 2014.
Property Acquisition Costs ($ Millions) |
Exploration Costs ($ Millions) |
Development Costs ($ Millions) |
||||||
Proved Properties | Unproved Properties | |||||||
CONSOLIDATED | ||||||||
Canada | | 5 | 105 | 325 | ||||
United States | | 14 | 13 | 890 | ||||
UK | | | | 1 | ||||
Norway | | | 59 | 124 | ||||
Southeast Asia | | 41 | 242 | 289 | ||||
Other(1) | | | 215 | 8 | ||||
TOTAL CONSOLIDATED | | 60 | 634 | 1,636 | ||||
TSEUK | 2 | | 56 | 549 | ||||
Equion | | | | 103 | ||||
TOTAL EQUITY INVESTMENTS | 2 | | 56 | 652 | ||||
TOTAL TALISMAN | 2 | 60 | 690 | 2,288 | ||||
Exploration and Development Activities
For a description of Talisman's most important current and likely exploration and development activities, please refer to the "Description of the Business" section of this Annual Information Form. The following tables set forth the number of wells completed in the year ended December 31, 2014:
Exploratory Wells |
Development Wells |
Total |
|||||||||||
Gross | Net | Gross | Net | Gross | Net | ||||||||
CONSOLIDATED ENTITIES | |||||||||||||
Canada | |||||||||||||
Oil | | | 35.0 | 24.2 | 35.0 | 24.2 | |||||||
Gas | 7.0 | 7.0 | 66.0 | 35.3 | 73.0 | 42.3 | |||||||
Service | | | 8.0 | 8.0 | 8.0 | 8.0 | |||||||
Stratigraphic Test | | | | | | | |||||||
Dry | | | | | | | |||||||
Total | 7.0 | 7.0 | 109.0 | 67.5 | 116.0 | 74.5 | |||||||
United States | |||||||||||||
Oil | | | 13.0 | 6.1 | 13.0 | 6.1 | |||||||
Gas | | | 150.0 | 59.6 | 150.0 | 59.6 | |||||||
Service | | | | | | | |||||||
Stratigraphic Test | | | | | | | |||||||
Dry | | | | | | | |||||||
Total | | | 163.0 | 65.7 | 163.0 | 65.7 | |||||||
58 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
North Sea (Norway)(1) | |||||||||||||
Oil | | | 4.0 | 1.0 | 4.0 | 1.0 | |||||||
Gas | | | | | | | |||||||
Service | | | 1.0 | 0.1 | 1.0 | 0.1 | |||||||
Stratigraphic Test | | | | | | | |||||||
Dry | | | | | | | |||||||
Total | | | 5.0 | 1.1 | 5.0 | 1.1 | |||||||
Southeast Asia(2) | |||||||||||||
Oil | 3.0 | 0.5 | 17.0 | 5.6 | 20.0 | 6.1 | |||||||
Gas | 5.0 | 1.8 | 4.0 | 1.6 | 9.0 | 3.4 | |||||||
Service | | | 1.0 | | 1.0 | | |||||||
Stratigraphic Test | | | | | | | |||||||
Dry | 4.0 | 2.4 | | | 4.0 | 2.4 | |||||||
Total | 12.0 | 4.7 | 22.0 | 7.2 | 34.0 | 11.9 | |||||||
Latin America(3) | |||||||||||||
Oil | 15.0 | 7.4 | | | 15.0 | 7.4 | |||||||
Gas | | | | | | | |||||||
Service | 1.0 | 0.5 | | | 1.0 | 0.5 | |||||||
Stratigraphic Test | | | | | | | |||||||
Dry | | | | | | | |||||||
Total | 16.0 | 7.9 | | | 16.0 | 7.9 | |||||||
Other(4) | |||||||||||||
Oil | 1.0 | 0.3 | | | 1.0 | 0.3 | |||||||
Gas | | | | | | | |||||||
Service | | | 1.0 | 0.1 | 1.0 | 0.1 | |||||||
Stratigraphic Test | | | | | | | |||||||
Dry | | | | | | | |||||||
Total | 1.0 | 0.3 | 1.0 | 0.1 | 2.0 | 0.4 | |||||||
EQUITY INVESTMENTS | |||||||||||||
TSEUK | |||||||||||||
Oil | | | 3.0 | 0.5 | 3.0 | 0.5 | |||||||
Gas | | | | | | | |||||||
Service | | | | | | | |||||||
Stratigraphic Test | | | | | | | |||||||
Dry | | | | | | | |||||||
Total | | | 3.0 | 0.5 | 3.0 | 0.5 | |||||||
Equion | |||||||||||||
Oil | | | 2.0 | 0.3 | 2.0 | 0.3 | |||||||
Gas | | | | | | | |||||||
Service | | | | | | | |||||||
Stratigraphic Test | | | | | | | |||||||
Dry | 1.0 | 0.3 | | | 1.0 | 0.3 | |||||||
Total | 1.0 | 0.3 | 2.0 | 0.3 | 3.0 | 0.6 | |||||||
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 59
Production Estimates
The following table sets forth the volume of working interest production, before royalties, estimated for 2015, which is reflected in the estimate of future net revenue disclosed in the tables of reserves information in respect of gross proved and probable reserves:
Product |
|||||||||||||
Light Oil (mbbls) |
Heavy Oil (mbbls) |
Shale Oil (mbbls) |
Shale Gas (mmscf) |
Non-Shale Natural Gas (mmscf) |
Natural Gas Liquids (mbbls) |
||||||||
CONSOLIDATED ENTITIES | |||||||||||||
Canada | |||||||||||||
Total Proved | 642.8 | 2,733.9 | | 4,256.3 | 60,214.3 | 3,448.3 | |||||||
Total Probable | 141.5 | 123.7 | | 309.9 | 5,038.1 | 411.6 | |||||||
Total Proved Plus Probable | 784.3 | 2,857.6 | | 4,566.2 | 65,252.3 | 3,859.8 | |||||||
United States | |||||||||||||
Total Proved | | | 1,772.2 | 201,242.8 | 4,770.1 | 6,576.3 | |||||||
Total Probable | | | 12.8 | 6,631.7 | 33.9 | 19.1 | |||||||
Total Proved Plus Probable | | | 1,785.1 | 207,874.5 | 4,804.0 | 6,595.4 | |||||||
North Sea(1) | |||||||||||||
Total Proved | 1,635.7 | | | | 1,934.9 | 234.4 | |||||||
Total Probable | 1,377.1 | | | | 5,038.0 | 369.8 | |||||||
Total Proved Plus Probable | 3,012.8 | | | | 6,972.9 | 604.2 | |||||||
Southeast Asia(2) | |||||||||||||
Total Proved | 10,005.4 | | | | 178,911.3 | 2,199.5 | |||||||
Total Probable | 2,119.4 | | | | 5,243.0 | 83.5 | |||||||
Total Proved Plus Probable | 12,124.8 | | | | 184,154.4 | 2,283.0 | |||||||
Latin America(3) | |||||||||||||
Total Proved | 1,972.5 | | | | | | |||||||
Total Probable | 146.2 | | | | | | |||||||
Total Proved Plus Probable | 2,118.7 | | | | | | |||||||
Other(4) | |||||||||||||
Total Proved | 3,295.1 | | | | | 177.1 | |||||||
Total Probable | 527.3 | | | | | 26.8 | |||||||
Total Proved Plus Probable | 3,822.5 | | | | | 203.9 | |||||||
TOTAL CONSOLIDATED ENTITIES | |||||||||||||
Total Proved | 17,551.5 | 2,733.9 | 1,772.2 | 205,499.1 | 245,830.6 | 12,635.7 | |||||||
Total Probable | 4,311.5 | 123.7 | 12.8 | 6,941.5 | 15,353.0 | 910.7 | |||||||
Total Proved Plus Probable | 21,863.0 | 2,857.6 | 1,785.1 | 212,440.7 | 261,183.6 | 13,546.3 | |||||||
60 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
EQUITY INVESTEES | |||||||||||||
TSEUK | |||||||||||||
Total Proved | 1,460.0 | | | | 577.3 | 22.5 | |||||||
Total Probable | 4,007.7 | | | | 44.9 | 3.3 | |||||||
Total Proved Plus Probable | 5,467.7 | | | | 622.3 | 25.8 | |||||||
Equion | |||||||||||||
Total Proved | 3,454.1 | | | | 15,188.1 | 488.7 | |||||||
Total Probable | 445.7 | | | | 698.5 | 29.9 | |||||||
Total Proved Plus Probable | 3,899.8 | | | | 15,886.7 | 518.6 | |||||||
TOTAL EQUITY INVESTEES | |||||||||||||
Total Proved | 4,914.1 | | | | 15,765.5 | 511.2 | |||||||
Total Probable | 4,453.4 | | | | 743.5 | 33.2 | |||||||
Total Proved Plus Probable | 9,367.4 | | | | 16,508.9 | 544.4 | |||||||
TOTAL TALISMAN(5) | |||||||||||||
Total Proved | 22,465.5 | 2,733.9 | 1,772.2 | 205,499.1 | 261,596.1 | 13,146.9 | |||||||
Total Probable | 8,764.9 | 123.7 | 12.8 | 6,941.5 | 16,096.4 | 943.9 | |||||||
Total Proved Plus Probable | 31,230.4 | 2,857.6 | 1,785.1 | 212,440.7 | 277,692.5 | 14,090.8 | |||||||
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 61
Average Daily Production and Netback Information
The following table sets forth certain information in respect of production, product prices received, royalties, production costs and netbacks received by Talisman for each quarter in 2014 and the total for 2014:
Quarter Ended |
Total Year |
||||||||||||
31-Mar | 30-Jun | 30-Sep | 31-Dec | 2014 | |||||||||
CONSOLIDATED | |||||||||||||
Canada | |||||||||||||
Average Daily Production | |||||||||||||
Light Oil (bbl/d) | 766 | 748 | 661 | 812 | 747 | ||||||||
Shale Gas (mmcf/d) | 132 | 21 | 10 | 15 | 44 | ||||||||
Natural Gas (mmcf/d) | 213 | 213 | 181 | 188 | 199 | ||||||||
Natural Gas Liquids(1) (bbl/d) | 10,487 | 10,449 | 9,326 | 10,196 | 10,112 | ||||||||
Heavy Oil (bbl/d) | 10,198 | 10,154 | 9,794 | 10,174 | 10,079 | ||||||||
Average Net Prices Received | |||||||||||||
Light Oil ($/bbl) | 85.58 | 95.72 | 89.82 | 67.59 | 84.13 | ||||||||
Shale Gas ($/mcf) | 4.72 | 3.95 | 4.89 | 3.18 | 4.51 | ||||||||
Natural Gas ($/mcf) | 4.89 | 4.29 | 4.10 | 3.81 | 4.29 | ||||||||
Natural Gas Liquids(1) ($/bbl) | 44.37 | 41.35 | 49.13 | 30.20 | 41.10 | ||||||||
Heavy Oil ($/bbl) | 71.62 | 80.65 | 76.26 | 58.93 | 71.80 | ||||||||
Royalties | |||||||||||||
Light Oil ($/bbl) | 8.00 | 15.08 | 13.12 | 8.38 | 11.02 | ||||||||
Shale Gas ($/mcf) | 0.42 | 0.51 | (0.15 | ) | 0.09 | 0.37 | |||||||
Natural Gas ($/mcf) | 0.23 | 0.32 | 0.19 | 0.09 | 0.21 | ||||||||
Natural Gas Liquids(1) ($/bbl) | 4.06 | 5.96 | 6.19 | 4.37 | 5.13 | ||||||||
Heavy Oil ($/bbl) | 9.70 | 14.67 | 14.43 | 10.69 | 12.36 | ||||||||
Production Costs(2) | |||||||||||||
Light Oil ($/bbl) | 37.12 | 34.46 | 40.00 | 28.31 | 34.63 | ||||||||
Shale Gas ($/mcf) | 2.09 | 1.04 | 3.24 | 4.25 | 2.20 | ||||||||
Natural Gas ($/mcf) | 1.36 | 1.62 | 1.79 | 1.24 | 1.51 | ||||||||
Natural Gas Liquids(1) ($/bbl) | 6.42 | 7.52 | 8.34 | 5.72 | 7.00 | ||||||||
Heavy Oil ($/bbl) | 19.91 | 25.35 | 23.60 | 18.75 | 21.82 | ||||||||
Netback Received | |||||||||||||
Light Oil ($/bbl) | 40.46 | 46.18 | 36.70 | 30.90 | 38.48 | ||||||||
Shale Gas ($/mcf) | 2.22 | 2.41 | 1.80 | (1.16 | ) | 1.94 | |||||||
Natural Gas ($/mcf) | 3.30 | 2.34 | 2.12 | 2.47 | 2.57 | ||||||||
Natural Gas Liquids(1) ($/bbl) | 33.88 | 27.87 | 34.59 | 20.11 | 28.96 | ||||||||
Heavy Oil ($/bbl) | 42.01 | 40.63 | 38.23 | 29.49 | 37.61 | ||||||||
United States | |||||||||||||
Average Daily Production | |||||||||||||
Light Oil (bbl/d) | 12,126 | 13,713 | 12,462 | 11,919 | 12,554 | ||||||||
Shale Gas (mmcf/d) | 507 | 546 | 538 | 550 | 535 | ||||||||
Natural Gas (mmcf/d) | 15 | 15 | 16 | 17 | 16 | ||||||||
Natural Gas Liquids(1) (bbl/d) | 8,250 | 9,712 | 9,020 | 11,717 | 9,682 | ||||||||
Heavy Oil (bbl/d) | | | | | | ||||||||
Average Net Prices Received | |||||||||||||
Light Oil ($/bbl) | 109.21 | 95.73 | 88.60 | 65.15 | 89.84 | ||||||||
Shale Gas ($/mcf) | 4.90 | 4.40 | 3.60 | 3.40 | 4.06 | ||||||||
Natural Gas ($/mcf) | 4.63 | 3.72 | 2.44 | 1.93 | 3.12 | ||||||||
Natural Gas Liquids(1) ($/bbl) | 31.61 | 33.45 | 48.02 | 23.82 | 33.55 | ||||||||
Heavy Oil ($/bbl) | | | | | | ||||||||
62 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
Royalties | |||||||||||||
Light Oil ($/bbl) | 26.73 | 24.29 | 19.51 | 17.87 | 22.14 | ||||||||
Shale Gas ($/mcf) | 0.81 | 0.73 | 0.59 | 0.58 | 0.68 | ||||||||
Natural Gas ($/mcf) | 0.66 | 0.53 | 0.35 | 0.28 | 0.45 | ||||||||
Natural Gas Liquids(1) ($/bbl) | 7.89 | 8.45 | 11.80 | 5.88 | 8.33 | ||||||||
Heavy Oil ($/bbl) | | | | | | ||||||||
Production Costs(2) | |||||||||||||
Light Oil ($/bbl) | 14.99 | 12.57 | 14.41 | 12.56 | 13.61 | ||||||||
Shale Gas ($/mcf) | 1.26 | 1.13 | 1.25 | 1.31 | 1.24 | ||||||||
Natural Gas ($/mcf) | 1.62 | 2.40 | 0.43 | 1.27 | 1.40 | ||||||||
Natural Gas Liquids(1) ($/bbl) | 7.04 | 6.30 | 6.88 | 7.04 | 6.81 | ||||||||
Heavy Oil ($/bbl) | | | | | | ||||||||
Netback Received | |||||||||||||
Light Oil ($/bbl) | 67.49 | 58.87 | 54.69 | 34.72 | 54.10 | ||||||||
Shale Gas ($/mcf) | 2.84 | 2.54 | 1.77 | 1.51 | 2.15 | ||||||||
Natural Gas ($/mcf) | 2.34 | 0.79 | 1.66 | 0.38 | 1.27 | ||||||||
Natural Gas Liquids(1) ($/bbl) | 16.68 | 18.69 | 29.35 | 10.91 | 18.40 | ||||||||
Heavy Oil ($/bbl) | | | | | | ||||||||
Norway | |||||||||||||
Average Daily Production | |||||||||||||
Light Oil (bbl/d) | 13,381 | 10,077 | 12,444 | 12,029 | 11,980 | ||||||||
Shale Gas (mmcf/d) | | | | | | ||||||||
Natural Gas (mmcf/d) | 15 | 20 | 21 | 18 | 18 | ||||||||
Natural Gas Liquids(1) (bbl/d) | 1,049 | 1,391 | 1,584 | 1,808 | 1,461 | ||||||||
Average Net Prices Received | |||||||||||||
Light Oil ($/bbl) | 107.20 | 114.87 | 95.84 | 68.54 | 96.05 | ||||||||
Shale Gas ($/mcf) | | | | | | ||||||||
Natural Gas ($/mcf) | 9.79 | 7.82 | 7.22 | 8.99 | 8.33 | ||||||||
Natural Gas Liquids(1) ($/bbl) | 60.77 | 53.92 | 58.24 | 34.18 | 50.16 | ||||||||
Royalties | |||||||||||||
Light Oil ($/bbl) | | | | | | ||||||||
Shale Gas ($/mcf) | | | | | | ||||||||
Natural Gas ($/mcf) | | | | | | ||||||||
Natural Gas Liquids(1) ($/bbl) | | | | | | ||||||||
Production Costs(2) | |||||||||||||
Light Oil ($/bbl) | 67.45 | 92.04 | 61.10 | 68.51 | 71.20 | ||||||||
Shale Gas ($/mcf) | | | | | | ||||||||
Natural Gas ($/mcf) | 5.05 | 2.21 | 3.73 | 3.33 | 3.49 | ||||||||
Natural Gas Liquids(1) ($/bbl) | 30.30 | 13.26 | 22.38 | 19.98 | 20.94 | ||||||||
Netback Received | |||||||||||||
Light Oil ($/bbl) | 39.75 | 22.83 | 34.74 | 0.03 | 24.85 | ||||||||
Shale Gas ($/mcf) | | | | | | ||||||||
Natural Gas ($/mcf) | 4.74 | 5.61 | 3.49 | 5.66 | 4.84 | ||||||||
Natural Gas Liquids(1) ($/bbl) | 30.47 | 40.66 | 35.86 | 14.20 | 29.22 | ||||||||
Southeast Asia | |||||||||||||
Average Daily Production | |||||||||||||
Light Oil (bbl/d) | 39,777 | 40,545 | 38,133 | 36,141 | 38,637 | ||||||||
Shale Gas (mmcf/d) | | | | | | ||||||||
Natural Gas (mmcf/d) | 522 | 515 | 494 | 509 | 510 | ||||||||
Natural Gas Liquids(1) (bbl/d) | 4,297 | 4,418 | 4,442 | 4,348 | 4,377 | ||||||||
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 63
Average Net Prices Received | |||||||||||||
Light Oil ($/bbl) | 112.20 | 112.57 | 102.92 | 66.86 | 99.30 | ||||||||
Shale Gas ($/mcf) | | | | | | ||||||||
Natural Gas ($/mcf) | 9.13 | 8.94 | 9.07 | 7.17 | 8.58 | ||||||||
Natural Gas Liquids(1) ($/bbl) | 93.05 | 96.44 | 96.42 | 72.30 | 89.57 | ||||||||
Royalties | |||||||||||||
Light Oil ($/bbl) | 39.16 | 39.48 | 33.82 | 20.32 | 33.47 | ||||||||
Shale Gas ($/mcf) | | | | | | ||||||||
Natural Gas ($/mcf) | 2.99 | 2.85 | 3.02 | 2.08 | 2.74 | ||||||||
Natural Gas Liquids(1) ($/bbl) | 55.28 | 55.39 | 54.06 | 45.89 | 52.64 | ||||||||
Production Costs(2) | |||||||||||||
Light Oil ($/bbl) | 26.58 | 28.53 | 29.14 | 22.65 | 26.81 | ||||||||
Shale Gas ($/mcf) | | | | | | ||||||||
Natural Gas ($/mcf) | 1.10 | 0.91 | 1.17 | 0.93 | 1.02 | ||||||||
Natural Gas Liquids(1) ($/bbl) | 6.60 | 5.46 | 7.02 | 5.58 | 6.12 | ||||||||
Netback Received | |||||||||||||
Light Oil ($/bbl) | 46.46 | 44.57 | 39.96 | 23.89 | 39.02 | ||||||||
Shale Gas ($/mcf) | | | | | | ||||||||
Natural Gas ($/mcf) | 5.04 | 5.18 | 4.88 | 4.16 | 4.82 | ||||||||
Natural Gas Liquids(1) ($/bbl) | 31.17 | 35.59 | 35.34 | 20.83 | 30.81 | ||||||||
Latin America(3) | |||||||||||||
Average Daily Production | |||||||||||||
Light Oil (bbl/d) | 3,025 | 3,894 | 3,977 | 3,887 | 3,699 | ||||||||
Shale Gas (mmcf/d) | | | | | | ||||||||
Natural Gas (mmcf/d) | | | | | | ||||||||
Natural Gas Liquids(1) (bbl/d) | | | | | | ||||||||
Average Net Prices Received | |||||||||||||
Light Oil ($/bbl) | 83.19 | 97.72 | 89.81 | 70.74 | 85.50 | ||||||||
Shale Gas ($/mcf) | | | | | | ||||||||
Natural Gas ($/mcf) | | | | | | ||||||||
Natural Gas Liquids(1) ($/bbl) | | | | | | ||||||||
Royalties | |||||||||||||
Light Oil ($/bbl) | 17.56 | 21.51 | 19.42 | 15.69 | 18.60 | ||||||||
Shale Gas ($/mcf) | | | | | | ||||||||
Natural Gas ($/mcf) | | | | | | ||||||||
Natural Gas Liquids(1) ($/bbl) | | | | | | ||||||||
Production Costs(2) | |||||||||||||
Light Oil ($/bbl) | 28.83 | 41.05 | 61.62 | 42.48 | 44.55 | ||||||||
Shale Gas ($/mcf) | | | | | | ||||||||
Natural Gas ($/mcf) | | | | | | ||||||||
Natural Gas Liquids(1) ($/bbl) | | | | | | ||||||||
Netback Received | |||||||||||||
Light Oil ($/bbl) | 36.80 | 35.16 | 8.77 | 12.57 | 22.35 | ||||||||
Shale Gas ($/mcf) | | | | | | ||||||||
Natural Gas ($/mcf) | | | | | | ||||||||
Natural Gas Liquids(1) ($/bbl) | | | | | | ||||||||
64 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
Other(4) | |||||||||||||
Average Daily Production | |||||||||||||
Light Oil (bbl/d) | 11,572 | 12,238 | 11,837 | 11,409 | 11,764 | ||||||||
Shale Gas (mmcf/d) | | | | | | ||||||||
Natural Gas (mmcf/d) | | | | | | ||||||||
Natural Gas Liquids(1) (bbl/d) | | | | | | ||||||||
Average Net Prices Received | |||||||||||||
Light Oil ($/bbl) | 109.66 | 110.96 | 92.59 | 48.06 | 90.61 | ||||||||
Shale Gas ($/mcf) | | | | | | ||||||||
Natural Gas ($/mcf) | | | | | | ||||||||
Natural Gas Liquids(1) ($/bbl) | | | | | | ||||||||
Royalties | |||||||||||||
Light Oil ($/bbl) | 61.50 | 60.42 | 50.78 | 26.23 | 49.88 | ||||||||
Shale Gas ($/mcf) | | | | | | ||||||||
Natural Gas ($/mcf) | | | | | | ||||||||
Natural Gas Liquids(1) ($/bbl) | | | | | | ||||||||
Production Costs(2) | |||||||||||||
Light Oil ($/bbl) | 9.15 | 8.33 | 8.94 | 7.58 | 8.50 | ||||||||
Shale Gas ($/mcf) | | | | | | ||||||||
Natural Gas ($/mcf) | | | | | | ||||||||
Natural Gas Liquids(1) ($/bbl) | | | | | | ||||||||
Netback Received | |||||||||||||
Light Oil ($/bbl) | 39.01 | 42.21 | 32.87 | 14.25 | 32.23 | ||||||||
Shale Gas ($/mcf) | | | | | | ||||||||
Natural Gas ($/mcf) | | | | | | ||||||||
Natural Gas Liquids(1) ($/bbl) | | | | | | ||||||||
TOTAL CONSOLIDATED ENTITIES | |||||||||||||
Average Daily Production | |||||||||||||
Light Oil (bbl/d) | 80,647 | 81,215 | 79,514 | 76,197 | 79,381 | ||||||||
Shale Gas (mmcf/d) | 639 | 567 | 548 | 565 | 579 | ||||||||
Natural Gas (mmcf/d) | 765 | 763 | 712 | 732 | 743 | ||||||||
Natural Gas Liquids(1) (bbl/d) | 24,083 | 25,970 | 24,372 | 28,069 | 25,632 | ||||||||
Heavy Oil (bbl/d) | 10,198 | 10,154 | 9,794 | 10,174 | 10,079 | ||||||||
Average Net Prices Received | |||||||||||||
Light Oil ($/bbl) | 109.22 | 108.90 | 97.27 | 64.25 | 95.24 | ||||||||
Shale Gas ($/mcf) | 4.87 | 4.39 | 3.63 | 3.39 | 4.09 | ||||||||
Natural Gas ($/mcf) | 7.88 | 7.51 | 7.60 | 6.23 | 7.31 | ||||||||
Natural Gas Liquids(1) ($/bbl) | 49.40 | 48.44 | 57.93 | 34.32 | 47.04 | ||||||||
Heavy Oil ($/bbl) | 71.62 | 80.65 | 76.26 | 58.93 | 71.80 | ||||||||
Royalties | |||||||||||||
Light Oil ($/bbl) | 32.89 | 34.08 | 27.92 | 17.25 | 28.16 | ||||||||
Shale Gas ($/mcf) | 0.73 | 0.73 | 0.58 | 0.56 | 0.65 | ||||||||
Natural Gas ($/mcf) | 2.12 | 2.02 | 2.15 | 1.48 | 1.95 | ||||||||
Natural Gas Liquids(1) ($/bbl) | 14.34 | 14.98 | 16.59 | 11.15 | 14.16 | ||||||||
Heavy Oil ($/bbl) | 9.70 | 14.67 | 14.43 | 10.69 | 12.36 | ||||||||
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 65
Production Costs(2) | |||||||||||||
Light Oil ($/bbl) | 29.34 | 31.32 | 30.56 | 27.04 | 29.60 | ||||||||
Shale Gas ($/mcf) | 1.43 | 1.13 | 1.28 | 1.39 | 1.31 | ||||||||
Natural Gas ($/mcf) | 1.26 | 1.17 | 1.39 | 1.08 | 1.22 | ||||||||
Natural Gas Liquids(1) ($/bbl) | 7.70 | 7.02 | 8.47 | 7.17 | 7.58 | ||||||||
Heavy Oil ($/bbl) | 19.91 | 25.35 | 23.60 | 18.75 | 21.82 | ||||||||
Netback Received | |||||||||||||
Light Oil ($/bbl) | 46.98 | 43.50 | 38.79 | 19.96 | 37.49 | ||||||||
Shale Gas ($/mcf) | 2.71 | 2.53 | 1.77 | 1.44 | 2.13 | ||||||||
Natural Gas ($/mcf) | 4.50 | 4.31 | 4.06 | 3.68 | 4.14 | ||||||||
Natural Gas Liquids(1) ($/bbl) | 27.36 | 26.44 | 32.87 | 16.00 | 25.30 | ||||||||
Heavy Oil ($/bbl) | 42.01 | 40.63 | 38.23 | 29.49 | 37.61 | ||||||||
EQUITY INVESTMENTS | |||||||||||||
TSEUK | |||||||||||||
Average Daily Production | |||||||||||||
Light Oil (bbl/d) | 17,694 | 19,282 | 11,840 | 16,614 | 16,342 | ||||||||
Shale Gas (mmcf/d) | | | | | | ||||||||
Natural Gas (mmcf/d) | 2 | 2 | 1 | 1 | 1 | ||||||||
Natural Gas Liquids(1) (bbl/d) | 95 | 122 | 53 | 79 | 87 | ||||||||
Average Net Prices Received | |||||||||||||
Light Oil ($/bbl) | 108.92 | 109.65 | 104.01 | 80.68 | 101.00 | ||||||||
Shale Gas ($/mcf) | | | | | | ||||||||
Natural Gas ($/mcf) | 5.60 | 4.41 | 3.93 | 3.24 | 4.54 | ||||||||
Natural Gas Liquids(1) ($/bbl) | 108.54 | 51.05 | 81.32 | 93.70 | 80.92 | ||||||||
Royalties | |||||||||||||
Light Oil ($/bbl) | 0.89 | 1.45 | 1.20 | 0.68 | 1.06 | ||||||||
Shale Gas ($/mcf) | | | | | | ||||||||
Natural Gas ($/mcf) | | | | | | ||||||||
Natural Gas Liquids(1) ($/bbl) | | | | | | ||||||||
Production Costs(2) | |||||||||||||
Light Oil ($/bbl) | 100.76 | 99.72 | 163.29 | 99.84 | 111.64 | ||||||||
Shale Gas ($/mcf) | | | | | | ||||||||
Natural Gas ($/mcf) | 0.56 | 0.22 | (0.96 | ) | 1.40 | 0.26 | |||||||
Natural Gas Liquids(1) ($/bbl) | 3.36 | 1.32 | (5.76 | ) | 8.40 | 1.56 | |||||||
Netback Received | |||||||||||||
Light Oil ($/bbl) | 7.27 | 8.48 | (60.47 | ) | (19.84 | ) | (11.70 | ) | |||||
Shale Gas ($/mcf) | | | | | | ||||||||
Natural Gas ($/mcf) | 5.04 | 4.19 | 4.89 | 1.84 | 4.28 | ||||||||
Natural Gas Liquids(1) ($/bbl) | 105.18 | 49.73 | 87.08 | 85.30 | 79.36 | ||||||||
Equion | |||||||||||||
Average Daily Production | |||||||||||||
Light Oil (bbl/d) | 9,248 | 8,817 | 9,084 | 9,096 | 9,061 | ||||||||
Shale Gas (mmcf/d) | | | | | | ||||||||
Natural Gas (mmcf/d) | 46 | 48 | 49 | 49 | 48 | ||||||||
Natural Gas Liquids(1) (bbl/d) | | | | | | ||||||||
Average Net Prices Received | |||||||||||||
Light Oil ($/bbl) | 98.99 | 100.01 | 97.63 | 65.19 | 90.34 | ||||||||
Shale Gas ($/mcf) | | | | | | ||||||||
Natural Gas ($/mcf) | 4.11 | 3.88 | 4.51 | 4.01 | 4.13 | ||||||||
Natural Gas Liquids(1) ($/bbl) | | | | | | ||||||||
66 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
Royalties | |||||||||||||
Light Oil ($/bbl) | 19.80 | 20.00 | 19.53 | 13.04 | 18.07 | ||||||||
Shale Gas ($/mcf) | | | | | | ||||||||
Natural Gas ($/mcf) | 0.71 | 0.87 | 0.75 | 1.91 | 1.07 | ||||||||
Natural Gas Liquids(1) ($/bbl) | | | | | | ||||||||
Production Costs(2) | |||||||||||||
Light Oil ($/bbl) | 11.82 | 12.04 | 13.55 | 10.54 | 11.98 | ||||||||
Shale Gas ($/mcf) | | | | | | ||||||||
Natural Gas ($/mcf) | 1.32 | 1.53 | 1.59 | 1.79 | 1.56 | ||||||||
Natural Gas Liquids(1) ($/bbl) | | | | | | ||||||||
Netback Received | |||||||||||||
Light Oil ($/bbl) | 67.37 | 67.97 | 64.55 | 41.61 | 60.29 | ||||||||
Shale Gas ($/mcf) | | | | | | ||||||||
Natural Gas ($/mcf) | 2.08 | 1.48 | 2.17 | 0.31 | 1.50 | ||||||||
Natural Gas Liquids(1) ($/bbl) | | | | | | ||||||||
TOTAL EQUITY INVESTMENTS | |||||||||||||
Average Daily Production | |||||||||||||
Light Oil (bbl/d) | 26,942 | 28,099 | 20,924 | 25,710 | 25,403 | ||||||||
Shale Gas (mmcf/d) | | | | | | ||||||||
Natural Gas (mmcf/d) | 48 | 50 | 50 | 50 | 49 | ||||||||
Natural Gas Liquids(1) (bbl/d) | 95 | 122 | 53 | 79 | 87 | ||||||||
Average Net Prices Received | |||||||||||||
Light Oil ($/bbl) | 105.51 | 106.63 | 101.24 | 75.20 | 97.20 | ||||||||
Shale Gas ($/mcf) | | | | | | ||||||||
Natural Gas ($/mcf) | 4.17 | 3.90 | 4.49 | 4.00 | 4.14 | ||||||||
Natural Gas Liquids(1) ($/bbl) | 108.54 | 51.05 | 81.32 | 93.70 | 80.92 | ||||||||
Royalties | |||||||||||||
Light Oil ($/bbl) | 7.38 | 7.27 | 9.15 | 5.05 | 7.12 | ||||||||
Shale Gas ($/mcf) | | | | | | ||||||||
Natural Gas ($/mcf) | 0.68 | 0.84 | 0.73 | 1.88 | 1.04 | ||||||||
Natural Gas Liquids(1) ($/bbl) | | | | | | ||||||||
Production Costs(2) | |||||||||||||
Light Oil ($/bbl) | 70.23 | 72.21 | 98.28 | 68.25 | 76.10 | ||||||||
Shale Gas ($/mcf) | | | | | | ||||||||
Natural Gas ($/mcf) | 1.29 | 1.48 | 1.53 | 1.78 | 1.53 | ||||||||
Natural Gas Liquids(1) ($/bbl) | 3.36 | 1.32 | (5.76 | ) | 8.40 | 1.56 | |||||||
Netback Received | |||||||||||||
Light Oil ($/bbl) | 27.90 | 27.15 | (6.19 | ) | 1.90 | 13.98 | |||||||
Shale Gas ($/mcf) | | | | | | ||||||||
Natural Gas ($/mcf) | 2.20 | 1.58 | 2.23 | 0.34 | 1.57 | ||||||||
Natural Gas Liquids(1) ($/bbl) | 105.18 | 49.73 | 87.08 | 85.30 | 79.36 | ||||||||
TOTAL TALISMAN | |||||||||||||
Average Daily Production | |||||||||||||
Light Oil (bbl/d) | 107,589 | 109,314 | 100,438 | 101,907 | 104,784 | ||||||||
Shale Gas (mmcf/d) | 639 | 567 | 548 | 565 | 579 | ||||||||
Natural Gas (mmcf/d) | 813 | 813 | 762 | 782 | 792 | ||||||||
Natural Gas Liquids(1) (bbl/d) | 24,178 | 26,092 | 24,425 | 28,148 | 25,719 | ||||||||
Heavy Oil (bbl/d) | 10,198 | 10,154 | 9,794 | 10,174 | 10,079 | ||||||||
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 67
Average Net Prices Received | |||||||||||||
Light Oil ($/bbl) | 108.29 | 108.32 | 98.09 | 67.01 | 95.71 | ||||||||
Shale Gas ($/mcf) | 4.87 | 4.39 | 3.63 | 3.39 | 4.09 | ||||||||
Natural Gas ($/mcf) | 7.66 | 7.29 | 7.40 | 6.09 | 7.11 | ||||||||
Natural Gas Liquids(1) ($/bbl) | 49.63 | 48.45 | 57.98 | 34.48 | 47.15 | ||||||||
Heavy Oil ($/bbl) | 71.62 | 80.65 | 76.26 | 58.93 | 71.80 | ||||||||
Royalties | |||||||||||||
Light Oil ($/bbl) | 26.50 | 27.19 | 24.01 | 14.17 | 23.06 | ||||||||
Shale Gas ($/mcf) | 0.73 | 0.73 | 0.58 | 0.56 | 0.65 | ||||||||
Natural Gas ($/mcf) | 2.03 | 1.95 | 2.06 | 1.50 | 1.89 | ||||||||
Natural Gas Liquids(1) ($/bbl) | 14.28 | 14.91 | 16.55 | 11.12 | 14.11 | ||||||||
Heavy Oil ($/bbl) | 9.70 | 14.67 | 14.43 | 10.69 | 12.36 | ||||||||
Production Costs(2) | |||||||||||||
Light Oil ($/bbl) | 40.27 | 42.91 | 45.53 | 37.92 | 41.65 | ||||||||
Shale Gas ($/mcf) | 1.43 | 1.13 | 1.28 | 1.39 | 1.31 | ||||||||
Natural Gas ($/mcf) | 1.26 | 1.19 | 1.40 | 1.12 | 1.24 | ||||||||
Natural Gas Liquids(1) ($/bbl) | 7.69 | 6.99 | 8.44 | 7.17 | 7.56 | ||||||||
Heavy Oil ($/bbl) | 19.91 | 25.35 | 23.60 | 18.75 | 21.82 | ||||||||
Netback Received | |||||||||||||
Light Oil ($/bbl) | 41.51 | 38.22 | 28.56 | 14.92 | 31.01 | ||||||||
Shale Gas ($/mcf) | 2.71 | 2.53 | 1.77 | 1.44 | 2.13 | ||||||||
Natural Gas ($/mcf) | 4.36 | 4.15 | 3.94 | 3.46 | 3.98 | ||||||||
Natural Gas Liquids(1) ($/bbl) | 27.66 | 26.54 | 32.99 | 16.20 | 25.49 | ||||||||
Heavy Oil ($/bbl) | 42.01 | 40.63 | 38.23 | 29.49 | 37.61 | ||||||||
Supplemental US Oil and Gas Information
Certain reserves and other oil and gas information prepared in accordance with US standards is contained in the Company's annual report on Form 40-F for the fiscal year ended December 31, 2014 filed with the SEC.
Talisman has obtained an exemption from the Canadian securities regulatory authorities to permit it to provide the US style disclosure in addition to the disclosure mandated by NI 51-101.
The primary differences between the Canadian requirements and the US standards are that:
68 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
REPORT ON RESERVES DATA BY TALISMAN'S INTERNAL QUALIFIED RESERVES EVALUATOR
To the Board of Directors of Talisman Energy Inc. (the "Company"):
We carried out our evaluation in accordance with standards set out in the Canadian Oil and Gas Evaluation Handbook (the "COGE Handbook") prepared jointly by the Society of Petroleum Evaluation Engineers (Calgary Chapter) and the Canadian Institute of Mining, Metallurgy & Petroleum (Petroleum Society).
Location of Reserves | Net Present Value of Future Net Revenue (Before Income Taxes, 10% Discount Rate) ($ millions) |
|
Canada | 1,360.6 | |
US | 3,325.3 | |
North Sea(1) | (78.9 | ) |
Southeast Asia | 6,925.0 | |
Latin America(1) | 262.6 | |
Other | 628.4 | |
Equity Investments | 648.4 | |
TOTAL COMPANY | 13,071.4 | |
(signed) "Mark Ireland"
Mark
Ireland
Internal Qualified Reserves Evaluator
Talisman Energy Inc.
Calgary, Alberta
March 3, 2015
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 69
REPORT OF MANAGEMENT AND DIRECTORS ON NI 51-101 RESERVES DATA AND OTHER INFORMATION
Management of Talisman Energy Inc. (the "Company") is responsible for the preparation and disclosure of information with respect to the Company's oil and gas activities in accordance with securities regulatory requirements. This information includes reserves data which are estimates of proved reserves and probable reserves and related future net revenue as at December 31, 2014, estimated using forecast prices and costs, prepared in accordance with the requirements of National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities ("NI 51-101") of the Canadian Securities Administrators.
The Company's reserves evaluation staff, including its Internal Qualified Reserves Evaluator who is an employee of the Company, have evaluated the Company's reserves data. The report of the Internal Qualified Reserves Evaluator will be filed with securities regulatory authorities concurrently with this report.
The Reserves Committee of the board of directors of the Company has:
The Reserves Committee of the board of directors of the Company has reviewed the Company's procedures for assembling and reporting other information associated with oil and gas activities and has reviewed that information with management. The board of directors has, on the recommendation of the Reserves Committee, approved:
Because the reserves data are based on judgments regarding future events, actual results will vary and the variations may be material.
(signed) |
||
Harold N. Kvisle President and Chief Executive Officer (signed) Paul Blakeley Executive Vice-President, Asia-Pacific (signed) Paul Warwick Executive Vice-President, Europe-Atlantic |
(signed) Lisa A. Stewart Director (signed) Charles R. Williamson Director |
March 3, 2015
70 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
SCHEDULE B AUDIT COMMITTEE INFORMATION
Composition of Audit Committee
As at February 1, 2015, Talisman's Audit Committee consists of Donald J. Carty, Thomas W. Ebbern, Michael T. Waites (Chairman) and Charles M. Winograd. The Board of Directors has determined that all members of the Audit Committee are "independent" and "financially literate" as defined in National Instrument 52-110 ("NI 52-110") and "independent" within the meaning of sections 303A.02 and 303A.07 of the New York Stock Exchange ("NYSE") Listed Company Manual. In addition, in accordance with NYSE corporate governance listing standards, the Board of Directors has determined that Michael T. Waites is an audit committee financial expert.
NI 52-110 states that a member of an audit committee is independent if the member has no direct or indirect material relationship with the issuer. A material relationship is a relationship which could, in the view of the issuer's Board of Directors, reasonably interfere with the exercise of a member's independent judgment.
In addition, an individual is considered financially literate if he or she has the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the issuer's financial statements.
Education and Experience
The members of Talisman's Audit Committee have education and experience relevant to the performance of their responsibilities as Audit Committee members, which includes the following:
Donald Carty served as Vice Chairman and Chief Financial Officer of Dell Inc. (global computer systems and services company) from January 2007 until mid-2008. From 1998 to 2003, he was the Chairman and Chief Executive Officer of AMR Corp. and American Airlines (airline transportation company). Prior to that, Mr. Carty served as President of AMR Airline Group and American Airlines. Mr. Carty was the President and Chief Executive Officer of Canadian Pacific Airlines (airline transportation company) from March 1985 to March 1987. Mr. Carty holds an undergraduate degree and an Honorary Doctor of Laws from Queen's University and a Master's degree in Business Administration from Harvard University. Mr. Carty is an Officer of the Order of Canada.
Thomas Ebbern has been Chief Financial Officer of North West Upgrading Inc. (bitumen refining company) since January 2012. He was formerly Managing Director, Investment Banking, of Macquarie Capital Markets Canada Ltd., a subsidiary of Macquarie Group Limited. Prior to that he was Managing Director of Tristone Capital Inc., an energy advisory firm that was acquired by Macquarie. He began his career as a geophysicist with Gulf Canada in 1982. Mr. Ebbern holds a Bachelor of Science degree in Geological Engineering from Queen's University and a Masters of Business Administration from the Richard Ivey School of Business at the University of Western Ontario.
Michael Waites was President and Chief Executive Officer of Finning International Inc. (heavy equipment dealer and service company) from 2008 to May 2013. Prior to that, Mr. Waites was Executive Vice President and Chief Financial Officer of Finning. He also served as a member of the Board of Directors of Finning for three years prior to his appointment as Executive Vice President and Chief Financial Officer. Prior to joining Finning in May 2006, Mr. Waites was Executive Vice President and Chief Financial Officer at Canadian Pacific Railway (railway and logistics company) since July 2000, and was also Chief Executive Officer U.S. Network of Canadian Pacific Railway. Previously, he was Vice President and Chief Financial Officer at Chevron Canada Resources (integrated oil and gas company). Mr. Waites holds a B.A. (Honours) in Economics from the University of Calgary, an MBA from Saint Mary's College of California, and a Masters of Arts, Graduate Studies in Economics, from the University of Calgary. He has also completed the Executive Program at The University of Michigan Business School.
Charles (Chuck) Winograd is Senior Managing Partner of Elm Park Credit Opportunities Fund (mid-market lending limited partnership). He is also President of Winograd Capital Inc. (external consulting and private investments firm). From 2001 to 2008, Mr. Winograd was Chief Executive Officer of RBC Capital Markets (investment bank). When RBC Dominion Securities (investment bank) acquired Richardson Greenshields in 1996, Mr. Winograd became Deputy Chairman and a director. He was appointed to the position of President and Chief Operating Officer of RBC Dominion Securities in 1998. Mr. Winograd held several executive postings in Richardson Greenshields (privately owned investment dealer) until becoming President and Chief Executive Officer in 1987 and Chairman and Chief Executive Officer in 1991. Mr. Winograd holds a Master of Business Administration degree from the University of Western Ontario and is a Chartered Financial Analyst (CFA).
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 71
Audit Fees and Pre-Approval of Audit Services
The following table presents fees for the audits of the Company's annual Consolidated Financial Statements for 2014 and 2013 and for other services provided by Ernst & Young LLP:
(C$) | 2014 | 2013 | ||
Audit and Internal Controls Attestation Fees | 5,274,251 | 5,262,014 | ||
Audit-Related Fees | 733,730 | 544,807 | ||
Tax Fees | 504,785 | 251,029 | ||
All Other Fees(1) | 117,376 | 795 | ||
Total | 6,630,142 | 6,058,645 | ||
The audit-related fees are primarily for assistance in connection with the Company's prospectus filings, pension plan audits and attestation procedures related to cost certifications and government compliance. Tax fees are primarily for tax compliance and tax advisory services. The Audit Committee has concluded that the provision of tax services is compatible with maintaining Ernst & Young's independence.
Under the terms of reference of the Audit Committee, which follow, the Audit Committee is required to review and pre-approve the objectives and scope of the external audit work and proposed fees. In addition, the Audit Committee is required to review and pre-approve all non-audit services, including tax services, the Company's external auditors are to perform.
During 2003, the Audit Committee implemented specific procedures regarding the pre-approval of services to be provided by the Company's external auditors. These procedures specify certain prohibited services that are not to be performed by the Company's external auditors. In addition, these procedures require that, at least annually, prior to the period in which the services are proposed to be provided, the Company's management, in conjunction with the Company's external auditors, prepares and submits to the Audit Committee a complete list of all proposed services and related fees to be provided to the Company by the Company's external auditors. Under the Audit Committee pre-approval procedures, for those non-audit services proposed to be provided by the Company's external auditors that have not been previously approved by the Audit Committee, the Audit Committee has delegated to the Chairman of the Audit Committee, and to management up to a fixed value, the authority to grant pre-approvals of such services. The decision to pre-approve a service covered under this procedure is presented to the full Audit Committee at the next scheduled meeting. At each of the Audit Committee's regular meetings, the Audit Committee is provided an update as to the status of services previously approved.
Pursuant to these procedures since their implementation in 2003, 100% of each of the services relating to fees reported as audit-related, tax and all other were pre-approved by the Audit Committee or its delegate, the Chair of the Audit Committee, or management within its delegated authority.
The full text of the terms of reference for Talisman's Audit Committee follows.
72 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
Audit Committee
Mission Statement
The Audit Committee's mission is to assist the Board in fulfilling its obligations by overseeing and monitoring the Corporation's financial accounting and reporting process and the integrity of the Corporation's financial statements and its internal control over financial reporting and the external financial audit process. To fulfill this mission, the Audit Committee has received this mandate and has been delegated certain authorities that it may exercise on behalf of the Board.
Composition
At the first meeting of the Board of Directors of the Corporation after the election of Directors at the annual meeting of shareholders, the Board shall appoint an Audit Committee comprised of not less than three and not more than six Directors of the Corporation. Each member of the Audit Committee shall be independent (as required by applicable securities laws and stock exchange rules). At least one member of the Audit Committee shall be an audit committee financial expert and all members of the Audit Committee shall have an appropriate level of financial literacy as required under applicable stock exchange rules and securities laws and determined by the Board from time to time. The Board may replace or remove from the Audit Committee any member at any time.
The Chair of the Audit Committee shall be appointed by the Board at the meeting of the Board referred to above. The Chair shall preside as chair at each Committee meeting, lead Committee discussion on meeting agenda items and report to the Board, on behalf of the Committee, with respect to the proceedings of each Committee meeting. The Audit Committee shall designate a Secretary to the Audit Committee who may be a member of the Audit Committee or an officer or employee of the Corporation. The Secretary shall keep minutes and records of all meetings of the Audit Committee. In the event that either the Chair or the Secretary is absent from any meeting, the members present shall designate any Director present to act as Chair and shall designate any Director, officer or employee of the Corporation to act as Secretary.
Meetings
Meetings of the Audit Committee, including telephone conference meetings, shall be held at such time and place as the Chair of the Audit Committee may determine. Notice of meetings shall be given to each member not less than 24 hours before the time of the meeting, provided that meetings of the Audit Committee may be held without formal notice if all of the members are present and do not object to notice not having been given, or if those absent waive notice in any manner before or after the meeting.
Notice of meeting may be given verbally or delivered personally, given by mail, facsimile or other electronic communication and need not be accompanied by an agenda or any other material. The notice shall however specify the purpose or purposes for which the meeting is being held.
At the request of the auditor of the Corporation (the "Auditor"), the Chief Executive Officer, the Chief Financial Officer or a member of the Audit Committee, the Chair shall call and convene a meeting of the Audit Committee.
A majority of the members of the Audit Committee present shall constitute a quorum. No business may be transacted by the Audit Committee except at a meeting of its members at which a quorum of the Audit Committee is present.
The Audit Committee shall meet at least quarterly.
Representatives of the Auditor and management of the Corporation shall have access to the Audit Committee each in the absence of the other.
The Auditor shall be notified of all meetings of the Audit Committee and, when appropriate, it may attend and be heard at any such meeting and shall attend if requested to do so by a member of the Audit Committee.
Any matter the Audit Committee does not unanimously approve will be referred to the Board for consideration.
No alteration to the roles and responsibilities of the Audit Committee shall be effective without the approval of the Board of Directors.
The Audit Committee shall review the adequacy of these Terms of Reference on an annual basis and recommend any changes it considers appropriate to the Governance and Nominating Committee, which shall in light of the Corporation's governance structure and framework recommend any changes it considers appropriate to the Board of Directors.
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 73
Role and Responsibilities
A. Financial Statements and Other Financial Information
The Audit Committee shall oversee the Corporation's financial reporting process on behalf of the Board and report on the results of these activities to the Board including:
B. External Audit
The Auditor shall be ultimately accountable to the shareholders of the Corporation, who shall be represented by the Board of Directors and the Audit Committee in their dealings with the Auditor. The Audit Committee shall recommend to the Board the auditor that will be proposed at the annual shareholders' meeting for appointment as the Auditor for the ensuing year. The Auditor shall report directly to the Audit Committee, which shall be responsible for compensation and retention of the Auditor and oversight of the Auditor's work (including resolution of disagreements between management and the Auditor regarding financial reporting).
At least annually, the Audit Committee shall require that the Auditor provide a formal written statement describing: (i) the firm's internal quality-control procedures; (ii) any material issues raised by the most recent internal quality control review, or peer review, of the firm, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the firm, and any steps taken to deal with any such issues; and (iii) all relationships between the Auditor and the Corporation (see also section D.1).
With respect to (iii) above and for more clarity, annually the Audit Committee shall obtain a written letter from the Auditor pursuant to the Independence Standards Board standard #1 disclosing all relationships between the Auditor and its related entities and the Corporation and its related entities, and confirming the Auditor's independence from the Corporation.
The Audit Committee shall not recommend to the Board that an auditor be appointed as the Auditor if the Corporation's Chief Executive Officer, Chief Financial Officer or Controller was employed by the auditor and participated in any capacity in the Corporation's audit during the one-year period preceding the date of the initiation of the Corporation's audit for which the Audit Committee is recommending the appointment. The Audit Committee shall review management's policies for hiring partners, employees and former partners and employees of the Auditor and former external auditor of the Corporation. The Audit Committee
74 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
further shall ensure the independence of the Auditor by reviewing, and discussing with the Board if necessary, any relationships that may adversely affect the independence of the Auditor.
The Audit Committee shall review the planning and results of external audit activities and the ongoing relationship with the Auditor. In this regard the Audit Committee shall:
C. Internal Audit
The Audit Committee shall oversee the internal audit function of the Corporation and the relationship of the internal auditor with management. Periodically, the Audit Committee shall meet separately with each of the internal auditor and management. To this end, the Audit Committee shall:
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 75
D. Internal Financial Control and Information Systems
The Audit Committee will review and obtain reasonable assurance that the internal financial control and information systems are operating effectively to produce accurate, appropriate and timely financial information. In this regard the Audit Committee will:
E. Financial Risk Oversight
The Audit Committee shall discuss with management the Corporation's material financial risk exposures and review the steps management has taken to monitor, control, report and mitigate such risk to the Corporation.
F. Insurance
The Audit Committee shall review insurance coverage of significant business risks and uncertainties.
G. Subsidiaries
The Audit Committee shall receive a report on the Corporation's material Subsidiaries, as requested from time to time, concerning any material non-routine structures e.g. special purpose entities, off balance sheet items or partnership arrangements.
H. Tax
The Audit Committee shall receive regular reports from management on the status of tax filings including:
I. Legal
The Audit Committee shall receive periodic reports from the General Counsel on legal matters affecting financial disclosure, including claims, potential claims and changes to legislation.
J. Investigations And Access To Management
The Audit Committee shall have the authority to direct and to supervise the investigation into any matter brought to its attention within the scope of its duties. It shall establish procedures for the receipt, retention and treatment of (i) complaints the Corporation may receive regarding accounting, internal accounting controls, or auditing matters, and (ii) confidential, anonymous submissions from Corporation employees expressing concern regarding questionable accounting or auditing matters.
The Audit Committee has the authority to engage independent counsel and other advisers having special competencies, as it determines necessary to carry out its duties. The Audit Committee shall determine the appropriate amount of funding the Corporation shall provide for compensation of any such advisors.
In carrying out its responsibilities, the Audit Committee shall have access to such members of the Corporation's management as appropriate, including the persons having responsibility for:
76 TALISMAN ENERGY ANNUAL INFORMATION FORM 2014
The Audit Committee shall receive from management copies of any report or inquires of a material nature from regulators or government bodies which is relevant to the responsibilities of the Audit Committee set out in this mandate and of management's responses thereto.
K. General
The Audit Committee shall review corporate policies that are within the scope of the roles and responsibilities specified by these terms of reference prior to submission for approval by the Board; monitor compliance on a regular basis; and ensure these policies are periodically reviewed and kept current.
The Audit Committee shall perform such other duties as may be assigned to it by the Board from time to time or as may be required by applicable law and stock exchange requirements.
In respect of matters within its purview under this mandate and delegation, the Audit Committee shall assist the Board in its oversight of the Corporation's compliance with legal and regulatory requirements.
The Audit Committee shall report to the Board at each regularly scheduled Board meeting next succeeding any Committee meeting.
The Audit Committee shall evaluate its own performance annually.
TALISMAN ENERGY ANNUAL INFORMATION FORM 2014 77
TALISMAN ENERGY INC.
Suite 2000, 888 3rd Street SW
Calgary, Alberta, Canada T2P 5C5
P 403.237.1234 F 403.237.1902
E tlm@talisman-energy.com
www.talisman-energy.com
2014 |
||
MANAGEMENT'S DISCUSSION AND ANALYSIS |
||
For the year ended December 31, 2014 |
MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A)
(March 4, 2015)
General
This Management's Discussion and Analysis (MD&A) should be read in conjunction with the Consolidated Financial Statements of Talisman Energy Inc. (Talisman or the Company) for the year ended December 31, 2014. The Company's Consolidated Financial Statements and the financial data included in this MD&A have been prepared in accordance with International Financial Reporting Standards (IFRS) and interpretations of the International Financial Reporting Interpretations Committee (IFRIC), unless otherwise noted.
Unless otherwise stated, references to production and reserves represent Talisman's working interest share (including Talisman's share of volumes of royalty interest) before deduction of royalties. Throughout this MD&A, the calculation of barrels of oil equivalent (boe) is calculated at a conversion rate of six thousand cubic feet (mcf) of natural gas to one barrel (bbl) of oil. The boe measure may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 bbl is based on an energy equivalence conversion method primarily applicable at the burner tip and does not necessarily represent a value equivalence at the wellhead.
All comparisons are between the years ended December 31, 2014 and 2013, unless stated otherwise. All amounts presented are in US$, except where otherwise indicated. Abbreviations used in this MD&A are listed in the section "Abbreviations and Definitions".
Additional information relating to the Company, including the Company's Annual Information Form (AIF), can be found on the Canadian System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com. The Company's Annual Report on Form 40-F may be found in the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) database at www.sec.gov.
Company Overview
Talisman Energy Inc. is a global upstream oil and gas company, headquartered in Canada. Talisman's main business activities include exploration, development, production, transportation and marketing of crude oil, natural gas and natural gas liquids. Talisman is committed to conducting business safely, in a socially and environmentally responsible manner, and is included in the Dow Jones Sustainability (North America) Index. Talisman is listed on the Toronto Stock Exchange and New York Stock Exchange under the symbol TLM.
Unless the context indicates otherwise, references in this MD&A to "Talisman" or the "Company" include, for reporting purposes only, the direct or indirect subsidiaries of Talisman Energy Inc. and partnership interests held by Talisman Energy Inc. and its subsidiaries. Such use of "Talisman" or the "Company" to refer to these other legal entities and partnership interests does not constitute a waiver by Talisman Energy Inc. or such entities or partnerships of their separate legal status, for any purpose.
Talisman's financial statements are prepared on a consolidated basis and include the accounts of Talisman and its subsidiaries. Substantially all of Talisman's activities are conducted jointly with others, and the Consolidated Financial Statements reflect only the Company's proportionate interest in such activities, with the exception of the Company's investments in Talisman Sinopec Energy UK Limited (TSEUK) and Equion Energía Limited (Equion) which are accounted for using the equity method.
Note 32 to the 2014 audited Consolidated Financial Statements provides segmented financial information that forms the basis for much of the following discussion and analysis. In 2014, Talisman's activities were conducted in four geographic segments for the purposes of financial reporting: North America, Southeast Asia, North Sea and Other. The North America segment includes operations and exploration activities in Canada and the US. The Southeast Asia segment includes operations and exploration activities in Indonesia, Malaysia, Vietnam, Papua New Guinea and non-operated production in Australia/Timor-Leste. The North Sea segment includes operations and exploration activities in the UK and Norway. The Company also has non-operated production in Algeria, operations and exploration activities in Colombia, and exploration activities in the Kurdistan Region of Iraq. In 2013, the Company completed the process of exiting Poland and received government approval to transfer its interests in Sierra Leone. Furthermore, the Company is in the process of exiting Peru. For ease of reference all of the activities in Algeria, Colombia, Peru and the Kurdistan Region of Iraq are referred to collectively as the "Other" geographic segment or "Rest of the World", except where otherwise noted.
On December 15, 2014, Talisman entered into an arrangement agreement ("Arrangement Agreement") with Repsol S.A. and an indirect wholly-owned subsidiary of Repsol (collectively "Repsol"), providing for Repsol's acquisition of Talisman. Under the terms of the Arrangement Agreement, the acquisition is to be accomplished through a plan of arrangement ("Arrangement") under the Canada Business Corporations Act. Completion of the deal remains subject to satisfaction or waiver of customary closing conditions, including applicable government and regulatory approvals. If the Arrangement is completed, common shareholders will receive US$8.00 for each common share that they own and preferred shareholders will receive C$25.00 plus accrued and unpaid dividends to the date of completion of the Arrangement for each preferred share that they own. The terms of the Arrangement Agreement allow Talisman to pay aggregate cash dividends of US $0.18 per common share prior to closing, including the dividend declared and paid
TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014 1
on December 31, 2014 of $0.0675 per common share. The terms of the Arrangement Agreement contain certain restrictions on the Company's activities without the approval of Repsol including, but not limited to, acquisitions and disposals of assets, certain actions related to employees, and the Company's legal and organizational structures.
Since the date the transaction with Repsol was announced, the following has occurred:
Adoption of New Accounting Standards
As at and for the year ended December 31, 2012, the Company proportionately consolidated its interests in TSEUK and Equion. Effective January 1, 2013, the Company adopted IFRS 11 Joint Arrangements which requires the Company to account for its investments in TSEUK and Equion using the equity method of accounting and was applied retrospectively. Accordingly, all 2012 amounts reported relating to the Company's investment in Equion have been restated to reflect this change.
As the TSEUK joint venture was formed on December 17, 2012, in conjunction with Talisman's sale of a 49% equity interest in Talisman Energy (UK) Limited (TEUK), 2012 amounts reported have been restated from December 17, 2012 onwards to reflect this change.
As a result of adopting IFRS 11 and the formation of the TSEUK joint venture in December 2012, amounts reported for 2012 are not comparable with respect to the Company's UK operations. Since December 17, 2012, Talisman's 51% interest in TSEUK is reflected in a single line item entitled "Income (loss) from joint ventures and associates, after tax", which also includes results from the Equion joint venture and results from associates.
References in this MD&A to "Consolidated Subsidiaries" are to Talisman together with its subsidiaries which are consolidated for financial reporting purposes. References to "Joint Ventures" are to TSEUK and Equion.
2 TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014
2014 Performance Highlights
Financial and Operating Highlights(1)
(millions of $, unless otherwise stated) | 2014 | 2013 | 2012 | |||||||
Cash provided by operating activities | 1,899 | 1,767 | 2,396 | |||||||
Net income (loss) | (911 | ) | (1,175 | ) | 132 | |||||
Common share dividends | 279 | 277 | 277 | |||||||
Preferred share dividends | 8 | 8 | 9 | |||||||
Per share ($) | ||||||||||
Net income (loss)(2) | (0.89 | ) | (1.15 | ) | 0.12 | |||||
Diluted net income (loss)(3) | (0.96 | ) | (1.21 | ) | 0.01 | |||||
Common share dividends | $ | 0.27 | $ | 0.27 | $ | 0.27 | ||||
Preferred share dividends | C$ | 1.05 | C$ | 1.05 | C$ | 1.10 | ||||
Total Production (mboe/d)(4) | 369 | 373 | 426 | |||||||
Production from ongoing operations (mboe/d)(5) | 357 | 338 | 355 | |||||||
Average sales price ($/boe) | 51.54 | 52.93 | 57.50 | |||||||
Total revenue and other income | 3,763 | 4,486 | 7,166 | |||||||
Operating costs ($/boe) | 11.52 | 11.41 | 15.91 | |||||||
Depreciation, depletion and amortization (DD&A) expense, exploration and dry hole expense | 2,308 | 2,271 | 2,955 | |||||||
Total exploration and development expenditures from Consolidated Subsidiaries and Joint Ventures | 2,776 | 2,885 | 3,511 | |||||||
Total assets | 17,330 | 19,161 | 19,337 | |||||||
Total long-term debt (including current portion) | 5,064 | 5,239 | 4,442 | |||||||
Cash and cash equivalents, net of bank indebtedness | 253 | 351 | 553 | |||||||
Total long-term liabilities | 6,748 | 7,051 | 7,362 | |||||||
TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014 3
2014 Net Income Variances
(millions of $) | |||
2013 net loss | (1,175 | ) | |
Favourable (unfavourable) variances(1): | |||
Commodity prices(2) | (456 | ) | |
Production volumes(2) | 220 | ||
Unlifted oil | (148 | ) | |
Royalties(2) | 385 | ||
Other income | 41 | ||
Loss from joint ventures and associates, after tax | (765 | ) | |
Operating & transportation expenses | 13 | ||
General and administrative (G&A) expense | 29 | ||
DD&A expense | (14 | ) | |
Impairment | (822 | ) | |
Dry hole expense | (51 | ) | |
Exploration expense | 28 | ||
Finance costs | (21 | ) | |
Share-based payments expense | 22 | ||
Gain on disposals | 450 | ||
Gain on held-for-trading financial instruments | 1,567 | ||
Other | 64 | ||
Current taxes (including Petroleum Revenue Tax (PRT)) | 205 | ||
Deferred taxes (including PRT) | (483 | ) | |
Total variances | 264 | ||
2014 net loss | (911 | ) | |
The significant variances from 2013, as summarized in the net income variances table, are:
4 TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014
Operations Review
Results Summary
Sales of oil, liquids and natural gas in 2014 were $4.6 billion, consistent with 2013 due principally to increased oil and liquids production in North America and Colombia and lower royalty rates in Southeast Asia due to lower prices and increased cost recovery. These gains were offset by lower pricing on oil and liquids production and decreased natural gas volumes in North America due to asset sales.
Oil and liquids sales increased by $42 million principally due to higher production in North America and Colombia, partially offset by lower prices for oil and liquids in 2014. The overall price for oil and liquids was 13% lower in 2014, compared to 2013.
Natural gas sales decreased by $35 million due primarily to decreased gas production in North America as a result of asset dispositions in western Canada. This was partially offset by a 3% increase in the Company's realized natural gas price in 2014 compared to 2013.
In North America, sales of oil, liquids and natural gas were $1.8 billion, an increase of 10% from 2013 due primarily to increased oil and liquids production in Edson and the Eagle Ford, and higher prices on natural gas, partially offset by lower natural gas production due to asset dispositions in western Canada, and lower oil and liquids prices. Operating expenses, transportation expense, and DD&A decreased by 9% year-over-year.
In Southeast Asia, sales of oil, liquids and natural gas were $2.1 billion, 7% lower than 2013 due primarily to lower prices for oil, liquids and natural gas, partially offset by lower royalty expense due to lower pricing and increased cost recovery. Production was stable year-over-year. Operating expenses, transportation expense and DD&A decreased by 5%.
In the North Sea, sales of oil, liquids and natural gas were $527 million, 9% lower than 2013 due principally to lower prices for oil, liquids and natural gas. This was partially offset by higher natural gas production in 2014.
In the Rest of the World, sales of oil, liquids and natural gas were $272 million, 18% higher than 2013 due principally to production increases in Colombia from the Akacias field, partially offset by lower pricing on oil and liquids sales.
TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014 5
Gross before royalties | Net of royalties | ||||||||||||
2014 | 2013 | 2012 | 2014 | 2013 | 2012 | ||||||||
Oil and liquids from Consolidated Subsidiaries (mbbls/d) | |||||||||||||
North America | 43 | 35 | 27 | 34 | 27 | 23 | |||||||
Southeast Asia | 43 | 44 | 42 | 28 | 24 | 24 | |||||||
North Sea | 13 | 14 | 70 | 13 | 14 | 69 | |||||||
Other | 16 | 12 | 12 | 8 | 6 | 6 | |||||||
115 | 105 | 151 | 83 | 71 | 122 | ||||||||
Oil and liquids from Joint Ventures (mbbls/d) | |||||||||||||
TSEUK | 17 | 18 | 1 | 17 | 18 | 1 | |||||||
Equion | 9 | 9 | 10 | 7 | 8 | 8 | |||||||
26 | 27 | 11 | 24 | 26 | 9 | ||||||||
Total Oil and liquids from Consolidated Subsidiaries and Joint Ventures (mbbls/d) | 141 | 132 | 162 | 107 | 97 | 131 | |||||||
Natural gas from Consolidated Subsidiaries (mmcf/d) | |||||||||||||
North America | 794 | 883 | 985 | 690 | 774 | 871 | |||||||
Southeast Asia | 510 | 516 | 524 | 348 | 346 | 357 | |||||||
North Sea | 18 | 7 | 31 | 18 | 7 | 31 | |||||||
Other | | | | | | | |||||||
1,322 | 1,406 | 1,540 | 1,056 | 1,127 | 1,259 | ||||||||
Natural gas from Joint Ventures (mmcf/d) | |||||||||||||
TSEUK | 1 | 2 | | 1 | 2 | | |||||||
Equion | 48 | 43 | 42 | 36 | 34 | 33 | |||||||
49 | 45 | 42 | 37 | 36 | 33 | ||||||||
Total natural gas from Consolidated Subsidiaries and Joint Ventures (mmcf/d) | 1,371 | 1,451 | 1,582 | 1,093 | 1,163 | 1,292 | |||||||
Total Daily Production from Consolidated Subsidiaries (mboe/d) | |||||||||||||
North America | 175 | 182 | 192 | 149 | 156 | 168 | |||||||
Southeast Asia | 128 | 130 | 129 | 85 | 82 | 84 | |||||||
North Sea | 17 | 15 | 75 | 17 | 15 | 74 | |||||||
Other | 15 | 12 | 12 | 8 | 6 | 6 | |||||||
335 | 339 | 408 | 259 | 259 | 332 | ||||||||
Total Daily Production From Joint Ventures (mboe/d) | |||||||||||||
TSEUK | 17 | 18 | 1 | 17 | 18 | 1 | |||||||
Equion | 17 | 16 | 17 | 13 | 14 | 14 | |||||||
34 | 34 | 18 | 30 | 32 | 15 | ||||||||
Total Daily production from Consolidated Subsidiaries and Joint Ventures (mboe/d) | 369 | 373 | 426 | 289 | 291 | 347 | |||||||
Less production from assets sold or held for sale (mboe/d)(2) | |||||||||||||
North America | 9 | 31 | 40 | 8 | 31 | 38 | |||||||
Southeast Asia | 3 | 4 | 6 | 1 | 3 | 4 | |||||||
North Sea | | | 25 | | | 25 | |||||||
12 | 35 | 71 | 9 | 34 | 67 | ||||||||
Total production from ongoing operations (mboe/d) | 357 | 338 | 355 | 280 | 257 | 280 | |||||||
6 TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014
Production represents gross production before royalties, unless noted otherwise. Production identified as net is production after deducting royalties.
Production from ongoing operations increased by 6% compared to 2013 due primarily to increased production from North America operations.
In North America, total production decreased by 4%, and production from ongoing operations increased by 10% compared to 2013. Oil and liquids production increased by 23% due principally to increased development activity in Edson and the Eagle Ford. Natural gas production decreased by 10% due principally to asset dispositions in western Canada.
In Southeast Asia, total production, and production from ongoing operations, were both in line with 2013. Total oil and liquids production decreased slightly due principally to completion of a property disposition in Indonesia and natural declines at Kitan. This was partially offset by higher production at Kinabalu following completion of a multi-well infill program during the year and increased production at HST/HSD in Vietnam resulting from a full year of production. Natural gas production was relatively stable with lower demand at PM-3 partially offset by a full year of production from Corridor expansion projects commissioned towards the end of 2013.
In the North Sea, including Norway and the TSEUK joint venture, total production increased by 3%. Production in Norway increased 13% due principally to the startup of the Varg gas export facility in the first quarter of 2014 as well as increased gas exports at Veslefrikk, partially offset by cessation of production at Rev. In the TSEUK joint venture, production decreased by 6% due principally to operational issues at Auk and Clyde, as well as an extended unplanned outage at Montrose and Arbroath.
In the Other segment, including the Equion joint venture, production increased by 14% in 2014. Increased liquids production in Colombia was principally due to additional long-term testing wells in Akacias. Production in Algeria increased due principally to increased liquids production at EMK from a liquids train brought online in 2014.
Volumes Produced Into (Sold Out of) Inventory(1)(2)
2014 | 2013 | 2012 | |||||
North America bbls/d | 82 | | | ||||
Southeast Asia bbls/d | 328 | (2,630 | ) | 920 | |||
North Sea bbls/d | (403 | ) | 525 | (468 | ) | ||
Other bbls/d | 791 | (410 | ) | 450 | |||
Total produced into (sold out of) inventory bbls/d | 798 | (2,515 | ) | 902 | |||
Total produced into (sold out of) inventory mmbbls | 0.3 | (0.9 | ) | 0.3 | |||
Inventory at December 31 mmbbls | 1.5 | 1.2 | 2.1 | ||||
The Company's produced oil is frequently stored in tanks until there is sufficient volume to be lifted. The Company recognizes revenue, and the related expenses on crude oil production, when liftings have occurred. Volumes presented in the "Daily Average Production" table represent production volumes in the period, which include oil and liquids volumes produced into inventory and exclude volumes sold out of inventory.
During the year ended December 31, 2014, volumes in inventory increased from 1.2 mmbbls to 1.5 mmbbls due principally to increased inventories in Malaysia and Algeria, partially offset by decreased inventories in Norway.
TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014 7
Company Netbacks(1)(2)
Gross before royalties | Net of royalties | ||||||||||||
2014 | 2013 | 2012 | 2014 | 2013 | 2012 | ||||||||
Oil and liquids ($/bbl) | |||||||||||||
Sales price | 82.45 | 94.65 | 103.79 | 82.45 | 94.65 | 103.79 | |||||||
Royalties | 23.67 | 31.41 | 20.20 | | | | |||||||
Transportation | 1.84 | 1.28 | 1.37 | 2.59 | 1.91 | 1.70 | |||||||
Operating costs | 20.96 | 21.84 | 32.33 | 29.41 | 32.69 | 40.15 | |||||||
35.98 | 40.12 | 49.89 | 50.45 | 60.05 | 61.94 | ||||||||
Natural gas ($/mcf) | |||||||||||||
Sales price | 5.90 | 5.73 | 5.03 | 5.90 | 5.73 | 5.03 | |||||||
Royalties | 1.38 | 1.41 | 1.20 | | | | |||||||
Transportation | 0.27 | 0.28 | 0.26 | 0.35 | 0.37 | 0.34 | |||||||
Operating costs | 1.10 | 1.12 | 1.04 | 1.43 | 1.50 | 1.36 | |||||||
3.15 | 2.92 | 2.53 | 4.12 | 3.86 | 3.33 | ||||||||
Total $/boe (6mcf=1boe) | |||||||||||||
Sales price | 51.54 | 52.93 | 57.50 | 51.54 | 52.93 | 57.50 | |||||||
Royalties | 13.56 | 15.54 | 12.03 | | | | |||||||
Transportation | 1.68 | 1.56 | 1.48 | 2.28 | 2.20 | 1.87 | |||||||
Operating costs | 11.52 | 11.41 | 15.91 | 15.40 | 15.69 | 20.46 | |||||||
24.78 | 24.42 | 28.08 | 33.86 | 35.04 | 35.17 | ||||||||
During 2014, the Company's average gross netback was $24.78/boe, 1% higher than 2013 due principally to lower royalties, partially offset by lower oil and liquids prices.
Talisman's net price of $51.54/boe was 3% lower than 2013 due principally to a 13% decline in realized oil and liquids prices due to lower global oil and liquids prices, partially offset by higher realized prices on natural gas which increased by 3%.
The Company's realized net sales price includes the impact of physical commodity contracts, but does not include the impact of financial commodity price derivatives discussed in the "Risk Management" section of this MD&A.
8 TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014
Commodity Prices and Exchange Rates(1)
2014 | 2013 | 2012 | |||||
Oil and liquids ($/bbl) | |||||||
North America | 61.49 | 66.70 | 69.39 | ||||
Southeast Asia | 98.31 | 108.56 | 111.69 | ||||
North Sea | 91.06 | 109.69 | 111.84 | ||||
Other | 89.39 | 107.32 | 108.52 | ||||
82.45 | 94.65 | 103.79 | |||||
Natural gas ($/mcf) | |||||||
North America | 4.12 | 3.49 | 2.63 | ||||
Southeast Asia | 8.58 | 9.44 | 9.28 | ||||
North Sea | 8.33 | 14.85 | 9.79 | ||||
Other | | | | ||||
5.90 | 5.73 | 5.03 | |||||
Company $/boe (6mcf=1boe) | 51.54 | 52.93 | 57.50 | ||||
Benchmark prices and foreign exchange rates | |||||||
WTI (US$/bbl) | 92.97 | 97.97 | 94.22 | ||||
Dated Brent (US$/bbl) | 98.99 | 108.66 | 111.61 | ||||
WCS (US$/bbl) | 73.36 | 72.96 | 73.17 | ||||
LLS (US$/bbl) | 96.74 | 107.31 | 111.70 | ||||
NYMEX ($/mmbtu) | 4.37 | 3.67 | 2.80 | ||||
AECO (C$/gj) | 4.19 | 3.00 | 2.28 | ||||
C$/US$ exchange rate | 1.10 | 1.03 | 1.00 | ||||
UK£/US$ exchange rate | 0.61 | 0.64 | 0.63 | ||||
In North America, realized oil and liquids prices decreased by 8% in 2014 principally due to price declines and increased liquids production in the product mix. In Southeast Asia, realized oil and liquids prices decreased by 9%, consistent with decreases in Brent crude. In Norway, realized oil and liquids prices declined by 17% due principally to lower sales in the second quarter when prices were higher and the timing of liftings. Due to these reasons, Talisman's overall realized oil and liquids price of $82.45/bbl decreased by 13% compared to 2013.
In North America, realized natural gas prices increased by 18% in 2014, consistent with increases in NYMEX prices. In Southeast Asia, realized natural gas prices decreased by 9% as the majority of natural gas pricing in Southeast Asia is linked to oil-based indices. Due to these reasons, Talisman's overall realized natural gas price of $5.90/mcf increased by 3% compared to 2013.
Royalties(1)(2)
2014 | 2013 | 2012 | ||||||||||
Rate (%) | $ million | Rate (%) | $ million | Rate (%) | $ million | |||||||
North America | 16 | 350 | 16 | 321 | 14 | 239 | ||||||
Southeast Asia | 34 | 1,036 | 39 | 1,413 | 36 | 1,243 | ||||||
North Sea | | | | | 1 | 18 | ||||||
Other | 46 | 233 | 54 | 270 | 55 | 267 | ||||||
26 | 1,619 | 30 | 2,004 | 21 | 1,767 | |||||||
The overall royalty rate was 26%, down from 30% in 2013 due primarily to lower royalty rates in Southeast Asia and the Rest of the World.
In Southeast Asia, royalty rates decreased due primarily to higher cash costs claimed in PM-3 due to a full-year infill drilling program versus only nine months in 2013, increased cost recovery due to higher capital spending in Kitan and lower prices across all assets.
TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014 9
In the Rest of the World, royalty rates were down to 46% from 54% as a result of increased production from Colombia which has lower royalty rates than Algeria.
Unit Operating Expenses(1)
Gross before royalties | Net of royalties | |||||||||||
($/boe) | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | ||||||
North America | 7.92 | 8.42 | 7.91 | 9.31 | 9.81 | 9.05 | ||||||
Southeast Asia | 11.19 | 10.92 | 9.03 | 16.76 | 17.26 | 13.88 | ||||||
North Sea | 52.54 | 55.39 | 49.73 | 52.55 | 55.39 | 50.03 | ||||||
Other | 11.39 | 6.47 | 6.81 | 21.66 | 13.84 | 14.96 | ||||||
11.52 | 11.41 | 15.91 | 15.40 | 15.69 | 20.46 | |||||||
Total Operating Expenses(1)
(millions of $) | 2014 | 2013 | 2012 | |||
North America | 517 | 568 | 564 | |||
Southeast Asia | 494 | 532 | 418 | |||
North Sea | 332 | 302 | 1,350 | |||
Other | 62 | 30 | 29 | |||
1,405 | 1,432 | 2,361 | ||||
Total operating expenses were down by $27 million compared to 2013.
In North America, total operating expenses decreased 9% compared to 2013 due primarily to property dispositions in western Canada and a weakening Canadian dollar, partially offset by increased production activity in the Eagle Ford and a full year of processing expenses at the Pembina Saturn Deep Cut plant in Edson, which commenced operations in the fourth quarter of 2013. Unit operating expenses in North America decreased by 6% due principally to a change in product mix as remaining assets have lower operating costs than assets disposed of in western Canada.
In Southeast Asia, total operating expenses decreased by 7% due primarily to the relinquishment of Song Doc Block 46-02, the dispositions of the Northwest Java and Southeast Sumatra assets, as well as the timing of liftings. These decreases were partially offset by increases in Vietnam due to the startup of HST/HSD in the second quarter of 2013 and the HST jacket repair. Excluding the timing of liftings, unit operating expenses were relatively stable, increasing by 2% due principally to the reasons noted above and decreased production.
In Norway, operating expenses were up by 14% (from $292 million to $332 million) due principally to the timing of liftings and increased maintenance costs during shutdowns at Brage and Veslefrikk, partially offset by higher repair costs in Varg in 2013. Unit operating costs in Norway decreased by 5% due primarily to higher production volumes.
In the Rest of the World, total operating expenses increased by 107% compared to 2013 due primarily to increased operating expenses associated with the early stage of production in Colombia.
Unit operating expense for the Company increased by 1% to $11.52/boe due to the reasons noted above.
Unit Depreciation, Depletion and Amortization (DD&A) Expense(1)
Gross before royalties | Net of royalties | |||||||||||
($/boe) | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | ||||||
North America | 17.38 | 18.25 | 16.25 | 20.43 | 21.25 | 18.58 | ||||||
Southeast Asia | 10.27 | 10.05 | 9.13 | 15.40 | 15.71 | 14.10 | ||||||
North Sea | 49.13 | 36.69 | 28.15 | 49.13 | 36.69 | 28.30 | ||||||
Other | 10.16 | 6.59 | 6.74 | 19.32 | 12.97 | 17.69 | ||||||
15.90 | 15.42 | 16.13 | 20.56 | 20.11 | 19.65 | |||||||
10 TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014
Total DD&A Expense(1)
(millions of $) | 2014 | 2013 | 2012 | |||
North America | 1,109 | 1,211 | 1,140 | |||
Southeast Asia | 473 | 486 | 427 | |||
North Sea | 302 | 195 | 774 | |||
Other | 52 | 30 | 30 | |||
1,936 | 1,922 | 2,371 | ||||
Total DD&A expense increased by 1% compared to 2013 due principally to increased DD&A expense in the North Sea, partially offset by decreases in North America.
DD&A expense in North America decreased by 8% primarily due to asset dispositions in western Canada, reserve additions in the US, and a decreased depletable base in western Canada, partially offset by increased production, and an increased depletable base in the US. Unit DD&A expense decreased by 5% as a result of the western Canadian asset dispositions mentioned above.
In Southeast Asia, DD&A expense decreased by 3%, due principally to reduced production from Kitan and other assets, as well as the timing of liftings, partially offset by production in HST/HSD which began in the second quarter of 2013. Unit DD&A expense increased by 2%.
In the North Sea, DD&A expense for Norway increased by 55% due principally to downward reserves revisions, higher unit rates, timing of liftings and increased production. Unit DD&A expense increased by 34% due primarily to the downward reserves revisions as mentioned above as well as an increased depletable base from new wells.
In the Rest of the World, total DD&A expense increased by 73% due principally to increased production in Colombia and increased volumes from EMK, a higher DD&A rate property, in Algeria. Unit DD&A expense increased 54% compared to 2013 due principally to the change in production mix in Algeria mentioned above.
Unit DD&A expense for the Company increased by 3% to $15.90/boe due to the reasons noted above.
Impairment(1)
(millions of $) | 2014 | 2013 | 2012 | ||||
Impairment losses | |||||||
North America | 625 | 332 | 363 | ||||
Southeast Asia | 60 | 55 | | ||||
North Sea(2) | 741 | 554 | 1,942 | ||||
Other(3) | 374 | 16 | 284 | ||||
1,800 | 957 | 2,589 | |||||
Impairment reversals | |||||||
North America | (32 | ) | | | |||
Southeast Asia | | | | ||||
North Sea | | (11 | ) | | |||
Other | | | | ||||
(32 | ) | (11 | ) | | |||
Net impairment | 1,768 | 946 | 2,589 | ||||
During 2014, the Company recorded an impairment expense of $625 million pre-tax ($625 million after-tax) in North America. The majority of this, $614 million pre-tax ($614 million after-tax), related to the Eagle Ford as a result of lower commodity prices.
During 2014, the Company recorded impairment expense of $60 million pre-tax ($27 million after-tax) in Southeast Asia. The majority relates to a $45 million pre-tax ($19 million after-tax) expense for PP&E assets in Australia as a result of lower commodity prices and increased decommissioning cost estimates.
TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014 11
During 2014, the Company recorded impairment expense of $454 million pre-tax ($178 million after-tax) in the North Sea. Of this, $158 million pre-tax ($35 million after-tax) expense relates to uncertainties in future development plans as a result of lower commodity prices and a further $166 million pre-tax expense ($36 million after-tax) as a result of lower commodity prices, capital overruns, high operating costs and lower than expected results which resulted in downward reserves revisions. A further impairment of $130 million pre-tax ($107 million after-tax) was taken as the result of the Company's decision to withdraw from an exploration licence following technical evaluation.
During 2014, the Company recorded a non-taxable impairment of $287 million relating to North Sea goodwill as a result of the Company's view of the declining value of its North Sea assets, driven by lower commodity prices, and higher decommissioning and development cost estimates.
During 2014, the Company recorded an impairment expense of $241 million pre-tax ($241 million after-tax) in the Rest of the World. The majority of the impairment expense, $234 million pre-tax ($234 million after-tax), related to a full impairment of Block 44 in the Kurdistan Region of Iraq after determining that future investment in a capital constrained environment was unlikely.
During 2014, the Company recorded an impairment expense of $133 million pre-tax ($133 million after-tax) related to its investment in Equion, due principally to lower commodity prices.
Dry Hole Expense(1)
(millions of $) | 2014 | 2013 | 2012 | |||
North America | 11 | | 22 | |||
Southeast Asia | 92 | 60 | 77 | |||
North Sea | (1 | ) | 18 | 45 | ||
Other | 38 | 11 | 94 | |||
140 | 89 | 238 | ||||
In 2014, dry hole expense principally relates to the writeoff of unsuccessful exploration wells in Malaysia, Vietnam, Australia and Colombia.
Exploration Expense(1)
(millions of $) | 2014 | 2013 | 2012 | |||
North America | 21 | 39 | 29 | |||
Southeast Asia | 108 | 59 | 92 | |||
North Sea | 37 | 39 | 46 | |||
Other | 66 | 123 | 179 | |||
232 | 260 | 346 | ||||
Exploration expense consists of geological and geophysical costs, seismic, non-producing land lease rentals and indirect exploration expense. These costs are expensed as incurred.
In North America, exploration expense decreased by 46% relative to 2013 due principally to reduced seismic spending in Duvernay and in the Cypress area of the Montney play, which was disposed of in the first quarter of 2014.
In Southeast Asia, exploration expense increased by 83% relative to 2013 due principally to increased seismic activity in Papua New Guinea and Vietnam.
In the North Sea, exploration expense decreased by 5% relative to 2013 due principally to reduced licence fees compared to 2013.
In the Rest of the World, exploration expense decreased by 46% relative to 2013 due principally to reduced exploration activity in the Kurdistan Region of Iraq and Colombia.
12 TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014
Income (Loss) from Joint Ventures and Associates(1)(2)
(millions of $) | 2014 | 2013 | 2012 | ||||
TSEUK | (1,055 | ) | (450 | ) | (46 | ) | |
Equion | 15 | 116 | 361 | ||||
Ocensa | | 59 | | ||||
(1,040 | ) | (275 | ) | 315 | |||
TSEUK Joint Venture
The 2014 loss of $1,055 million after-tax in the TSEUK joint venture was due primarily to asset impairments of $1.6 billion pre-tax ($683 million after-tax) net to Talisman principally due to lower commodity prices, as well as increases to decommissioning and development cost estimates.
In addition to impairment losses, the net loss from TSEUK increased due principally to decreased revenues due to lower oil prices. Furthermore, other expenses were higher in 2014 as the result of both an adjustment to decommissioning obligations in Beatrice and a provision for onerous contracts and contract cancellations related to drilling and vessel leases. These increases were partially offset by decreased DD&A expense and an increase in deferred tax recovery. The deferred tax recovery resulted in a deferred tax asset of $2.3 billion ($1.2 billion net to Talisman) related to decommissioning obligations. The deferred tax asset related to decommissioning obligations is limited to $2.3 billion, representing taxes paid since 2002.
The factors noted above resulted in a negative investment balance in the TSEUK joint venture of $186 million as at December 31, 2014. The obligation to fund TSEUK arises from the Company's past practice of funding TSEUK's cash flow deficiencies, and the expectation that cash flow deficiencies will continue to be funded through 2015. In addition the Company has a guarantee to fund TSEUK's decommissioning obligation if TSEUK is unable to. As such, the Company has recognized a negative investment value from the application of equity accounting. The Company's obligation to fund TSEUK will increase to the extent future losses are generated within TSEUK. In addition, future contributions to the TSEUK joint venture could be impaired to the extent recoverability is not probable.
Equion Joint Venture
Income of $15 million after-tax represents Talisman's 49% interest in the Equion joint venture in Colombia. Income was down in 2014 due principally to lower oil and liquids prices as well as higher income taxes and DD&A expense.
Ocensa
In December 2013, Talisman sold its 12.152% equity interest in the Ocensa pipeline for proceeds, net of disposition costs, of approximately $590 million. Talisman retained its crude oil transportation rights in the pipeline and retained its option to transport proprietary crude and to market any unused capacity to third parties.
Corporate and Other(1)
(millions of $) | 2014 | 2013 | 2012 | ||||
G&A expense | 405 | 434 | 510 | ||||
Finance costs | 352 | 331 | 272 | ||||
Share-based payments expense (recovery) | 27 | 49 | (63 | ) | |||
(Gain) loss on held-for-trading financial instruments | (1,427 | ) | 140 | 93 | |||
Gain on disposals | (550 | ) | (100 | ) | (1,624 | ) | |
Other income | 150 | 109 | 84 | ||||
Other expenses, net | 49 | 113 | 124 | ||||
G&A expense decreased by $29 million relative to 2013 due principally to lower workforce costs.
Finance costs include interest on long-term debt (including current portion), other finance charges and accretion expense relating to decommissioning liabilities, less interest capitalized. Finance costs increased by $21 million in 2014 due principally to increased accretion expense in Norway as a result of increased decommissioning liabilities and a reduction in capitalized interest in Southeast Asia as the result of HST/HSD in Vietnam becoming operational in 2013, partially offset by lower interest on long-term debt.
TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014 13
Share-based payments expense in 2014 was $27 million, due principally to expenses from amortization of the long-term Performance Share Unit (PSU) plan and the Restricted Share Unit (RSU) plan, partially offset by reduced option valuation due to a decline in the year-over-year share price.
Talisman recorded a gain on held-for-trading financial instruments of $1,427 million in 2014 due principally to a decrease in oil and natural gas forward prices. See the "Risk Management" section of this MD&A for further details concerning the Company's financial instruments.
The 2014 gain on disposals of $550 million is due primarily to the first quarter disposition of Talisman's Montney play position in the Farrell Creek and Cypress areas.
Other income consists primarily of $63 million of pipeline and customer treating tariffs, $42 million of marketing and other miscellaneous income and $28 million of interest on the loan to TSEUK.
Other expense consists primarily of restructuring costs of $18 million, a foreign exchange gain of $42 million, inventory writedowns of $10 million and $57 million of other miscellaneous expenses.
Income Taxes(1)
(millions of $) | 2014 | 2013 | 2012 | |||||
Income (loss) before taxes | (780 | ) | (1,322 | ) | (272 | ) | ||
Less: PRT | ||||||||
Current | 15 | 33 | 102 | |||||
Deferred | (18 | ) | 5 | (25 | ) | |||
Total PRT | (3 | ) | 38 | 77 | ||||
(777 | ) | (1,360 | ) | (349 | ) | |||
Income tax expense (recovery) | ||||||||
Current income tax | 403 | 590 | 690 | |||||
Deferred income tax | (269 | ) | (775 | ) | (1,171 | ) | ||
Income tax expense (recovery) (excluding PRT) | 134 | (185 | ) | (481 | ) | |||
Effective income tax rate (%) | (17% | ) | 14% | 138% | ||||
The effective tax rate is expressed as a percentage of income before taxes adjusted for PRT, which is deductible in determining taxable income. The effective tax rate was impacted by pre-tax losses of $886 million in Norway where tax rates are 78%, and pre-tax losses of $530 million in North America where tax rates are between 25% and 39%, partially offset by pre-tax income of $751 million in Southeast Asia where tax rates range from 30% to 50%.
In addition to the jurisdictional mix of income, the effective tax rate in 2014 was also impacted by:
The Company's 2013 effective tax rate was impacted by pre-tax losses of $538 million in Norway where tax rates are 78%, and pre-tax losses of $634 million in North America where tax rates are between 25% and 39%, partially offset by pre-tax income of $947 million in Southeast Asia where tax rates ranged from 30% to 55%.
14 TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014
In addition to the jurisdictional mix of income, the effective tax rate in 2013 was also impacted by:
The reduction of $187 million in current taxes from $590 million in 2013 to $403 million in 2014 was primarily driven by lower revenues in Indonesia and the sale of the Ocensa pipeline in 2013.
The deferred tax recovery of $269 million in 2014 compared to a deferred tax recovery of $775 million in 2013 was due principally to the sale of Talisman's equity investment in the Ocensa pipeline in 2013, the revaluation of foreign exchange on tax pools denominated in a foreign currency, and the gains associated with non-core asset disposals in Canada in 2014.
Capital Expenditures(1)
($ millions) | 2014 | 2013 | 2012 | ||||
North America | 1,322 | 1,283 | 1,562 | ||||
Southeast Asia | 439 | 482 | 421 | ||||
North Sea | 152 | 381 | 1,149 | ||||
Other | 161 | 161 | 230 | ||||
Exploration and development expenditure from subsidiaries(2) | 2,074 | 2,307 | 3,362 | ||||
Corporate, IS and Administrative | 47 | 41 | 138 | ||||
Acquisitions | 35 | 111 | 160 | ||||
Proceeds of dispositions(3) | (1,517 | ) | (146 | ) | (964 | ) | |
Net capital expenditure for subsidiaries | 639 | 2,313 | 2,696 | ||||
TSEUK | 599 | 460 | 24 | ||||
Equion | 103 | 118 | 125 | ||||
Exploration and development expenditure from Joint Ventures(4) | 702 | 578 | 149 | ||||
Net capital expenditure for Consolidated Subsidiaries and Joint Ventures | 1,341 | 2,891 | 2,845 | ||||
North America capital expenditures were $1.3 billion in 2014, an increase of 3% from 2013. Of this, $1.2 billion related to development activity, with the majority spent in the Eagle Ford, Marcellus, and Edson areas. The remaining capital was invested in exploration activities, largely in the Duvernay.
In Southeast Asia, capital expenditures of $439 million included $300 million on development, with the majority spent in Malaysia, Indonesia and Australia. The majority of the $139 million for exploration was spent in Vietnam and Malaysia.
In Norway, capital expenditures of $152 million included $130 million on development primarily related to development activities in Brynhild, Brage, Veslefrikk and the Varg gas export. The majority of the $22 million for exploration was spent on the Yme redevelopment.
In the Rest of the World, capital expenditures of $161 million included $149 million of exploration and evaluation activities in Colombia and the Kurdistan Region of Iraq.
In the TSEUK joint venture, capital expenditures of $599 million consisted primarily of development activity at several fields as well as exploration drilling at Seagull. In the Equion joint venture, capital expenditures of $103 million were primarily for development activities including the expansion of the Piedemonte facility and development wells at Florena and Pauto.
TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014 15
Asset Disposals
North America Dispositions
In 2014, Talisman completed the sale of its Montney acreage in northeast British Columbia for proceeds of $1.3 billion, resulting in a pre-tax gain of $564 million ($493 million after-tax).
In 2014, Talisman sold non-core assets in western Canada for net proceeds of $141 million, after $3 million in working capital adjustments, resulting in a pre-tax loss on disposal of $6 million ($7 million after-tax).
In 2013, Talisman completed sales of non-core assets in western Canada for proceeds of $98 million, resulting in a pre-tax gain of $49 million ($37 million after-tax).
Southeast Asia Disposition
In 2014, Talisman completed the sale of its 7.48% interest in the Southeast Sumatra Production Sharing Contract (PSC) in Indonesia for proceeds of $34 million, net of withholding tax, resulting in a pre-tax loss of $3 million ($nil after-tax).
In 2013, Talisman completed the sale of its 5.03% interest in the Offshore Northwest Java PSC in Indonesia for net proceeds of $36 million, resulting in a pre-tax gain of $9 million ($3 million after-tax).
Sale of Colombian Pipeline Interest
In 2013, Talisman sold its 12.152% equity interest in the Ocensa pipeline in Colombia for proceeds, net of disposition costs, of approximately $590 million, resulting in a pre-tax gain of $34 million. Talisman retained its crude oil transportation rights in the pipeline and retained its option to market any unused capacity to third parties.
Sale of 49% Equity Interest in Talisman Energy (UK) Limited (TEUK) to China Petrochemical Corporation (Sinopec)
On December 17, 2012, Talisman completed the sale of a 49% equity interest in TEUK, now renamed TSEUK, to Addax Petroleum UK Limited (APUKL), an indirect wholly-owned subsidiary of Sinopec, for cash consideration of $1.5 billion, based on an effective date of January 1, 2012. This newly created entity was accounted for using the equity method effective December 17, 2012.
Farm-Outs
In 2012, the Company reached agreements to farm down its working interest in the Block SL04B-10 in Sierra Leone from 80% to 30%, including a reimbursement of past costs. The Company exited Sierra Leone in 2013.
In 2012, Talisman concluded an agreement with Mitsubishi to farm-out interests in nine of the Company's licences in Papua New Guinea's onshore Western Province. This agreement is valued at approximately $280 million and is being paid in the form of a capital carry. Following the farm-out, the Company's equity position averages 40% in these nine licences.
Acquisitions
Vietnam Acquisition
In 2013, Talisman acquired a 55% working interest and operatorship of exploration and evaluation assets in Block 07/03 offshore Vietnam via two separate transactions with a total acquisition cost of $95 million. The block is adjacent to the Company's existing position in the Nam Con Son Basin.
Kinabalu PSC
The Company entered into a new PSC with PETRONAS, the national oil company of Malaysia, acquiring ownership of a 60% working interest in the Kinabalu PSC as well as assuming operatorship on December 26, 2012. As consideration for receipt of the PSC interest, the Company paid to PETRONAS $50 million in January 2013.
16 TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014
Reserves at December 31
Disclosure Requirements
As a Canadian public company, Talisman is subject to the oil and gas disclosure requirements of National Instrument 51-101 (NI 51-101) of the Canadian Securities Administrators. Information regarding the pricing assumptions used in the preparation of the estimates of NI 51-101 reserves is set forth in Schedule A of Talisman's AIF dated March 4, 2015.
Talisman's gross before royalties proved and probable reserves at December 31, 2014 (including the reserves attributable to its investments in TSEUK and Equion), compiled in accordance with NI 51-101 disclosure requirements using forecast prices, are estimated as follows:
Summary of working interest reserves for Consolidated Subsidiaries on gross basis | Light Oil (mmbbls) |
Heavy Oil (mmbbls) |
Shale Oil (mmbbls) |
Shale Gas (bcf) |
Non-Shale Natural Gas (bcf) |
NGL (mmbbls) |
Total (mmboe) |
||
Proved Developed Producing | 42.7 | 29.3 | 5.8 | 1,134.8 | 1,245.9 | 62.7 | 537.6 | ||
Proved Developed Non-Producing | 1.5 | | | 133.1 | 49.4 | 0.9 | 32.8 | ||
Proved Undeveloped | 0.9 | 4.6 | 6.3 | 803.1 | 475.8 | 32.0 | 257.0 | ||
Proved | 45.1 | 33.9 | 12.1 | 2,071.0 | 1,771.1 | 95.6 | 827.4 | ||
Probable | 95.2 | 23.2 | 2.2 | 838.1 | 898.6 | 31.6 | 441.7 | ||
Total Proved Plus Probable Reserves for Consolidated Subsidiaries | 140.3 | 57.1 | 14.3 | 2,909.1 | 2,669.7 | 127.2 | 1,269.1 | ||
Summary of working interest reserves for Joint Ventures on gross basis | |||||||||
Proved Developed Producing | 15.7 | | | | 58.5 | 2.1 | 27.6 | ||
Proved Developed Non-Producing | | | | | | | | ||
Proved Undeveloped | 13.5 | | | | 22.7 | | 17.3 | ||
Proved | 29.2 | | | | 81.2 | 2.1 | 44.9 | ||
Probable | 62.0 | | | | 34.1 | 0.1 | 67.8 | ||
Total Proved Plus Probable Reserves for Joint Ventures | 91.2 | | | | 115.3 | 2.2 | 112.7 | ||
Total Proved Plus Probable Reserves for Consolidated Subsidiaries and Joint Ventures | 231.5 | 57.1 | 14.3 | 2,909.1 | 2,785.0 | 129.4 | 1,381.8 | ||
TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014 17
Reconciliation of proved and probable reserves:
Continuity of working interest reserves for Consolidated Subsidiaries on gross basis | Light Oil (mmbbls) |
Heavy Oil (mmbbls) |
Shale Oil (mmbbls) |
Shale Gas (bcf) |
Non-Shale Natural Gas (bcf) |
NGL (mmbbls) |
Total (mmboe) |
|||||||||
At December 31, 2013 | 142.7 | 41.4 | 13.5 | 3,542.8 | 3,346.0 | 132.9 | 1,478.6 | |||||||||
Discoveries | 25.6 | | | | | | 25.6 | |||||||||
Additions and extensions | 3.0 | 19.8 | 5.1 | 664.6 | 88.9 | 24.9 | 178.5 | |||||||||
Acquisitions | | | | | | | | |||||||||
Divestment | (2.8 | ) | | | (651.4 | ) | (340.7 | ) | (1.7 | ) | (169.9 | ) | ||||
Technical revisions | (5.6 | ) | 0.8 | (0.8 | ) | 56.1 | (54.2 | ) | (7.3 | ) | (12.2 | ) | ||||
Economic revisions | (1.1 | ) | (0.2 | ) | (1.6 | ) | (499.4 | ) | (88.8 | ) | (8.6 | ) | (109.5 | ) | ||
Production | (21.5 | ) | (4.7 | ) | (1.9 | ) | (203.6 | ) | (281.5 | ) | (13.0 | ) | (122.0 | ) | ||
At December 31, 2014 for Consolidated Subsidiaries | 140.3 | 57.1 | 14.3 | 2,909.1 | 2,669.7 | 127.2 | 1,269.1 | |||||||||
Continuity of working interest reserves for Joint Ventures on gross basis | ||||||||||||||||
At December 31, 2013 | 137.5 | | | | 135.2 | 1.7 | 161.7 | |||||||||
Discoveries | | | | | | | | |||||||||
Additions and extensions | 1.7 | | | | 4.5 | 1.1 | 3.6 | |||||||||
Acquisitions | 0.6 | | | | | | 0.6 | |||||||||
Divestment | | | | | | | | |||||||||
Technical revisions | (6.4 | ) | | | | (5.2 | ) | (0.1 | ) | (7.3 | ) | |||||
Economic revisions | (33.0 | ) | | | | (3.4 | ) | (0.2 | ) | (33.8 | ) | |||||
Production | (9.2 | ) | | | | (15.8 | ) | (0.3 | ) | (12.1 | ) | |||||
At December 31, 2014 for Joint Ventures | 91.2 | | | | 115.3 | 2.2 | 112.7 | |||||||||
Total at December 31, 2014 for Consolidated Subsidiaries and Joint Ventures | 231.5 | 57.1 | 14.3 | 2,909.1 | 2,785.0 | 129.4 | 1,381.8 | |||||||||
At the end of 2014, Talisman's proved plus probable reserves totaled 1.38 billion boe. The Company added (discoveries, additions, and extensions) approximately 208 million boe (135 million boe proved), offset by negative technical revisions of 19 million boe, negative economic revisions of 143 million boe, and divestments of 170 million boe.
Liquidity and Capital Resources
Talisman's gross debt at December 31, 2014 was $5.1 billion ($4.8 billion, net of cash and cash equivalents and bank indebtedness), compared to $5.2 billion ($4.9 billion, net of cash and cash equivalents and bank indebtedness) at December 31, 2013.
During 2014, the Company generated $1.9 billion of cash provided by operating activities, incurred capital expenditures of $2.1 billion, and received proceeds of $1.5 billion from the disposition of assets.
Talisman's capital structure consists of shareholders' equity and debt. The Company makes adjustments to its capital structure based on changes in economic conditions and its planned requirements. Talisman has the ability to adjust its capital structure by issuing new equity or debt, selling assets to reduce debt, controlling the amount it returns to shareholders and making adjustments to its capital expenditure program, subject to restrictions in the Arrangement Agreement the Company entered into with Repsol on December 15, 2014, as filed on www.sedar.com.
In May 2014, the Company renewed its universal shelf prospectus under the Multi-Jurisdictional Disclosure System pursuant to which it may issue up to $3.5 billion of debt securities, common shares, preferred shares, subscription receipts, warrants and units. The Company simultaneously renewed its medium-term note shelf prospectus in Canada pursuant to which it may issue up to C$1 billion of medium-term notes in Canada. Both shelf prospectuses remain valid over a 25-month period.
Talisman manages its liquidity requirements by use of both short-term and long-term cash forecasts, and by maintaining appropriate undrawn capacity under committed bank credit facilities. At December 31, 2014, Talisman had unsecured credit facilities totaling $3.2 billion, consisting of facilities of $3.0 billion (Facility No. 1), maturing March 19, 2019 and $200 million (Facility No. 2) maturing October 21, 2019.
18 TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014
At December 31, 2014, borrowings from bank lines totaled $625 million, which was comprised of $475 million in the form of bankers' acceptances and $150 million in the form of a short-term LIBOR loan. There was also $91 million in letters of credit support outstanding at December 31, 2014. The average rate on the outstanding bankers' acceptances and short-term LIBOR loan was 2.06%, which reflects the weighted average interest rate of instruments outstanding at December 31, 2014. In addition, $103 million of commercial paper was outstanding and the average interest rate on outstanding commercial paper was 0.67%. The authorized amount under the Company's commercial paper program is $1.0 billion, but the amount available under this program is limited to the availability of backup funds under the Company's Facility No. 1. Total available borrowing capacity was $2.4 billion at December 31, 2014.
In addition, the Company utilizes letters of credit pursuant to letter of credit facilities, most of which are uncommitted. At December 31, 2014, demand letters of credit guaranteed by the Company totaling $1.1 billion were issued of which $1.0 billion were issued from uncommitted facilities. Of that total, $0.8 billion is provided as security for the costs of decommissioning obligations in the UK. The remaining outstanding letters of credit relate primarily to a retirement compensation arrangement, guarantees of minimum work commitments and decommissioning obligations in other areas.
TSEUK is required to provide letters of credit as security in relation to certain decommissioning obligations in the UK pursuant to contractual arrangements under Decommissioning Security Agreements (DSAs). At the commencement of the joint venture, Addax assumed 49% of the decommissioning obligations of TSEUK. Addax's parent company, China Petrochemical Corporation (Sinopec), has provided an unconditional and irrevocable guarantee for this 49% of the UK decommissioning obligations.
The UK government passed legislation in 2013 which provides for a contractual instrument, known as a Decommissioning Relief Deed, for the government to guarantee tax relief on decommissioning costs at 50%, allowing security under DSAs to be posted on an after-tax basis and reducing the amount of letters of credit required to be posted by 50%. TSEUK has entered into a Decommissioning Relief Deed with the UK government and will continue to negotiate with counterparties to amend all DSAs accordingly. Tax relief guaranteed by the UK government is limited to corporate tax paid since 2002. Under the limitation, TSEUK's tax relief is capped at $2.3 billion, representing corporate income taxes paid and recoverable since 2002.
At December 31, 2014, TSEUK has $2.6 billion of demand shared facilities in place under which letters of credit of $1.6 billion have been issued. At January 1, 2015, total letters of credit issued under these shared facilities increased to $2.1 billion. Of this $2.1 billion, approximately 60% were posted on an after-tax basis subsequent to successful negotiations to recognize the UK government's tax relief on decommissioning costs of 50%; however, rising cost estimates as well as new letters of credit requirements being triggered on assets where future cash flow is inadequate to cover the abandonment obligation resulted in a net increase in letters of credit requirement of $0.5 billion when compared to December 31, 2014. The Company guarantees 51% of all letters of credit issued under these shared facilities.
The Company has also granted guarantees to various beneficiaries in respect of decommissioning obligations of TSEUK.
The Company also has obligations to fund the losses and net asset deficiency of TSEUK which arises from the Company's past practice of funding TSEUK's cash flow deficiencies, and the expectation that cash flow deficiencies will continue to be funded through 2015. In addition the Company has a guarantee to fund TSEUK's decommissioning obligation if TSEUK is unable to. As such, the Company has recognized a negative investment value from the application of equity accounting. The Company's obligation to fund TSEUK will increase to the extent future losses are generated within TSEUK. In addition, future contributions to the TSEUK joint venture could be impaired to the extent recoverability is not probable.
Any changes to decommissioning estimates influence the value of letters of credit to be provided pursuant to the DSAs. In addition, the extent to which shared facility capacity is available, and the cost of that capacity, is influenced by the Company's investment-grade credit rating. During the second half of 2014, Talisman was downgraded by Moody's, Standard & Poor's, Fitch and Dominion Bond Rating Service to Baa3 (negative), BBB- (stable), BBB- (stable), and BBB under review with developing implications, respectively. The Company remains investment grade and believes it will continue to have access to capital, as and when needed, at a reasonable cost of funds.
The current portion of long-term debt of $1,109 million consists of $475 million in bankers' acceptances and $150 million in short-term LIBOR loan, $103 million in commercial paper, $375 million of 5.125% notes, and $6 million in Tangguh project financing.
Talisman monitors its balance sheet with reference to its liquidity and a debt-to-cash flow ratio. The main factors in assessing the Company's liquidity are cash flow, including cash flow from equity accounted entities (defined in accordance with the Company's debt covenant as cash provided by operating activities before adjusting for changes in non-cash working capital, and exploration expenditure), cash provided by and used in investing activities and available bank credit facilities. The debt-to-cash flow ratio is calculated using debt (calculated by adding the gross debt and bank indebtedness, production payments and finance leases) divided by cash flow for the year.
TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014 19
The Company is in compliance with all of its debt covenants. The Company's principal financial covenant under its primary bank credit facility is a debt-to-cash flow ratio of less than 3.5:1, calculated quarterly on a trailing 12-month basis as of the last day of each fiscal quarter. For the trailing 12-month period ended December 31, 2014, the debt-to-cash flow ratio was 2.2:1.
The Company has a hedging program that will partially protect 2015 cash flow from the effect of declining oil and gas prices, subject to restrictions in the Arrangement Agreement the Company entered into with Repsol on December 15, 2014, as filed on www.sedar.com. See the "Risk Management" section of this MD&A for further information.
Talisman is exposed to credit risk, which is the risk that a customer or counterparty will fail to perform an obligation or settle a liability, resulting in financial loss to the Company. Talisman manages exposure to credit risk by adopting credit risk guidelines approved by the Board of Directors that manage transaction limits according to counterparty creditworthiness. The Company routinely assesses the financial strength of its joint interest participants and customers, in accordance with the credit risk guidelines. Talisman's credit policy requires collateral to be obtained from counterparties considered to present a material risk of non-payment, which would include entities internally assessed as having credit ratings unacceptable per the credit risk guidelines. Collateral received from customers at December 31, 2014 included $80 million of letters of credit. At December 31, 2014, an allowance of $9 million was recorded in respect of specifically identified doubtful accounts.
A significant proportion of Talisman's accounts receivable balance is with customers in the oil and gas industry and is subject to normal industry credit risks. At December 31, 2014, approximately 86% of the Company's accounts receivable were aged less than 90 days and the largest single counterparty exposure, accounting for 6% of the total, was with a highly rated counterparty. Concentration of credit risk is mitigated by having a broad domestic and international customer base consisting primarily of highly rated counterparties.
The Company also has credit risk arising from cash and cash equivalents held with banks and financial institutions. The Company's policy allows it to deposit cash balances at financial institutions subject to a sliding scale limit, depending on creditworthiness.
The maximum credit exposure associated with financial assets is the carrying values.
At December 31, 2014, there were 1,036,166,028 common shares outstanding, of which 4,640,040 were held in trust by the Company, resulting in 1,031,525,988 common shares outstanding for accounting purposes. During 2014, Talisman declared common share dividends of $0.27 per share (2013 $0.27 per share; 2012 $0.27 per share) for an aggregate dividend of $279 million (2013 $277 million; 2012 $277 million). Subsequent to December 31, 2014, no stock options were exercised for shares and 3,790,837 common shares were purchased and held in trust for the long-term PSU plan. There were 1,036,166,028 common shares outstanding at February 27, 2015, of which 8,430,877 were held in trust by the Company, resulting in 1,027,735,151 common shares outstanding for accounting purposes.
At December 31, 2014, there were 8,000,000 Series 1 preferred shares outstanding. Holders of Series 1 preferred shares are entitled to receive cumulative quarterly fixed dividends of 4.2% per annum for the initial period ending December 31, 2016, if, as, and when declared by the Board of Directors. Thereafter, the dividend rate will be reset every five years at a rate equal to the five-year Government of Canada bond yield plus 2.77%. During 2014, Talisman declared preferred share dividends of C$1.05 per share (2013 C$1.05 per share; 2012 C$1.10 per share) for an aggregate dividend of $8 million (2013 $8 million; 2012 $9 million).
At December 31, 2014, there were 33,600,762 stock options, 2,534,360 cash units, 11,028,855 RSUs, 2,997,003 Deferred Share Units (DSUs) and 10,680,442 PSUs outstanding.
On April 1, 2013, Talisman implemented the "Global Restricted Share Unit Plan for Eligible Employees of Talisman Energy Inc. and its Affiliates". All RSUs issued by the Company permit the holder to receive a cash payment equal to the market value of the common shares at the vest date. Participants are also credited with additional RSUs corresponding to any associated notional dividend payments (referred to as "dividend equivalent RSUs"). Typically, one third of the RSUs granted under the plan are paid on the grant anniversary date every year for the three years following the grant date. During 2014, non-executive employees were granted a total of 7,950,314 RSUs in place of stock options, cash units and PSUs.
Subsequent to December 31, 2014, no stock options were surrendered for cash, exercised for shares, or granted, and 596,373 were forfeited or expired, with 33,004,389 stock options outstanding at February 27, 2015. Subsequent to December 31, 2014, 81,876 cash units were forfeited or expired, with 2,452,484 cash units outstanding at February 27, 2015. Subsequent to December 31, 2014, 327,048 PSUs were forfeited or expired, with 10,353,394 outstanding at February 27, 2015. Subsequent to December 31, 2014, no RSUs were granted, 173,532 were forfeited or expired and 74,036 were released with 10,781,287 outstanding at February 27, 2015.
The Company may purchase shares on the open market to satisfy its obligation to deliver common shares to settle long-term PSUs, which are held in trust. The 2011 long-term PSU grant vested on December 31, 2013 and was settled in March 2014 based on the vesting of 75% of the PSUs granted as approved by the Board of Directors. The 2012 long-term PSU grant vested on December 31,
20 TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014
2014 and settlement is expected to occur during the first quarter of 2015. In accordance with an agreement governing the PSUs, the Board of Directors approved vesting of 100% of the PSUs granted. During 2014, 2,265,898 common shares were purchased on the open market for $21 million (During 2013 100,000 common shares purchased for $1 million). Between January 1 and February 27, 2015, 3,790,837 common shares were purchased on the open market.
Talisman continually monitors its portfolio of assets and investigates business opportunities in the oil and gas sector. The Company may make acquisitions, investments or dispositions, some of which may be material. In connection with any acquisition or investment, Talisman may incur debt or issue equity. Any acquisitions, investments, dispositions or issuance of debt or equity are subject to restrictions in the Arrangement Agreement the Company entered into with Repsol on December 15, 2014, as filed on www.sedar.com.
For additional information regarding the Company's liquidity and capital resources, refer to notes 20 and 23 to the 2014 audited Consolidated Financial Statements.
Sensitivities
Talisman's financial performance is affected by factors such as changes in production volumes, commodity prices and exchange rates. The estimated annualized impact of these factors for 2015 (excluding the effect of derivative contracts) is summarized in the following table, based on a Dated Brent oil price of approximately $70/bbl, a NYMEX natural gas price of approximately $3.50/mmbtu and exchange rates of US$0.86=C$1 and UK£1=US$1.55.
(millions of $) | Net Income | Cash Provided by Operating Activities(3) |
||||
Volume changes | ||||||
Oil 10,000 bbls/d | 40 | 120 | ||||
Natural gas 60 mmcf/d | 5 | 50 | ||||
Price changes(1) | ||||||
Oil $1.00/bbl | 25 | 25 | ||||
Natural gas (North America)(2) $0.10/mcf | 20 | 25 | ||||
Exchange rate changes | ||||||
US$/C$ decreased by US$0.01 | (5 | ) | (5 | ) | ||
US$/UK£ increased by US$0.02 | | | ||||
Commitments and Off-Balance Sheet Arrangements
As part of its normal business, the Company has entered into arrangements and incurred obligations that will impact the Company's future operations and liquidity, some of which are reflected as liabilities in the Consolidated Financial Statements at year-end. The principal commitments of the Company are in the form of debt repayments, decommissioning obligations, lease commitments relating to corporate offices and ocean-going vessels, firm commitments for gathering, processing and transmission services, minimum work commitments under various international agreements, other service contracts and fixed price commodity sales contracts.
Additional disclosure of the Company's decommissioning liabilities, debt repayment obligations and significant commitments can be found in notes 8, 16, 18, 19 and 24 to the 2014 audited Consolidated Financial Statements. A discussion of the Company's derivative financial instruments and commodity sales contracts can be found in the "Risk Management" section of this MD&A.
TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014 21
The following table includes the Company's gross long-term debt, decommissioning obligations, share-based payments, operating and finance leases, PP&E and E&E spend commitments and other expected future payment commitments as at December 31, 2014 and estimated timing of such payments:
Payments due by period(1)(2) (millions of $) | |||||||||||||
Commitments | Recognized in balance sheet |
Total | 2015 | 2016-2017 | 2018-2019 | 2020+ | |||||||
Gross long-term debt | Yes Liability | 5,064 | 1,109 | 551 | 710 | 2,694 | |||||||
Decommissioning liabilities(3) | Yes Partially accrued | 3,075 | 117 | 577 | 477 | 1,904 | |||||||
Yme removal obligation | Yes | 186 | 186 | | | | |||||||
Office leases | No | 396 | 47 | 87 | 73 | 189 | |||||||
Vessel leases | No | 91 | 71 | 8 | 5 | 7 | |||||||
Finance lease obligations | Yes Partially accrued | 73 | 18 | 29 | 18 | 8 | |||||||
Transportation and processing commitments(4) | No | 1,548 | 264 | 382 | 342 | 560 | |||||||
PP&E and E&E assets(5) | No | 618 | 343 | 231 | 44 | | |||||||
Other service contracts | No | 110 | 73 | 22 | 7 | 8 | |||||||
Share-based payments(6) | Yes Liability | 111 | 110 | 1 | | | |||||||
Obligation to fund equity investee | Yes Liability | 186 | 186 | | | | |||||||
Total | 11,458 | 2,524 | 1,888 | 1,676 | 5,370 | ||||||||
The following summary of commitments summarizes Talisman's share of TSEUK and Equion commitments as at December 31, 2014.
Payments due by period(1)(2) (millions of $) | |||||||||||
Commitments | Total | 2015 | 2016-2017 | 2018-2019 | 2020+ | ||||||
Office leases | 22 | 3 | 4 | 4 | 11 | ||||||
Vessel leases | 159 | 135 | 19 | 5 | | ||||||
Transportation and processing commitments(3) | 41 | 17 | 14 | 1 | 9 | ||||||
Decommissioning liabilities(4) | 3,320 | 58 | 332 | 407 | 2,523 | ||||||
PP&E and E&E assets(5) | 240 | 180 | 60 | | | ||||||
Other service contracts | 121 | 95 | 14 | 12 | | ||||||
Total | 3,903 | 488 | 443 | 429 | 2,543 | ||||||
There have been no significant changes in the Company's expected future payment commitments, and the timing of those payments, since December 31, 2014.
Transactions with Related Parties
The shareholders of TSEUK have provided an unsecured loan facility totaling $2.4 billion to TSEUK, of which Talisman is committed to $1.2 billion, for the purpose of funding capital expenditures of TSEUK. As at December 31, 2014, $1.0 billion has been drawn under this facility, of which Talisman's share is $514 million. Remaining borrowing capacity under this facility as at December 31, 2014 is $742 million ($378 million net to Talisman). Loans under this facility bear interest at the UK interest rate swap rate plus 2.5%,
22 TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014
and are repayable quarterly in equal instalments based upon a five-year repayment period calculated from the date each loan is advanced. All outstanding loans mature December 31, 2017, although the maturity date may be extended from time to time upon agreement between the shareholders and TSEUK. Prior to the maturity date, TSEUK may repay, in full or in part, the balance outstanding on any loan under this facility. For further information regarding the TSEUK loan facility refer to note 8 of the 2014 audited Consolidated Financial Statements.
The Company has a loan due to Equion of $15 million (2013 $288 million) which is unsecured, due upon demand and bears interest at LIBOR plus 0.30%.
The compensation of key management personnel, consisting of the Company's directors and members of the executive committee, is as follows:
(millions of $) | 2014 | 2013 | 2012 | |||
Short-term benefits | 14 | 15 | 15 | |||
Pension and other post-employment benefits | 5 | 5 | 6 | |||
Termination benefits | 3 | 6 | 15 | |||
Share-based payments(1) | 3 | 9 | 13 | |||
25 | 35 | 49 | ||||
There were no other significant transactions with related parties.
Risk Management
Talisman monitors its exposure to variations in commodity prices, interest rates and foreign exchange rates. In response, Talisman periodically enters into physical delivery transactions for commodities of fixed or collared prices and into derivative financial instruments to reduce exposure to unfavourable movements in commodity prices, interest rates and foreign exchange rates. The terms of these contracts or instruments may limit the benefit of favourable changes in commodity prices, interest rates and currency values and may result in financial or opportunity loss due to delivery commitments, royalty rates and counterparty risks associated with contracts. The Company has established a system of internal controls to minimize risks associated with its derivatives program and credit risk associated with derivatives counterparties.
The accounting policy with respect to derivative financial instruments and commodity sales contracts is set out in note 3(q) to the 2014 audited Consolidated Financial Statements. Derivative financial instruments and commodity sales contracts outstanding at December 31, 2014, including their respective fair values, are detailed in note 23 to the 2014 audited Consolidated Financial Statements.
The Company has elected not to designate as hedges for accounting purposes any commodity price derivative contracts entered into. These derivatives are classified as held-for-trading financial instruments and are measured at fair value with changes in fair value recognized in net income quarterly. This can potentially increase the volatility of net income.
TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014 23
Commodity Price Derivative Financial Instruments
The Company had the following commodity price derivative contracts outstanding at December 31, 2014, none of which are designated as hedges:
Two-way collars (Oil) | Term | bbls/d | Floor/ceiling $/bbl | |||
Dated Brent oil index | 2015 Jan-Dec | 5,000 | 90.00/100.01 | |||
NYMEX WTI oil index | 2015 Jan-Dec | 5,000 | 80.00/95.02 | |||
Dated Brent oil index | 2015 Jan-Dec | 20,000 | 90.00/106.16 | |||
Dated Brent oil index | 2016 Jan-Dec | 5,000 | 90.00/108.00 | |||
NYMEX WTI oil index | 2016 Jan-Dec | 5,000 | 85.00/95.95 | |||
Fixed price swaps (Oil) | Term | bbls/d | $/bbl | ||||
Dated Brent oil index | 2015 Jan-Dec | 10,000 | 100.46 | ||||
Dated Brent oil index | 2015 Jan-Dec | 1,000 | 104.00 | ||||
Dated Brent oil index | 2015 Jan-Dec | 9,000 | 100.59 | ||||
NYMEX WTI oil index | 2015 Jan-Dec | 5,000 | 96.36 | ||||
WCS Differential | 2015 Jan-Mar | 6,500 | (21.55 | ) | |||
Dated Brent oil index | 2016 Jan-Dec | 10,000 | 98.01 | ||||
Dated Brent oil index | 2016 Jan-Dec | 5,000 | 100.29 | ||||
Dated Brent oil index | 2016 Jan-Dec | 10,000 | 102.98 | ||||
Two-way collars (Gas) | Term | mcf/d | Floor/ceiling $/mcf | |||
NYMEX HH LD | 2015 Jan-Dec | 47,468 | 4.23/4.87 | |||
NYMEX HH LD | 2015 Jan-Dec | 94,936 | 4.21/5.06 | |||
NYMEX HH LD | 2016 Jan-Dec | 47,468 | 4.21/4.75 | |||
NYMEX HH LD | 2016 Jan-Dec | 47,468 | 4.21/4.87 | |||
Fixed price swaps (Gas) | Term | mcf/d | $/mcf | |||
NYMEX HH LD | 2015 Jan-Dec | 47,468 | 4.54 | |||
NYMEX HH LD | 2015 Jan-Dec | 47,468 | 4.39 | |||
NYMEX HH LD | 2015 Jan-Dec | 47,468 | 4.39 | |||
NYMEX HH LD | 2015 Jan-Dec | 47,468 | 4.48 | |||
NYMEX HH LD | 2015 Jan-Dec | 47,468 | 4.53 | |||
NYMEX HH LD | 2015 Jan-Dec | 47,468 | 4.55 | |||
NYMEX HH LD | 2016 Jan-Dec | 47,468 | 4.48 | |||
NYMEX HH LD | 2016 Jan-Dec | 42,721 | 4.55 | |||
Fixed price swaps (Power) | Term | MWh | C$/MWh | |||
Alberta Power | 2015 Jan-Dec | 5 | 73.72 | |||
Alberta Power | 2016 Jan-Dec | 2 | 73.83 | |||
Alberta Power | 2017 Jan-Dec | 1 | 74.75 | |||
Alberta Power | 2018 Jan-Dec | 1 | 74.75 | |||
Subsequent to December 31, 2014, the Company entered into no new commodity price derivative contracts.
Further details of contracts outstanding are presented in note 23 to the 2014 audited Consolidated Financial Statements.
Long-Term Sales Contracts
In order to support the Company's investments in natural gas projects outside of North America and the North Sea, Talisman has entered into or is a party to a number of long-term sales contracts.
The majority of Talisman's natural gas production from the Corridor Block in Indonesia is currently sold under long-term sales agreements with PT Caltex Pacific Indonesia (Chevron), Gas Supply Pte. Ltd. (GSPL) and PT Perusahaan Gas Negara (Persero) Tbk
24 TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014
(PGN). Under the sales agreement with Chevron, which is currently due to expire in 2021, delivered gas sales are priced at approximately 76% of the equivalent value of the Indonesian Crude Price for Duri crude oil. Talisman's share of the minimum volume commitment under the agreement with Chevron is approximately 211 bcf over its remaining seven-year life.
Under the sales agreement with GSPL, which is currently due to expire in 2023, delivered gas sales to Singapore from the Corridor Block are priced at approximately 115% of the spot price of high-sulphur fuel oil in Singapore. Talisman's share of the minimum volume commitment is approximately 170 bcf over the remaining nine-year life of the agreement.
Sales from the Corridor Block to PGN for their markets located primarily in West Java are sold under a long-term agreement, which is currently due to expire in 2023, with no associated transportation costs. Talisman's share of the minimum volume commitment is approximately 537 bcf over the remaining nine-year life of the agreement. The balance of the gas production from the Corridor Block is sold under gas sales contracts which vary in length from one to five years and are generally at fixed prices with fixed annual escalation. Under the West Java agreement and two others, the Corridor Block partners and the buyers have agreed to price increases which are currently awaiting the approval of the Minister of Energy and Mineral Resources.
At Jambi Merang, the majority of gas production is sold under long-term agreements which contain fixed prices with fixed annual escalation and are in place until the current termination date of the PSC, which is in February 2019.
The Company is subject to volume delivery requirements for approximately 70-90 mmcf/d at a price that is referenced to the spot price of high-sulphur fuel oil in Singapore in relation to a long-term sales contract from the PM-3 Commercial Arrangement Area in Malaysia/Vietnam, which is currently scheduled to expire in 2018. In the event these delivery requirements are not met in a contract year, volumes delivered in the subsequent contract year are subject to a 25% price discount for the equivalent volume of unexcused shortage that was not delivered in the prior year.
Currently, the Company anticipates having sufficient production to meet all of these future delivery requirements.
Interest Rate Swap
In order to swap a portion of the $375 million 5.125% notes due in 2015 to floating interest rates, the Company entered into fixed to floating interest rate swap contracts with a total notional amount of $300 million that expire on May 15, 2015. These swap contracts require Talisman to pay interest at a rate of three-month US$ LIBOR plus 0.433% while receiving payments of 5.125% semi-annually.
TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014 25
The following is a summary of quarterly results of the Company for the eight most recently completed quarters.
Three months ended | ||||||||||||
(millions of $, unless otherwise stated) | Annual | Dec. 31 | Sep. 30 | Jun. 30 | Mar. 31 | |||||||
2014 | ||||||||||||
Total revenue and other income(1) | 3,763 | 44 | 1,136 | 1,242 | 1,341 | |||||||
Net income (loss) | (911 | ) | (1,590 | ) | 425 | (237 | ) | 491 | ||||
Per common share ($) | ||||||||||||
Net income (loss)(2) | (0.89 | ) | (1.54 | ) | 0.41 | (0.23 | ) | 0.47 | ||||
Diluted net income (loss)(3) | (0.96 | ) | (1.54 | ) | 0.38 | (0.24 | ) | 0.43 | ||||
Daily average production from Consolidated Subsidiaries and Joint Ventures | ||||||||||||
Oil and liquids (mbbls/d)(4) | 141 | 140 | 135 | 145 | 142 | |||||||
Natural gas (mmcf/d) | 1,371 | 1,347 | 1,310 | 1,380 | 1,452 | |||||||
Total (mboe/d) | 369 | 365 | 353 | 375 | 384 | |||||||
Less assets sold or held for sale (mboe/d)(5) | 12 | 1 | 5 | 11 | 31 | |||||||
Total production from ongoing operations (mboe/d) | 357 | 364 | 348 | 364 | 353 | |||||||
2013 | ||||||||||||
Total revenue and other income(1) | 4,486 | 929 | 1,244 | 1,190 | 1,123 | |||||||
Net income (loss) | (1,175 | ) | (1,005 | ) | (54 | ) | 97 | (213 | ) | |||
Per common share ($) | ||||||||||||
Net income (loss)(2) | (1.15 | ) | (0.98 | ) | (0.05 | ) | 0.09 | (0.21 | ) | |||
Diluted net income (loss)(3) | (1.21 | ) | (0.98 | ) | (0.08 | ) | 0.06 | (0.21 | ) | |||
Daily average production from Consolidated Subsidiaries and Joint Ventures | ||||||||||||
Oil and liquids (mbbls/d)(4) | 132 | 137 | 134 | 126 | 129 | |||||||
Natural gas (mmcf/d) | 1,451 | 1,505 | 1,423 | 1,414 | 1,461 | |||||||
Total (mboe/d) | 373 | 387 | 371 | 361 | 372 | |||||||
Less assets sold or held for sale (mboe/d)(5) | 35 | 33 | 33 | 36 | 40 | |||||||
Total production from ongoing operations (mboe/d) | 338 | 354 | 338 | 325 | 332 | |||||||
During the three-month period ended December 31, 2014, total revenue and other income decreased by $885 million over the same period in 2013 due principally to increased losses from joint ventures as a result of increased impairment expenses, and lower oil and liquids prices.
Net loss of $1.0 billion for the three-month period ended December 31, 2013 increased to a net loss of $1.6 billion for the three-month period ended December 31, 2014 due principally to higher impairment expenses related to lower commodity prices, increased losses from joint ventures and associates after tax, and lower revenue due to lower oil and liquids prices, partially offset by a gain on held-for-trading financial instruments of $1.2 billion compared to losses of $161 million in 2013.
Also, during the three-month period ended December 31, 2014, the Company:
26 TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014
Internal Control over Financial Reporting and Disclosure Controls and Procedures
Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in rules 13a-15(f) and 15d-15(f) under the United States Securities Exchange Act of 1934, as amended (the Exchange Act).
Management, including the Company's Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the Company's internal control over financial reporting based on the criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework).
Based on management's assessment as at December 31, 2014, management has concluded that the Company's internal control over financial reporting is effective.
The results of management's assessment were reviewed with the Audit Committee of the Company's Board of Directors. Ernst & Young LLP, the independent registered public accounting firm that audited the Company's 2014 Consolidated Financial Statements, independently assessed the effectiveness of the Company's internal control over financial reporting. Ernst & Young LLP's attestation is located in the Independent Auditors' Report on Internal Controls Under Standards of the Public Company Accounting Oversight Board (United States), which is an exhibit to the Company's Annual Report on Form 40-F.
Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of the Company's financial statements would be prevented or detected. Further, the evaluation of the effectiveness of internal control over financial reporting was made as of a specific date, and continued effectiveness in future periods is subject to the risks that controls may become inadequate.
There have been no changes in Talisman's internal control over financial reporting during the year ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Disclosure Controls and Procedures
At the end of the period covered by this MD&A, an evaluation was carried out under the supervision of, and with the participation of, the Company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective.
Talisman's disclosure controls and procedures are designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is (a) accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure; and (b) reported within the time periods specified in the rules and forms of the SEC and the Canadian Securities Administrators.
Legal Proceedings
From time to time, Talisman is the subject of litigation arising out of the Company's operations. Damages claimed under such litigation may be material or may be indeterminate and the outcome of such litigation may materially impact the Company's financial condition or results of operations. While Talisman assesses the merits of each lawsuit and defends itself accordingly, the Company may be required to incur significant expenses or devote significant resources to defend itself against such litigation. These claims are not expected to have a material impact on the Company's financial position.
Application of Critical Accounting Policies and Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect reported assets and liabilities, disclosures of contingencies and revenues and expenses. Management is also required to adopt accounting policies that require the use of significant estimates and judgment. Actual results could differ materially from those estimates. A summary of significant accounting policies adopted by Talisman can be found in note 3 to the 2014 audited Consolidated Financial Statements. In assisting the Company's Audit Committee to fulfil its financial statement oversight role, management regularly meets with the Committee to review the Company's significant accounting policies, estimates and any significant changes thereto, including those discussed below.
Management believes the most critical accounting policies, including judgments in their application, which may have an impact on the Company's financial results, relate to the accounting for PP&E, E&E assets, impairments, income taxes, decommissioning liabilities, the recognition of assets acquired and liabilities assumed upon a business combination and goodwill. The rate at which the Company's assets are depleted, depreciated or otherwise written off and the decommissioning liabilities provided for, with the
TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014 27
associated accretion expensed to the income statement, are subject to a number of estimates about future events, many of which are beyond management's control. Reserves recognition is central to much of an oil and gas company's accounting, as described below.
Reserves Recognition
Underpinning Talisman's estimates and judgments regarding oil and gas assets and goodwill are its oil and gas reserves. Detailed rules and industry practice, to which Talisman adheres, have been developed to provide uniform reserves recognition criteria. However, the process of estimating oil and gas reserves is inherently judgmental. There are two principal sources of uncertainty: technical and commercial. Technical reserves estimates are made using available geological and reservoir data as well as production performance data. As new data becomes available, including actual reservoir performance, reserves estimates may change. Reserves can also be classified as proved or probable with decreasing levels of certainty as to the likelihood that the reserves will be ultimately produced.
Reserves recognition is also impacted by economic considerations. In order for reserves to be recognized, they must be reasonably certain of being produced under existing economic and operating conditions, which is viewed as being annual average commodity prices determined by the prices in effect on the first day of each month with a cost profile based on current operations (SEC requirements) or forecast prices and cost assumptions (NI 51-101 requirements). Any anticipated changes in conditions must have reasonable certainty of occurrence. In particular, in international operations, consideration includes the status of field development planning and gas sales contracts. As economic conditions change, primarily as a result of changes in commodity prices and, to a lesser extent, operating and capital costs, marginally profitable production, typically experienced in the later years of a field's life cycle, may be added to reserves or, conversely, may no longer qualify for reserves recognition.
The Company's reserves and revisions to those reserves, although not separately reported on the Company's balance sheet or statement of income, impact the Company's reported assets, liabilities and net income through the DD&A of the Company's PP&E, impairments and the provision for decommissioning liabilities.
The Reserves Committee of Talisman's Board of Directors reviews the Company's reserves booking process and related public disclosures and the report of the internal qualified reserves evaluator (IQRE). The primary responsibilities of the Reserves Committee include, among other things, reviewing the Company's reserves booking process and recommending to the Board of Directors the Company's annual disclosure of reserves data and other oil and gas information contained in the Company's AIF. The IQRE reports the Company's annual reserves data to the Reserves Committee and delivers a regulatory certificate regarding proved and probable reserves and their related future net revenue, disclosed pursuant to NI 51-101 requirements.
Depreciation, Depletion and Amortization Expense (DD&A)
A significant portion of the Company's PP&E is amortized based on the unit of production method with other assets being depreciated on a straight-line basis over their expected useful lives. The unit of production method attempts to amortize the asset's cost over its proved oil and gas reserves base. Accordingly, revisions to reserves or changes to management's view as to the operational lifespan of an asset will impact the Company's future DD&A expense. Depletion and depreciation rates are updated in each reporting period that a significant change in circumstances, including reserves revisions, occurs.
Exploration and Evaluation (E&E) Assets
Exploration well costs are initially capitalized and, if subsequently determined to have not found sufficient reserves to justify commercial production, are charged to dry hole expense. Exploration well costs that have found sufficient reserves to justify commercial production, but those reserves cannot be classified as proved, continue to be capitalized as long as sufficient progress is being made to assess the reserves and economic viability of the well and/or related project. All such carried costs are subject to technical, commercial and management review at each reporting date to confirm the continued intent to develop or otherwise extract value from the discovery. When this is no longer the case, the costs are written off. When proved reserves of oil and natural gas are determined and development is sanctioned, the relevant expenditure is tested for potential impairment and then transferred to PP&E. If a project no longer meets these criteria, it is tested for impairment and transferred back from PP&E to E&E assets.
Undeveloped land costs are classified initially as E&E assets and transferred to PP&E as proved reserves are assigned. E&E assets are not subject to DD&A.
Impairment of Assets
The Company tests PP&E and E&E assets for possible impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable, for example, changes in assumptions relating to future prices, future costs, reserves and contingent resources. Individual assets are grouped for impairment assessment purposes at the lowest level at which there are identifiable cash inflows that are largely independent of the cash inflows of other groups of assets, known as a cash-generating unit (CGU). If any such indication of impairment exists, an estimate of the CGU's recoverable amount is made. A CGU's recoverable amount is the higher of its fair value less costs to sell and its value in use. These assessments require the use of estimates and assumptions regarding production volumes, discount rates, long-term commodity prices, reserve quantities, operating
28 TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014
costs, royalty rates, future capital cost estimates, foreign exchange rates, income taxes and life of field. In addition, the Company will consider market data related to recent transactions for similar assets. In determining the fair value of the Company's investment in shale properties the Company considers a variety of valuation metrics from recent comparable transactions in the market. These metrics include price per flowing barrel of oil equivalent, undeveloped land values per acre held, and midstream asset valuations based on expected volumes, tariffs and earnings multiples. E&E assets are also tested for impairment when transferred to PP&E.
A previously recognized impairment loss is reversed only if there has been a change in the estimates or assumptions used to determine the CGU's recoverable amount since the impairment loss was recognized. If that is the case, the carrying amount of the CGU is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depletion, had no impairment loss been recognized for the CGU in prior periods. Such a reversal is recognized in net income, following which the depletion charge is adjusted in future periods to allocate the CGU's revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.
The Company assesses investments in associates and joint ventures for impairment whenever changes in circumstances or events indicate that the carrying value may not be recoverable. If such impairment indicators exist, the carrying amount of the investment is compared to its recoverable amount. The recoverable amount is the higher of the investment's fair value less costs to sell and its value in use. The investment is written down to its recoverable amount when its carrying amount exceeds the recoverable amount.
In estimating the possible impairment to PP&E, management estimates fair value based on market information, which consists of offers to purchase the asset or comparable assets, independent market surveys and values derived from exchange-quoted prices. Where reliable market information is not available, the recoverable amount was determined using cash flow projections that were based on a long-term view of commodity prices and a post-tax discount rate of 10%.
Goodwill Impairments
Goodwill represents the excess of the consideration transferred over the fair value of the identifiable assets acquired and liabilities assumed in a business combination. Goodwill is tested for impairment annually and when circumstances indicate that the carrying value may be impaired. The impairment test requires that goodwill be allocated to CGUs, which Talisman has determined by aggregating locations having similar economic characteristics and/or which are in similar geographic locations, and which correspond with the operating segments, except for locations within the Other segment, which are allocated to the relevant countries. Impairment is determined for goodwill by assessing the recoverable amount (based on fair value less costs to sell) of each segment to which the goodwill relates. Where the recoverable amount of the segment is less than the carrying amount, an impairment loss is recognized. Goodwill impairment losses cannot be reversed.
Goodwill was assessed for impairment as at December 31, 2014 using fair value less costs to sell. Fair value less costs to sell was estimated for each CGU, with allocated goodwill, based on the assumptions used in the asset impairment test.
Impairment of Investments
The Company assesses investments for impairment whenever changes in circumstances or events indicate that the carrying value may not be recoverable. If such impairment indicators exist, the carrying amount of the investment is compared to its recoverable amount. The recoverable amount is the higher of the investment's fair value less costs to sell and its value in use. The investment is written down to its recoverable amount when its carrying amount exceeds the recoverable amount.
During 2014, the Company recorded an impairment expense of $133 million pre-tax ($133 million after-tax) related to its investment in Equion, due principally to the lower commodity price environment.
Business Combinations
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred at acquisition date fair value. When the Company acquires a business, it assesses the assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. The Company allocates the purchase price to identifiable assets and liabilities based on their fair value. In many cases, the determination of fair value requires management to make certain assumptions and estimates regarding future events. Typically in determining fair value, management develops a number of possible future cash flow scenarios to which probabilities are judgmentally assigned. The acquired assets and liabilities may span multiple geographical segments and may be amortized at different rates, or not at all as in the case of goodwill or, initially, for acquired probable reserves.
Transaction costs include stamp duty, consulting fees (e.g. legal, accounting and valuation fees) and other integration costs and are expensed as incurred.
TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014 29
Decommissioning Liabilities
Decommissioning liabilities are measured based on the estimated cost of abandonment discounted to its net present value using a weighted average credit-adjusted risk free rate. At December 31, 2014, the net present value of the Company's decommissioning liability was $1.9 billion (2013 $1.8 billion) and is recorded as a liability on the Company's balance sheet.
At December 31, 2014, the estimated undiscounted decommissioning liabilities associated with oil and gas properties and facilities were $3.1 billion (2013 $3.2 billion). The majority of the payments to settle this provision will occur over a period of 35 years and will be funded from the general resources of the Company as they arise. The provision for the costs of decommissioning production facilities and pipelines at the end of their economic lives has been estimated using existing technology, at current prices or long-term assumptions and based upon the expected timing of the activity. The provision has been discounted using a weighted average credit-adjusted risk free rate of 3.5% (2013 3.8%), which excludes the impact of inflation.
While the provision is based on the best estimate of future costs and the economic lives of the facilities and pipelines, there is uncertainty regarding both the amount and timing of incurring these costs. As an indication of possible future changes in estimated decommissioning liabilities, if all of the Company's decommissioning obligations could be deferred by one year, the net present value of the liabilities would decrease by approximately $60 million.
Income Taxes
Current tax is based on estimated taxable income and tax rates, which are determined pursuant to the tax laws that are enacted or substantively enacted at the balance sheet date.
Deferred tax is determined using the liability method. Under the liability method, deferred tax is calculated based on the differences between assets and liabilities reported for financial accounting purposes and those reported for income tax purposes. Deferred tax assets and liabilities are measured using substantively enacted tax rates. The impact of a change in tax rate is recognized in net income in the period in which the tax rate is substantively enacted. The Company recognizes in its financial statements the best estimate of the impact of a tax position by determining if the available evidence indicates whether it is more likely than not, based solely on technical merits, that the position will be sustained on audit. The Company estimates the amount to be recorded by weighting all possible outcomes by their associated probabilities.
Deferred tax assets and liabilities are offset only when a legally enforceable right of offset exists and the deferred tax assets and liabilities arose in the same tax jurisdiction and relate to the same taxable entity. The Company assesses the available positive and negative evidence of both an objective and subjective nature to estimate if sufficient future taxable income will be generated to realize the existing deferred tax assets.
The determination of the income tax provision is an inherently complex process, requiring management to interpret continually changing regulations and to make certain judgments. Issues in dispute for audited years and audits for subsequent years are ongoing and in various stages of completion in the jurisdictions in which the Company operates around the world. As a consequence, the balance in unrecognized tax benefits can be expected to fluctuate from period to period. It is reasonably possible that such changes could be significant when compared with the Company's total unrecognized tax benefits. However, the amount of change cannot be quantified.
Foreign Exchange Accounting
Talisman's worldwide operations expose the Company to transactions denominated in a number of different currencies, which are required to be translated into one currency for financial statement reporting purposes. Talisman's foreign currency translation policy, as detailed in note 3(o) to the 2014 audited Consolidated Financial Statements, is designed to reflect the economic exposure of the Company's operations to the various currencies. The Company's functional currency is US$, a reflection of Talisman's overall exposure to US$ denominated transactions, assets and liabilities; oil prices are largely denominated in US$ as is much of the Company's corporate debt and international capital spending and operating costs.
The foreign operations are translated as follows: monetary assets and liabilities at exchange rates in effect at the balance sheet date, non-monetary assets and liabilities at rates in effect on the dates the assets were acquired or liabilities were assumed, and revenues and expenses at rates of exchange prevailing on the transaction dates. Gains and losses on translation are reflected in income when incurred.
30 TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014
Production Sharing Contract (PSC) Arrangements
A significant portion of the Company's operations outside North America and the North Sea are governed by PSCs. Under PSCs, Talisman, along with other working interest holders, typically bears all risk and costs for exploration, development and production. In return, if exploration is successful, Talisman recovers the sum of its investment and operating costs (cost oil) from a percentage of the production and sale of the associated hydrocarbons. Talisman is also entitled to receive a share of the production in excess of cost oil (profit oil). The sharing of profit oil varies between the working interest holders and the government from contract to contract. The cost oil, together with the Company's share of profit oil, represents Talisman's hydrocarbon entitlement (working interest less royalties). Talisman records gross production, sales and reserves based on its working interest ownership with sales disclosed net of royalties. In addition, certain of the Company's contractual arrangements in foreign jurisdictions stipulate that income tax payments are to be withheld from the Company and paid to the government out of the respective national oil company's entitlement share of production. The Company includes such amounts in income tax expense at the statutory tax rate in effect at the time of production.
The amount of cost oil required to recover Talisman's investment and costs in a PSC is dependent on commodity prices and, consequently, Talisman's share of profit oil is also impacted. Accordingly, the amount of royalty paid by Talisman over the term of a PSC and the corresponding net after royalty reserves booked by the Company are dependent on the amount of initial investment and past costs yet to be recovered and anticipated future costs, commodity prices and production. As a result, when year-end prices increase, the amount of net reserves after royalty the Company books may decrease and vice versa.
Risk Management
The Company enters into derivative financial instruments in order to manage risks associated with fluctuations in commodity prices, interest rates and foreign currency exchange rates. As detailed in Talisman's financial instruments accounting policy described in note 3(q) to the 2014 audited Consolidated Financial Statements, derivative instruments are recorded at fair value on the Consolidated Balance Sheets. Gains or losses on financial instruments are recognized as held-for-trading gains or losses in net income. Fair values are determined based on third party market information and are subject to a degree of uncertainty. Estimates of fair value are subject to change with fluctuations in commodity prices, interest rates, foreign currency exchange rates and estimates of non-performance risk. Cash settlement of derivative financial instruments may vary from fair value estimates, depending on the underlying market prices at the date of settlement.
Accounting Changes
a) Accounting Policies Adopted on January 1, 2014
The Company adopted the following new standards and interpretations effective as of January 1, 2014:
Offsetting Financial Assets and Financial Liabilities
Impairment of Assets
Levies
TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014 31
b) Accounting Standards and Interpretations Issued but Not Yet Effective
The following pronouncements from the IASB are applicable to Talisman and will become effective for future reporting periods, but have not yet been adopted. The Company intends to adopt these standards, if applicable, when they become effective on, or after, January 1, 2015:
Effective January 1, 2015
Effective January 1, 2016 and thereafter
Risk Factors
Talisman is exposed to a number of risks inherent in exploring for, developing and producing crude oil and natural gas. This section describes the important risks and other matters that could cause actual results of Talisman to differ materially from those reflected in forward-looking statements and that could affect the trading price of the Company's outstanding securities. The risks described below may not be the only risks Talisman faces, as Talisman's business and operations may also be subject to risks that Talisman does not yet know of, or that Talisman currently believes are immaterial. Events or circumstances described below could materially and adversely affect Talisman's business, financial condition, results of operations or cash flow and the trading price of Talisman's securities could decline. The risks described below are interconnected, and more than one of these risks could materialize simultaneously, or in short sequence, if certain events or circumstances described below actually occur. The following risk factors should be read in conjunction with the other information contained herein and in the 2014 audited Consolidated Financial Statements and the related notes.
32 TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014
Risks Relating to the Repsol Transaction
Termination of the Arrangement Agreement
Repsol has the right to terminate the Arrangement Agreement in certain circumstances. Accordingly, there is no certainty that the Arrangement Agreement will not be terminated by Repsol before the completion of the plan of arrangement. If the Arrangement Agreement is terminated, there is no guarantee that a transaction could be negotiated with an alternative party. Failure to complete the plan of arrangement could materially negatively impact the price of Talisman's Common Shares and Preferred Shares.
Conditions Precedent and Requirement for Regulatory Approvals
The completion of the Arrangement is subject to a number of conditions precedent, some of which are outside of the control of the parties to the Arrangement Agreement, including receipt of certain regulatory approvals. There can be no certainty, nor can the parties to the Arrangement Agreement provide any assurance, that these conditions will be satisfied or, if satisfied, when they will be satisfied. Moreover, a substantial delay in obtaining satisfactory approvals could result in the Arrangement not being completed. If the Arrangement is not completed for any reason, there are risks that the announcement of the Arrangement and the dedication of substantial resources of the Company to the completion thereof could have a negative impact on the Company's current business relationships (including with future and prospective employees, customers, distributors, suppliers and partners) and could have a material adverse effect on the current and future operations, financial condition and prospects of the Company. In addition, failure to complete the Arrangement for any reason could materially negatively impact the trading price of the common shares and preferred shares of the Company.
Credit, Liquidity and Access to Capital
Talisman's financial performance and cash flow is highly sensitive to the prevailing prices of crude oil, natural gas liquids and natural gas, which fluctuate in response to a variety of factors beyond the Company's control. A substantial and extended decline in the prices of crude oil, natural gas liquids or natural gas could negatively impact the Company's liquidity and/or credit ratings, adversely affect the Company's ability to comply with covenants under denominated long-term notes and credit facilities, and/or affect the Company's ability to pay dividends. See also "Risk Factors Volatility of Crude Oil, Natural Gas Liquids and Natural Gas Prices."
Future development of the Company's business may be dependent on its ability to obtain additional capital, including, but not limited to, debt and equity financing. An inability to access capital could affect the Company's ability to make future capital expenditures and to fund its capital, operating and financing commitments. The Company's ability to obtain additional capital is dependent on, among other things, interest in investments in the energy industry in general and interest in the Company's securities in particular.
The volatility of credit markets can result in market conditions that may restrict timely access and limit the Company's ability to secure and maintain cost-effective financing on acceptable terms and conditions. In addition, if any lender under Talisman's syndicated bank credit facility does not fund its commitment, the Company's liquidity may be reduced by an amount up to the aggregate amount of such lender's commitment. See also "Risk Factors Counterparty Credit Risk."
The credit rating agencies regularly evaluate the Company, and their ratings of the Company's securities are based on a number of factors not entirely within the Company's control, including conditions affecting the oil and gas industry generally, and the wider state of the economy. There can be no assurance that one or more of the Company's credit ratings will not be downgraded. A reduction in any of the Company's current investment-grade credit ratings to below investment grade could adversely affect the cost and availability of borrowing, and access to sources of liquidity and capital. In addition, the Company relies on access to letters of credit in the normal course of business in order to support some of its operations. For example, with respect to Talisman's North Sea operations, the Company relies on access to letters of credit facilities which entitle a bank to demand cash at any time to cover the full amount of any letter of credit issued with respect to UK decommissioning obligations. There can be no assurance that the Company will be able to obtain the necessary letters of credit or repay the full amount of a letter of credit upon demand. See also "Risk Factors Capital Allocation and Project Decisions."
Volatility of Oil, Natural Gas Liquids and Natural Gas Prices
Talisman's financial performance is highly sensitive to the prevailing prices of crude oil, natural gas liquids and natural gas. Fluctuations in these prices could have a material adverse effect on the Company's operations and financial condition, the value of its liquids and natural gas reserves and its level of expenditure for liquids and gas exploration and development. Prices for liquids and natural gas fluctuate in response to changes in the supply of and demand for liquids and natural gas, market uncertainty and a variety of additional factors that are largely beyond the Company's control. Oil prices are largely determined by international supply and demand. Factors which affect crude oil prices include the actions of the Organization of Petroleum Exporting Countries, world economic conditions, government regulation, political stability throughout the world, the availability of alternative fuel sources, technological advances affecting energy production and consumption, and weather conditions. About 58% of the natural gas prices realized by Talisman are affected primarily by North American supply and demand, weather conditions and prices of alternative sources of energy. The remaining 42% of natural gas prices realized by Talisman are in markets outside of North America, primarily in Southeast Asia. These other prices are largely determined by long-term contracts that are linked to international oil and/or oil
TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014 33
equivalent prices. The development of crude oil and natural gas discoveries in offshore areas and the development of shale gas plays are particularly dependent on the outlook for liquids and natural gas prices because of the large amount of capital expenditure required for development prior to commencing production.
A substantial and extended decline in the prices of liquids and/or natural gas could result in delay or cancellation of drilling, development or construction programs, and curtailment in production and/or unutilized long-term transportation commitments, all of which could have a material adverse impact on the Company. The amount of cost oil required to recover Talisman's investment and costs in various PSCs is dependent on commodity prices, with higher commodity prices resulting in the booking of lower oil and gas reserves net of royalties. Moreover, changes in commodity prices may result in the Company making downward adjustments to the Company's estimated reserves. If this occurs, or if the Company's estimates of production or economic factors change, accounting rules may require the Company to impair, as a non-cash charge to earnings, the carrying value of the Company's oil and gas properties. The Company is required to perform impairment tests on oil and gas properties whenever events or changes in circumstances indicate that the carrying value of properties may not be recoverable. To the extent such tests indicate a reduction of the estimated useful life or estimated future cash flows of the Company's oil and gas properties, the carrying value may not be recoverable and, therefore, an impairment charge will be required to reduce the carrying value of the properties to their estimated fair value. The Company may incur impairment charges in the future, which could materially affect the Company's results of operations in the period incurred.
Capital Allocation and Project Decisions
Talisman's long-term financial performance is sensitive to the capital allocation decisions taken and the underlying performance of the projects undertaken. Capital allocation and project decisions are undertaken after assessing reserve and production projections, capital and operating cost estimates, and applicable fiscal regimes that govern the respective government take from any project. All of these factors are evaluated against common commodity pricing assumptions and the relative risks of projects. These factors are used to establish a relative ranking of projects and capital allocation, which is then calibrated to ensure the debt and liquidity of the Company is not compromised. However material changes to project outcomes and deviation from forecasted assumptions such as production volumes and rates, realized commodity price, costs, taxes and/or royalties, could have a material impact on the Company's cash flow and financial performance as well as assessed impacts of impairments on Talisman's assets. Adverse economic and/or fiscal conditions could impact the prioritization of projects and capital allocation to these projects, which in turn could lead to adverse effects such as asset under investment, asset performance impairments or land access expiries.
Uncertainties around some of Talisman's projects could result in changes to the Company's capital allocation or its spending target being exceeded. The Company cannot be certain that funding, if needed, will be available to the extent required or on acceptable terms. To the extent that asset sales are necessary to fund capital requirements, Talisman's ability to sell assets is subject to market interest. If Talisman is unable to access funding when needed on acceptable terms, the Company may not be able to fully implement its business plans, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on Talisman's business, financial condition, cash flows, and results of operations. See also "Risk Factors Credit, Liquidity, and Access to Capital" and "Risk Factors Interest Rates."
Project Delivery
Talisman manages a variety of projects, including exploration and development projects and the construction or expansion of facilities and pipelines. Project delays may impact expected revenues and project cost overruns could make projects uneconomic. Talisman's ability to complete projects depends upon numerous factors, many of which are beyond the Company's control. These factors include the level of direct control by Talisman since many of the projects in which Talisman is involved are not operated by Talisman, and timing and project management control are the responsibility of the operator. See also "Risk Factors Non-Operatorship and Partner Relations." The global demand for project resources can impact the access to appropriately competent contractors and construction yards as well as to raw products, such as steel. Typical execution risks include the availability of seismic data, the availability of processing capacity, the availability and proximity of pipeline capacity, the availability of drilling and other equipment, the ability to access lands, weather, unexpected cost increases, accidents, the availability of skilled labour, including engineering and project planning personnel, the need for government approvals and permits, and regulatory matters. Subsurface challenges can also result in additional risk of cost overruns and scheduling delays if conditions are not typical of historical experiences. Talisman utilizes materials and services which are subject to general industry-wide conditions. Cost escalation for materials and services may be unrelated to commodity price changes and may continue to have a significant impact on project planning and economics. Talisman operates in challenging, environmentally hostile climates, such as Papua New Guinea, where logistical costs can be materially impacted by seasonal and occasionally unanticipated weather patterns. Contracts where work has been placed under a lump sum arrangement are subject to additional challenges related to scheduling, reputation and relationship management with the Company's coventurers.
Ability to Find, Develop or Acquire Additional Reserves
The Company's future success depends largely on its ability to find and develop, or acquire, additional oil and gas reserves that are economically recoverable. Hydrocarbons are a limited resource, and Talisman is subject to increasing competition from other
34 TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014
companies, including national oil companies. Exploration and development drilling may not result in commercially productive reserves and, if production begins, reservoir performance may be less than projected. Successful acquisitions require an assessment of a number of factors, many of which are uncertain. These factors include recoverable reserves, development potential, future oil and gas prices, operating costs and potential environmental and other liabilities. Such assessments are inexact and their accuracy is inherently uncertain. If a high impact prospect identified by the Company fails to materialize in a given year, the Company's multi-year exploration and/or development portfolio may be compromised. See also "Risk Factors Volatility of Crude Oil, Natural Gas Liquids and Natural Gas Prices". The recent decline in commodity prices, if sustained, may result in promising exploration and development projects being deemed uneconomic. Continued failure to achieve anticipated reserve and resource addition targets may result in the Company's withdrawal from an area, which in turn may result in a writedown of any associated reserves and/or resources for that area.
Hedging Activities
Talisman uses derivative instruments to hedge a portion of the Company's expected production so as to manage the impact of fluctuations in crude oil and natural gas prices on the Company's results of operations and cash flow. Fluctuations in crude oil and gas prices could have a material effect on the volatility of the Company's earnings. To the extent that Talisman engages in hedging activities to protect itself against commodity price declines, Talisman may be prevented from fully realizing the benefits of increases in crude oil and natural gas prices above the prices established by the Company's hedging contracts. See also "Risk Factors Volatility of Crude Oil, Natural Gas Liquids and Natural Gas Prices." When considered appropriate, the Company may also use currency swaps to manage fluctuations in exchange rates and interest rate swaps to manage Talisman's exposure to interest rate changes through the Company's borrowings. See also "Risk Factors Exchange Rate Fluctuations" and "Risk Factors Interest Rates."
In addition, Talisman's hedging portfolio may expose it to financial losses in certain circumstances, such as the recognition of certain mark-to-market gains and losses on derivative instruments. The fair value of the Company's natural gas and crude oil, exchange rate or interest rate derivative instruments can fluctuate significantly between periods.
Uncertainty of Reserves Estimates
The process of estimating oil and gas reserves is complex and involves a significant number of assumptions in evaluating available geological, geophysical, engineering and economic data. In addition, the process requires future projections of reservoir performance and economic conditions; therefore, reserves estimates are inherently uncertain. Since all reserves estimates are, to some degree, uncertain, reserves classification attempts to qualify the degree of uncertainty involved.
Since the evaluation of reserves involves the evaluator's interpretation of available data and projections of price and other economic factors, estimates of the economically recoverable oil and natural gas reserves attributable to any particular group of properties, the classification of such reserves based on estimated uncertainty, and the estimates of future net revenue or future net cash flows prepared by different evaluators or by the same evaluators at different times may vary substantially.
Each year, Talisman prepares evaluations of all of its reserves internally. Initial estimates of reserves are often based upon volumetric calculations and analogy to similar types of reservoirs, rather than actual well data and performance history. Estimates based on these methods generally are less certain than those based on actual performance. The Company may adjust its estimates and classification of reserves and future net revenues or cash flows based on results of exploration and development drilling and testing, additional performance history, prevailing oil and gas prices, and other factors, many of which are beyond the Company's control. As new information becomes available, subsequent evaluations of the same reserves may continue to have variations in the estimated reserves, some of which may be material. In addition, Talisman's actual production, taxes, and development and operating expenditures with respect to its reserves will likely vary from such estimates and such variances could be material.
Operational Risks
Major Incident, Major Spill / Loss of Well Control
Oil and gas drilling and producing operations are subject to many risks, including the risk of fire, explosions, mechanical failure, pipe or well cement failure, well casing collapse, pressure or irregularities in formations, chemical and other spills, unauthorized access to hydrocarbons, accidental flows of oil, natural gas or well fluids, sour gas releases, contamination, vessel collision, structural failure, loss of buoyancy, storms or other adverse weather conditions and other occurrences. If any of these should occur, Talisman could incur legal defence costs and remedial costs and could suffer substantial losses due to injury or loss of life, human health risks, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, unplanned production outage, cleanup responsibilities, regulatory investigation and penalties, increased public interest in Talisman's operational performance and suspension of operations. The Company's horizontal and deep drilling activities involve greater risk of mechanical problems than vertical and shallow drilling operations.
Talisman maintains insurance that contemplates both first and third party exposures for Talisman's onshore and offshore operations globally. There is no assurance that this insurance will be adequate to cover all losses or exposures to liability. The Company believes
TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014 35
that its coverage is aligned with customary industry practices and in amounts and at costs that Talisman believes to be prudent and commercially practicable. While Talisman believes these policies are customary in the industry, they do not provide complete coverage against all operating risks. In addition, the Company's insurance does not cover penalties or fines that may be assessed by a governmental authority. A loss not fully covered by insurance could have a material adverse effect on the Company's financial position, results of operations and cash flows. The insurance coverage that the Company maintains may not be sufficient to cover every claim made against Talisman in the future. In addition, a major incident could impact Talisman's reputation in such a way that it could have a material adverse effect on the Company's business.
Talisman operates and drills wells in both mature producing areas such as the UK, Norway and North America and in several remote areas in multiple countries. In 2014, Talisman carried out drilling operations in the Kurdistan Region of Iraq, Papua New Guinea and Colombia. The Company may seek new leases and/or drill in similar environments in the future.
Health Hazards and Personal Safety Incidents
The employee and contractor personnel involved in exploration and production activities and operations of the Company are subject to many inherent health and safety risks and hazards, which could result in occupational illness or health issues, personal injury, and loss of life, facility quarantine and/or facility and personnel evacuation. For example, employees and contractors are subject to the possibility of loss of containment. This could lead to exposure to the release of high pressure materials as well as collateral shrapnel from piping or vessels which could result in personal injury and loss of life.
Security Incident
Talisman's operations may be adversely affected by security-related incidents which are not within the control of the Company, such as war (external and internal conflicts) and remnants of war, sectarian violence, civil unrest, criminal acts, terrorism and abductions in locations where Talisman operates. Security-related incidents may include allegations of human rights abuse associated with the provision of security to Talisman operations. In particular, the Company faces increased security risks in the Kurdistan Region of Iraq, Colombia, Peru, Papua New Guinea and Algeria within Talisman's current portfolio. A significant security incident could result in the deferral of or termination of Company activity within the impacted areas of operations, thus adversely impacting execution of the Company's business strategy (e.g., delaying exploration and development, causing a halt to production or forcing exit strategy processes), which could adversely affect Talisman's financial condition.
Regulatory Approvals/Compliance and Changes to Laws and Regulations
Talisman's exploration and production operations are subject to extensive regulation at many levels of government, including municipal, state, provincial and federal governments, in the countries where Talisman operates and are subject to interruption or termination by governmental and regulatory authorities based on environmental or other considerations. Moreover, Talisman has incurred and will continue to incur costs in the Company's efforts to comply with the requirements of environmental, safety and other regulations. Further, the regulatory environment in the oil and gas industry could change in ways that Talisman cannot predict and that might substantially increase the Company's costs of compliance and, in turn, materially and adversely affect the Company's business, results of operations and financial condition.
Failure to comply with the applicable laws or regulations may result in significant increases in costs, fines or penalties and even shutdowns or losses of operating licences or criminal sanctions. If regulatory approvals or permits required for operations are delayed or not obtained, Talisman could experience delays or abandonment of projects, decreases in production and increases in costs. This could result in an inability of the Company to fully execute its strategy and adversely impact its financial condition. See also "Risk Factors Fiscal Stability" and "Risk Factors Socio-Political Risks."
Changes to existing laws and regulations or new laws could have an adverse effect on Talisman's business by increasing costs, impacting development schedules, reducing revenue and cash flow from natural gas and oil sales, reducing liquidity or otherwise altering the way Talisman conducts business. There have been various proposals to enact new, or amend existing, laws and regulations relating to greenhouse gas ("GHG") emissions, hydraulic fracturing (including associated additives, water use, induced seismicity, and disposal) and shale gas development generally. For example, in Colombia, the high level of oil and gas activity in the country has resulted in significant delays in the granting of the required environmental licences. These delays may result in reduced near-term production. See also "Risk Factors Environmental Risks."
Talisman continues to monitor and assess any new policies, legislation, regulations and treaties in the areas where the Company operates to determine the impact on Talisman's operations. Governmental organizations unilaterally control the timing, scope and effect of any currently proposed or future laws, regulations or treaties, and such enactments are subject to a myriad of factors, including political, monetary and social pressures. Talisman acknowledges that the direct and indirect costs of such laws, regulations and treaties (if enacted) could materially and adversely affect the Company's business, results of operations and financial condition.
36 TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014
Fiscal Stability
Governments may amend or create new legislation that could impact the Company's operations and that could result in increased capital, operating and compliance costs. Moreover, Talisman's operations are subject to various levels of taxation in the countries where the Company operates. Federal, provincial, and state income tax rates or incentive programs relating to the oil and gas industry in the jurisdictions where the Company operates may in the future be changed or interpreted in a manner that could materially affect the economic value of the respective assets. For example, the US Congress has been considering a revision of the immediate deduction currently available for drilling costs.
Stakeholder Opposition
Talisman's planned activities may be adversely affected if there is strong community opposition to its operations. For example, local community concerns in parts of Colombia, the Kurdistan Region of Iraq and Papua New Guinea could potentially result in development and production delays in those operations. There is also heightened public concern regarding hydraulic fracturing in parts of North America, such as New York, which could materially affect the Company's shale operations. In some circumstances, this risk of community opposition may be higher in areas where Talisman operates alongside indigenous communities who may have additional concerns regarding land ownership, usage or claim compensation.
Socio-Political Risks
The Company's operations may be adversely affected by political or economic developments or social instability in the jurisdictions in which it operates, which are not within the control of Talisman, including, among other things, a change in crude oil, natural gas liquids or natural gas pricing policy and/or related regulatory delays, the risks of war, terrorism, abduction, expropriation, nationalization, renegotiation or nullification of existing concessions and contracts, a change in taxation policies, economic sanctions, the imposition of specific drilling obligations, the imposition of rules relating to development and abandonment of fields, access to or development of infrastructure, jurisdictional boundary disputes, and currency controls. As a result of continuing evolution of an international framework for corporate responsibility and accountability for international crimes, the Company could also be exposed to potential claims for alleged breaches of international law, health, safety and environmental regulations, and other human rights-based litigation risk. Numerous countries in which the Company is active, including, but not limited to, the Kurdistan Region of Iraq, Colombia, Vietnam, Algeria and Indonesia, have been subject to recent economic or political instability, disputes and social unrest, and military or rebel hostilities. The potential deterioration of socio-political security situations (i.e. political instability and/or disputes) poses increased risk, which may result in the cessation of operations as well as the delay in payment or exports; for example, in the Kurdistan Region of Iraq with respect to the negotiation of Iraq Federal Oil and Gas Law, and in Vietnam and Malaysia with respect to China's claim over disputed waters in the East Sea. In addition, Talisman regularly evaluates opportunities worldwide, and may in the future engage in projects or acquire properties in other nations that are experiencing economic or political instability, social unrest, military hostilities or United Nations, US or other international sanctions. Some of the foregoing government actions may lead to political or reputational pressures on the Company from non-governmental organizations, home governments and investors.
Non-Operatorship and Partner Relations
Some of Talisman's projects are conducted in joint arrangement environments where Talisman has a limited ability to influence or control operations or future development, safety and environmental standards, and amount of capital expenditures. Companies which operate these properties may not necessarily share Talisman's health, safety and environmental standards or strategic or operational goals or approach to partner relationships, which may result in accidents, regulatory noncompliance, project delays or unexpected future costs, all of which may affect the viability of these projects and Talisman's standing in the external market.
Talisman is also dependent on other working interest co-participants of these projects to fund their contractual share of the capital expenditures. If these co-participants are unable to fund their contractual share of, or do not approve, the capital expenditures, the co-participants may seek to defer programs, resulting in strategic misalignments and a delay of a portion of development of Talisman's programs, or the co-participants may default such that projects may be delayed and/or Talisman may be partially or totally liable for their share.
Some of Talisman's projects involve transition of operatorship as part of a joint arrangement, which requires a significant amount of effort and coordination. Successful handover of the operations to the partners is dependent on Talisman's ability to maintain equal governance and active involvement in the operations.
Litigation
From time to time, Talisman is the subject of litigation arising out of the Company's operations. Specific disclosure of current legal proceedings, and the risks associated with current proceedings and litigation generally, are disclosed under the heading "Legal Proceedings" in this MD&A.
TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014 37
Results of operations are affected primarily by the exchange rates between the US$, the C$, UK£ and NOK. These exchange rates may vary substantially. Most of the Company's revenue is received in, or is referenced to, US$ denominated prices (including the Company's Consolidated Financial Statements, which are presented in US$), while the majority of Talisman's expenditures are denominated in US$, C$, UK£ and NOK. A change in the relative value of the US$ against the C$ or the UK£ would also result in an increase or decrease in Talisman's C$ or UK£ denominated debt, as expressed in US$, and the related interest expense. Talisman is also exposed to fluctuations in other foreign currencies.
Environmental Risks
General
All phases of Talisman's oil and natural gas business are subject to environmental regulation pursuant to a variety of laws and regulations in the countries where Talisman does business. These laws and regulations may require the acquisition of a permit before operations commence, restrict the types, quantities and concentration of substances that can be released into the environment in connection with the Company's drilling and production activities, limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas, and impose substantial liabilities for pollution that may result from the Company's operations. Talisman's business is subject to the trend toward increased rigour in regulatory compliance and civil or criminal liability for environmental matters in certain regions (e.g., Canada, the United States and the European Union). Compliance with environmental legislation can require significant expenditures, and failure to comply with environmental legislation may result in the assessment of administrative, civil and criminal penalties, the cancellation or suspension of regulatory permits, the imposition of investigatory or remedial obligations or the issuance of injunctions restricting or prohibiting certain activities. Under existing environmental laws and regulations, Talisman could be held strictly liable for the remediation of previously released materials or property contamination resulting from its operations, regardless of whether those operations were in compliance with all applicable laws at the time they were performed. Regulatory delays, legal proceedings and reputational impacts from an environmental incident could result in a material adverse effect on the Company's business. Increased stakeholder concerns and regulatory actions regarding shale gas development could lead to third party or governmental claims, and could adversely affect the Company's business and financial condition. Although Talisman currently believes that the costs of complying with environmental legislation and dealing with environmental civil liabilities will not have a material adverse effect on the Company's financial condition or results of operations, there can be no assurance that such costs will not have such an effect in the future.
Hydraulic Fracturing
Public concern has been expressed over the potential impact of hydraulic fracturing operations, including water aquifer contamination: other qualitative and quantitative effects on water resources as large quantities of water are used and injected fluids either remain underground or flow back to the surface to be collected, treated and disposed; and the potential for fracturing activities to induce seismic events. Regulatory authorities in certain jurisdictions have announced initiatives in response to such concerns. Federal, provincial, state, and local legislative and regulatory initiatives relating to hydraulic fracturing, as well as governmental reviews of such activities, could result in increased costs, additional operating restrictions or delays, and adversely affect Talisman's production. Public perception of environmental risks associated with hydraulic fracturing can further increase pressure to adopt new laws, regulation or permitting requirements, or lead to regulatory delays, legal proceedings and/or reputational impacts. Any new laws, regulations or permitting requirements regarding hydraulic fracturing could lead to operational delay, increased operating costs, and third party or governmental claims. They could also increase the Company's costs of compliance and doing business as well as delay the development of hydrocarbon (natural gas and oil) resources from shale formations, which may not be commercial without the use of hydraulic fracturing.
Due to the adoption of legal restrictions in New York, or if legal restrictions are adopted in other areas where Talisman is currently conducting or in the future plans to conduct operations, Talisman may incur additional costs to comply with such requirements that may be significant in nature, experience delays or curtailment in the pursuit of exploration, development, or production activities, and perhaps even be precluded from the drilling of wells. In addition, if hydraulic fracturing becomes more regulated, the Company's fracturing activities could become subject to additional permitting requirements and result in permitting delays as well as potential increases in costs. Restrictions on hydraulic fracturing could also reduce the amount of oil and natural gas that the Company is ultimately able to produce from its reserves.
Greenhouse Gas Emissions
Talisman is subject to various GHG emissions-related legislation. Current GHG emissions legislation does not result in material compliance costs, but compliance costs may increase in the future and may impact the Company's operations and financial results. Talisman operates in jurisdictions with existing GHG legislation (e.g., UK, Norway, United States and Canada, notably Alberta and British Columbia) as well as in regions which currently do not have GHG emissions legislation and jurisdictions where GHG emissions legislation is emerging or is subject to change. Talisman monitors GHG legislative developments in all areas that the Company operates. Potential new or additional GHG legislation, and associated compliance costs, may have a material impact on the Company.
38 TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014
Environmental and Decommissioning Liabilities
Talisman is involved in the operation and maintenance of facilities and infrastructure in difficult and challenging areas, including offshore, deepwater, jungle and desert environments. Despite Talisman's implementation of health, safety and environmental standards, there is a risk that accidents or regulatory noncompliance can occur, the outcomes of which, including remedial work or regulatory intervention, cannot be foreseen or planned for. Talisman expects to incur site restoration costs over a prolonged period as existing fields are depleted. The Company provides for decommissioning liabilities in its annual Consolidated Financial Statements in accordance with IFRS. Additional information regarding decommissioning liabilities is set forth in the notes to the annual Consolidated Financial Statements. The process of estimating decommissioning liabilities is complex and involves significant uncertainties concerning the timing of the decommissioning activity; legislative changes; technological advancement; regulatory, environmental and political changes; and the appropriate discount rate used in estimating the liability. Any change to these assumptions could result in a change to the decommissioning liabilities to which Talisman is subject. In Talisman's North Sea operations, changes in these assumptions would potentially have a significant impact on the Company's decommissioning liabilities because of the assessed size of these future costs. Any changes to decommissioning estimates influence the value of letters of credit to be provided pursuant to the decommissioning security agreements. There can be no assurances that the cost estimates and decommissioning liabilities are materially correct and that the liabilities will occur when predicted. In addition, Talisman is often jointly and severally liable for the decommissioning costs associated with Talisman's various operations and could, therefore, be required to pay more than its net share.
Attraction, Retention and Development of Personnel
Successful execution of the Company's plans is dependent on Talisman's ability to attract and retain talented personnel who have the skills necessary to deliver on the Company's strategy and maintain safe operations. This includes not only key talent at a senior level, but also individuals with the professional and technical skill sets critical for Talisman's business, particularly geologists, geophysicists, engineers, accountants and other specialists. As labour demand remains high and a greater percentage of the population reaches retirement age, retention concerns are also heightened. In North America, Talisman competes for talent in two very competitive markets Calgary and Houston. If the Company is unable to attract and retain highly qualified petrotechnical people in these markets, its ability to deliver may be significantly compromised. In addition, in the North Sea, high project activity has compounded competition for labour, posing an increased retention risk. In Asia, energy demand driven by economic growth has resulted in higher levels of activity in the sector and created strong competition for skilled technical staff. National oil companies and joint arrangement activities may also impose requirements to develop their national talent, increase secondee assignments, and employ local nationals.
Information Systems
Many of Talisman's business processes depend on the availability, capacity, reliability and security of the Company's information technology ("IT") infrastructure and Talisman's ability to expand and continually update this infrastructure in response to the Company's changing needs. The Company's IT systems are increasingly integrated in terms of geography, number of systems, and key resources supporting the delivery of IT systems. The performance of Talisman's key suppliers is critical to ensure appropriate delivery of key services. Any failure to manage, expand and update the Company's IT infrastructure, any failure in the extension or operation of this infrastructure, or any failure by the Company's key resources or service providers in the performance of their services could materially and adversely harm Talisman's business.
The ability of the IT function to support Talisman's business in the event of a disaster such as fire, flood or loss/denial of any of the Company's DataCentres or major office locations and Talisman's ability to recover key systems from unexpected interruptions cannot be fully tested and there is a risk that, if such an event actually occurs, the business continuity plan may not be adequate to immediately address all repercussions of the disaster. In the event of a disaster affecting a DataCentre or key office location, key systems may be unavailable for a number of days, leading to inability to perform some business processes in a timely manner.
In addition, the increasing risk of information security breaches, including more sophisticated attempts often referred to as advanced persistent threats, requires Talisman to continually improve its ability to detect and prevent such occurrences. Disruption of critical IT services, or breaches of information security, could have a negative effect on Talisman's operational performance and earnings, as well as on the Company's reputation.
Egress and Gas & Liquids Buyers
As increasing volumes of natural gas and liquids are brought onstream by Talisman and others, transportation and processing infrastructure capacity may, at times, be exceeded before capacity additions become available. In such an event, there is a risk that the transportation and/or processing of some of the Company's production may be restricted or delayed until pipeline connection or infrastructure additions are complete. For example, Colombia's oil export infrastructure generally continues to operate close to or at capacity, pending capacity additions which are at various stages of commissioning, approval and/or construction. Talisman and Equion currently have access to sufficient capacity in the key Ocensa pipeline, allowing access to the Coveñas terminal and international markets. In addition, Equion has access to Oleoducto de Colombia, a parallel line from Vasconia to Coveñas. As Talisman's production in Colombia grows, the Company may not be able to secure sufficient upstream pipeline access into the
TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014 39
Ocensa pipeline as soon as it is required. If Talisman is unable to negotiate access to additional upstream pipeline capacity or to employ trucking as an alternative, Talisman's production may be restricted or delayed and/or netbacks may be reduced on a portion of Talisman's production. In the Eagle Ford play, Talisman has acquired sufficient access to infrastructure for both liquids and gas for the near and medium term. Ensuring that Talisman holds sufficient transportation capacity to take gas supplies from the Marcellus area, which has seen a significant growth in production, to areas with liquid markets is critical to ensuring the ability to flow production on an unrestricted basis as well as to maximize the value for Talisman's production. Another associated risk will be the availability and diversity of contract and credit-enabled buyers. Should Talisman be unable to secure access to infrastructure and qualified buyers for its production, the Company could face reduced production and/or materially lower prices on some portion of production, which in turn could adversely affect the Company's operating results.
Interest Rates
The Company is exposed to interest rate risk principally by virtue of its borrowings. Borrowing at floating rates exposes Talisman to short-term movements in interest rates. Borrowing at fixed rates exposes Talisman to reset risk associated with debt maturity. Most of the Company's debt is issued at fixed interest rates; therefore, the Company's main exposure to changes in interest rates would occur in respect of short-term investments or borrowings in the event that substantial cash balances are invested in or owed to the Company.
Counterparty Credit Risk
In the normal course of business, Talisman enters into contractual relationships with counterparties in the energy industry and other industries, including suppliers and coventurers and counterparties to commodity sale/purchase agreements, interest rate hedging, foreign exchange hedging and commodity derivative arrangements. If such counterparties do not fulfil their contractual obligations or settle their liabilities to the Company, the Company may suffer losses, may have to proceed on a sole risk basis, may have to forgo opportunities or may have to relinquish leases or blocks. The Company also has credit risk arising from cash and cash equivalents held with banks and financial institutions. While the Company maintains a risk management system that limits exposures to any one counterparty, losses due to the failure by counterparties to fulfil their contractual obligations may adversely affect Talisman's financial condition.
Competitive Risk
The global oil and gas industry is highly competitive. Talisman faces significant competition and many of the Company's competitors have resources in excess of Talisman's available resources. The Company actively competes for the acquisition of properties, the exploration for and development of new sources of supply, the contractual services for oil and gas drilling and production equipment and services, the transportation and marketing of current production, and industry personnel, including, but not limited to, geologists, geophysicists, engineers and other specialists that enable the business. Many of Talisman's competitors have the ability to pay more for seismic and lease rights in crude oil and natural gas properties and exploratory prospects. They can define, evaluate, bid for and purchase a greater number of properties and prospects than Talisman's financial or human resources permit. If the Company is not successful in the competition for oil and gas reserves or in the marketing of production, Talisman's financial condition and results of operations may be adversely affected. Many of the Company's competitors have resources substantially greater than Talisman's and have established positions in countries in which Talisman may seek new entry and, as a consequence, the Company may be at a competitive disadvantage. Typically during times of high commodity prices or increased industry activity, drilling and operating costs will also increase. These competitive forces may also lead to an overall increase in costs, which could have a negative impact on the Company's financial results.
Corruption & Fraud
Talisman's operations are governed by the laws of many jurisdictions, which generally prohibit bribery and other forms of corruption. Talisman requires all employees to participate in ethics awareness training, which includes Talisman's policies against giving or accepting money or gifts in certain circumstances. Despite the training and policies, it is possible that Talisman, or some of its employees or contractors, could be charged with bribery or corruption. If Talisman is found guilty of such a violation, which could include a failure to take effective steps to prevent or address corruption by its employees or contractors, Talisman could be subject to onerous penalties. A mere investigation itself could lead to significant corporate disruption, high legal costs and forced settlements (such as the imposition of an internal monitor). In addition, bribery allegations or bribery or corruption convictions could impair Talisman's ability to work with governments or non-governmental organizations. Such convictions or allegations could result in the formal exclusion of Talisman from a country or area, national or international lawsuits, government sanctions or fines, project suspension or delays, reduced market capitalization, reputational impacts and increased investor concern.
Advisories
Forward-Looking Statements
This MD&A contains information that constitutes "forward-looking information" or "forward-looking statements" (collectively "forward-looking information") within the meaning of applicable securities legislation. Forward-looking information is included throughout this
40 TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014
MD&A, including under the heading "Risk Factors". This forward-looking information includes, but is not limited to, statements regarding:
The Company's priorities and goals disclosed in this MD&A are objectives only and their achievement cannot be guaranteed.
Statements concerning oil and gas reserves contained in this MD&A may be deemed to be forward-looking information as they involve the implied assessment that the resources described can be profitably produced in the future.
The factors or assumptions on which the forward-looking information is based include: assumptions inherent in current guidance; projected capital investment levels; the flexibility of capital spending plans and the associated sources of funding; the successful and timely implementation of capital projects; the continuation of tax, royalty and regulatory regimes; ability to obtain regulatory and partner approval; commodity price and cost assumptions; and other risks and uncertainties described in the filings made by the Company with securities regulatory authorities. The Company believes the material factors, expectations and assumptions reflected in the forward-looking information are reasonable but no assurance can be given that these factors, expectations and assumptions will prove to be correct. Forward-looking information for periods past 2015 assumes escalating commodity prices. Closing of the Repsol transaction is subject to receipt of certain regulatory approvals and contractual conditions.
Undue reliance should not be placed on forward-looking information. Forward-looking information is based on current expectations, estimates and projections that involve a number of risks which could cause actual results to vary, and, in some instances to differ materially from those anticipated by Talisman and described in the forward-looking information contained in this MD&A. The material risk factors include, but are not limited to:
TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014 41
The foregoing list of risk factors is not exhaustive. Additional information on these and other factors which could affect the Company's operations or financial results or strategy are included in the Company's most recent AIF. In addition, information is available in the Company's other reports on file with Canadian securities regulatory authorities and the SEC.
Forward-looking information is based on the estimates and opinions of the Company's management at the time the information is presented. The Company assumes no obligation to update forward-looking information should circumstances or management's estimates or opinions change, except as required by law.
As used in the context of Talisman's Colombian assets, long-term testing indicates continuous well production going to market at the most recent weekly average. A permit for long-term testing is required for a well to produce oil until the permit for full field development has been granted.
Reserves Data and Other Oil and Gas Information
An exemption granted to Talisman permits it to disclose internally evaluated reserves data. Any reserves data contained in this MD&A reflects Talisman's internally-generated estimates of its reserves.
Non-Core Assets/Properties
In this MD&A, all references to "core" or "non-core" assets and properties align with the Company's current public disclosures regarding its assets and properties.
Gross Production
Throughout this MD&A, Talisman makes reference to production volumes. Such production volumes are stated on a gross basis, which means they are stated prior to the deduction of royalties and similar payments. In the US, net production volumes are reported after the deduction of these amounts. US readers may refer to the table headed "Net Production After Royalties" in Talisman's most recent 40-F for a statement of Talisman's net production volumes by reporting segment that are comparable to those made by US companies subject to SEC reporting and disclosure requirements.
Netbacks
Talisman discloses its Company netbacks in this MD&A. Netbacks per boe are calculated by deducting from sales price associated royalties, operating and transportation costs.
42 TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014
Abbreviations and Definitions
The following abbreviations and definitions are used in this MD&A:
AIF | Annual Information Form | |
bbl | barrel | |
bbls | barrels | |
bbls/d | barrels per day | |
bcf | billion cubic feet | |
boe | barrels of oil equivalent | |
boe/d | barrels of oil equivalent per day | |
CGU | Cash generating unit | |
C$ | Canadian dollar | |
DD&A | Depreciation, depletion and amortization | |
DSA | Decommissioning Security Agreements | |
DSU | Deferred share unit | |
E&E | Exploration and evaluation | |
EU | European Union | |
G&A | General and administrative | |
GAAP | Generally Accepted Accounting Principles | |
GHG | Greenhouse gas emissions | |
gj | gigajoule | |
HHLD | Henry Hub Last Day | |
IFRIC | International Financial Reporting Interpretations Committee | |
IFRS | International Financial Reporting Standards | |
IQRE | International Qualified Reserves Evaluator | |
LIBOR | London Interbank Offered Rate | |
LLS | Light Louisiana | |
LNG | Liquefied Natural Gas | |
mbbls/d | thousand barrels per day | |
mboe/d | thousand barrels of oil equivalent per day | |
mcf | thousand cubic feet | |
mcf/d | thousand cubic feet per day | |
mmbbls | million barrels | |
mmboe | million barrels of oil equivalent | |
mmbtu | million British thermal units | |
mmcf/d | million cubic feet per day | |
mmcfe/d | million cubic feet equivalent per day | |
MWh | megawatt hour | |
NGL | Natural Gas Liquids | |
NI | National Instrument | |
NOK | Norwegian kroner | |
NYMEX | New York Mercantile Exchange | |
PGN | PT Perusahaan Gas Negara (Persero), Tbk | |
PP&E | Property, plant and equipment | |
PRT | Petroleum Revenue Tax | |
PSC | Production Sharing Contract | |
PSU | Performance share unit | |
RSU | Restricted share unit | |
SEC | US Securities and Exchange Commission | |
tcf | trillion cubic feet | |
UK | United Kingdom | |
UK£ | Pound sterling | |
US | United States of America | |
US$ or $ | United States dollar | |
WCS | Western Canadian Select | |
WTI | West Texas Intermediate |
Gross acres means the total number of acres in which Talisman has a working interest. Net acres means the sum of the fractional working interests owned in gross acres expressed as whole numbers and fractions thereof.
TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014 43
Gross production means Talisman's interest in production volumes (through working interests and royalty interests) before the deduction of royalties. Net production means Talisman's interest in production volumes after deduction of royalties payable by Talisman.
Gross wells means the total number of wells in which the Company has a working interest. Net wells means the sum of the fractional working interests owned in gross wells expressed as whole numbers and fractions thereof.
Conversion and equivalency factors
Imperial | Metric | |
1 ton | = 0.907 tonnes | |
1 acre | = 0.40 hectares | |
1 barrel | = 0.159 cubic metres | |
1 cubic foot | = 0.0282 cubic metres |
44 TALISMAN ENERGY MANAGEMENT'S DISCUSSION AND ANALYSIS 2014
TALISMAN ENERGY INC.
Suite 2000, 888 3rd Street SW
Calgary, Alberta, Canada T2P 5C5
P 403.237.1234 F 403.237.1902
E tlm@talisman-energy.com
www.talisman-energy.com
2014 |
||
CONSOLIDATED FINANCIAL STATEMENTS |
||
For the year ended December 31, 2014 |
Management is responsible for the Consolidated Financial Statements.
Management has prepared the Consolidated Financial Statements in accordance with International Financial Reporting Standards. If alternative accounting methods exist, management has chosen those it deems most appropriate in the circumstances. Financial statements are not precise since they include certain amounts based on estimates and judgments. Management has ensured that the Consolidated Financial Statements are presented fairly in all material respects.
The Board of Directors is responsible for reviewing and approving the Consolidated Financial Statements and Management's Discussion and Analysis and, primarily through its Audit Committee, ensures that management fulfils its responsibilities for financial reporting.
The Audit Committee is appointed by the Board of Directors and is composed entirely of unrelated, independent directors. The Audit Committee meets regularly with management, and with the internal and external auditors, to discuss internal controls and reporting issues and to satisfy itself that each party is properly discharging its responsibilities. It reviews the Consolidated Financial Statements and the external auditors' report. The Audit Committee also considers, for review by the Board of Directors and approval by the shareholders, the engagement or reappointment of the external auditors.
Ernst & Young LLP, the external auditors, have audited the Consolidated Financial Statements in accordance with auditing standards generally accepted in Canada and the standards of the Public Company Accounting Oversight Board (United States) on behalf of the shareholders. Ernst & Young LLP have full and free access to the Audit Committee.
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in rules 13a-15(f) and 15d-15(f) under the United States Securities Exchange Act of 1934, as amended.
Management has conducted an evaluation of the Company's internal control over financial reporting based on the criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (2013 Framework).
Based on management's assessment as at December 31, 2014, the end of the Company's fiscal year, management has concluded that the Company's internal control over financial reporting is effective.
The results of management's assessment were reviewed with the Audit Committee of the Company's Board of Directors. Ernst & Young LLP, the independent registered public accounting firm that audited the Company's Consolidated Financial Statements included herewith, independently assessed the effectiveness of the Company's internal control over financial reporting. Ernst & Young LLP's attestation is located in the Independent Auditors' Report on Internal Controls under Standards of the Public Company Accounting Oversight Board (United States), which is an exhibit to the Company's Annual Report on Form 40-F.
![]() |
![]() |
|
Harold N. Kvisle |
Paul R. Smith |
|
President and Chief Executive Officer | Executive Vice-President, Finance and Chief Financial Officer | |
March 3, 2015 |
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 1
INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROLS UNDER STANDARDS OF THE PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD (UNITED STATES)
To the Shareholders of Talisman Energy Inc.
We have audited Talisman Energy Inc.'s internal control over financial reporting as at December 31, 2014, based on the criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, 2013 Framework (the COSO criteria). Talisman Energy Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS, and that receipts and expenditures of the company are being made only in accordance with authorization of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Talisman Energy Inc. maintained, in all material respects, effective internal control over financial reporting as at December 31, 2014, based on the COSO criteria.
We also have audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheets of Talisman Energy Inc. as of December 31, 2014 and 2013 and the Consolidated Statements of Income (Loss), Comprehensive Income (Loss), Changes in Shareholders' Equity and Cash Flows for each of the years in the three-year period ended December 31, 2014 and our report dated March 3, 2015 expressed an unqualified opinion thereon.
Chartered Accountants
Calgary,
Canada
March 3, 2015
2 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
INDEPENDENT AUDITORS' REPORT OF
REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of Talisman Energy Inc.
We have audited the accompanying Consolidated Financial Statements of Talisman Energy Inc., which comprise the Consolidated Balance Sheets as at December 31, 2014 and 2013 and the Consolidated Statements of Income (Loss), Comprehensive Income (Loss), Changes in Shareholders' Equity and Cash Flows for each of the years in the three-year period ended December 31, 2014 and a summary of significant accounting policies and other explanatory information.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the Consolidated Financial Statements present fairly, in all material respects, the financial position of Talisman Energy Inc. as at December 31, 2014 and 2013 and its financial performance and its cash flows for each of the years in the three-year period ended December 31, 2014 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Other Matter
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Talisman Energy Inc.'s internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework), and our report dated March 3, 2015 expressed an unqualified opinion on Talisman Energy Inc.'s internal control over financial reporting.
Chartered Accountants
Calgary,
Canada
March 3, 2015
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 3
December 31 (millions of US$) | 2014 | 2013 | |||
ASSETS | |||||
CURRENT | |||||
Cash and cash equivalents (note 29) | 262 | 364 | |||
Accounts receivable (note 10) | 893 | 1,117 | |||
Risk management (note 23) | 850 | 17 | |||
Income and other taxes receivable | 80 | 52 | |||
Restricted cash (note 13) | 149 | 121 | |||
Inventories (note 11) | 133 | 137 | |||
Prepaid expenses | 34 | 14 | |||
Assets held for sale (note 5) | | 776 | |||
2,401 | 2,598 | ||||
Other assets (note 12) | 180 | 160 | |||
Restricted cash (note 13) | | 94 | |||
Investments (note 8) | 604 | 1,204 | |||
Risk management (note 23) | 421 | 20 | |||
Goodwill (note 9) | 279 | 575 | |||
Property, plant and equipment (note 14) | 9,064 | 9,752 | |||
Exploration and evaluation assets (note 14) | 2,544 | 3,165 | |||
Deferred tax assets (note 27) | 1,837 | 1,593 | |||
14,929 | 16,563 | ||||
TOTAL ASSETS | 17,330 | 19,161 | |||
LIABILITIES | |||||
CURRENT | |||||
Bank indebtedness | 9 | 13 | |||
Accounts payable and accrued liabilities | 1,577 | 1,835 | |||
Current portion of Yme removal obligation (note 13) | 186 | 121 | |||
Obligation to fund equity investee (note 8) | 186 | | |||
Risk management (note 23) | 2 | 101 | |||
Income and other taxes payable | 93 | 155 | |||
Loans from joint ventures (note 8) | 15 | 288 | |||
Current portion of long-term debt (note 18) | 1,109 | 882 | |||
Liabilities associated with assets held for sale (note 5) | | 160 | |||
3,177 | 3,555 | ||||
Decommissioning liabilities (note 16) | 1,885 | 1,727 | |||
Yme removal obligation (note 13) | | 131 | |||
Other long-term obligations (note 19) | 273 | 246 | |||
Risk management (note 23) | | 37 | |||
Long-term debt (note 18) | 3,955 | 4,357 | |||
Deferred tax liabilities (note 27) | 635 | 553 | |||
6,748 | 7,051 | ||||
Contingencies and commitments (note 24) | |||||
SHAREHOLDERS' EQUITY |
|||||
Common shares (note 21) | 1,738 | 1,723 | |||
Preferred shares (note 21) | 191 | 191 | |||
Contributed surplus | 176 | 135 | |||
Retained earnings | 4,489 | 5,695 | |||
Accumulated other comprehensive income (note 22) | 811 | 811 | |||
7,405 | 8,555 | ||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | 17,330 | 19,161 | |||
See accompanying notes.
On behalf of the Board:
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![]() |
|
Charles R. Williamson |
Michael T. Waites |
|
Chairman of the Board | Director |
4 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Years ended December 31 (millions of US$) | 2014 | 2013 | 2012 | |||||
|
|
|
(restated note 4) |
|||||
---|---|---|---|---|---|---|---|---|
REVENUE | ||||||||
Sales | 4,653 | 4,652 | 6,767 | |||||
Other income (note 25) | 150 | 109 | 84 | |||||
Income (loss) from joint ventures and associates, after tax (note 8) | (1,040 | ) | (275 | ) | 315 | |||
Total revenue and other income | 3,763 | 4,486 | 7,166 | |||||
EXPENSES |
||||||||
Operating | 1,405 | 1,432 | 2,361 | |||||
Transportation | 206 | 192 | 221 | |||||
General and administrative | 405 | 434 | 510 | |||||
Depreciation, depletion and amortization | 1,936 | 1,922 | 2,371 | |||||
Impairment, net of reversals (note 15) | 1,768 | 946 | 2,589 | |||||
Dry hole | 140 | 89 | 238 | |||||
Exploration | 232 | 260 | 346 | |||||
Finance costs (note 17) | 352 | 331 | 272 | |||||
Share-based payments expense (recovery) (note 21) | 27 | 49 | (63 | ) | ||||
(Gain) Loss on held-for-trading financial instruments (note 23) | (1,427 | ) | 140 | 93 | ||||
Gain on disposals (note 5) | (550 | ) | (100 | ) | (1,624 | ) | ||
Other, net (note 26) | 49 | 113 | 124 | |||||
Total expenses | 4,543 | 5,808 | 7,438 | |||||
Loss before taxes | (780 | ) | (1,322 | ) | (272 | ) | ||
Income taxes (note 27) | ||||||||
Current income tax | 418 | 623 | 792 | |||||
Deferred income tax recovery | (287 | ) | (770 | ) | (1,196 | ) | ||
131 | (147 | ) | (404 | ) | ||||
Net income (loss) | (911 | ) | (1,175 | ) | 132 | |||
Per common share (US$): |
||||||||
Net income (loss) | (0.89 | ) | (1.15 | ) | 0.12 | |||
Diluted net income (loss) | (0.96 | ) | (1.21 | ) | 0.01 | |||
Weighted average number of common shares outstanding (millions) | ||||||||
Basic (note 30) | 1,033 | 1,030 | 1,025 | |||||
Diluted (note 30) | 1,033 | 1,032 | 1,033 | |||||
See accompanying notes.
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years ended December 31 (millions of US$) | 2014 | 2013 | 2012 | |||
|
|
|
(restated note 4) |
|||
---|---|---|---|---|---|---|
Net income (loss) |
(911 |
) |
(1,175 |
) |
132 |
|
Remeasurements relating to pension and other post-employment benefit plans(1) | (8 | ) | 7 | 10 | ||
Other comprehensive income (loss) not being reclassified to net income or loss in subsequent years | (8 | ) | 7 | 10 | ||
Comprehensive income (loss) | (919 | ) | (1,168 | ) | 142 | |
See accompanying notes.
6 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31 (millions of US$) | 2014 | 2013 | 2012 | ||||
|
|
|
(restated note 4) |
||||
---|---|---|---|---|---|---|---|
COMMON SHARES (note 21) | |||||||
Balance at beginning of year | 1,723 | 1,639 | 1,561 | ||||
Issued on exercise of stock options | 5 | 41 | 15 | ||||
Shares purchased and held in trust for long-term PSU plan | (21 | ) | (1 | ) | (25 | ) | |
Shares released from trust for long-term PSU plan | 31 | 44 | 88 | ||||
Balance at end of year | 1,738 | 1,723 | 1,639 | ||||
PREFERRED SHARES (note 21) |
|||||||
Balance at beginning of year | 191 | 191 | 191 | ||||
Issued | | | | ||||
Balance at end of year | 191 | 191 | 191 | ||||
CONTRIBUTED SURPLUS |
|||||||
Balance at beginning of year | 135 | 121 | 186 | ||||
Settlement of long-term PSU plan grant (note 21) | (31 | ) | (44 | ) | (88 | ) | |
Share-based payments (note 21) | 72 | 58 | 23 | ||||
Balance at end of year | 176 | 135 | 121 | ||||
RETAINED EARNINGS |
|||||||
Balance at beginning of year | 5,695 | 7,148 | 7,292 | ||||
Net income (loss) | (911 | ) | (1,175 | ) | 132 | ||
Remeasurements of employee benefit plans transferred to retained earnings | (8 | ) | 7 | 10 | |||
Common share dividends (note 21) | (279 | ) | (277 | ) | (277 | ) | |
Preferred share dividends (note 21) | (8 | ) | (8 | ) | (9 | ) | |
Balance at end of year | 4,489 | 5,695 | 7,148 | ||||
ACCUMULATED OTHER COMPREHENSIVE INCOME (note 22) |
|||||||
Balance at beginning of year | 811 | 811 | 788 | ||||
Other comprehensive income (loss) | (8 | ) | 7 | 10 | |||
Transfer of accumulated foreign currency loss to net income | | | 23 | ||||
Remeasurements of employee benefit plans transferred to retained earnings | 8 | (7 | ) | (10 | ) | ||
Balance at end of year | 811 | 811 | 811 | ||||
See accompanying notes.
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 7
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 (millions of US$) | 2014 | 2013 | 2012 | |||||
|
|
|
(restated note 4) |
|||||
---|---|---|---|---|---|---|---|---|
OPERATING ACTIVITIES | ||||||||
Net income (loss) | (911 | ) | (1,175 | ) | 132 | |||
Add: Finance costs (cash and non-cash) (note 17) | 352 | 331 | 272 | |||||
Dividends from associates (note 8) | | 58 | | |||||
Items not involving cash (note 28) | 2,706 | 2,549 | 2,152 | |||||
2,147 | 1,763 | 2,556 | ||||||
Changes in non-cash working capital (note 28) | (248 | ) | 4 | (160 | ) | |||
Cash provided by operating activities | 1,899 | 1,767 | 2,396 | |||||
INVESTING ACTIVITIES |
||||||||
Capital expenditures | ||||||||
Exploration, development and other | (2,118 | ) | (2,363 | ) | (3,509 | ) | ||
Property acquisitions (note 6) | (23 | ) | (100 | ) | (109 | ) | ||
Proceeds of resource property dispositions (note 5) | 1,517 | 146 | 964 | |||||
Yme removal obligation, net of settlement (note 13) | (66 | ) | 252 | | ||||
Restricted cash, net of settlement (note 13) | 66 | (215 | ) | | ||||
Investments | (319 | ) | (13 | ) | (20 | ) | ||
Proceeds on disposition of associate (note 5) | | 590 | | |||||
Loan to joint venture, net of repayments (note 8) | (337 | ) | (398 | ) | | |||
Proceeds on reduction in UK investment, net of cash disposed (note 5) | | | 1,349 | |||||
Changes in non-cash working capital | 51 | (231 | ) | 113 | ||||
Cash used in investing activities | (1,229 | ) | (2,332 | ) | (1,212 | ) | ||
FINANCING ACTIVITIES |
||||||||
Long-term debt repaid (note 18) | (1,264 | ) | (308 | ) | (1,807 | ) | ||
Long-term debt issued (note 18) | 1,110 | 1,094 | 1,336 | |||||
Loans from joint ventures, net of repayments (note 8) | 6 | 141 | 109 | |||||
Common shares issued (note 21) | 4 | 28 | 13 | |||||
Common shares purchased (note 21) | (21 | ) | (1 | ) | (25 | ) | ||
Finance costs (note 17) | (301 | ) | (295 | ) | (190 | ) | ||
Common share dividends (note 21) | (279 | ) | (277 | ) | (277 | ) | ||
Preferred share dividends (note 21) | (8 | ) | (8 | ) | (9 | ) | ||
Deferred credits and other | (16 | ) | (8 | ) | (3 | ) | ||
Changes in non-cash working capital | (3 | ) | (2 | ) | (6 | ) | ||
Cash provided by (used in) financing activities | (772 | ) | 364 | (859 | ) | |||
Effect of translation on foreign currency cash and cash equivalents | 4 | (1 | ) | 9 | ||||
Net increase (decrease) in cash and cash equivalents | (98 | ) | (202 | ) | 334 | |||
Cash and cash equivalents net of bank indebtedness, beginning of year | 351 | 553 | 219 | |||||
Cash and cash equivalents net of bank indebtedness, end of year | 253 | 351 | 553 | |||||
Cash and cash equivalents | 262 | 364 | 553 | |||||
Bank indebtedness | (9 | ) | (13 | ) | | |||
Cash and cash equivalents net of bank indebtedness, end of year | 253 | 351 | 553 | |||||
See accompanying notes.
8 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in millions of US dollars, except as noted)
1. Corporate Information
Talisman Energy Inc. ("Talisman" or "the Company") is a public company incorporated pursuant to the laws of Canada and domiciled in Alberta, Canada, with common shares listed on the Toronto Stock Exchange and the New York Stock Exchange under the symbol "TLM". The registered office is located at Suite 2000, 888 3rd Street SW, Calgary, Alberta, Canada, T2P 5C5. The Consolidated Financial Statements of the Company are comprised of the Company and its subsidiaries and the Company's interest in associates and joint arrangement entities.
The Company is in the business of exploration, development, production and marketing of crude oil, natural gas and natural gas liquids (NGLs).
The Consolidated Financial Statements as at and for the year ended December 31, 2014 were authorized for issuance by the Board of Directors on March 3, 2015.
Repsol Acquisition of Talisman
On December 15, 2014, Talisman entered into an arrangement agreement ("Arrangement Agreement") with Repsol S.A. and an indirect wholly-owned subsidiary of Repsol (collectively "Repsol"), providing for the acquisition of Talisman. Under the terms of the Arrangement Agreement, the acquisition is to be accomplished through a plan of arrangement ("Arrangement") under the Canada Business Corporations Act. Completion of the deal remains subject to satisfaction or waiver of customary closing conditions, including applicable government and regulatory approvals. If the Arrangement is completed, common shareholders will receive US$8.00 for each common share that they own and preferred shareholders will receive C$25.00 plus accrued and unpaid dividends to the date of completion of the Arrangement for each preferred share that they own. The terms of the Arrangement Agreement allow Talisman to pay aggregate cash dividends of US $0.18 per common share prior to closing, including the dividend declared and paid on December 31, 2014 of $0.0675 per common share. The terms of the Arrangement Agreement contain certain restrictions on the Company's activities without the approval of Repsol including, but not limited to, acquisitions and disposals of assets, certain actions related to employees, and the Company's legal and organizational structures.
Since the date the transaction with Repsol was announced, the following has occurred:
2. Basis of Preparation
The Consolidated Financial Statements of Talisman Energy Inc. and its subsidiaries have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and interpretations of the International Financial Reporting Interpretations Committee (IFRIC).
The Consolidated Financial Statements have been prepared on a going concern basis using the historical cost convention, except for derivative financial instruments and available-for-sale financial assets that have been measured at fair value.
The Consolidated Financial Statements are prepared in United States dollars (US$), which is the Company's functional currency.
The preparation of Consolidated Financial Statements in accordance with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgment in applying the Company's accounting policies. The areas of accounting that require a high degree of judgment or which are based upon significant estimates are disclosed in note 3(z).
3. Significant Accounting Policies
a) Accounting Policies Adopted on January 1, 2014
Effective January 1, 2014, Talisman adopted new and amended accounting standards as described below:
Offsetting Financial Assets and Financial Liabilities
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 9
The scope includes derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending agreements. The amendments to IAS 32 are effective for annual periods beginning on or after January 1, 2014 and require retrospective application. As the Company is not netting any significant amounts related to financial instruments and does not have any significant offsetting arrangements, the amendment did not have a significant impact on the Company's financial statements.
Impairment of Assets
Levies
b) Consolidation
The Consolidated Financial Statements include the accounts of Talisman and its subsidiaries, being those investees over which the Company, either directly or indirectly, has control. Control is achieved when Talisman is exposed, or has the rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, Talisman controls an investee if, and only if, Talisman has:
Subsidiaries are consolidated from the date on which control is obtained until the date that such control ceases, using consistent accounting policies. The trusts holding common shares to settle the Company's obligation arising from its long-term performance share unit (PSU) plan are also consolidated since they are structured entities controlled by the Company (note 21). All intercompany balances and transactions, including unrealized profits arising from such transactions, are eliminated upon consolidation. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies.
c) Joint Arrangements and Investments
A joint arrangement represents an arrangement where two or more parties hold joint control. Joint control is deemed to exist under contractual agreement where decisions regarding relevant activities of the arrangement require the unanimous consent of those parties sharing control.
A joint venture is a joint arrangement and represents a company or other entity in which each venturer has an interest, holds joint control and holds rights to the net assets of the entity. Interests in joint ventures are accounted for using the equity method of accounting.
A joint operation is a joint arrangement and represents a company, partnership or other entity in which each venturer has an interest, holds joint control and holds rights to the assets and obligations for the liabilities of the entity. Interests in joint operations are accounted for by recognizing the Company's share of the assets, liabilities, revenue and expenses.
An associate is an entity, including an unincorporated entity such as a partnership, over which Talisman has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.
Investments in associates and joint ventures are accounted for using the equity method. Investments of this nature are recorded at original cost and adjusted periodically. Talisman's share of the income of equity investments is recorded in the Consolidated Statements of Income (Loss). Dividends from equity investments are included in cash provided by operating activities. Interests in entities over which Talisman does not have significant influence are accounted for as available-for-sale financial assets. Both equity investments and investments classified as available-for-sale assets are tested for possible impairment whenever events or changes in
10 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
circumstances indicate that the carrying value of the investment may not be recoverable. If, and when, an equity accounted investment balance becomes negative by the application of equity method accounting, the Company assesses whether the Company has an obligation to fund the operations of the equity investment. If so, the Company presents the amount as an obligation to fund equity investee.
d) Business Combinations and Goodwill
Business combinations are accounted for using the acquisition method when control is transferred to the Company. The cost of an acquisition is the aggregate of the consideration transferred, measured at acquisition date fair value. Acquisition costs incurred are expensed. When the Company acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts acquired.
Contingent consideration to be transferred by the Company is recognized at fair value at the acquisition date. Subsequent changes to the fair value of contingent consideration recorded as a financial asset or liability are recognized in net income in accordance with IAS 39 Financial Instruments: Recognition and Measurement.
Goodwill represents the excess of the consideration transferred over the fair value of identifiable assets acquired and liabilities assumed in business combinations. Goodwill is not amortized but is subject to impairment reviews annually, or more frequently as economic events dictate, as described in note 3(j).
Where goodwill forms part of an operating segment and part of the operation within that segment is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the segment retained.
e) Accounts Receivable
Accounts receivable are recorded based on the Company's revenue recognition policy. The allowance for doubtful accounts is management's best estimate of accounts receivable balances that may not be collectible, and is reviewed quarterly.
f) Inventories
Inventories are valued at the lower of cost and net realizable value. Cost comprises direct purchase costs, cost of production and taxes, and is determined using the first-in first-out method for product inventories and by the average cost method for materials and supplies. Net realizable value is determined by reference to prices existing at the balance sheet date less any costs expected to be incurred to completion and disposal.
g) Property, Plant and Equipment (PP&E)
PP&E, comprising oil and gas development and production properties and corporate assets, is stated at cost less accumulated depreciation, depletion and amortization and accumulated impairment losses.
Oil and gas development and production expenditure is generally accounted for using the principles of the successful efforts method of accounting. Expenditure on the construction, installation and completion of infrastructure facilities such as platforms, pipelines and the drilling of development wells is capitalized within PP&E.
The initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable to bringing the asset into operation, the initial estimate of the decommissioning liability and capitalized borrowing costs for qualifying assets. The capitalized value of a finance lease is also included within PP&E.
Expenditure on turnarounds comprises the cost of replacement assets or parts of assets and inspection and overhaul costs. Where an asset or part of an asset is replaced and it is probable that future economic benefits will flow to the Company from the replacement, the expenditure is capitalized and the replaced part is derecognized. Inspection and overhaul costs relating to turnarounds, which generally occur annually, and all other repairs and maintenance costs are expensed when incurred.
Well injection costs incurred to stimulate depleted wells are charged as an expense when incurred. Certain stimulation costs which increase production and reserves, extending beyond one year, are deferred in PP&E and depleted using the unit of production method.
Exchanges of development and production assets are measured at fair value unless the exchange transaction lacks commercial substance or the fair value of neither the asset received nor the asset exchanged is reliably measurable. The cost of the acquired asset is measured at the fair value of the asset exchanged, unless the fair value of the asset received is more clearly evident. Where fair value is not used, the cost of the acquired asset is measured at the carrying amount of the asset exchanged. Any gain or loss arising is recognized in net income.
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 11
The Company assesses at each reporting date whether there is an indication that its PP&E may be impaired or subject to impairment reversals. If any indication exists, the Company estimates the asset's recoverable amount using the methodology described in note 3(i).
h) Exploration and Evaluation (E&E) Assets
Exploration well costs are initially capitalized and, if subsequently determined to have not found sufficient reserves to justify commercial production, are charged to dry hole expense. Exploration well costs that have found sufficient reserves to justify commercial production, but those reserves cannot be classified as proved, continue to be capitalized as long as sufficient progress is being made to assess the reserves and economic viability of the well and/or related project. All such carried costs are subject to technical, commercial and management review at each reporting date to confirm the continued intent to develop or otherwise extract value from the discovery, and that the carrying amount is likely to be recovered in full from successful development or sale. When this is no longer the case, the costs are written off to their estimated recoverable amount. When proved reserves of oil and natural gas are determined and development is sanctioned, the relevant expenditure is tested for potential impairment and then transferred to PP&E (see note 3(i) for details of the impairment methodology). If a project no longer meets these criteria, it is tested for impairment and transferred back from PP&E to E&E assets.
Undeveloped land costs are classified initially as E&E assets and transferred to PP&E as proved reserves are assigned.
All other exploration costs, including geological and geophysical costs and annual lease rentals, are charged to exploration expense when incurred.
For exchanges or parts of exchanges that involve principally E&E assets, the exchange is generally accounted for at the carrying amount of the asset exchanged.
i) Impairment of Assets
The Company tests PP&E and E&E assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable; for example, changes in assumptions relating to future prices, future costs and reserves. Individual assets are grouped for impairment assessment purposes at the lowest level at which there are identifiable cash inflows that are largely independent of the cash inflows of other groups of assets, known as a cash generating unit (CGU). If any such indication of impairment exists, an estimate of the CGU's recoverable amount is made. A CGU's recoverable amount is the higher of its fair value less costs to sell and its value in use. These assessments require the use of estimates and assumptions regarding production volumes, discount rates, long-term commodity prices, reserve quantities, operating costs, royalty rates, future capital cost estimates, foreign exchange rates, income taxes and life-of-field. In addition, the Company will consider market data related to recent transactions for similar assets. In determining the fair value of the Company's investment in shale properties, the Company considers a variety of valuation metrics from recent comparable transactions in the market. These metrics include price per flowing barrel of oil equivalent, undeveloped land values per acre held, and midstream asset valuations based on expected volumes, tariffs and earnings multiples.
E&E assets are also tested for impairment when transferred to PP&E.
A previously recognized impairment loss is reversed only if there has been a change in the estimates or assumptions used to determine the CGU's recoverable amount since the impairment loss was recognized. If that is the case, the carrying amount of the CGU is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depletion, had no impairment loss been recognized for the CGU in prior periods. Such a reversal is recognized in net income, following which the depletion charge is adjusted in future periods to allocate the CGU's revised carrying amount on a systematic basis over its remaining useful life.
The Company assesses investments in associates and joint ventures for impairment whenever changes in circumstances or events indicate that the carrying value may not be recoverable. If such impairment indicators exist, the carrying amount of the investment is compared to its recoverable amount. The recoverable amount is the higher of the investment's fair value less costs to sell and its value in use. The investment is written down to its recoverable amount when its carrying amount exceeds the recoverable amount.
j) Goodwill
Goodwill is tested for impairment annually and when circumstances indicate that the carrying amount may be impaired. The impairment test requires that goodwill be allocated to CGUs, which Talisman has determined by aggregating locations having similar economic characteristics and/or which are in similar geographic locations, and which correspond with the operating segments described in note 32, except for locations within the Other segment, which are generally grouped by country. Impairment is determined for goodwill by assessing the recoverable amount (based on fair value less costs to sell) of each segment or country, as appropriate, to which the goodwill relates. Where the recoverable amount of the segment or country, as appropriate, is less than the carrying amount, an impairment loss is recognized. Goodwill impairment losses cannot be reversed.
12 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
k) Depreciation, Depletion and Amortization (DD&A)
Capitalized costs of proved oil and gas properties are depleted using the unit of production method. For purposes of these calculations, production and reserves of natural gas are converted to barrels (bbls) on an energy equivalent basis at a ratio of six thousand cubic feet (mcf) of natural gas for one barrel (bbl) of oil. Depletion and depreciation rates are updated in each reporting period that a significant change in circumstances, including reserves revisions, occurs.
Successful exploratory wells and development costs are depleted over proved developed reserves. Significant development costs incurred in connection with proved undeveloped reserves are excluded from depletion until the reserves are developed.
Acquired resource properties with proved reserves, including offshore platform costs, are depleted over total proved reserves. Acquisition costs of probable reserves are not depleted or amortized while under active evaluation for commercial reserves. Costs are transferred to depletable costs as proved reserves are recognized.
Costs associated with significant development projects are not depleted until the asset is substantially complete and ready for its intended use. Unproved land acquisition costs that are individually material are not amortized, but are assessed for impairment and transferred to depletable costs as proved reserves are recognized. Unproved land acquisition costs that are individually immaterial are amortized on a straight-line basis over the average lease term. Gas plants are depreciated on a straight-line basis over their estimated remaining useful lives, not to exceed the estimated remaining productive lives of related fields. Pipelines and corporate assets are depreciated using the straight-line method at annual rates of 4% and 5-33%, respectively. Gas plants and pipelines in Norway are depleted using the unit of production method based on the related fields.
The transportation rights owned with respect to the Ocensa pipeline are recorded in other assets (note 12), and are being depreciated using the straight-line method at an annual rate of 8%.
l) Non-Current Assets Held for Sale
Non-current assets classified as held for sale and associated liabilities are measured at the lower of carrying amount and fair value less costs to sell, and are presented as current on the Consolidated Balance Sheets.
Non-current assets are classified as held for sale if their carrying amounts will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification.
PP&E is not depreciated once classified as held for sale.
m) Decommissioning and Environmental Liabilities
Decommissioning liabilities are recognized when the Company has a legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. A corresponding amount equivalent to the liability is recognized as part of the cost of the related PP&E or E&E asset.
Decommissioning liabilities are carried on the Consolidated Balance Sheets at their discounted present value, which is remeasured each reporting period in order to reflect the period end discount rate. The liabilities are calculated using a weighted average credit-adjusted risk free rate, and are accreted over time for the change in their present value, with this accretion expense included in finance costs on the Consolidated Statements of Income (Loss). Actual expenditures incurred are charged against the accumulated obligation. Any difference between the recorded decommissioning liability and the actual retirement costs incurred is recorded as a gain or loss.
The increase in capitalized costs is amortized to income on a basis consistent with DD&A of the underlying assets. Subsequent changes in the estimated decommissioning liabilities are capitalized and amortized over the remaining useful life of the underlying asset.
Liabilities for environmental costs are recognized when an obligation exists and the associated costs can be reliably estimated. Generally, the timing of recognition of these liabilities coincides with the commitment to a formal plan of action or, if earlier, on divestment or on closure of inactive sites. The amount recognized is the best estimate of the expenditure required. Where the liability will not be settled for a number of years, the amount recognized is the present value of the estimated future expenditure. These estimates are included in decommissioning liabilities.
n) Finance Costs and Long-Term Debt
Finance costs include interest and other costs that Talisman incurs in connection with the borrowing of funds, as well as accretion expense relating to the Company's decommissioning liabilities.
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 13
Finance costs associated with major development projects are capitalized and included in the carrying amounts of the related assets until they are completed and ready for use. These costs are subsequently amortized to income with the related assets. The amount of borrowing costs capitalized for the period is determined by applying the weighted average interest rate applicable to appropriate borrowings outstanding during the period to the average amount of capitalized expenditure for the qualifying assets.
All other finance costs are recognized on the Consolidated Statements of Income (Loss) in the period in which they are incurred.
The classification of debt instruments in the Consolidated Balance Sheets reflects contractual requirements and management's intent in respect of the refinancing of those instruments. In particular, the classification of bankers' acceptances and commercial paper, when outstanding, reflects management's intent to repay within twelve months.
o) Foreign and Reporting Currency
The functional currency of all Talisman's operations is the US$.
Foreign operations are translated as follows: monetary assets and liabilities at exchange rates in effect at the balance sheet date, non-monetary assets and liabilities at rates in effect on the dates the assets were acquired or liabilities were assumed, and revenues and expenses at rates of exchange prevailing on the transaction dates. Gains and losses on translation are reflected in income when incurred.
Prior to January 1, 2010, in Canada and Norway, the Company's operations were translated from C$ and NOK respectively into US$ where assets and liabilities were translated at year-end exchange rates, while revenue and expenses were converted using average rates for the period. Gains and losses arising on translation from C$ and NOK were deferred and included in a separate component of shareholders' equity described as accumulated other comprehensive income.
Since then, the Company's operations in Canada and Norway are accounted for as US$ functional currency entities and gains and losses on translation are reflected in income. As a result, previously recognized foreign currency translation adjustments remain in accumulated other comprehensive income until Talisman reduces its net investment in its Canadian or Norwegian subsidiaries.
p) Employee Benefit Plans
The cost of providing benefits under the Company's defined benefit pension plans and non-pension post-employment benefit plans is determined using the projected benefit method pro-rated on service and management's best estimate of expected plan investment performance, salary escalation and employee retirement ages. There is uncertainty relating to the assumptions used to calculate the net benefit expense and accrued benefit obligation, due to their long-term nature.
The discount rate used to determine the accrued benefit obligation is determined by reference to market interest rates at the measurement date on high quality debt instruments with cash flows that match the timing and amount of expected benefit payments. The effects of changes in demographic and financial assumptions, experience adjustments, as well as other plan remeasurements such as the return on plan assets are recognized in other comprehensive income (loss) and transferred to retained earnings in the year recorded.
Payments to defined contribution plans are expensed as incurred, which is as the related service is rendered.
The pension benefits of key management personnel represent the attributable amount of the net benefit expense of the plans in which they participate.
q) Financial Instruments
The Company classifies its financial instruments into one of the following categories: held-for-trading assets and liabilities, assets available-for-sale, loans and receivables, assets held-to-maturity and other financial liabilities. All financial assets and liabilities are recognized on the Consolidated Balance Sheets when the Company becomes a party to the contractual requirements of the instrument. All financial instruments are measured at fair value on initial recognition. Transaction costs are included in the initial carrying amount of financial instruments except for held-for-trading items, in which case they are expensed as incurred. Measurement in subsequent periods depends on the classification of the financial instrument.
In conducting its business, the Company may use derivative financial instruments in order to manage risks associated with fluctuations in commodity prices, interest rates and foreign currency exchange rates.
Non-Hedge Financial Instruments
Held-for-trading financial assets and liabilities are subsequently measured at fair value with changes in fair value recognized in net income. Financial assets available-for-sale are subsequently measured at fair value with changes in fair value recognized in other comprehensive income (loss), net of tax. Financial assets held-to-maturity, loans and receivables, and other financial liabilities are subsequently measured at amortized cost using the effective interest rate method.
14 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
Cash equivalents are classified as loans and receivables and are measured at carrying value, which approximates fair value, due to the short-term nature of these instruments. Accounts receivable and certain other assets that are financial instruments are classified as loans and receivables. Bank indebtedness, accounts payable and accrued liabilities, certain other long-term obligations and current and long-term debt are classified as other financial liabilities. Financial liabilities are derecognized when the obligation under the liability is discharged, cancelled or expires. Financial instruments that are derivative contracts are considered held-for-trading. The financial derivative contracts outstanding at December 31, 2014 are disclosed in note 23.
Derivatives embedded in other financial instruments and non-financial host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contract. Contracts are assessed for embedded derivatives when the Company becomes a party to them, including at the date of a business combination. Embedded derivatives requiring separation are measured at fair value at each balance sheet date and any gains or losses arising from changes in fair value are recognized in net income.
Own Use Exemption
Contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the Company's expected purchase, sale or usage requirements fall within the exemption from IAS 32 and IAS 39, which is known as the "own use" exemption. The Company enters into physical commodity contracts in the normal course of business, including contracts with fixed terms. The Company's production is expected to be sufficient to deliver all required volumes under these contracts. No amounts are recognized in the Consolidated Financial Statements related to these contracts until such time as the associated volumes are delivered.
r) Comprehensive Income (Loss)
The Consolidated Statements of Comprehensive Income (Loss) reflects net income and items of other comprehensive income (loss) which comprise changes in the fair value of financial instruments designated as cash flow hedges, to the extent they are effective and remeasurements relating to the Company's employee benefit plans.
s) Income Taxes
Income taxes comprise current tax, deferred tax and Petroleum Revenue Tax (PRT) and are recognized on the Consolidated Statements of Income (Loss) except to the extent they relate to items recognized in other comprehensive income (loss) or directly in equity. PRT is treated as an income tax and deferred PRT is accounted for on a temporary difference basis.
Interest and penalties assessed by taxing authorities on any underpayment of income tax are accrued and classified as a component of income taxes on the Consolidated Statements of Income (Loss).
Certain of the Company's contractual arrangements in foreign jurisdictions stipulate that income taxes be paid by the respective national oil company out of its entitlement share of production. Such amounts are included in income taxes at the statutory tax rate in effect at the time of production.
The Company recognizes in its financial statements the best estimate of the impact of a tax position by determining if the available evidence indicates whether it is more likely than not, based solely on technical merits, that the position will be sustained on audit. The Company estimates the amount to be recorded by weighting all possible outcomes by their associated probabilities.
Current Tax
Current tax is based on estimated taxable income and tax rates which are determined pursuant to the tax laws that are enacted or substantively enacted at the balance sheet date.
Deferred Tax
Deferred tax is determined using the liability method. Under the liability method, deferred tax is calculated based on the differences between assets and liabilities reported for financial accounting purposes and those reported for income tax purposes. Deferred tax assets and liabilities are measured using substantively enacted tax rates. The impact of a change in tax rate is recognized in net income in the period in which the tax rate is substantively enacted.
Deferred tax assets and liabilities are offset only when a legally enforceable right of offset exists and the deferred tax assets and liabilities arose in the same tax jurisdiction and relate to the same taxable entity.
t) Revenue Recognition
Revenues associated with the sale of crude oil, natural gas and NGLs are recognized at the fair value of the consideration received or receivable when the significant risks and rewards of ownership have been transferred, which is when title passes from the Company to the customer. For the Company's international operations, generally, customers take title when the crude oil is loaded onto a tanker. The Company employs the entitlement method in accounting for crude oil and natural gas sales and records a receivable from a joint
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 15
interest participant if a participant sells more than its proportionate share of crude oil or natural gas production. Crude oil and natural gas produced and sold, below or above the Company's working interest share in the related resource properties, results in production underliftings, or overliftings. Underliftings are recorded as inventory at the cost to produce and transport the product to storage tanks, and overliftings are recorded in accounts payable and accrued at the sales value. Underliftings are reversed from inventory when the crude oil is lifted and sold, with the sales proceeds recorded as revenue and the cost of the inventory expensed. Overliftings are reversed from accounts payable and accrued liabilities when sufficient volumes are produced to make up the overlifted volume. Amounts received under take-or-pay gas sales contracts in respect of undelivered volumes are accounted for as deferred income in deferred credits and recognized as revenue when volumes are delivered. Transportation expenses are reported as a separate expense and are not netted against revenue.
A significant portion of the Company's operations outside North America and the North Sea are governed by Production Sharing Contracts (PSCs). Under PSCs, revenues are derived from cost recovery oil and gas and profit oil and gas. Generally, cost recovery oil and gas allows the Company to recover its capital and production costs and, as appropriate, the costs carried by the Company on behalf of state oil companies from production. Profit oil and gas is allocated to the host government and contract parties in accordance with their respective equity interests.
All taxes collected from customers that are remitted to governments are excluded from revenues.
Certain of the Company's foreign operations are conducted jointly with the respective national oil companies. These operations are reflected in the Consolidated Financial Statements based on Talisman's working interest in such activities. All other government takes, other than income taxes, are considered to be royalty interests. Royalties on production from these joint foreign operations represent the entitlement of the respective governments to a portion of Talisman's share of crude oil, natural gas and NGLs production and are recorded using rates in effect under the terms of contracts at the time of production.
Sales as reported represents the Company's share of revenues from the sale of crude oil, natural gas and NGLs and is presented after deduction of royalty payments to governments and other mineral interest owners.
u) Leases
Leases that transfer substantially all of the benefits and risks of ownership to Talisman are accounted for at the commencement of the lease term as finance leases and recorded as PP&E at the fair value of the leased asset, or, if lower, at the present value of the minimum lease payments, together with an offsetting liability. Finance charges are allocated to each period so as to achieve a constant rate of interest on the remaining balance of the liability and are recognized in net income. Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term.
All other leases are accounted for as operating leases and the lease costs are expensed as incurred.
v) Share-Based Payments
Talisman has stock option plans, cash unit plans, a PSU plan, deferred share unit (DSU) plans and restricted share unit (RSU) plans, under which it receives services from employees and directors as consideration for cash payments or equity instruments of the Company. The PSUs are ordinarily settled in shares. The cash units, DSUs and RSUs must be settled in cash. The stock option plans may be settled in cash at the option of the holder or the underlying share can be purchased.
Equity-Settled Awards
The Company uses the Black-Scholes pricing model to estimate the fair value of equity-settled stock options.
For the PSU plans, the Company determines the fair value of the units on the date of grant using the market value of common shares and recognizes the fair value over the vesting period as share-based payments expense and contributed surplus.
Cash-Settled Awards
The Company uses the Black-Scholes pricing model to estimate the fair value of cash units. The fair value of all other cash-settled awards is determined by using the market value of common shares. Fair value is established initially at the grant date and the obligation is revalued each reporting period until the awards are settled with any changes in the obligation recognized as share-based payments expense (recovery) on the Consolidated Statements of Income (Loss), except for the changes related to DSUs to directors, which are included in general and administrative expenses.
The stock option plans are classified as liability instruments and remeasured at their fair value at the end of each reporting period.
For plans having vesting conditions, the total expense is recognized over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each reporting period, the Company revises its estimates of the number of options and units that are expected to vest based on the vesting conditions and recognizes the impact of the revision to original estimates, if any, in net income.
16 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
w) Net Income and Diluted Net Income Per Share
Net income per share is calculated by dividing net income less after-tax cumulative preferred share dividends by the weighted average number of common shares outstanding. Diluted net income per share is calculated giving effect to the potential dilution that could occur if stock options were exercised in exchange for common shares.
The method the Company uses to determine the dilutive impact of stock options assumes that any proceeds from the exercise of in-the-money stock options would be used to purchase common shares at the average market price during the period. In periods when a share-based payments recovery is reported, net income used in the dilution calculation is reduced by the amount of the recovery.
For stock options that may be settled in cash or shares at the employees' option, the more dilutive impact of cash settlement and equity settlement is used in calculating diluted net income per share regardless of how the stock option plan is accounted for. Stock options that are reported as cash-settled for accounting purposes may require an adjustment to the numerator in the diluted net income per share calculation for any changes in net income that would result if the stock options had been reported as equity instruments.
x) Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit with banks and interest-bearing short-term investments with an original maturity of three months or less. Cash and cash equivalents are stated at cost, which approximates fair value.
For the purpose of the Consolidated Statements of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of bank indebtedness.
y) Segmented Information
The Company's reporting segments are established on the basis of having similar economic characteristics and/or which are in similar geographic locations and those components of the Company that are evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
See note 32 for disclosure of segmented information.
z) Significant Accounting Judgments, Estimates and Assumptions
To facilitate the timely preparation of the Consolidated Financial Statements, management has made estimates and assumptions regarding certain assets and liabilities and contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the periods noted. Such estimates relate primarily to unsettled transactions and events as of the date of the Consolidated Financial Statements. Accordingly, actual results may differ from estimated amounts.
DD&A, the fair value of PP&E and E&E assets, goodwill, investment in equity accounted entities, amounts recognized for impairment charges and reversals and the recognition of assets acquired and liabilities assumed upon a business combination are impacted by estimates of oil and natural gas reserves, contingent resources, commodity prices, and capital and operating costs required to develop and produce those reserves. The Company also used a variety of market metrics, described in note 15, in assessing the fair value of the PP&E and E&E assets, and goodwill. By their nature, market metrics, estimates of reserves and resources and the related future cash flows are subject to measurement uncertainty, and the impact of differences between actual and estimated amounts on the Consolidated Financial Statements of future periods could be material. The measurement of impairment charges and reversals is also dependent upon management's judgment in determining CGUs.
Inherent in the calculation of decommissioning liabilities are numerous assumptions and judgments, including the ultimate settlement amounts, inflation factors, credit-adjusted discount rates, timing of settlement and changes in the legal, regulatory, environmental and political environments. To the extent future revisions to assumptions impact the amount of decommissioning liabilities, a corresponding adjustment is made to the PP&E and/or E&E assets balance.
The values of pension assets and obligations and the amount of the net benefit expense charged to net income depend on certain actuarial and economic assumptions which, by their nature, are subject to measurement uncertainty.
The measurement of income tax expense, the related provisions and deferred tax assets on the Consolidated Balance Sheets, is subject to uncertainty associated with future recoverability of oil and natural gas reserves, commodity prices, the timing of future events and changes in legislation, tax rates and interpretations by tax authorities.
The fair values of financial instruments are estimated based upon market and third party inputs. These estimates are subject to change with fluctuations in commodity prices, interest rates, foreign currency exchange rates and estimates of non-performance risk.
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 17
The fair values of equity-settled and cash-settled share-based payments awards are estimated using the Black-Scholes pricing model and the market value of common shares. These estimates depend on certain assumptions, including share price volatility, risk free interest rate, the term of the awards, the forfeiture rate and the annual dividend yield which, by their nature, are subject to measurement uncertainty.
The designation of the Company's functional currency is a management judgment based on the composition of revenue and costs in the locations in which it operates.
Provisions are recorded when the Company has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where appropriate, the future cash flow estimates are adjusted to reflect risks specific to the liability.
Once the Company's interest in an equity investee is reduced to zero, additional losses are provided for, and an obligation to fund equity investee is recognized, only to the extent that the Company has incurred legal or constructive obligations.
Contingent liabilities are possible obligations whose existence will only be confirmed by future events not wholly within the control of the Company. Contingent liabilities are not recognized in the financial statements but are disclosed unless the possibility of an outflow of economic resources is considered remote. The evaluation of the likelihood of the contingent events requires management judgment as to the probability of exposure to potential loss.
aa) Accounting Standards and Interpretations Issued but Not Yet Effective
The following pronouncements from the IASB are applicable to Talisman and will become effective for future reporting periods, but have not yet been adopted. The Company intends to adopt these standards, if applicable, when they become effective on, or after, January 1, 2015:
Effective January 1, 2015
Effective January 1, 2016 and thereafter
18 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
4. Adoption of IFRS 11 Joint Arrangements
Effective January 1, 2013, the Company adopted IFRS 11 Joint Arrangements which establishes the accounting principles for parties to a joint arrangement and replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly Controlled Entities: Non-Monetary Contributions by Venturers. Upon adoption of this standard, the Company now accounts for its investments in Talisman Energy (UK) Limited (TEUK), (now renamed TSEUK), and Equion Energía Limited (Equion) using the equity method of accounting. Changes have been applied retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, resulting in the adjustment of prior period financial information. The impact of adopting IFRS 11 is outlined below.
The accounting policies described in note 3 have been applied in preparing the Consolidated Financial Statements as at and for the year ended December 31, 2013. The Company's 2012 comparative balances reflect the deconsolidation of Equion's entire respective year balances as joint control was shared over this period. Comparative figures presented pertaining to the Company's 2012 results have been restated.
The Company's 2012 comparative balances reflect the deconsolidation of TSEUK's balances commencing December 17, 2012 triggered by the sale of its 49% equity interest in TEUK.
On transition to IFRS 11, the net assets of TSEUK were negative, however Talisman has a long-term loan in place with TSEUK. This loan bears long-term interest that in substance forms part of Talisman's net investment in TSEUK.
The most significant impact of adoption was from the application of equity accounting on joint arrangements which are classified as joint ventures.
Reconciliations from Proportionate Consolidation of Joint Ventures to Equity Accounting under IFRS 11
The Company has adjusted amounts reported previously in its Consolidated Financial Statements. The transition from proportionate consolidation of joint ventures to equity accounting affected the Company's results of operations and cash flows as presented in the following reconciliations:
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 19
Reconciliation of Consolidated Statement of Income for the Year Ended December 31, 2012
December 31, 2012 Previously Released |
Deconsolidation of Equion | Deconsolidation of TSEUK(1) | December 31, 2012 Restated |
|||||||
Revenue | ||||||||||
Sales | 7,229 | (403 | ) | (59 | ) | 6,767 | ||||
Other income | 83 | | 1 | 84 | ||||||
Income (loss) from joint ventures and associates, after tax | | 361 | (46 | ) | 315 | |||||
Total revenue and other income | 7,312 | (42 | ) | (104 | ) | 7,166 | ||||
Expenses |
||||||||||
Operating | 2,452 | (58 | ) | (33 | ) | 2,361 | ||||
Transportation | 221 | | | 221 | ||||||
General and administrative | 510 | | | 510 | ||||||
Depreciation, depletion and amortization | 2,501 | (108 | ) | (22 | ) | 2,371 | ||||
Impairment | 2,744 | | (155 | ) | 2,589 | |||||
Dry hole | 269 | (31 | ) | | 238 | |||||
Exploration | 346 | 1 | (1 | ) | 346 | |||||
Finance costs | 276 | (3 | ) | (1 | ) | 272 | ||||
Share-based payments recovery | (62 | ) | | (1 | ) | (63 | ) | |||
Loss on held-for-trading financial instruments | 93 | | | 93 | ||||||
Gain on disposals | (1,624 | ) | | | (1,624 | ) | ||||
Gain on revaluation of investment | (365 | ) | 365 | | | |||||
Other, net | 125 | | (1 | ) | 124 | |||||
Total expenses | 7,486 | 166 | (214 | ) | 7,438 | |||||
Loss before taxes | (174 | ) | (208 | ) | 110 | (272 | ) | |||
Income taxes | ||||||||||
Current income tax | 874 | (90 | ) | 8 | 792 | |||||
Deferred tax recovery | (1,180 | ) | (118 | ) | 102 | (1,196 | ) | |||
(306 | ) | (208 | ) | 110 | (404 | ) | ||||
Net income | 132 | | | 132 | ||||||
20 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
Reconciliation of Consolidated Statement of Cash Flows for the Year Ended December 31, 2012
December 31, 2012 Previously Released |
Deconsolidation of Equion |
Deconsolidation of TSEUK(1) |
December 31, 2012 Restated |
|||||||
Operating activities | ||||||||||
Net income | 132 | | | 132 | ||||||
Add: Finance costs (cash and non-cash) | 276 | (3 | ) | (1 | ) | 272 | ||||
Items not involving cash | 2,433 | (255 | ) | (26 | ) | 2,152 | ||||
2,841 | (258 | ) | (27 | ) | 2,556 | |||||
Changes in non-cash working capital | (125 | ) | (86 | ) | 51 | (160 | ) | |||
Cash provided by operating activities | 2,716 | (344 | ) | 24 | 2,396 | |||||
Investing activities |
||||||||||
Capital expenditures | ||||||||||
Exploration, development and other | (3,658 | ) | 125 | 24 | (3,509 | ) | ||||
Property acquisitions | (109 | ) | | | (109 | ) | ||||
Proceeds of resource property dispositions | 964 | | | 964 | ||||||
Investments | (20 | ) | | | (20 | ) | ||||
Proceeds on reduction in UK investment, net of cash disposed | 1,349 | | | 1,349 | ||||||
Changes in non-cash working capital | (1 | ) | 105 | 9 | 113 | |||||
Cash used in investing activities | (1,475 | ) | 230 | 33 | (1,212 | ) | ||||
Financing activities |
||||||||||
Long-term debt repaid | (1,807 | ) | | | (1,807 | ) | ||||
Long-term debt issued | 1,336 | | | 1,336 | ||||||
Loan from joint venture | | 109 | | 109 | ||||||
Common shares issued | 13 | | | 13 | ||||||
Common shares purchased | (25 | ) | | | (25 | ) | ||||
Finance costs (cash) | (190 | ) | (1 | ) | 1 | (190 | ) | |||
Common share dividends | (277 | ) | | | (277 | ) | ||||
Preferred share dividends | (9 | ) | | | (9 | ) | ||||
Deferred credits and other | 22 | (25 | ) | | (3 | ) | ||||
Changes in non-cash working capital | (6 | ) | | | (6 | ) | ||||
Cash used in financing activities | (943 | ) | 83 | 1 | (859 | ) | ||||
Effect of translation on foreign currency cash and cash equivalents | 9 | | | 9 | ||||||
Net increase in cash and cash equivalents | 307 | (31 | ) | 58 | 334 | |||||
Cash and cash equivalents, beginning of year | 414 | (73 | ) | (122 | ) | 219 | ||||
Cash and cash equivalents, end of year | 721 | (104 | ) | (64 | ) | 553 | ||||
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 21
5. Disposals and Assets Held for Sale
Asset Sales Completed in 2014
Southeast Asia Dispositions
In October 2014, Talisman completed the sale of its 7.48% interest in the Southeast Sumatra PSC in Indonesia for proceeds of $34 million, net of withholding tax, resulting in a pre-tax loss of $3 million ($nil after-tax).
North America Dispositions
In June 2014, Talisman signed a purchase and sale agreement to sell non-core assets in western Canada for total cash consideration of C$120 million, before closing adjustments. The transaction closed on July 31, 2014 with net proceeds of $99 million after $1 million in working capital adjustments, resulting in a pre-tax loss on disposal of $3 million ($3 million after-tax).
In April 2014, Talisman sold non-core assets in western Canada for net proceeds of $42 million after $2 million in working capital adjustments, resulting in a pre-tax loss on disposal of $3 million ($4 million after-tax).
In March 2014, Talisman completed the sale of its Montney acreage in northeast British Columbia for proceeds of $1.3 billion, resulting in a pre-tax gain of $564 million ($493 million after-tax). The assets held for sale and liabilities associated with assets held for sale included in the Consolidated Balance Sheets as at January 1, 2014 were $776 million and $160 million respectively. The operating results from January 1, 2014 up to the date of closing were included in net income for the three month period ended March 31, 2014 and the gain was included in "Gain on disposals" on the Consolidated Statements of Income (Loss).
Asset Sales Completed in 2013
Sale of Colombian Pipeline Interest
In December 2013, Talisman sold its 12.152% equity interest in the Ocensa pipeline in Colombia for proceeds, net of disposition costs, of approximately $590 million, resulting in a pre-tax gain of $34 million. Talisman retained its crude oil transportation rights in the Ocensa pipeline and retained its option to market any unused capacity to third parties.
North America Dispositions
In November 2013, Talisman completed sales of non-core assets in western Canada for net proceeds of $35 million, resulting in a pre-tax loss of $3 million ($2 million after-tax).
In May 2013, Talisman completed sales of non-core assets in western Canada for proceeds of $63 million, resulting in a pre-tax gain of $52 million ($39 million after-tax).
Southeast Asia Dispositions
In 2013, Talisman completed the sale of its 5.03% interest in the Offshore Northwest Java PSC in Indonesia for net proceeds of $36 million, resulting in a pre-tax gain of $9 million ($3 million after-tax).
Asset Sales Completed in 2012
Sale of 49% Equity Interest in Talisman Energy (UK) Limited (TEUK) to China Petrochemical Corporation (Sinopec)
On December 17, 2012, Talisman completed the sale of 49% of its equity interest in TEUK, now renamed TSEUK, which owns substantially all of Talisman's UK assets, to Addax Petroleum UK Limited (APUK), an indirect wholly-owned subsidiary of Sinopec, for cash consideration of $1.5 billion based on an effective date of January 1, 2012. The $1.5 billion cash consideration is comprised of $1,349 million in cash ($1,467 million in cash received net of $118 million cash disposed) and $33 million of working capital and other adjustments.
The transaction resulted in a non-taxable gain of $860 million, which is included in the "Gain on disposals" on the Consolidated Statements of Income (Loss). At December 31, 2013, Talisman holds 51% of the joint venture company, with APUK holding the remaining 49%. As a result of the transaction, $23 million of exchange losses previously accumulated in other comprehensive income (loss) were included in the "Gain on disposals" on the Consolidated Statements of Income (Loss).
North America Dispositions
In 2012, the Company completed sales of oil and gas producing assets in Western Canada for proceeds of $437 million, resulting in a pre-tax gain of $256 million ($189 million after-tax). The Company also sold non-core coal assets in northeast British Columbia for cash consideration of $496 million after transaction costs. The carrying value of these assets was $nil and a gain of $372 million was recorded, net of tax of $124 million.
22 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
6. Property Acquisitions
During the year ended December 31, 2013, Talisman acquired a 55% working interest and operatorship of exploration and evaluation assets in Block 07/03 offshore Vietnam via two separate transactions with a total acquisition cost of $95 million. The block is adjacent to the Company's existing position in the Nam Con Son Basin.
During the year ended December 31, 2012, the Company completed an agreement with the Kurdistan Regional Government for a further investment of $50 million in the Kurdamir Block arising from the Company's decision to enter the next exploration sub-period of the licence.
7. Business Combinations
Kinabalu PSC
In 2012, the Company entered into a new PSC with PETRONAS, the national oil company of Malaysia, acquiring ownership of a 60% working interest in the Kinabalu PSC, as well as assuming operatorship. As consideration for receipt of the PSC interest, the Company paid to PETRONAS $50 million in January 2013.
This acquisition, which builds on the Company's acreage position in Malaysia and is being reported in the Southeast Asia segment, was accounted for using the acquisition method. The fair values of the identifiable assets acquired and liabilities assumed by Talisman, after working capital and other adjustments, were allocated as follows:
Fair value of share of net assets acquired | ||||
Property, plant and equipment | 61 | |||
Exploration and evaluation assets | 39 | |||
Decommissioning liability (note 16) | (53 | ) | ||
Deferred tax liability | (19 | ) | ||
Total identifiable net assets at fair value | 28 | |||
Goodwill arising on acquisition | 22 | |||
Total cost of acquisition | 50 | |||
Satisfied by: | ||||
Cash paid in 2013 | 50 | |||
The goodwill arising on this acquisition is attributable to the difference between the accounting fair value and the tax basis of the net assets acquired, and is not deductible for income tax purposes.
Revenue and net income from Kinabalu PSC did not have a material impact on the Company during 2012, since the effective date of transaction was December 26, 2012. It is impractical to disclose information of revenue or net income had the transaction closed on January 1, 2012, as reliable information is not readily available. The Company did not incur any transaction costs as part of the acquisition.
No contingent consideration or contingent liabilities arose from this transaction.
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 23
8. Investments
December 31, 2014 | December 31, 2013 | |||||
Investments in Joint Ventures | ||||||
Equity investment in Equion | 523 | 920 | ||||
Equity investment in TSEUK(1) | | (606 | ) | |||
Loan to TSEUK(1) | | 812 | ||||
523 | 1,126 | |||||
Available-for-sale investment | ||||||
Transasia Pipeline Company Pvt. Ltd. | 34 | 34 | ||||
Other | 47 | 44 | ||||
81 | 78 | |||||
Total | 604 | 1,204 | ||||
December 31, 2014 | December 31, 2013 | ||||
Obligation to Fund Equity Investee | |||||
Equity investment in TSEUK(1) | (700 | ) | | ||
Loan to TSEUK(1) | 514 | | |||
(186 | ) | | |||
Investments in Joint Ventures
Movement in the investment in TSEUK joint venture during the year is as follows:
Year ended December 31, 2014 | Year ended December 31, 2013 |
||||
Balance, beginning of year | 206 | 258 | |||
Investment in TSEUK | 961 | | |||
Loan to TSEUK, net of repayments and settlements(1) | (298 | ) | 398 | ||
Share of net loss and comprehensive loss | (1,055 | ) | (450 | ) | |
Balance, end of year(2) | (186 | ) | 206 | ||
Talisman has a 51% interest in the ownership and voting rights of TSEUK whose principal place of operations is the United Kingdom (UK) and is incorporated in England and Wales. Talisman is one of two shareholders in this corporate joint venture engaging in the exploration for, and development and production of crude oil and natural gas. The corporate joint venture is governed by a shareholders' agreement, which requires that unanimous consent be obtained from the shareholders for all significant operating and financing decisions.
Movement in the investment in Equion joint venture during the year is as follows:
Year ended December 31, 2014 | Year ended December 31, 2013 |
|||
Balance, beginning of year | 920 | 804 | ||
Share of net loss and comprehensive loss | 15 | 116 | ||
Dividend declared by Equion(1) | (279 | ) | | |
Impairment (note 15) | (133 | ) | | |
Balance, end of year | 523 | 920 | ||
24 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
Talisman has a 49% interest in the ownership and voting rights of Equion whose principal place of operations is Colombia. Talisman is one of two shareholders in this strategic corporate joint venture engaged in the exploration for, and development and production of crude oil and natural gas. The corporate joint venture is governed by a heads of agreement amongst the shareholders, which requires that unanimous consent be obtained from the shareholders for all significant operating and financing decisions.
The following tables summarize the financial information of the joint ventures. The tables also reconcile financial information to the carrying amount of the Company's interest in joint ventures, which are accounted for using the equity method.
December 31, 2014 |
December 31, 2013 |
|||||||||||
Summarized Balance Sheets | TSEUK(1) | Equion(1) | Total | TSEUK(1) | Equion(1) | Total | ||||||
Cash and cash equivalents | 37 | 141 | 178 | 42 | 69 | 111 | ||||||
Current assets | 517 | 314 | 831 | 527 | 304 | 831 | ||||||
Loans receivable from shareholders | | 29 | 29 | | 587 | 587 | ||||||
Non-current assets | 4,812 | 1,246 | 6,058 | 3,515 | 1,321 | 4,836 | ||||||
Total assets | 5,366 | 1,730 | 7,096 | 4,084 | 2,281 | 6,365 | ||||||
Current liabilities | 1,073 | 392 | 1,465 | 700 | 420 | 1,120 | ||||||
Loans payable to shareholders | 1,009 | | 1,009 | 1,592 | | 1,592 | ||||||
Non-current liabilities | 4,807 | 329 | 5,136 | 3,131 | 315 | 3,446 | ||||||
Total liabilities | 6,889 | 721 | 7,610 | 5,423 | 735 | 6,158 | ||||||
Net assets (liabilities) | (1,523 | ) | 1,009 | (514 | ) | (1,339 | ) | 1,546 | 207 | |||
Talisman's interest | 51% | 49% | 51% | 49% | ||||||||
Talisman's share of net assets (liabilities) | (777 | ) | 494 | (283 | ) | (683 | ) | 758 | 75 | |||
Goodwill(2) | 77 | 162 | 239 | 77 | 162 | 239 | ||||||
(700 | ) | 656 | (44 | ) | (606 | ) | 920 | 314 | ||||
Loan to TSEUK | 514 | | 514 | 812 | | 812 | ||||||
Impairment (note 15) | | (133 | ) | (133 | ) | | | | ||||
Talisman's investment (obligation to fund) | (186 | ) | 523 | 337 | 206 | 920 | 1,126 | |||||
Year ended December 31, 2014 |
Year ended December 31, 2013 |
||||||||||||
Summarized Statements of Income (Loss) | TSEUK(1) | Equion(1) | Total | TSEUK(1) | Equion(1) | Total | |||||||
Revenue | 1,191 | 601 | 1,792 | 1,411 | 729 | 2,140 | |||||||
Expenses | |||||||||||||
Operating | 1,315 | 100 | 1,415 | 1,270 | 96 | 1,366 | |||||||
Transportation | 20 | 37 | 57 | 24 | 43 | 67 | |||||||
General and administrative | 38 | | 38 | 10 | | 10 | |||||||
Depreciation, depletion and amortization | 383 | 267 | 650 | 718 | 207 | 925 | |||||||
Dry hole | 25 | | 25 | 43 | | 43 | |||||||
Exploration expense | 10 | | 10 | 36 | 1 | 37 | |||||||
Finance costs | 122 | 2 | 124 | 86 | 3 | 89 | |||||||
Impairment | 3,149 | | 3,149 | 1,625 | | 1,625 | |||||||
Other | 609 | (24 | ) | 585 | 35 | (9 | ) | 26 | |||||
Income (loss) before tax | (4,480 | ) | 219 | (4,261 | ) | (2,436 | ) | 388 | (2,048 | ) | |||
Current income tax expense (recovery) | (98 | ) | 167 | 69 | (176 | ) | 157 | (19 | ) | ||||
Deferred income tax expense (recovery) | (2,314 | ) | 21 | (2,293 | ) | (1,378 | ) | (6 | ) | (1,384 | ) | ||
Net income (loss) and comprehensive income (loss) | (2,068 | ) | 31 | (2,037 | ) | (882 | ) | 237 | (645 | ) | |||
Talisman's interest | 51% | 49% | 51% | 49% | |||||||||
Talisman's share of income (loss) after tax | (1,055 | ) | 15 | (1,040 | ) | (450 | ) | 116 | (334 | ) | |||
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 25
Year ended December 31, 2014 |
Year ended December 31, 2013 |
||||||||||||
Summarized Statements of Cash Flows | TSEUK(1) | Equion(1) | Total | TSEUK(1) | Equion(1) | Total | |||||||
Operating activities | |||||||||||||
Net income (loss) | (2,068 | ) | 31 | (2,037 | ) | (882 | ) | 237 | (645 | ) | |||
Add: Finance costs (cash and non-cash) | 122 | 2 | 124 | 86 | 3 | 89 | |||||||
Items not involving cash | 1,605 | 289 | 1,894 | 1,031 | 199 | 1,230 | |||||||
Changes in non-cash working capital | 154 | (65 | ) | 89 | (81 | ) | (16 | ) | (97 | ) | |||
Cash provided by (used in) operating activities | (187 | ) | 257 | 70 | 154 | 423 | 577 | ||||||
Investing activities |
|||||||||||||
Capital expenditures and acquisitions | (1,179 | ) | (214 | ) | (1,393 | ) | (1,045 | ) | (241 | ) | (1,286 | ) | |
Proceeds of disposition | | 14 | 14 | | | | |||||||
Loans to shareholders, net of repayments | | (11 | ) | (11 | ) | | (284 | ) | (284 | ) | |||
Other | 112 | 26 | 138 | 33 | (39 | ) | (6 | ) | |||||
Cash used in investing activities | (1,067 | ) | (185 | ) | (1,252 | ) | (1,012 | ) | (564 | ) | (1,576 | ) | |
Financing Activities |
|||||||||||||
Common shares issued | 625 | | 625 | | | | |||||||
Loans from shareholders, net of repayments | 661 | | 661 | 780 | | 780 | |||||||
Finance costs (cash) | (49 | ) | | (49 | ) | (39 | ) | (2 | ) | (41 | ) | ||
Other | 12 | | 12 | 35 | | 35 | |||||||
Cash provided by (used in) financing activities | 1,249 | | 1,249 | 776 | (2 | ) | 774 | ||||||
The summarized financial information presented are the amounts included in the financial statements of the joint venture entities adjusted for fair value adjustments made at the time of acquisition, as appropriate. The fair value adjustments related to the Company's jointly controlled equity interest in Equion principally relate to property, plant and equipment, provisions and the related indemnification asset and goodwill. In addition, the financial statements of TSEUK have been adjusted with respect to asset impairments, dry hole expense, deferred tax assets and provisions.
TSEUK Joint Venture
As at December 31, 2014, the investment balance in the TSEUK joint venture was negative $186 million. The obligation to fund TSEUK arises from the Company's past practice of funding TSEUK's cash flow deficiencies, and the expectation that cash flow deficiencies will continue to be funded through 2015. In addition the Company has a guarantee to fund TSEUK's decommissioning obligation if TSEUK is unable to. As such, the Company has recognized a negative investment value from the application of equity accounting. The Company's obligation to fund TSEUK will increase to the extent future losses are generated within TSEUK. In addition, future contributions to the TSEUK joint venture could be impaired to the extent recoverability is not probable.
In June 2014, the shareholders of TSEUK agreed to subscribe for common shares of TSEUK in the amount of $1.26 billion, of which Talisman's share was $643 million, which settled shareholder loans of $1.24 billion and accrued interest of $18 million, of which Talisman's share was $634 million and $9 million, respectively.
In addition, the shareholders of TSEUK provided an equity funding facility totaling $1.2 billion to TSEUK in June 2014, of which Talisman is committed to $612 million, for the purpose of funding capital, decommissioning and operating expenditures of TSEUK. TSEUK may fund operating expenditures under this facility to a maximum amount of $150 million. This facility expires on June 30, 2015. During the period from July 1, 2014 to December 31, 2014, the shareholders of TSEUK agreed to subscribe for common shares of TSEUK in the amount of $625 million under this facility, of which Talisman's share was $319 million. As at December 31, 2014, the remaining facility commitment is $575 million, of which the Company's share is $293 million.
The shareholders of TSEUK have provided an unsecured loan facility with a borrowing limit of $2.4 billion to TSEUK, of which Talisman is committed to $1.2 billion, for the purpose of funding capital expenditures of TSEUK. As at December 31, 2014, $1.0 billion has been drawn under this facility, of which Talisman's share is $514 million (2013 $812 million).
26 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
Loans under this facility bear interest at the UK interest rate swap rate plus 2.5%, and are repayable quarterly in equal instalments based upon a five-year repayment period calculated from the date each loan is advanced. All outstanding loans mature December 31, 2017, although the maturity date may be extended from time to time upon agreement between the shareholders and TSEUK. Prior to the maturity date, TSEUK may repay, in full or in part, the balance outstanding on any loan under this facility. Remaining borrowing capacity under this facility:
Year ended December 31, 2014 |
Year ended December 31, 2013 |
||||
Borrowing capacity, beginning of year | 1,525 | 2,400 | |||
Advances | (783 | ) | (875 | ) | |
Borrowing capacity, end of year | 742 | 1,525 | |||
Talisman's share |
378 |
778 |
|||
TSEUK is required to provide demand letters of credit as security in relation to certain decommissioning obligations in the UK pursuant to contractual arrangements under Decommissioning Security Agreements (DSAs). Refer to "Liquidity Risk" in note 23.
As at December 31, 2014, TSEUK recognized provisions for onerous contracts and contract cancellation related to drilling and vessel leases of $235 million ($120 million net to Talisman).
Equion Joint Venture
During the year ended December 31, 2014, Equion declared dividends payable to the shareholders in the amount of $570 million, of which Talisman's share was $279 million. The Company has recorded a reduction in the equity investment in Equion. The dividends were settled through reduction of the loan due to Equion as described below.
The loan due to Equion of $15 million (2013 $288 million) is unsecured, due upon demand and bears interest at LIBOR plus 0.30%.
The following table summarizes the Company's share of TSEUK and Equion commitments as at December 31, 2014:
Payments due by:(1)(2) | 2015 | 2016 | 2017 | 2018 | 2019 | Subsequent to 2019 |
Total | |||||||
Office leases | 3 | 2 | 2 | 2 | 2 | 11 | 22 | |||||||
Vessel leases | 135 | 11 | 8 | 5 | | | 159 | |||||||
Transportation and processing commitments(3) | 17 | 7 | 7 | 1 | | 9 | 41 | |||||||
Decommissioning liabilities(4) | 58 | 81 | 251 | 195 | 212 | 2,523 | 3,320 | |||||||
PP&E and E&E assets(5) | 180 | 60 | | | | | 240 | |||||||
Other service contracts | 95 | 7 | 7 | 6 | 6 | | 121 | |||||||
488 | 168 | 275 | 209 | 220 | 2,543 | 3,903 | ||||||||
As of December 31, 2014, TSEUK's total recorded decommissioning liabilities were $4.8 billion, of which Talisman's share is $2.5 billion. Decommissioning estimates are subject to a significant amount of management judgment given the long dated nature of the assets and the timing of remediation on cessation of production. The Company reviews its assessment of decommissioning liabilities annually, or where a triggering event causes a review, taking into account new information and industry experience. TSEUK Management has updated their review of decommissioning liability estimates, taking into account both internal assessments as well as external party views, including other operators, independent decommissioning experts and, more recently, new industry studies. As a result, TSEUK has increased its discounted liability estimates by $1.8 billion to $4.8 billion, largely as a result of longer expected durations for well remediation and increased topside removal costs.
Investments in Joint Operations
Talisman accounts for joint operations using proportionate consolidation. Talisman's interest in the Talisman Sasol Montney Partnership (TSMP) was accounted for as a joint operation and proportionately consolidated as Talisman shared its interests in the
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 27
partnership assets based on the Company's 50% ownership interest and was jointly and severally liable for the obligations of the partnership. TSMP's principal place of operations and country of incorporation was Canada. In 2013, Talisman reached an agreement to sell part of its Montney acreage in northeast British Columbia, which included Talisman's interest in TSMP. Talisman's interest in TSMP was therefore reclassified to assets held for sale. Talisman completed the sale during the three-month period ended March 31, 2014 (note 5).
Investments in Associate
Talisman had a 12.152% interest in Ocensa whose principal place of operations and country of incorporation is Colombia. On January 17, 2013, Ocensa's shareholders approved a resolution to change the nature of Ocensa's business from a cost recovery operating model to a profit oriented operating model, and certain elements of the governance structure within Ocensa. Among these changes, the arrangement for appointing the Board of Directors was modified, which provided Talisman with the ability to appoint one director to Ocensa's Board based upon its ownership interest in Ocensa at that time. Talisman was able to exercise significant influence over Ocensa from its ability to participate in the significant operating and financing decisions of Ocensa, and as a result, Talisman has accounted for its investment in Ocensa using the equity method commencing January 17, 2013 until December 19, 2013, when Talisman sold its 12.152% equity interest in Ocensa (note 5). In addition, at the time Talisman obtained the option to sell, on a temporary or permanent basis, all or a part of its entitlement to shipping capacity on the Ocensa pipeline (the Transportation Rights). As a result of this change, Talisman attributed $108 million to the Transportation Rights given its ability to sell excess transportation capacity in the Colombian markets. After the sale of its interest in Ocensa, Talisman retained its crude oil transportation rights and its right to generate third party revenue from sales of excess capacity (note 12).
The following tables summarize the financial information of Ocensa. No summarized balance sheet of Ocensa is presented as there was no investment balance at the beginning or end of 2013, or 2014(1).
Summarized Statements of Income
Year ended December 31 | 2014 | 2013 | ||
Revenue | | 1,204 | ||
Expenses (including income taxes) | | 715 | ||
Net income and comprehensive income | | 489 | ||
Talisman's previous interest | | 12.152% | ||
Talisman's share of net income and comprehensive income | | 59 | ||
Summarized Statements of Cash Flows
Years ended December 31 | 2014 | 2013 | |||
Operating Activities | |||||
Net income | | 489 | |||
Items not involving cash | | 227 | |||
Changes in non-cash working capital | | 501 | |||
Cash provided by operating activities | | 1,217 | |||
Cash used in investing activities | | (32 | ) | ||
Cash used in financing activities | | (957 | ) | ||
9. Goodwill
Changes in the carrying amount of the Company's goodwill are as follows:
Continuity of goodwill | 2014 | 2013 | |||
Balance, beginning of year | 575 | 775 | |||
Reclassified to assets held for sale (note 5) | | (14 | ) | ||
Disposals | (9 | ) | (1 | ) | |
Impairment (note 15) | (287 | ) | (185 | ) | |
Balance, end of year | 279 | 575 | |||
Goodwill has no tax basis.
28 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
10. Accounts Receivable
December 31, | 2014 | 2013 | |||
Accounts receivable | 902 | 1,127 | |||
Allowance for doubtful accounts | (9 | ) | (10 | ) | |
893 | 1,117 | ||||
The fair value of accounts receivable approximates the carrying amount due to their short term to maturity. Trade receivables are non-interest bearing and are generally on 30-90 day terms.
At December 31, the analysis of accounts receivables that were due or past due, but not impaired, was as follows:
Past due but not impaired | ||||||||
Total | < 90 days | 91-120 days | > 120 days | |||||
2014 | 893 | 770 | 7 | 116 | ||||
2013 | 1,117 | 1,040 | 4 | 73 | ||||
11. Inventories
December 31, | 2014 | 2013 | ||
Materials and supplies | 70 | 59 | ||
Product | 63 | 78 | ||
133 | 137 | |||
12. Other Assets
December 31, | 2014 | 2013 | ||
Accrued pension asset (note 31) | 4 | | ||
Decommissioning sinking fund (note 16) | 71 | 50 | ||
Transportation rights(1) (note 8) | 92 | 100 | ||
Other | 13 | 10 | ||
180 | 160 | |||
13. Yme Removal Obligation
In March 2013, Talisman, acting on behalf of its partners in the Yme field in Norway, entered into an agreement with the platform contractor. This agreement terminated all existing Yme contracts and outstanding disputes between the Yme partners and the platform contractor, set out the provisions regarding the removal of the existing above-surface Yme structure, the delivery of the existing above-surface Yme structure to the platform contractor (which Talisman, acting on behalf of the Yme partners, will complete as the "Talisman Works") and provided for a payment of $470 million from the platform contractor to the Yme partners to fund the cost of the Talisman Works. The Yme partners agreed to deposit $409 million into an escrow account, which can only be withdrawn for purposes of settling costs and liabilities associated with the Talisman Works.
As at December 31, 2014, Talisman's share of the liability associated with the Talisman Works in the amount of $186 million (2013 $252 million) has been recorded as the Yme removal obligation of which all (2013 $121 million) has been classified as current, as it is expected to be settled within the next twelve months. In 2013, the remaining balance of $131 million had been classified as long-term. Talisman's share of the cash held in the escrow account in the amount of $149 million (2013 $215 million) has been recorded as restricted cash of which all (2013 $121 million) has been classified as current. In 2013, the remaining $94 million was classified as long-term. During the year ended December 31, 2014, $66 million (2013 $30 million, 2012 $nil) in eligible expenditures were incurred on the Talisman Works which reduced the Yme removal obligation and the restricted cash balance by an equal amount.
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 29
14. Oil and Gas Assets
The cost and accumulated DD&A of the Company's PP&E (including corporate assets) and E&E assets are as follows:
PP&E | E&E assets |
Total | |||||
COST | |||||||
At December 31, 2012 | 21,550 | 5,577 | 27,127 | ||||
Additions | 1,943 | 522 | 2,465 | ||||
Disposals and derecognition | (354 | ) | (39 | ) | (393 | ) | |
Transfers from E&E assets to PP&E | 481 | (481 | ) | | |||
Change in decommissioning liabilities | 271 | (5 | ) | 266 | |||
Expensed to dry hole | | (89 | ) | (89 | ) | ||
Transfers to assets held for sale | (852 | ) | (92 | ) | (944 | ) | |
At December 31, 2013 | 23,039 | 5,393 | 28,432 | ||||
Additions | 1,743 | 409 | 2,152 | ||||
Disposals and derecognition | (1,981 | ) | (23 | ) | (2,004 | ) | |
Transfers from E&E assets to PP&E | 285 | (285 | ) | | |||
Change in decommissioning liabilities | 130 | 114 | 244 | ||||
Expensed to dry hole | | (140 | ) | (140 | ) | ||
At December 31, 2014 | 23,216 | 5,468 | 28,684 | ||||
ACCUMULATED DD&A |
|||||||
At December 31, 2012 | 11,088 | 2,258 | 13,346 | ||||
Charge for the period | 1,921 | | 1,921 | ||||
Disposals and derecognition | (269 | ) | (36 | ) | (305 | ) | |
Impairment losses | 755 | 17 | 772 | ||||
Impairment reversals | | (11 | ) | (11 | ) | ||
Transfers to assets held for sale | (208 | ) | | (208 | ) | ||
At December 31, 2013 | 13,287 | 2,228 | 15,515 | ||||
Charge for the period | 1,936 | 10 | 1,946 | ||||
Disposals and derecognition | (1,733 | ) | | (1,733 | ) | ||
Transfers from E&E assets to PP&E | 10 | (10 | ) | | |||
Impairment losses, net of reversals (note 15) | 672 | 676 | 1,348 | ||||
Transfers from PP&E to E&E assets | (20 | ) | 20 | | |||
At December 31, 2014 | 14,152 | 2,924 | 17,076 | ||||
NET BOOK VALUE |
|||||||
At December 31, 2014 | 9,064 | 2,544 | 11,608 | ||||
At December 31, 2013 | 9,752 | 3,165 | 12,917 | ||||
At December 31, 2012 | 10,462 | 3,319 | 13,781 | ||||
Included in PP&E are capitalized interest costs of $15 million (2013 $212 million) relating to projects under construction and development. During the year ended December 31, 2014, interest costs of $nil (2013 $9 million; 2012 $107 million) were capitalized.
In 2013, the Company reclassified the cost of certain properties in the North Sea segment, net of impairment charges from the PP&E category to the E&E category as a result of previously sanctioned development plans being re-evaluated and the associated proved reserves being reclassified to probable and contingent resources.
30 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
Non-Depleted Capital
PP&E and E&E assets include the following costs that were not subject to DD&A:
December 31 | 2014 | 2013 | |||
Undeveloped land | |||||
North America | 1,297 | 1,560 | |||
Southeast Asia | 321 | 313 | |||
Other | 40 | 196 | |||
Acquired unproved reserve costs not associated with producing fields(1) | |||||
Southeast Asia | 114 | 141 | |||
North Sea(4) | 85 | 204 | |||
Other | | 10 | |||
Exploration costs(2) | |||||
North America | 48 | 20 | |||
Southeast Asia | 232 | 261 | |||
North Sea(4) | 40 | 85 | |||
Other | 367 | 375 | |||
E&E assets | 2,544 | 3,165 | |||
Development projects(3) | |||||
North America | 311 | 524 | |||
Southeast Asia | 451 | 285 | |||
North Sea(4) | 21 | 114 | |||
Other | | | |||
3,327 | 4,088 | ||||
Costs relating to wells drilled prior to 2014 continue to be capitalized, since management's ongoing assessment includes further planned activity. The Company has performed impairment analysis on E&E assets as a result of the lower commodity price environment as at December 31, 2014 (note 15). The number of wells drilled prior to 2014 and related costs are as follows:
Years | Number of wells(1) | Cost(1) | ||||
North America | 2013 | 1 | 10 | |||
Southeast Asia | 2003-2013 | 13 | 127 | |||
North Sea | 2011 | 1 | 38 | |||
Other | 2008-2013 | 23 | 270 | |||
38 | 445 | |||||
North Sea and other international wells relate to projects that are in the process of being evaluated, including the drilling of additional appraisal wells and the completion of additional seismic analysis. Some of these projects are in the final stages of project sanction.
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 31
15. Impairment, Net of Reversals
Years ended December 31 | 2014 | 2013 | 2012 | ||||
Impairment losses | |||||||
E&E assets | 676 | 17 | 464 | ||||
PP&E | 704 | 755 | 2,125 | ||||
Goodwill impairment loss (note 9) | 287 | 185 | | ||||
Impairment in Equion (note 8) | 133 | | | ||||
1,800 | 957 | 2,589 | |||||
Impairment reversals | |||||||
E&E assets | | (11 | ) | | |||
PP&E | (32 | ) | | | |||
(32 | ) | (11 | ) | | |||
Net impairment | 1,768 | 946 | 2,589 | ||||
At December 31, 2014, the Company assessed the carrying amount of its oil and gas assets for indicators of impairment such as changes in future prices, future costs and reserves. The Company generally calculates the recoverable amount as the fair value less costs to sell using a discounted cash flow model. The discount rate is derived from the Company's post-tax weighted average cost of capital and then adjusted to arrive at a market participant rate. Any country-specific risks are adjusted for within the cash flows. The rate to be applied is reassessed each year. The calculation of recoverable amounts is sensitive to the following assumptions which have been based on a long-term view of global oil and gas supply and demand as well as extensive industry experience:
Production volumes, operating costs and future capital cost estimates are based on management's best estimates of future costs based on the development plans approved by senior management, and in some areas, full field development plans that a reasonable market participant would use. Reserve quantities form the basis of the production profiles within the discounted cash flow models. The data generated for each field takes into consideration the development plans approved by senior management and reasonable assumptions that an external party would apply in appraising the assets, including expected licence renewals.
Commodity prices are based on market indicators at the end of the year. Management's long-term assumptions are benchmarked against the forward price estimates of a range of analysts and external reserves evaluation firms on an annual basis.
Discount rates used reflect the estimated weighted average cost of capital rates that market participants would use for each CGU.
Foreign exchange rates are based on forward average rates for 2014 and thereafter on management's long-term assumptions set with reference to a range of underlying economic indicators.
Income taxes are calculated using the tax pools available to a buyer in the relevant jurisdiction using the tax rates and rules in place at the end of the year. Royalties are also calculated on a field-by-field basis using available deductions.
32 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
The following assumptions were used in developing the cash flow model and applied over the expected life of the respective fields within each CGU:
2015 | 2016 | 2017 | 2018 | 2019(1) | ||||||
WTI ($/bbl) | 65.00 | 75.00 | 85.00 | 86.54 | 88.83 | |||||
Dated Brent ($/bbl) | 70.00 | 80.00 | 90.00 | 91.54 | 93.83 | |||||
Henry Hub natural gas ($/mmbtu) | 3.50 | 4.00 | 4.25 | 4.50 | 4.73 | |||||
AECO (C$/gj) | 3.31 | 3.77 | 4.04 | 4.31 | 4.56 | |||||
US$/C$ | 0.86 | 0.88 | 0.88 | 0.88 | 0.88 | |||||
US$/UK£ | 1.55 | 1.55 | 1.60 | 1.60 | 1.60 | |||||
NOK/US$ | 7.25 | 7.25 | 7.25 | 7.25 | 7.25 | |||||
Post-tax discount rate | 10% | 10% | 10% | 10% | 10% | |||||
In addition to discounted cash flows, the Company also considered a variety of market metrics in assessing fair value less cost to sell in certain areas. Market metric information was obtained from recent transactions involving similar assets. In determining the fair value of the Company's investment in shale properties, the Company considers a variety of valuation metrics from recent comparable transactions in the market. These metrics include:
Impairment of Assets in 2014
During 2014, the Company recorded a $614 million pre-tax ($614 million after-tax) impairment expense relating to Eagle Ford, of which $488 million was to PP&E assets and $126 million to E&E assets. The CGU consists of upstream properties and midstream assets. The impairment was taken mainly as a result of the overall lower commodity price environment leading to the decrease of the properties and asset valuation. The recoverable amount, as reflected by the fair value less cost to sell of the CGU, is $1.8 billion (using Level 2 fair value inputs). In developing its view of fair market value, management considered precedent Eagle Ford transactions. Precedent transactions from 2014 and 2013 were used to derive market metrics. A discount factor was applied to the historical 2014 and 2013 market metrics to reflect the lower liquids prices observed in the fourth quarter of 2014, the reduction determined by reference to comparable "pure play" companies operating in the CGU.
During 2014, the Company recorded impairment expenses of $60 million pre-tax ($27 million after-tax) in Southeast Asia, of which $45 million pre-tax expense ($19 million after-tax) related to PP&E assets in Australia and $8 million pre-tax expense ($5 million after-tax) to PP&E assets in Malaysia. The impairment relating to Australia was a result of lower commodity prices and increased 2014 decommissioning cost estimates. The impairment relating to Malaysia was a result of lower commodity prices.
During 2014, the Company recorded impairment expenses of $288 million pre-tax ($142 million after-tax) related to E&E assets in Norway. Of the $288 million, $158 million pre-tax expense ($35 million after-tax) was recorded due to uncertainties in future development plans as a result of lower prices and a further $130 million of pre-tax impairment expense ($107 million after-tax) as a result of the Company's decision to withdraw from an exploration licence following technical evaluation, representing the full book value of the licence. In addition, the Company also recorded a $166 million pre-tax impairment ($36 million after-tax) related to PP&E assets as a result of lower commodity prices, capital overruns, high operating costs and lower than expected results which resulted in downward reserves revisions.
During 2014, the Company recorded pre-tax impairment expense of $234 million ($234 million after-tax) relating to Block 44 included in E&E assets in the Kurdistan Region of Iraq after determining that future investment in a capital constrained environment was unlikely.
During 2014, the Company recorded an impairment of $133 million pre-tax ($133 million after-tax) related to its investment in Equion, due principally to the lower commodity price environment.
Impairment of Goodwill
Goodwill was assessed for impairment as at December 31, 2014 using fair value less costs to sell. Fair value less costs to sell was estimated for a group of CGUs in an operating segment or a country, with allocated goodwill, based on the assumptions used in the
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 33
asset impairment tests. Any determination with respect to the recoverable amount of the group of CGUs is sensitive to the changes in key assumptions.
During 2014, the Company recorded a non-taxable goodwill impairment expense of $287 million in the North Sea operating segment, representing a full write-off of the North Sea goodwill balance. The goodwill write-off was a result of the Company's view of the declining value of its North Sea assets driven by lower commodity prices and higher decommissioning and development cost estimates.
Other than the goodwill impairment in the North Sea, no reasonably possible change in assumptions would cause goodwill to become impaired in the other CGUs, or group of CGUs.
Impairment of Assets in 2013
During 2013, the Company recorded impairment expense of $332 million pre-tax ($252 million after-tax) in North America. The majority of this impairment, $309 million pre-tax ($231 million after-tax), was recorded in conventional properties in Canada as a result of the Company lowering its long-term natural gas price assumptions by approximately 25% over the previous year's assumptions and upward revisions in cost estimates.
During 2013, Kitan in Australia was impacted by well performance issues and, as a result, the Company made a downward revision to estimated recoverable reserves and recorded an impairment expense of $55 million pre-tax ($27 million after-tax).
During 2013 in Norway, the Company recorded a net impairment expense of $358 million pre-tax ($79 million after-tax). The impairments are primarily as a result of increased decommissioning costs on Gyda and Rev, and negative reserves revisions on Varg.
During 2013, the Company recorded $16 million pre-tax ($16 million after-tax) of impairment expense in the "Other" segment relating primarily to Sierra Leone and Peru. In 2013, the Company received government approval to transfer all of its interests in Sierra Leone, and was in the process of exiting Peru.
During 2013, the Company recorded a non-taxable impairment of $185 million relating to North Sea goodwill arising from the diminution of the Company's view of the value of its North Sea assets.
Impairment of Assets in 2012
During the year ended December 31, 2012, the Company recorded impairments of $1.9 billion for the North Sea, primarily related to the Yme project in Norway. The Yme project experienced significant delays, quality issues and cost overruns and was subject to arbitration with the platform contractor. The Company also made a decision to de-man the platform for safety-related reasons and it had not been re-manned. Given the uncertainty of the timing for first oil, Talisman removed Yme from its forward projections and recorded impairment losses of $1,475 million pre-tax ($373 million after-tax). This represented an impairment of the remaining book value of the property, plant and equipment of Yme, leaving a deferred tax asset of $521 million relating to the investment in the project. Capital expenditures incurred during the fourth quarter, capitalized interest and revised decommissioning liabilities totaling $99 million pre-tax ($28 million after-tax) were also impaired in full.
Also during the year ended December 31, 2012, the Rev field in Norway experienced a significant drop in reservoir pressure, resulting in a decline in production. As a result, the Company made a downward revision of its estimates of recoverable reserves and recorded an impairment expense of $250 million pre-tax ($55 million after-tax). An impairment expense of $74 million pre-tax ($17 million after-tax) in respect of other Norwegian exploration assets upon completion of the commercial feasibility studies of these assets was also recorded. As a result of a revision to decommissioning cost estimates in Gyda, the Company also recorded an impairment expense of $41 million pre-tax ($9 million after-tax).
During 2012, the Company recorded impairment expense of $363 million in North America of which $194 million pre-tax ($138 million after-tax) relates to lower long-term gas price assumptions and reserves reduction in conventional areas, and impairment expense of $60 million pre-tax ($45 million after-tax) was recorded in respect of conventional assets disposed of in the third quarter. In addition, the Company concluded during the third quarter that it would not commit capital in the foreseeable future to exploration and evaluation activities in Quebec, where the prohibition regarding hydraulic fracturing for shale gas developments has been reaffirmed. Accordingly, the Company fully impaired its Quebec exploration and evaluation assets and recorded an impairment expense of $109 million pre-tax ($82 million after-tax).
In 2012, $171 million of impairment expenses were recorded in Peru related to the Company's decision to cease exploration activities in the Marañon Basin in northern Peru and exit the country. An impairment expense of $41 million was recorded during the year ended December 31, 2012, in respect of exploration and evaluation assets in Poland.
During the year ended December 31, 2012, the Company recorded $72 million of impairment expense related to exploration acreage relinquished in the Kurdistan Region of Iraq.
34 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
16. Decommissioning Liabilities
Continuity of decommissioning liabilities(1) | 2014 | 2013 | |||
Balance, beginning of year | 1,769 | 1,557 | |||
Liabilities incurred during the year | 75 | 73 | |||
Liabilities settled during the year | (59 | ) | (77 | ) | |
Accretion expense (note 17) | 51 | 36 | |||
Revisions in estimated cash flows | 109 | 405 | |||
Change in discount rate | 60 | (212 | ) | ||
Disposals | (77 | ) | (4 | ) | |
Reclassified to liabilities associated with assets held for sale (note 5) | | (9 | ) | ||
Balance, end of year | 1,928 | 1,769 | |||
Expected to be settled within one year | 43 | 42 | |||
Expected to be settled in more than one year | 1,885 | 1,727 | |||
1,928 | 1,769 | ||||
Revisions in estimated discounted cash flows occurring in 2014 included revisions to North Sea cost estimates of approximately $92 million as a result of longer expected durations for well remediation. The liabilities incurred during the year related principally to new wells and facilities in North America and Southeast Asia.
The Company provides for the future cost of decommissioning oil and natural gas properties and facilities on a discounted basis. At December 31, 2014, the estimated undiscounted decommissioning liabilities associated with oil and gas properties and facilities were $3.1 billion (2013 $3.2 billion). The majority of the payments to settle this provision will occur over a period of 35 years and will be funded from the general resources of the Company as they arise. The provision for the costs of decommissioning production facilities and pipelines at the end of their economic lives has been estimated using existing technology, at current prices or long-term assumptions and based upon the expected timing of the activity. The provision has been discounted using a weighted average credit-adjusted risk free rate of 3.5% (2013 3.8%), which excludes the impact of inflation. Total accretion expense for the year ended December 31, 2014 of $51 million (2013 $36 million; 2012 $81 million) has been included in Finance costs in the Consolidated Statements of Income (Loss).
While the provision is based on the best estimate of future costs and the economic lives of the facilities and pipelines, there is uncertainty regarding both the amount and timing of the costs to be incurred.
The Company has established a decommissioning sinking fund of $71 million at December 31, 2014 (2013 $50 million) that represents secured funding for a portion of its decommissioning obligations in Southeast Asia.
17. Finance Costs
2014 | 2013 | 2012 | |||||
Interest on long-term debt | 269 | 271 | 256 | ||||
Miscellaneous interest expense and other fees | 32 | 33 | 42 | ||||
Non-cash accretion expense (note 16) | 51 | 36 | 81 | ||||
Less: interest capitalized | | (9 | ) | (107 | ) | ||
352 | 331 | 272 | |||||
Interest capitalization ceased on certain North Sea projects including Yme effective January 1, 2013. In addition, interest capitalization ceased on the HST/HSD blocks in Vietnam upon first production in May 2013.
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 35
18. Long-Term Debt
December 31 | 2014 | 2013 | ||||
Bankers' Acceptances | 475 | 250 | ||||
Commercial Paper | 103 | 544 | ||||
Tangguh Project Financing | 43 | 81 | ||||
Short-term LIBOR Loan | 150 | | ||||
Debentures and Notes (Unsecured)(1) | ||||||
8.25% notes (US$50 million), due 2014 | | 50 | ||||
5.125% notes (US$375 million), due 2015(2) | 375 | 375 | ||||
8.50% notes (US$150 million), due 2016 | 150 | 150 | ||||
6.625% notes (UK£250 million), due 2017 | 388 | 413 | ||||
7.75% notes (US$700 million), due 2019 | 696 | 695 | ||||
3.75% notes (US$600 million), due 2021 | 595 | 593 | ||||
7.25% debentures (US$300 million), due 2027 | 300 | 300 | ||||
5.75% notes (US$125 million), due 2035 | 123 | 123 | ||||
5.85% notes (US$500 million), due 2037 | 495 | 494 | ||||
6.25% notes (US$600 million), due 2038 | 588 | 588 | ||||
5.50% notes (US$600 million), due 2042 | 583 | 583 | ||||
Gross debt(3) | 5,064 | 5,239 | ||||
Less: current portion | (1,109 | ) | (882 | ) | ||
Long-term debt | 3,955 | 4,357 | ||||
During the year ended December 31, 2014, Talisman repaid debt of $1,264 million.
Bank Credit Facilities and Commercial Paper
At December 31, 2014, Talisman had unsecured credit facilities totaling $3.2 billion, consisting of facilities of $3.0 billion (Facility No. 1) and $200 million (Facility No. 2). On May 5, 2014, the Company amended certain terms of Facility No. 1 of its revolving syndicated credit facility, converting the denomination to US dollars, extending the facility to $3.0 billion, and extending the term to five years maturing on March 19, 2019. Facility No. 2 was renegotiated by the Company on October 21, 2013 and amended in August 2014, with a five-year term, and matures October 21, 2019. Both facilities are committed credit facilities with borrowings under them which must be repaid on the maturity date.
Borrowings under Facility No. 1 are available in the form of prime loans, C$ or US$ bankers' acceptances, US$ base rate loans or LIBOR-based loans. In addition, drawings to a total of $1.0 billion are available in the form of letters of credit. Borrowings under Facility No. 2 are available in the form of prime loans, C$ or US$ bankers' acceptances, US$ base rate loans and LIBOR-based loans.
At December 31, 2014, borrowings from bank lines totaled $625 million, which was comprised of $475 million in the form of bankers' acceptances and $150 million in the form of a short-term LIBOR loan. There was also $91 million in letters of credit support outstanding at December 31, 2014. The average rate on the outstanding bankers' acceptances and short-term LIBOR loan was 2.06%, which reflects the weighted average interest rate of instruments outstanding at December 31, 2014. In addition, $103 million of commercial paper was outstanding and the average interest rate on outstanding commercial paper was 0.67%. The authorized amount under the Company's commercial paper program is $1.0 billion, but the amount available under this program is limited to the availability of backup funds under the Company's Facility No. 1.
At December 31, 2014, available borrowing capacity under the bank credit facilities was $2.4 billion.
Tangguh Project Financing
In connection with the acquisition of its interest in the Tangguh LNG Project, Talisman became a participant in a series of project financing facilities, the Company's share of which is up to $105 million. Approximately $43 million was outstanding under these facilities at December 31, 2014 (2013 $81 million), of which $6 million is due for repayment in 2015. Talisman's obligations under these facilities are being secured by a $30 million letter of credit issued to one of the partners in the Tangguh LNG Project, which in
36 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
turn guarantees Talisman's obligations under these facilities. Talisman's interest in the Tangguh LNG Project has a net book value of $304 million. Draws under these facilities bear interest at LIBOR plus 0.19% through to LIBOR plus 0.33% per annum. Two financing facilities were repaid in January 2014 and the remaining two other facilities will be fully amortized by 2021.
Debentures and Notes
On May 15, 2012, Talisman completed a $600 million offering of 5.5% notes due May 15, 2042. Proceeds, net of the discount and issuance costs, were $583 million. Interest on the notes is payable semi-annually. The notes are redeemable at the option of the Company at a make-whole premium. The notes are unsecured and unsubordinated and rank equally with all of the Company's other unsecured and unsubordinated indebtedness.
Other
The Company has a financing structure whereby subsidiaries have $1.3 billion drawn on bank facilities that have been offset against equal amounts of cash deposited by another subsidiary with the same bank under a right of offset agreement. The Company intends to offset these amounts at maturity.
Repayment Schedule
The Company's minimum repayments of gross long-term debt are as follows:
Year | ||
2015 | 1,109 | |
2016 | 156 | |
2017 | 395 | |
2018 | 7 | |
2019 | 703 | |
Subsequent to 2019 | 2,694 | |
Gross debt | 5,064 | |
The current liability of $1,109 million consists of $475 million in bankers' acceptances, $150 million in short-term LIBOR loan, $103 million in commercial paper, $375 million of 5.125% notes, and $6 million in Tangguh project financing.
19. Other Long-Term Obligations
December 31 | 2014 | 2013 | ||
Accrued pension and other post-employment benefits liability (note 31) | 135 | 114 | ||
Deferred credits | 41 | 33 | ||
Long-term portion of discounted obligations under finance leases | 41 | 44 | ||
Long-term portion of share-based payments liability (note 21) | 1 | 10 | ||
Other | 55 | 45 | ||
273 | 246 | |||
The fair value of financial liabilities included above approximates the carrying amount.
Finance Leases
The Company has entered into two leasing arrangements for the modification, refitting and use of Floating Storage Offloading (FSO) vessels for use in its operations. Elements of the leasing arrangements have been defined by the Company as finance leases. The imputed rates of interest on these leases, which expire in 2016 and 2019, are 6% and 10%, respectively. During the year ended December 31, 2014, the Company also entered into a leasing arrangement for the use of a condensate transportation vessel that has been categorized as a finance lease. The lease, which expires in 2026, has an imputed rate of interest of 4%.
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 37
The future minimum lease payments for finance leases and the present value of minimum finance lease payments by payment date are as follows:
2014 | 2013 | |||||||
Minimum payments |
Present value of payments |
Minimum payments |
Present value of payments |
|||||
Within one year | 18 | 17 | 18 | 18 | ||||
After one year but not more than five years | 47 | 36 | 58 | 42 | ||||
More than five years | 8 | 5 | 3 | 2 | ||||
Total minimum lease payments | 73 | 58 | 79 | 62 | ||||
Less amounts representing accretion | (15 | ) | | (17 | ) | | ||
Present value of minimum lease payments | 58 | 58 | 62 | 62 | ||||
Of the total discounted liability of $58 million (2013 $62 million), $17 million (2013 $18 million) is included in accounts payable and accrued liabilities.
20. Capital Disclosures
Talisman's objective in managing capital is to retain access to capital markets, ensure its ability to meet all financial obligations and meet its operational and strategic objectives.
Talisman's capital structure consists of shareholders' equity and debt. The Company makes adjustments to its capital structure based on changes in economic conditions and its planned requirements. Talisman has the ability to adjust its capital structure by issuing new equity or debt, selling assets to reduce debt, controlling the amount it returns to shareholders and making adjustments to its capital expenditure program, subject to restrictions in the Arrangement Agreement the Company entered into with Repsol on December 15, 2014.
Talisman monitors its balance sheet with reference to its liquidity and a debt-to-cash flow ratio. The main factors in assessing the Company's liquidity are cash flow (defined below), cash provided by and used in investing activities and available bank credit facilities. The debt-to-cash flow ratio at December 31, 2014 and 2013 was as follows:
2014 | 2013 | |||
Debt | 5,134 | 5,322 | ||
Cash flow | 2,368 | 2,318 | ||
Debt-to-cash flow | 2.2:1 | 2.3:1 | ||
The calculation of debt is as follows:
2014 | 2013 | |||
Gross debt and bank indebtedness | 5,073 | 5,252 | ||
Add: Production payments and finance leases | 61 | 70 | ||
Debt | 5,134 | 5,322 | ||
The calculation of cash flow is as follows:
2014 | 2013 | ||||
Cash provided by operating activities | 1,899 | 1,767 | |||
Changes in non-cash operating working capital | 248 | (4 | ) | ||
Add: Exploration expenditure | 232 | 260 | |||
Less: Dividends and distributions received from associates | | (58 | ) | ||
Add: Cash provided by operating activities from jointly controlled entities | 31 | 286 | |||
Changes in non-cash operating working capital from jointly controlled entities | (47 | ) | 49 | ||
Add: Exploration expenditure from jointly controlled entities | 5 | 18 | |||
Cash flow | 2,368 | 2,318 | |||
Talisman is in compliance with all of its debt covenants. The Company's principal financial covenant under its primary bank credit facility is a debt-to-cash flow ratio of less than 3.5:1, calculated quarterly on a trailing 12-month basis as of the last day of each fiscal quarter.
38 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
21. Share Capital and Share-Based Payments(1)
Authorized
Talisman's authorized share capital consists of an unlimited number of common shares without nominal or par value and an unlimited number of first and second preferred shares.
Common Shares Issued
Continuity of common shares | 2014 | 2013 | 2012 | ||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | ||||||||
Balance, beginning of year | 1,031,356,870 | 1,723 | 1,025,449,730 | 1,639 | 1,021,422,470 | 1,561 | |||||||
Issued on exercise of stock options | 478,244 | 5 | 3,223,810 | 41 | 1,190,223 | 15 | |||||||
Shares purchased and held in trust for long-term PSU plan (see below) | (2,265,898 | ) | (21 | ) | (100,000 | ) | (1 | ) | (2,022,000 | ) | (25 | ) | |
Shares released from trust for long-term PSU plan | 1,956,772 | 31 | 2,783,330 | 44 | 4,859,037 | 88 | |||||||
Balance, end of year | 1,031,525,988 | 1,738 | 1,031,356,870 | 1,723 | 1,025,449,730 | 1,639 | |||||||
During 2014, Talisman declared common share dividends of $0.27 per share (2013 $0.27 per share; 2012 $0.27 per share) for an aggregate dividend of $279 million (2013 $277 million; 2012 $277 million). Subsequent to December 31, 2014, no stock options were exercised for shares and 3,790,837 common shares were purchased and held in trust for the long-term PSU plan. There were 1,027,735,151 common shares outstanding at February 27, 2015.
Holders of common shares are entitled to receive notice of and to attend all meetings of shareholders. Each common share carries with it the right to one vote. Subject to the rights of holders of other classes of shares who are entitled to receive dividends in priority to or rateably with the common shares, the Board of Directors may declare dividends on the common shares to the exclusion of any other class of shares of the Company. In the event of liquidation, dissolution or winding up of the Company or any other distribution of assets of the Company among its shareholders for the purpose of winding up its affairs, and subject to the rights of other classes of shares on a priority basis, the holders of common shares are entitled to participate rateably in any distribution of any assets of the Company.
On February 18, 2015, the Arrangement Agreement was approved by the common and preferred shareholders of the Company as described in note 1.
Preferred Shares Issued
Continuity of preferred shares | 2014 | 2013 | 2012 | |||||||||
Shares | Amount | Shares | Amount | Shares | Amount | |||||||
Cumulative Redeemable Rate Reset First Preferred Shares, 4.2% Series 1: | ||||||||||||
Balance, beginning and end of year | 8,000,000 | 191 | 8,000,000 | 191 | 8,000,000 | 191 | ||||||
On December 13, 2011, Talisman issued 8,000,000 Cumulative Redeemable Rate Reset First Preferred Shares, Series 1 at a price of C$25 per share for aggregate gross proceeds of C$200 million. Net proceeds, after deducting underwriting fees, were C$194 million ($191 million).
Holders of Series 1 preferred shares are entitled to receive a cumulative quarterly fixed dividend of 4.2% annually for the initial period ending December 31, 2016, if, as, and when declared by the Board of Directors. Thereafter, the dividend rate will be reset every five years at a rate equal to the five-year Government of Canada bond yield plus 2.77%.
The Company may redeem all or a portion of the outstanding Series 1 preferred shares for C$25 per share plus accrued and unpaid dividends, on December 31, 2016 and on December 31 every five years thereafter. Holders of Series 1 preferred shares will have the right to convert their shares into Cumulative Rate Reset First Preferred Shares, Series 2 (Series 2 preferred shares), subject to certain conditions, on December 31, 2016 and on December 31 every five years thereafter. Holders of Series 2 preferred shares will be entitled to receive cumulative quarterly floating rate dividends at a rate equal to the three-month Government of Canada Treasury Bill yield plus 2.77%.
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 39
In the event of the liquidation, dissolution or winding up of the Company, the holders of Series 1 preferred shares will be entitled to receive C$25 per share together with all dividends accrued and unpaid to the date of payment before any amount will be paid or any assets of the Company distributed to the holders of any shares ranking junior to the Series 1 preferred shares. The holders of Series 1 preferred shares will not be entitled to share in any further distribution of the assets of the Company.
Holders of Series 1 preferred shares are not entitled to voting rights or to receive notice of or to attend shareholders' meetings unless dividends on the Series 1 preferred shares are in arrears to the extent of eight quarterly dividends, whether or not consecutive.
During the year ended December 31, 2014, Talisman declared preferred share dividends of C$1.05 per share (2013 C$1.05; 2012 C$1.10), for an aggregate dividend of $8 million (2013 $8 million; 2012 $9 million).
Stock Option Plans
Talisman has stock option plans that govern the granting of options to employees and directors. All options issued by the Company permit the holder to purchase one common share of the Company at the stated exercise price per share or to receive a cash payment equal to the appreciated value of the shares underlying the stock option. Options granted under the plans are generally exercisable after three years and expire 10 years after the grant date. Commencing in 2006, options granted to new employees vest evenly on an annual basis over a three-year period. Option exercise prices approximate the market price for the common shares on the date the options are granted.
Continuity of stock options | 2014 | 2013 | 2012 | |||||||||
Number of shares underlying options |
Weighted average exercise price (C$) |
Number of shares underlying options |
Weighted average exercise price (C$) |
Number of shares underlying options |
Weighted average exercise price (C$) |
|||||||
Outstanding, beginning of year | 43,285,254 | 16.80 | 59,836,097 | 16.28 | 59,092,044 | 16.82 | ||||||
Granted | | | 117,270 | 12.62 | 8,985,070 | 12.53 | ||||||
Exercised for common shares | (518,834 | ) | 8.66 | (3,223,810 | ) | 7.96 | (1,190,223 | ) | 9.03 | |||
Surrendered for cash | (27,812 | ) | 9.50 | (591,090 | ) | 7.60 | (192,712 | ) | 10.24 | |||
Expired or Forfeited | (9,137,846 | ) | 17.36 | (12,853,213 | ) | 16.97 | (6,858,082 | ) | 17.22 | |||
Outstanding, end of year | 33,600,762 | 16.78 | 43,285,254 | 16.80 | 59,836,097 | 16.28 | ||||||
Exercisable, end of year | 29,551,817 | 17.37 | 34,659,513 | 16.77 | 41,565,657 | 16.00 | ||||||
Options available for future grants pursuant to Stock Option Plans | 59,549,440 | 50,385,022 | 37,388,284 | |||||||||
The range of exercise prices of the Company's outstanding stock options is as follows:
December 31, 2014 | Outstanding options | Exercisable options | ||||||||
Range of exercise prices (C$) | Number of shares underlying options |
Weighted average exercise price (C$) |
Weighted average years to expiry |
Number of shares underlying options |
Weighted average exercise price (C$) |
|||||
10.99 12.99 | 6,691,441 | 12.30 | 6.33 | 2,696,199 | 12.03 | |||||
13.00 15.99 | 7,791,150 | 13.64 | 2.60 | 7,737,447 | 13.64 | |||||
16.00 18.99 | 9,449,631 | 17.74 | 3.94 | 9,449,631 | 17.74 | |||||
19.00 21.99 | 6,092,230 | 20.04 | 1.91 | 6,092,230 | 20.04 | |||||
22.00 23.92 | 3,576,310 | 23.90 | 5.95 | 3,576,310 | 23.90 | |||||
10.99 23.92 | 33,600,762 | 16.78 | 3.95 | 29,551,817 | 17.37 | |||||
The fair value of the liability for the stock option plans at December 31, 2014 was $37 million (2013 $93 million), of which the total amount (2013 $89 million) is included in accounts payable and accrued liabilities on the Consolidated Balance Sheets.
Subsequent to December 31, 2014, no stock options were surrendered for cash, exercised for shares, or granted and 596,373 were forfeited or expired, with 33,004,389 stock options outstanding at February 27, 2015.
Cash Units
In addition to the Company's stock option plans, Talisman has stock appreciation rights under cash unit plans. Cash units are similar to stock options except that the holder does not have a right to purchase the underlying shares of the Company. Units granted under
40 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
the cash unit plans are generally exercisable after three years and expire 10 years after the grant date. Commencing in 2007, cash units granted to new employees vest evenly on an annual basis over a three-year period. Cash unit exercise prices approximate the market price for the common shares on the date the options are granted.
At December 31, 2014, 2,534,360 cash units were outstanding. The fair value of the liability for the cash unit plan at December 31, 2014 was $1 million (2013 $1 million), of which the total amount (2013 $1 million) was included in accounts payable and accrued liabilities on the Consolidated Balance Sheets.
Subsequent to December 31, 2014, no cash units were surrendered for cash, exercised for shares, or granted and 81,876 were forfeited or expired, with 2,452,484 cash units outstanding at February 27, 2015.
Long-Term Performance Share Unit (PSU) Plan
In 2009, the Company implemented a long-term PSU plan that allows for the granting of PSUs to employees. The PSUs vest after three years to varying degrees (75%-150%) subject to predetermined performance measures being achieved. Each PSU represents the right, subject to performance, to receive one common share of the Company. Participants in the PSU plan are credited with additional PSUs corresponding to any associated dividend payments (referred to as "dividend equivalent PSUs").
Continuity of long-term PSU plan | 2014 | 2013 | 2012 | ||||
Number of units |
Number of units |
Number of units |
|||||
Outstanding, beginning of year | 12,496,313 | 16,536,700 | 11,219,027 | ||||
Granted | 1,396,346 | 1,287,901 | 11,652,041 | ||||
Expired or Forfeited | (1,559,824 | ) | (2,840,178 | ) | (2,056,761 | ) | |
Released | (1,956,772 | ) | (2,783,330 | ) | (4,672,151 | ) | |
Dividend equivalent PSUs | 304,379 | 295,220 | 394,544 | ||||
Outstanding, end of year | 10,680,442 | 12,496,313 | 16,536,700 | ||||
To satisfy the Company's obligations to deliver common shares to settle the PSUs, Talisman has arranged for third party trustees to hold common shares which were purchased on the open market. During 2014, the Company purchased 2,265,898 common shares on the open market for $21 million. At December 31, 2014, the Company held 4,640,040 common shares in trust. For accounting purposes, the cost of the purchase of the common shares held in trust has been accounted for as a reduction in outstanding common shares and the trusts have been consolidated since they are special purpose entities controlled by the Company. The Company is not exposed to fluctuations in the stock price in respect of the shares held in trust. Additional purchases of common shares to satisfy the Company's obligations are contemplated.
The 2012 long-term PSU grant vested on December 31, 2014 and settlement is expected to occur during the first quarter of 2015. In accordance with an agreement governing the PSUs, the Board of Directors approved vesting of 100% of the PSUs granted.
Subsequent to December 31, 2014, no PSUs were granted and 327,048 were forfeited or expired with 10,353,394 outstanding at February 27, 2015. Between January 1 and February 27, 2015, 3,790,837 common shares were purchased on the open market.
Deferred Share Unit (DSU) Plan
Non-Employee Directors DSU (DDSU) Plan
Under Talisman's DDSU Plan, directors may elect to receive a portion of their cash retainer and attendance fees in the form of DSUs, in addition to an annual DSU equity retainer. Each DSU represents the right to receive a cash payment on retirement equal to the market value of the Company's shares at the time of surrender. When dividends are paid on Common Shares, notional dividend equivalents are credited as additional DSUs.
At December 31, 2014, there were 1,038,973 (2013 826,371) DSUs outstanding to the Company's Board of Directors. The fair value of the liability was $8 million (2013 $10 million), which is included in accounts payable and accrued liabilities on the Consolidated Balance Sheets. A recovery of $1 million (2013 $3 million expense; 2012 $1 million recovery) related to the DSUs is recognized in general and administrative expenses on the Consolidated Statements of Income (Loss).
Executive DSU (EDSU) Plan
Under Talisman's EDSU Plan, executives may elect to receive DSUs in lieu of annual variable cash compensation. Additional EDSUs have been granted to the President and Chief Executive Officer: (a) in lieu of a percentage of his base salary, the value of various perquisites, and the value equal to the incremental compensatory value which would have accrued had he participated under the executive pension plan; and (b) as a form of long-term incentive (these DSUs contain performance conditions). Each vested DSU
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 41
under this plan represents the right to receive a cash payment on retirement or termination equal to the market value of the Company's shares at the time of surrender. When dividends are paid on common shares, notional dividend equivalents are credited as additional DSUs.
At December 31, 2014, there were 1,958,030 (2013 1,106,009) DSUs outstanding to certain executives of the Company. The fair value of the liability was $18 million (2013 $15 million), which is included in accounts payable and accrued liabilities on the Consolidated Balance Sheets. Expense of $3 million (2013 $15 million; 2012 $nil) related to DSUs was recognized on the Consolidated Statements of Income (Loss), which comprised $1 million in share-based payments expense and $2 million in general and administrative expense.
Restricted Share Unit (RSU) Plans
On April 1, 2013, Talisman implemented the "Global Restricted Share Unit Plan for Eligible Employees of Talisman Energy Inc. and its Affiliates". All RSUs issued by the Company permit the holder to receive a cash payment equal to the market value of the common shares at the vest date. Participants are also credited with additional RSUs corresponding to any associated notional dividend payments (referred to as "dividend equivalent RSUs"). Typically, one-third of the RSUs granted under the plan are paid on the grant anniversary date every year for the three years following the grant date. At December 31, 2014, there were 11,028,855 (2013 7,005,696) units outstanding (including dividend equivalent RSUs) and the fair value of the liability was $47 million (2013 $33 million), which is included in accounts payable and accrued liabilities on the Consolidated Balance Sheets. In 2014, non-executive employees were granted a total of 7,950,314 (2013 7,919,118) RSUs in place of stock options, cash units and PSUs.
Subsequent to December 31, 2014, no RSUs were granted, 173,532 were forfeited or expired and 74,036 were released with 10,781,287 outstanding at February 27, 2015.
Share-Based Payments Expense
The Company uses the Black-Scholes option pricing model to estimate the fair value of equity-settled share-based payment plans, with the following assumptions:
2014 | 2013 | 2012 | ||||
Expected volatility | 52% | 35% | 42% | |||
Risk free interest rate | 1.2% | 1.8% | 1.4% | |||
Expected term (years) | 4 | 5 | 5 | |||
Expected forfeiture rate | 5.7% | 5.1% | 4.2% | |||
Expected annual dividend yield | 2.0% | 1.8% | 1.6% | |||
The expected volatility is based on the historical volatility of the Company's common shares over a historical period that matches the expected term of the share-based payment plans. The risk free rate is based on Government of Canada bond yields for terms that match the expected term of the share-based payment plans. The expected term for each option tranche is estimated at the end of each reporting period. The expected dividend rate takes into account historical dividend payments and the Company's expectation for future payments.
During the year ended December 31, 2014, the Company recorded share-based payments expense of $27 million (2013 $49 million expense; 2012 $63 million recovery) in respect of the plans described above as follows: stock options $62 million recovery (2013 $48 million recovery; 2012 $82 million recovery), cash units $1 million expense (2013 $1 million expense; 2012 $5 million recovery), long-term PSU plan $68 million expense (2013 $56 million expense; 2012 $23 million expense), DSUs $1 million expense (2013 $13 million expense; 2012 $nil) and RSUs $19 million expense (2013 $27 million expense; 2012 $1 million expense).
During the year ended December 31, 2014, the Company recorded a net increase in contributed surplus of $41 million relating to share-based payments expense of the PSU plan (expenses of $72 million offset by $31 million related to settlement), compared to a net increase of $14 million in 2013 (expenses of $58 million offset by $44 million related to settlement) relating to the PSU plan, and a net decrease of $65 million for the year ended December 31, 2012, which related to $88 million settlement offset by $23 million of expenses.
During the year ended December 31, 2014, the Company paid cash of $20 million (2013 $4 million; 2012 $2 million) to employees in settlement of RSUs and fully accrued option liabilities for options exercised. In addition, the Company capitalized share-based payments expense of $27 million (2013 $26 million; 2012 $15 million).
42 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
For units that can be settled with cash or cash and shares, which include stock option, cash unit, DSU and RSU plans, of the combined liability of $111 million (2013 $152 million), $110 million (2013 $142 million) was included in accounts payable and accrued liabilities on the Consolidated Balance Sheets and $1 million (2013 $10 million) was included in other long-term obligations (note 19).
The total number of options and cash units expected to vest as at December 31, 2014 was 36 million, with a weighted average remaining contractual life of four years, a weighted average exercise price of $16.75 and no aggregate intrinsic value.
22. Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income are as follows:
2014 | 2013 | 2012 | |||||
Balance, beginning of year | |||||||
Derivative financial instruments designated as cash flow hedges | 2 | 2 | 2 | ||||
Foreign currency translation adjustments | 809 | 809 | 786 | ||||
811 | 811 | 788 | |||||
Other comprehensive income (loss) for the year | |||||||
Transfer of accumulated foreign currency loss to net income | | | 23 | ||||
Remeasurements relating to pension and other post-employment benefits | (8 | ) | 7 | 10 | |||
(8 | ) | 7 | 33 | ||||
Employee benefit plans remeasurements transferred to retained earnings | 8 | (7 | ) | (10 | ) | ||
Balance, end of year | |||||||
Derivative financial instruments designated as cash flow hedges | 2 | 2 | 2 | ||||
Foreign currency translation adjustments | 809 | 809 | 809 | ||||
811 | 811 | 811 | |||||
In 2012, as a result of the sale of 49% equity interest in TEUK to Sinopec, $23 million of exchange losses previously accumulated in other comprehensive income (loss) were included in the "Gain on disposals" on the Consolidated Statements of Income (Loss) (note 5).
23. Financial Instruments
Talisman's financial assets and liabilities at December 31, 2014 consisted of cash and cash equivalents, accounts receivable, available-for-sale investments, bank indebtedness, accounts payable and accrued liabilities, long-term debt (including the current portion) and risk management assets and liabilities arising from the use of derivative financial instruments.
The Company is exposed to financial risks arising from its financial assets and liabilities. The financial risks include market risk related to foreign exchange rates, interest rates, commodity prices, credit risk and liquidity risk.
Fair Value of Financial Assets and Liabilities
The fair values of cash and cash equivalents, accounts receivable, bank indebtedness, and accounts payable and accrued liabilities approximate their carrying values due to the short-term maturity of those instruments.
Borrowings under bank credit facilities are short-term in nature and are market rate-based; thus, carrying value approximates fair value. The fair value of public debentures and notes is based on market quotations, which reflect the discounted present value of the principal and interest payments using the effective yield for instruments having the same term and risk characteristics. The fair values of private notes are based on estimations provided by third parties. The fair value of Talisman's floating rate debt is determined by discounting future estimated coupon payments at the current market interest rate. The fair value of Talisman's long-term debt at December 31, 2014 was $5.3 billion (2013 $5.5 billion), while the carrying value was $5.1 billion (2013 $5.2 billion). The Company used Level 2 inputs as described below to estimate the fair value of the outstanding long-term debt as at December 31, 2014.
The fair values of all other financial assets and liabilities approximate their carrying values.
Risk management assets and liabilities are recorded at their estimated fair values. To estimate fair value, the Company uses quoted market prices when available, or models that utilize observable market data. In addition to market information, the Company incorporates transaction-specific details that market participants would utilize in a fair value measurement, including the impact of non-performance risk. The Company's non-performance risk is determined based on third party quotes for the Company's debt
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 43
instruments with maturity dates that are similar, or in close approximation, to the maturity dates of the corresponding financial instrument. The Company's risk management assets decreased by $7 million as a result of incorporating non-performance risk. The Company characterizes inputs used in determining fair value using a hierarchy that prioritizes inputs depending on the degree to which they are observable. The three levels of the fair value hierarchy are as follows:
In forming estimates, the Company utilizes the most observable inputs available for valuation purposes. If a fair value measurement reflects inputs of different levels within the hierarchy, the measurement is categorized based upon the lowest level of input that is significant to the fair value measurement. The valuation of over the counter financial swaps and collars is based on similar transactions observable in active markets or industry standard models that rely primarily on market observable inputs. Substantially all of the assumptions for industry standard models are observable in active markets throughout the full term of the instrument. These are categorized as Level 2.
Fair values for derivative instruments are determined based on the estimated cash payment or receipt necessary to settle the contract. Fair values for commodity price derivatives are based on discounted cash flow analysis using current market rates and prices and option pricing models using forward pricing curves and implied volatility, as appropriate, which are compared to quotes received from financial institutions for reasonability. Fair values for interest rate instruments are based on discounted cash flow analysis using current market rates and prices.
The following table presents the Company's risk management assets and liabilities classified as held for trading and measured at fair value for each hierarchy level at December 31, 2014:
Fair value measurements using | ||||||||
Level 1 inputs | Level 2 inputs | Level 3 inputs | Total fair value | |||||
ASSETS | ||||||||
Interest rate swaps | | 7 | | 7 | ||||
Commodity contracts | | 1,264 | | 1,264 | ||||
LIABILITIES | ||||||||
Commodity contracts | | 2 | | 2 | ||||
During the year ended December 31, 2014, there were no transfers of assets or liabilities among the above hierarchy levels.
Risk Management Assets, Liabilities, Gains and Losses
Derivative instrument | Balance sheet presentation | 2014 | 2013 | |||
Interest rate swaps | Current assets | 7 | 13 | |||
Interest rate swaps | Non-current assets | | 6 | |||
Commodity contracts | Current assets | 843 | 4 | |||
Commodity contracts | Non-current assets | 421 | 14 | |||
Risk management assets | 1,271 | 37 | ||||
Commodity contracts | Current liabilities | 2 | 101 | |||
Commodity contracts | Non-current liabilities | | 37 | |||
Risk management liabilities | 2 | 138 | ||||
44 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
During the year ended December 31, 2014, the Company recorded a gain on held-for-trading financial instruments of $1,427 million (2013 $140 million loss; 2012 $93 million loss).
Currency Risk
Talisman operates internationally and is therefore exposed to foreign exchange risk. Talisman's primary exposure is from fluctuations in the US$ relative to the C$, UK£, and NOK.
Talisman manages its foreign exchange exposure in a number of ways. By denominating most of its borrowings in US$, the Company is able to reduce some of its economic exposure to currency fluctuations. Talisman also manages its translation exposure by generally matching internal borrowings with its subsidiaries' functional currencies. The Company purchases foreign currencies, mostly at spot value, to meet its current foreign currency obligations as they come due.
In respect of financial instruments existing at December 31, 2014, a 1% strengthening of the US$ against the other currencies noted above, with all other variables assumed constant, would have resulted in a decrease of $4 million in net loss and a $4 million impact on comprehensive loss during the year ended December 31, 2014. A similar weakening of the US$ would have had the opposite impact.
Interest Rate Risk
Talisman is exposed to interest rate risk principally by virtue of its borrowings. Borrowing at floating rates exposes Talisman to short-term movements in interest rates. Borrowing at fixed rates exposes Talisman to reset risk (i.e., at debt maturity). Risk management activities aim to manage the mix of fixed-to-floating debt to best manage the trade-off between longer term interest rate reset risk and shorter term volatility in interest rates.
In order to mitigate its exposure to interest rate changes, Talisman enters into interest rate swaps from time to time to manage the ratio of fixed rate debt to floating rate debt. At December 31, 2014, the Company had fixed-to-floating interest rate swap contracts with a total notional amount of $300 million that expire on May 15, 2015. During the year ended December 31, 2014, the fair value of the fixed-to-floating interest rate swaps decreased by $12 million offset by associated realized gains.
In respect of financial instruments existing at December 31, 2014, a 1% increase in interest rates would have resulted in a $13 million increase in net loss and a $13 million impact on comprehensive loss during the year ended December 31, 2014.
Credit Risk
Talisman is exposed to credit risk, which is the risk that a customer or counterparty will fail to perform an obligation or settle a liability, resulting in financial loss to the Company. Talisman manages exposure to credit risk by adopting credit risk guidelines approved by the Board of Directors that limit transactions according to counterparty creditworthiness. The Company routinely assesses the financial strength of its joint participants and customers, in accordance with the credit risk guidelines. Talisman's credit policy requires collateral to be obtained from counterparties considered to present a material risk of non-payment, which would include entities internally assessed as high risk or those with ratings below investment grade. Collateral received from customers at December 31, 2014 included $80 million of letters of credit. At December 31, 2014, an allowance of $9 million was recorded in respect of specifically identified doubtful accounts.
A significant proportion of Talisman's accounts receivable balance is with customers in the oil and gas industry and is subject to normal industry credit risks. At December 31, 2014, approximately 86% of the Company's accounts receivable were aged less than 90 days and the largest single counterparty exposure, accounting for 6% of the total, was with a highly rated counterparty. Concentration of credit risk is managed by having a broad domestic and international customer base of primarily highly rated counterparties.
The Company also has credit risk arising from cash and cash equivalents held with banks and financial institutions. The Company's policy allows it to deposit cash balances at financial institutions subject to a sliding scale limit, depending on creditworthiness.
The maximum credit exposure associated with financial assets is the carrying values.
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 45
Talisman is exposed to liquidity risk, which is the risk that the Company may be unable to generate or obtain sufficient cash to meet its commitments as they come due. Talisman mitigates this risk through its management of cash, debt, committed credit capacity and its capital program, subject to restrictions in the Arrangement Agreement the Company entered into with Repsol on December 15, 2014, as described in note 1.
The table below summarizes the maturity profile of the Company's non-derivative financial liabilities based on contractual undiscounted payments:
Total | 2015 | 2016-2017 | 2018-2019 | Thereafter | ||||||
Long-term debt (note 18) | 5,064 | 1,109 | 551 | 710 | 2,694 | |||||
Leases (note 19) | 73 | 18 | 29 | 18 | 8 | |||||
Bank indebtedness | 9 | 9 | | | | |||||
Accounts payable and accrued liabilities | 1,577 | 1,577 | | | | |||||
Loans from joint ventures | 15 | 15 | | | | |||||
Obligation to fund equity investee (note 8) | 186 | 186 | | | | |||||
6,924 | 2,914 | 580 | 728 | 2,702 | ||||||
Talisman manages its liquidity requirements by use of both short-term and long-term cash forecasts, and by maintaining appropriate undrawn capacity under committed bank credit facilities. The Company has in place facilities totaling $3.2 billion, all of which is committed through 2019. At December 31, 2014, $103 million of commercial paper was outstanding, $475 million in the form of bankers' acceptances were drawn, and a short-term LIBOR loan of $150 million was outstanding. Available borrowing capacity was $2.4 billion at December 31, 2014.
In addition, the Company utilizes letters of credit pursuant to letter of credit facilities, most of which are uncommitted. At December 31, 2014, demand letters of credit guaranteed by the Company totaling $1.1 billion were issued, of which $1.0 billion were issued from uncommitted facilities. Of that total, $0.8 billion is provided as security for the costs of decommissioning obligations in the UK as described below. The remaining outstanding letters of credit relate primarily to a retirement compensation arrangement, guarantees of minimum work commitments and decommissioning obligations in other areas.
TSEUK is required to provide letters of credit as security in relation to certain decommissioning obligations in the UK pursuant to contractual arrangements under Decommissioning Security Agreements (DSAs). At the commencement of the joint venture, Addax assumed 49% of the decommissioning obligations of TSEUK. Addax's parent company, China Petrochemical Corporation (Sinopec), has provided an unconditional and irrevocable guarantee for this 49% of the UK decommissioning obligations.
The UK government passed legislation in 2013 which provides for a contractual instrument, known as a Decommissioning Relief Deed, for the government to guarantee tax relief on decommissioning costs at 50%, allowing security under DSAs to be posted on an after-tax basis and reducing the value of letters of credit required to be posted by 50%. TSEUK has entered into a Decommissioning Relief Deed with the UK Government and continues to negotiate with counterparties to amend all DSAs accordingly. Tax relief guaranteed by the UK government is limited to corporate tax paid since 2002. Under the limitation, TSEUK's tax relief is capped at $2.3 billion, representing corporate income taxes paid and recoverable since 2002.
At December 31, 2014, TSEUK has $2.6 billion of demand shared facilities in place under which letters of credit of $1.6 billion have been issued. At January 1, 2015, total letters of credit issued under these shared facilities increased to $2.1 billion. Of this $2.1 billion, approximately 60% were posted on an after-tax basis subsequent to successful negotiations to recognize the UK government's tax relief on decommissioning costs of 50%; however, rising cost estimates as well as new letters of credit requirements being triggered on assets where future cash flow is inadequate to cover the abandonment obligation resulted in a net increase in letters of credit requirement of $0.5 billion when compared to December 31, 2014. The Company guarantees 51% of all letters of credit issued under these shared facilities.
The Company has also granted guarantees to various beneficiaries in respect of decommissioning obligations of TSEUK.
At December 31, 2014, Talisman's share of TSEUK's total recorded decommissioning liabilities was $2.5 billion. Decommissioning estimates are subject to a significant amount of management judgment given the long dated nature of the assets and the timing of remediation upon cessation of production. The Company reviews its assessment of decommissioning liabilities annually, or where a triggering event causes a review, taking into account new information and industry experience.
46 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
Any changes to decommissioning estimates influence the value of letters of credit required to be provided pursuant to DSAs. In addition, the extent to which shared facility capacity is available, and the cost of that capacity, is influenced by the Company's investment-grade credit rating.
As at December 31, 2014, the investment balance in the TSEUK joint venture was negative $186 million. The obligation to fund TSEUK arises from the Company's past practice of funding TSEUK's cash flow deficiencies, and the expectation that cash flow deficiencies will continue to be funded through 2015. In addition the Company has a guarantee to fund TSEUK's decommissioning obligation if TSEUK is unable to. As such, the Company has recognized a negative investment value from the application of equity accounting. The Company's obligation to fund TSEUK will increase to the extent future losses are generated within TSEUK. In addition, future contributions to the TSEUK joint venture could be impaired to the extent recoverability is not probable.
Commodity Price Risk
Talisman is exposed to commodity price risk since its revenues are dependent on the price of crude oil, natural gas and NGLs. Talisman enters into derivative instruments from time to time to mitigate commodity price risk volatility under guidelines approved by the Board of Directors. The Company may hedge a portion of its future production to protect cash flows to allow it to meet its strategic objectives.
The Company had the following commodity price derivative contracts outstanding at December 31, 2014, none of which are designated as hedges:
Two-way collars (Oil) | Term | bbls/d | Floor/ceiling $/bbl |
Fair value asset | ||||
Dated Brent oil index | Jan-Dec 2015 | 5,000 | 90.00/100.01 | 53 | ||||
NYMEX WTI oil index | Jan-Dec 2015 | 5,000 | 80.00/95.02 | 44 | ||||
Dated Brent oil index | Jan-Dec 2015 | 20,000 | 90.00/106.16 | 211 | ||||
Dated Brent oil index | Jan-Dec 2016 | 5,000 | 90.00/108.00 | 43 | ||||
NYMEX WTI oil index | Jan-Dec 2016 | 5,000 | 85.00/95.95 | 42 | ||||
393 | ||||||||
Fixed priced swaps (Oil) | Term | bbls/d | $/bbl | Fair value asset (liability) |
|||||
Dated Brent oil index | Jan-Dec 2015 | 10,000 | 100.46 | 143 | |||||
Dated Brent oil index | Jan-Dec 2015 | 1,000 | 104.00 | 16 | |||||
Dated Brent oil index | Jan-Dec 2015 | 9,000 | 100.59 | 129 | |||||
NYMEX WTI oil index | Jan-Dec 2015 | 5,000 | 96.36 | 72 | |||||
WCS differential | Feb-Mar 2015 | (1) | 6,500 | (21.55 | ) | (2 | ) | ||
Dated Brent oil index | Jan-Dec 2016 | 10,000 | 98.01 | 106 | |||||
Dated Brent oil index | Jan-Dec 2016 | 5,000 | 100.29 | 57 | |||||
Dated Brent oil index | Jan-Dec 2016 | 10,000 | 102.98 | 121 | |||||
642 | |||||||||
Two-way collars (Gas) | Term | mcf/d | Floor/ceiling $/mcf |
Fair value asset | ||||
NYMEX HH LD | Feb-Dec 2015 | (1) | 47,468 | 4.23/4.87 | 17 | |||
NYMEX HH LD | Feb-Dec 2015 | (1) | 94,936 | 4.21/5.06 | 34 | |||
NYMEX HH LD | Jan-Dec 2016 | 47,468 | 4.21/4.75 | 12 | ||||
NYMEX HH LD | Jan-Dec 2016 | 47,468 | 4.21/4.87 | 12 | ||||
75 | ||||||||
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 47
Fixed priced swaps (Gas) | Term | mcf/d | $/mcf | Fair value asset | ||||
NYMEX HH LD | Feb-Dec 2015 | (1) | 47,468 | 4.54 | 22 | |||
NYMEX HH LD | Feb-Dec 2015 | (1) | 47,468 | 4.39 | 19 | |||
NYMEX HH LD | Feb-Dec 2015 | (1) | 47,468 | 4.39 | 19 | |||
NYMEX HH LD | Feb-Dec 2015 | (1) | 47,468 | 4.48 | 21 | |||
NYMEX HH LD | Feb-Dec 2015 | (1) | 47,468 | 4.53 | 21 | |||
NYMEX HH LD | Feb-Dec 2015 | (1) | 47,468 | 4.55 | 22 | |||
NYMEX HH LD | Jan-Dec 2016 | 47,468 | 4.48 | 14 | ||||
NYMEX HH LD | Jan-Dec 2016 | 42,721 | 4.55 | 14 | ||||
152 | ||||||||
Fixed priced swaps (Power) | Term | MWh | C$/MWh | Fair value liability |
||||
Alberta Power | Jan-Dec 2015 | 5 | 73.72 | | ||||
Alberta Power | Jan-Dec 2016 | 2 | 73.83 | | ||||
Alberta Power | Jan-Dec 2017 | 1 | 74.75 | | ||||
Alberta Power | Jan-Dec 2018 | 1 | 74.75 | | ||||
| ||||||||
The Company is not netting any significant amounts related to financial instruments in accordance with IAS 32 and does not have significant offsetting arrangements as summarized in the table above.
Subsequent to December 31, 2014, the Company has not entered into any new commodity price derivative contracts.
In respect of outstanding financial instruments and assuming forward commodity prices in existence at December 31, 2014, an increase of $1/bbl in the price of oil and an increase of $0.10/mcf in the price of gas would have reduced the net fair value of commodity derivatives, thereby resulting in an increase in net loss of $39 million and a $39 million impact on comprehensive loss during the year ended December 31, 2014. A similar decrease in commodity prices would result in a decrease in net loss of approximately $40 million and a $40 million impact on comprehensive loss during the year ended December 31, 2014.
24. Contingencies and Commitments
Provisions and Contingencies
Talisman's provision for decommissioning is presented in note 16. The other provisions recorded by the Company are not material.
From time to time, Talisman is the subject of litigation arising out of the Company's operations. Damages claimed under such litigation may be material or may be indeterminate and the outcome of such litigation may materially impact the Company's financial condition or results of operations. While Talisman assesses the merits of each lawsuit and defends itself accordingly, the Company may be required to incur significant expenses or devote significant resources to defend itself against such litigation. These claims are not currently expected to have a material impact on the Company's financial position.
48 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
Estimated Future Minimum Commitments(1)(2)(6)
Estimated future commitments for 2015 and beyond are as follows:
2015 | 2016 | 2017 | 2018 | 2019 | Subsequent to 2019 |
Total | ||||||||
Office leases | 47 | 47 | 40 | 37 | 36 | 189 | 396 | |||||||
Vessel leases | 71 | 4 | 4 | 3 | 2 | 7 | 91 | |||||||
Transportation and processing commitments(3) | 264 | 194 | 188 | 177 | 165 | 560 | 1,548 | |||||||
Decommissioning liabilities(4) | 117 | 262 | 315 | 266 | 211 | 1,904 | 3,075 | |||||||
Yme removal obligation (note 13) | 186 | | | | | | 186 | |||||||
PP&E and E&E assets(5) | 343 | 153 | 78 | 44 | | | 618 | |||||||
Other service contracts | 73 | 15 | 7 | 5 | 2 | 8 | 110 | |||||||
1,101 | 675 | 632 | 532 | 416 | 2,668 | 6,024 | ||||||||
Talisman's estimated undiscounted decommissioning liabilities at December 31, 2014 were $3.1 billion (2013 $3.2 billion). At December 31, 2014, Talisman had recorded $1.9 billion (2013 $1.8 billion), representing the discounted amount of this liability (note 16).
Talisman leases certain of its ocean-going vessels and corporate offices, all of which, with the exception of the leasing arrangements described in note 19, are accounted for as operating leases. In addition to the minimum lease payments, Talisman has ongoing operating commitments associated with the vessels. The majority of the vessel leases have an average life of five years, the office leases have an average life of 10 years and the transportation commitment contracts have average lives of between 10 and 15 years.
Talisman has firm commitments for gathering, processing and transportation services that require the Company to pay tariffs to third parties for processing or shipment of certain minimum quantities of crude oil, natural gas and NGLs.
In the case of an operating lease entered into by Talisman as the operator of a joint operation, the amounts reported represent the net operating lease expense and net future minimum lease payments. These net amounts are after deducting amounts reimbursed, or to be reimbursed, by joint operation partners, whether the joint operation partners have co-signed the lease or not. Where Talisman is not the operator of a joint operation, Talisman's share of the lease expense and future minimum lease payments is included in the amounts shown, whether Talisman has co-signed the lease or not. Where lease rentals are dependent on a variable factor, the future minimum lease payments are based on the factor as at the inception of the lease.
During the year ended December 31, 2014, Talisman incurred net rental expense of $202 million (2013 $289 million; 2012 $292 million) in respect of its operating leases.
Long-Term Sales Contracts
In order to support the Company's investments in natural gas projects outside of North America and the North Sea, Talisman has entered into or is a party to a number of long-term sales contracts.
The majority of Talisman's natural gas production from the Corridor Block in Indonesia is currently sold under long-term sales agreements with PT Caltex Pacific Indonesia (Chevron), Gas Supply Pte. Ltd. (GSPL) and PT Perusahaan Gas Negara (Persero) Tbk (PGN). Under the sales agreement with Chevron, which is currently due to expire in 2021, delivered gas sales are priced at approximately 76% of the equivalent value of the Indonesian Crude Price for Duri crude oil. Talisman's share of the minimum volume commitment under the agreement with Chevron is approximately 211 bcf over its remaining seven-year life.
Under the sales agreement with GSPL, which is currently due to expire in 2023, delivered gas sales to Singapore from the Corridor Block are priced at approximately 115% of the spot price of high-sulphur fuel oil in Singapore. Talisman's share of the minimum volume commitment is approximately 170 bcf over the remaining nine-year life of the agreement.
Sales from the Corridor Block to PGN for their markets located primarily in West Java are sold under a long-term agreement, which is currently due to expire in 2023, with no associated transportation costs. Talisman's share of the minimum volume commitment is
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 49
approximately 537 bcf over the remaining nine-year life of the agreement. The balance of the gas production from the Corridor Block is sold under gas sales contracts which vary in length from one to five years and are generally at fixed prices with fixed annual escalation. Under the West Java agreement and two others, the Corridor Block partners and the buyers have agreed to price increases which are currently awaiting the approval of the Minister of Energy and Mineral Resources.
At Jambi Merang, the majority of gas production is sold under long-term agreements which contain fixed prices with fixed annual escalation and are in place until the current termination date of the PSC, which is in February 2019.
The Company is subject to volume delivery requirements for approximately 70-90 mmcf/d at a price that is referenced to the spot price of high-sulphur fuel oil in Singapore in relation to a long-term sales contract from the PM-3 Commercial Arrangement Area in Malaysia/Vietnam, which is currently scheduled to expire in 2018. In the event these delivery requirements are not met in a contract year, volumes delivered in the subsequent contract year are subject to a 25% price discount for the equivalent volume of unexcused shortage that was not delivered in the prior year.
Currently, the Company anticipates having sufficient production to meet all of these future delivery requirements.
25. Other Income
Years ended December 31 | 2014 | 2013 | 2012 | |||
Pipeline and customer treating tariffs | 63 | 63 | 46 | |||
Investment income | 17 | 16 | 10 | |||
Interest on loan to TSEUK (note 8) | 28 | 23 | | |||
Marketing and other miscellaneous income | 42 | 7 | 28 | |||
150 | 109 | 84 | ||||
26. Other Expenses, Net
Years ended December 31 | 2014 | 2013 | 2012 | |||
Foreign exchange (gain) loss | (42 | ) | 18 | 33 | ||
PP&E derecognition | 5 | | 20 | |||
Taxes, interest and penalties | | 2 | 1 | |||
Inventory writedowns | 10 | 5 | 1 | |||
Allowance for doubtful accounts | 1 | 3 | | |||
Restructuring | 18 | 44 | | |||
Other miscellaneous | 57 | 41 | 69 | |||
49 | 113 | 124 | ||||
50 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
27. Income Taxes
Current Tax Expense (Recovery)
North America | Southeast Asia | North Sea | Other | Total | |||||||
Year ended December 31, 2014 | |||||||||||
Current tax | 8 | 412 | (14 | ) | 57 | 463 | |||||
Adjustments related to prior years | (40 | ) | (22 | ) | 2 | | (60 | ) | |||
Petroleum Revenue Tax | | 15 | | | 15 | ||||||
(32 | ) | 405 | (12 | ) | 57 | 418 | |||||
Year ended December 31, 2013 | |||||||||||
Current tax | (33 | ) | 549 | (50 | ) | 132 | 598 | ||||
Adjustments related to prior years | (29 | ) | | | | (29 | ) | ||||
Petroleum Revenue Tax | | 33 | | | 33 | ||||||
Other | | 21 | | | 21 | ||||||
(62 | ) | 603 | (50 | ) | 132 | 623 | |||||
Year ended December 31, 2012 | |||||||||||
Current tax | (4 | ) | 500 | 125 | 63 | 684 | |||||
Adjustments related to prior years | 2 | (1 | ) | | 5 | 6 | |||||
Petroleum Revenue Tax | | 46 | 56 | | 102 | ||||||
(2 | ) | 545 | 181 | 68 | 792 | ||||||
Deferred Tax Expense (Recovery)
North America | Southeast Asia | North Sea | Other | Total | |||||||
Year ended December 31, 2014 | |||||||||||
Origination and reversal of temporary differences | 4 | (12 | ) | (283 | ) | (23 | ) | (314 | ) | ||
Adjustments related to prior years | 7 | | 4 | (6 | ) | 5 | |||||
Petroleum Revenue Tax | | (18 | ) | | | (18 | ) | ||||
Changes in tax rates | | | | | | ||||||
(Recognized) / derecognized asset | | 40 | | | 40 | ||||||
11 | 10 | (279 | ) | (29 | ) | (287 | ) | ||||
Year ended December 31, 2013 | |||||||||||
Origination and reversal of temporary differences | (291 | ) | (20 | ) | (223 | ) | (204 | ) | (738 | ) | |
Adjustments related to prior years | 24 | (10 | ) | 6 | 25 | 45 | |||||
Petroleum Revenue Tax | | 5 | | | 5 | ||||||
Changes in tax rates | | | | | | ||||||
(Recognized) / derecognized asset | | (82 | ) | | | (82 | ) | ||||
(267 | ) | (107 | ) | (217 | ) | (179 | ) | (770 | ) | ||
Year ended December 31, 2012 | |||||||||||
Origination and reversal of temporary differences | (352 | ) | (8 | ) | (1,370 | ) | (20 | ) | (1,750 | ) | |
Adjustments related to prior years | (2 | ) | 6 | | 4 | 8 | |||||
Petroleum Revenue Tax | | (1 | ) | (24 | ) | | (25 | ) | |||
Changes in tax rates | 5 | | 137 | | 142 | ||||||
Derecognized asset | 429 | | | | 429 | ||||||
80 | (3 | ) | (1,257 | ) | (16 | ) | (1,196 | ) | |||
During 2011, the Company made elections for its Canadian subsidiaries to file tax returns in US$ with effect from the beginning of their 2011 and 2012 tax years. Tax on foreign exchange on tax pools has not been recorded since the effective dates of these elections.
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 51
Deferred Tax Assets and Liabilities
The significant components of the deferred tax (assets) and liabilities are as follows:
PP&E and E&E assets |
Decommissioning liabilities |
Tax loss carryforward |
Other | Total | |||||||
At December 31, 2012 | 1,530 | (796 | ) | (818 | ) | (32 | ) | (116 | ) | ||
Charged (credited) to tax expense, net | (368 | ) | (217 | ) | (177 | ) | (8 | ) | (770 | ) | |
Credited to equity | | | | (1 | ) | (1 | ) | ||||
Held for sale reclassification | (140 | ) | 2 | | | (138 | ) | ||||
Other | | | | (15 | ) | (15 | ) | ||||
At December 31, 2013 | 1,022 | (1,011 | ) | (995 | ) | (56 | ) | (1,040 | ) | ||
Charged (credited) to tax expense, net | (414 | ) | (149 | ) | 185 | 91 | (287 | ) | |||
Credited to equity | | | | (13 | ) | (13 | ) | ||||
Disposal | 140 | (2 | ) | | | 138 | |||||
At December 31, 2014 | 748 | (1,162 | ) | (810 | ) | 22 | (1,202 | ) | |||
Other movements in the net deferred tax liability relate mostly to risk management assets.
At December 31, 2014, the Company has the following non-capital loss carry-forwards:
Loss carry-forward | Expiry | |||
US | 3,027 | 2028-2034 | ||
Canada | 56 | 2034 | ||
Norway | 669 | No expiry | ||
Malaysia | 161 | No expiry | ||
Colombia | 206 | 2025-2034 | ||
Vietnam | 13 | 2026-2034 | ||
4,132 | ||||
The Company has not recognized US losses in excess of taxable temporary differences. In Canada, Colombia, Malaysia, and Vietnam, income projections show sufficient taxable income to utilize these losses within the carry-forward period. In Norway, income projections and existing Norwegian tax legislation demonstrate that these losses will be realized.
The majority of the $2.6 billion (2013 $1.8 billion; 2012 $1.3 billion) of unused non-capital tax losses in respect of which no deferred tax asset has been recognized arose in the US.
No deferred tax liability has been recognized for temporary differences associated with investments in subsidiaries, associates, branches and joint operations since the Company is in a position to control or jointly control the entity and it is considered probable that these temporary differences will not reverse in the foreseeable future.
52 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
Effective Tax Rate
The following provides a reconciliation of the Canadian statutory tax rate of 25.19% (2013 25.19%; 2012 25.05%) to the effective tax rate on the Company's total income before income taxes:
Years ended December 31 | 2014 | 2013 | 2012 | |||||
Loss before taxes | (780 | ) | (1,322 | ) | (272 | ) | ||
Statutory income tax rate (%) | 25.19% | 25.19% | 25.05% | |||||
Income taxes calculated at the Canadian statutory rate | (196 | ) | (333 | ) | (68 | ) | ||
Increase (decrease) in income taxes resulting from: | ||||||||
Change in statutory tax rates, net | | | 137 | |||||
Non (taxable) deductible hedging | (308 | ) | 31 | 24 | ||||
Deductible PRT expense | (3 | ) | (12 | ) | (20 | ) | ||
Higher foreign tax rates | (321 | ) | (257 | ) | (229 | ) | ||
Non-deductible goodwill/impairment | 336 | 144 | | |||||
Non-recognition of deferred tax asset, net | 534 | 330 | 429 | |||||
Share-based payments | (7 | ) | (6 | ) | (17 | ) | ||
Uplift | (47 | ) | (52 | ) | (60 | ) | ||
Non-taxable equity earnings (loss) | 262 | 69 | (79 | ) | ||||
Non-taxable gain on sale of investment | (72 | ) | | (548 | ) | |||
Other | (44 | ) | (99 | ) | (50 | ) | ||
Income tax (recovery) expense (excluding PRT) | 134 | (185 | ) | (481 | ) | |||
The 2014 effective tax rate was impacted by non-taxable hedging gains, equity earnings, and North Sea goodwill and the partial impairment of the investment in Equion. Hedging gains/losses related to foreign production are not taxable in Canada. The rate was also impacted by non-taxable foreign exchange impact of foreign denominated tax basis. Deferred tax assets continue to be derecognized in the US including a significant amount from Eagle Ford impairment.
During 2013, the Company completed the sale of all of its interest in the Ocensa pipeline, which resulted in a significant reduction in the effective tax rate.
On December 17, 2012, Talisman completed the sale of a 49% equity interest in TSEUK, which owned substantially all of the UK assets. The sale was non-taxable resulting in a significant reduction in the effective tax rate.
Additionally in 2012, the UK government restricted tax relief for decommissioning expenditures to a 50% tax rate from the UK tax rate of 62%. This measure was substantively enacted in July 2012 and the deferred income tax expense associated with the legislative change was approximately $137 million.
Unrecognized Tax Benefit
Changes in the Company's unrecognized tax benefit are as follows:
2014 | 2013 | ||||
Unrecognized tax benefit, beginning of year | 110 | 58 | |||
Increase due to prior period tax positions | 9 | 81 | |||
Decrease due to prior period tax positions | (17 | ) | (29 | ) | |
Unrecognized tax benefit, end of year | 102 | 110 | |||
Talisman's entire unrecognized tax benefit as at December 31, 2014 and December 31, 2013, if recognized, would affect the Company's effective tax rate.
No significant change in the total unrecognized tax benefit is expected in 2015.
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 53
28. Supplemental Cash Flow Information
Items Not Involving Cash
Years ended December 31 | 2014 | 2013 | 2012 | ||||
Depreciation, depletion and amortization | 1,936 | 1,922 | 2,371 | ||||
Impairment, net of reversals | 1,768 | 946 | 2,589 | ||||
Dry hole | 140 | 89 | 238 | ||||
Share-based payments expense (recovery) | 27 | 45 | (66 | ) | |||
Gain on disposals | (550 | ) | (100 | ) | (1,624 | ) | |
Unrealized (gain) loss on held-for-trading financial instruments | (1,368 | ) | 93 | 48 | |||
Deferred income tax (recovery) | (287 | ) | (770 | ) | (1,196 | ) | |
Foreign exchange | (28 | ) | 18 | 39 | |||
PP&E derecognition | 5 | | 20 | ||||
(Income) loss from joint venture and associates, after tax | 1,040 | 275 | (315 | ) | |||
Other | 23 | 31 | 48 | ||||
2,706 | 2,549 | 2,152 | |||||
Changes in Non-Cash Operating Working Capital
Years ended December 31 | 2014 | 2013 | 2012 | ||||
Accounts receivable | 102 | (187 | ) | 369 | |||
Inventories | 14 | (16 | ) | (46 | ) | ||
Prepaid expenses | (20 | ) | 4 | 5 | |||
Decommissioning expenditures(1) | (60 | ) | (59 | ) | (56 | ) | |
Accounts payable and accrued liabilities | (208 | ) | 261 | (99 | ) | ||
Income and other taxes payable | (89 | ) | 14 | (333 | ) | ||
Operating working capital in assets held for sale (note 5) | 13 | (13 | ) | | |||
(248 | ) | 4 | (160 | ) | |||
Other Cash Flow Information
Years ended December 31 | 2014 | 2013 | 2012 | |||
Cash interest paid | 278 | 268 | 291 | |||
Cash interest received | 25 | 10 | 5 | |||
Cash income taxes paid | 497 | 600 | 1,041 | |||
In respect of its exploration and evaluation activities in 2014, the Company has included exploration expenditure of $232 million within cash provided by operating activities, and exploration capital expenditure and acquisitions of $426 million and $23 million, respectively, within cash used in investing activities.
54 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
29. Cash and Cash Equivalents
Of the cash and cash equivalents balance of $262 million (December 31, 2013 $364 million), substantially all (December 31, 2013 $364 million) has been invested in bank deposits and the remainder in highly rated investments with original maturities of less than three months.
30. Net Income per Share Basic and Diluted
(millions) | 2014 | 2013 | 2012 | ||||
Net income (loss) | (911 | ) | (1,175 | ) | 132 | ||
Less: Share-based payments recoveries for all options | (64 | ) | (48 | ) | (82 | ) | |
Less: Cumulative preferred share dividends after-tax | (6 | ) | (6 | ) | (6 | ) | |
Less: Share-based payments expenses for unvested dilutive options | (14 | ) | (24 | ) | (43 | ) | |
Diluted net income (loss) | (995 | ) | (1,253 | ) | 1 | ||
Weighted average number of common shares outstanding basic | 1,033 | 1,030 | 1,025 | ||||
Dilution effect of stock options and PSUs | | 2 | 8 | ||||
Weighted average number of common shares outstanding diluted | 1,033 | 1,032 | 1,033 | ||||
In computing diluted per share amounts at December 31, 2014, 33,560,447 options and 10,680,442 PSUs were excluded from the calculation as their effect was anti-dilutive.
Outstanding stock options and PSUs are the only instruments that are potentially dilutive to net income per share.
Basic net income per share is calculated by dividing net income less after-tax cumulative preferred share dividends, by the weighted average number of common shares outstanding during the year, excluding shares held in trust to settle long-term PSU plan obligations.
For the diluted net income per share calculation, the net income is adjusted for the change in the fair value of stock options. The weighted average number of shares outstanding during the year is adjusted for options expected to be exercised and management's best estimate of shares expected to be issued in settlement of the Company's obligations pursuant to the long-term PSU plan.
31. Employee Benefits
Overview
At December 31, 2014, the Company operated pension plans for the benefit of a significant portion of its employees throughout the world. The plans are provided through both defined benefit and defined contribution arrangements, and their legal status and control varies depending on the conditions and practices in the countries concerned.
The Company operates defined benefit plans in Canada and Norway, defined contribution plans in Canada, the US and Indonesia, and an international notional defined contribution plan for third-country nationals and Canadian expatriates. In 2014, Talisman implemented a notional defined contribution plan for former expatriates who transferred employment with the Company. The Company also provides non-pension post-employment benefits to certain of its Canadian retirees. The Company contributes to the Canadian registered defined benefit plans pursuant to independent actuarial advice. The Canadian non-registered defined benefit pension plans are unfunded, except for the assets held in refundable tax accounts by the Canada Revenue Agency. The Norwegian plans provide for accrued benefits on a fully insured basis and premiums are adjusted annually for the impact of current salary rates on past service benefits and the impact of any changes in the Norwegian National Insurance Scheme.
The costs and the present value of the obligations of the defined benefit pension plans and non-pension post-employment benefits are determined using actuarial valuations. An actuarial valuation involves making various assumptions that may differ from actual developments in the future. These assumptions include the determination of the discount rate, future salary increases, mortality rates and future pension increases. Due to the complexities involved in the valuation and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date.
The Company's Board of Directors has delegated its authority to oversee the administration and fund management of the Canadian pension plans to the Pension Management Committee (PMC), a committee of management employees, which is chaired by the Company's Executive Vice President, Corporate. The PMC advises on the pension strategy, policy and operation. The PMC reports regularly to the Board of Directors. The PMC monitors the effects of volatility in financial markets and the impact of uncertainty in the assumptions used to measure the obligations of the Canadian pension plans.
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 55
Plan Liabilities
The Company sponsors two registered and three non-registered defined benefit pension plans in Canada, which make pension payments throughout the life of the members. The amount of pension paid depends on how long employees have been active members of the plan and their final average pensionable earnings when they leave the plan. Although the Company has no commitment to provide for increases related to inflation in the Canadian defined benefit pension plans, the benefits have generally increased annually by one-half of the rate of inflation since 2003. Two of the plans are closed to new entrants.
The Company also sponsors defined benefit pension plans in Norway, which makes pension payments throughout the life of the members. The amount of pension paid depends on how long employees are active members of the plan and their salary when they leave the plan. Pension payments increase with the surplus return on assets on the pensioner's part of the premium reserve.
The Norwegian defined benefit pension plan is open to new entrants. Accrued benefits provided under the Norwegian plan are fully insured. The Company pays an annual premium, which reflects the annual cost of benefits accruing during the year plus the impacts of current salary rates on past service benefits and of any changes in the basic amount in the Norwegian National Insurance Scheme. The accrued benefit obligation recognized in the Company's financial statements includes the present value of future salary increases on the accrued benefits.
Actuarial Assumptions
The following liability weighted actuarial assumptions were employed to determine the net benefit expense and the accrued benefit obligations for the defined benefit pension plans:
2014 | 2013 | 2012 | ||||
Accrued benefit obligation | ||||||
Discount rate (%) | 3.4 | 4.6 | 4.1 | |||
Rate of inflation (%)(1) | 2.5 | 2.5 | 2.5 | |||
Mortality rate (refer to discussion below)(1) | ||||||
Benefit expense | ||||||
Discount rate (%) | 4.6 | 4.1 | 4.1 | |||
Sensitivity Information
The measurement of the Company's net accrued benefit obligations is particularly sensitive to changes in the Company's significant assumptions:
Discount rate
The discount rate assumptions reflect the prevailing rates available on high quality corporate bonds. Discount rates have been selected following actuarial advice related to the countries where the Company operates defined benefit pension plans, taking into account the duration of the liabilities. The overall rate is the liability weighted average of the country-specific discount rates adopted for individual plans. At December 31, 2014, a 1.0% increase or decrease in the discount rate would result in a $30 million decrease or a $38 million increase, respectively, in the accrued benefit obligations.
Inflation
Inflation is used to determine pension increases for the Canadian defined benefit pension plans. The assumption adopted is consistent with the discount rates adopted. An increase or decrease in the inflation rate of 1.0% would result in a $10 million increase or $9 million decrease, respectively, in the accrued benefit obligations of the Canadian defined benefit pension plans.
Mortality rates
The mortality assumptions adopted are based on those recommended by the actuaries that advise the plan management and reflect the most recent information. Assumptions used for the Canadian defined benefit pension plans indicate that the future life expectancy of a male (female) pensioner reaching age 65 in 2015 would be 22.7 (24.4) years and the future life expectancy from age 65 for a male (female) non-pensioner member currently aged 45 of 23.9 (25.3) years.
An increase or decrease of 10% in the assumed mortality assumption rates decreases or increases, respectively, the future life expectancy by approximately 1 year. A change in the mortality assumption by applying an increase or decrease of 10% to the assumed mortality rates would cause the Canadian defined benefit pension plans' accrued benefit obligation to decrease by $4 million or increase by $5 million, respectively.
56 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
A change in the Company's significant assumptions would cause a change in the accrued benefit obligation by the following amounts:
Increase (decrease) in pension obligation |
|||||||
Change in assumption |
Increase in assumption |
Decrease in assumption |
|||||
Discount rate | 1.0% | (30 | ) | 38 | |||
Inflation rate(1) | 1.0% | 10 | (9 | ) | |||
Mortality rate(1) | 10.0% Load | (4 | ) | 5 | |||
The methods used to carry out the sensitivity analyses alter the relevant assumption by the amount specified and assume that all other variables remain the same. Although this approach may not necessarily be realistic since some assumptions are related, it determines the effect on the defined benefit obligation of each individual assumption.
Investment Policies
The Company has an investment strategy for the plan assets of Canadian registered defined benefit pension plans that broadly matches the nature of its liabilities, which includes a proportionate allowance for risk-seeking asset classes. The target allocation percentage for the Canadian registered defined benefit pension plans is 35% equities and 65% fixed income. In 2014, the Company implemented a strategy to reduce the risk for the Canadian registered defined benefit plans by more closely matching the assets of these plans to the underlying liabilities, which will reduce the volatility of the net benefit expense and net benefit obligation for the Canadian registered defined benefit plans on the Company's balance sheet.
The assets of the Norwegian defined benefit pension plan comprise a savings fund and a premium reserve fund. A portion of the premiums paid for the Norwegian fund are invested in a savings fund according to the insurance company's investment strategy. The insurance company is responsible for managing the investments and guarantees a 2.75% return on the savings fund. Excess returns are credited to a premium reserve fund, which is subject to regulatory limits with respect to the amount which may be held in the fund. Any amounts in excess of the regulatory limit are returned to the Company or used to reduce current year premiums.
Plan Assets
The approximate allocation percentage for the Canadian defined benefit registered pension plans, which account for 56% of total plan assets, is 34% equities, and 66% fixed income. Plan assets do not include any common shares of Talisman, other than through Canadian or US equity pooled funds.
The allocation of the assets of the defined benefit pension plans is as follows:
2014 | 2013 | 2012 | ||||
Equity securities (%) | 21 | 30 | 32 | |||
Fixed income (%) | 55 | 47 | 47 | |||
Cash (%) | 16 | 16 | 14 | |||
Real estate (%) | 5 | 5 | 6 | |||
Other (%) | 3 | 2 | 1 | |||
100 | 100 | 100 | ||||
The Company characterizes inputs used in determining fair value using a hierarchy that prioritizes inputs depending on the degree to which they are observable. Refer to note 23 for details concerning the three levels of the fair value hierarchy.
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 57
The fair values of defined benefit pension plan assets at December 31, 2014 by asset category were as follows:
Level 1 inputs | Level 2 inputs | Level 3 inputs | Total fair value | ||||||
Cash | 20 | | | 20 | |||||
Pooled Funds: | |||||||||
Canadian companies | | 4 | | 4 | |||||
US companies | | 9 | | 9 | |||||
International companies | | 13 | | 13 | |||||
Bonds | | 65 | | 65 | |||||
Real estate | | | 6 | 6 | |||||
Other | | | 3 | 3 | |||||
20 | 91 | 9 | 120 | ||||||
Obligation, Assets and Funded Status
Information about the Company's defined benefit pension plans is as follows:
2014 Pension plans grouped by funded status |
2013 Pension plans grouped by funded status |
||||||||
Surplus | Deficit | Surplus | Deficit | ||||||
Accrued benefit obligation | |||||||||
Accrued benefit obligation, beginning of year | 63 | 163 | 65 | 168 | |||||
Impact on Profit or Loss: | |||||||||
Current service cost | | 10 | | 12 | |||||
Past service cost | | 5 | | 5 | |||||
Interest cost | 3 | 8 | 3 | 7 | |||||
Impact on Profit or Loss | 3 | 23 | 3 | 24 | |||||
Remeasurements through OCI: | |||||||||
Loss from change in demographic assumptions | | 1 | 5 | 8 | |||||
Loss (gain) from change in financial assumptions | 5 | 24 | (4 | ) | (8 | ) | |||
Gain from experience adjustments | | (4 | ) | | (4 | ) | |||
Impact of Remeasurements on OCI | 5 | 21 | 1 | (4 | ) | ||||
Benefits paid | (4 | ) | (12 | ) | (6 | ) | (8 | ) | |
Foreign currency translation | (5 | ) | (23 | ) | (4 | ) | (13 | ) | |
Other | (4 | ) | 8 | 4 | (4 | ) | |||
Accrued benefit obligation, end of year | 58 | 180 | 63 | 163 | |||||
Plan assets | |||||||||
Fair value of plan assets, beginning of year | 63 | 62 | 68 | 57 | |||||
Impact on Profit or Loss: | |||||||||
Interest income | 3 | 3 | 3 | 3 | |||||
Impact on Profit or Loss | 3 | 3 | 3 | 3 | |||||
Remeasurements through OCI: | |||||||||
Return on plan assets | 5 | (4 | ) | 3 | (4 | ) | |||
Impact of Remeasurements on OCI | 5 | (4 | ) | 3 | (4 | ) | |||
Benefits paid | (4 | ) | (12 | ) | (6 | ) | (8 | ) | |
Employer contributions | | 20 | | 19 | |||||
Foreign currency translation | (5 | ) | (11 | ) | (5 | ) | (5 | ) | |
Fair value of plan assets, end of year | 62 | 58 | 63 | 62 | |||||
Funded status surplus (deficit)(1) | 4 | (122 | ) | | (101 | ) | |||
58 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
The asset recognized for the Canadian defined benefit plan in a surplus position represents the maximum economic benefit available to the Company in respect of its pension obligations. The Company has been able to recognize the entire surplus since it has control over plan assets and can recoup the surplus through a combination of refunds and reductions in contributions.
The weighted average durations of the accrued benefit obligations for the Canadian and Norwegian defined benefit pension plans are approximately 12 and 20 years, respectively.
Funding
In Canada, the provincial pension regulator imposes a minimum funding requirement for registered defined benefit pension plans based on actuarial valuation reports prepared by independent actuaries. The actuarial reports also set up maximum funding limits based on the status of the registered defined benefit pension plans as Designated Plans under the Income Tax Act (Canada). The most recent actuarial valuation of the Canadian registered defined benefit pension plans for funding purposes was at December 31, 2013.
The PMC has a funding policy for the Canadian registered defined benefit pension plans and reviews the policy on a regular basis. None of the Canadian defined benefit pension plans include large risk concentrations.
The Company's objective, where legislation does not otherwise provide impediments, is to fund the defined benefit pension plans 100% on a basis that should ensure that benefits can be paid as they fall due. To provide reassurance to Canadian plan members that the Company will meet its obligations, letters of credit have been provided to ensure full funding in the event that certain default conditions occur.
The Company expects to make annual contributions to its defined benefit plans as follows:
Pension plans |
Non-pension benefits plan |
Total | ||||
2015 | 16 | 1 | 17 | |||
2016 | 16 | 1 | 17 | |||
2017 | 17 | 1 | 18 | |||
2018 | 17 | 1 | 18 | |||
2019 | 17 | 1 | 18 | |||
2020 2025 | 90 | 5 | 95 | |||
Of the aggregate accrued benefit obligation of $238 million at December 31, 2014, $102 million related to plans that are unfunded. Four unfunded plans, with a total deficit of $93 million, are secured by letters of credit in the amount of C$106 million.
Net Deficit
Years ended December 31 | 2014 | 2013 | 2012 | ||||
Accrued benefit obligation at December 31 | 238 | 226 | 233 | ||||
Fair value of plan assets at December 31 | 120 | 125 | 125 | ||||
Net deficit | (118 | ) | (101 | ) | (108 | ) | |
Net Benefit Expense
The net benefit expense for the pension plans recognized in the Consolidated Statements of Income (Loss) was as follows:
Years ended December 31 | 2014 | 2013 | 2012 | |||
Current service cost | 10 | 12 | 14 | |||
Past service cost | 5 | 5 | | |||
Interest cost | 5 | 4 | 5 | |||
Other | 4 | (4 | ) | 3 | ||
Defined benefit plan expense | 24 | 17 | 22 | |||
Defined contribution plan expense | 16 | 18 | 17 | |||
Net benefit expense | 40 | 35 | 39 | |||
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 59
Non-Pension Post-Employment Benefit Plan
At December 31, 2014, the accrued benefit obligation for the non-pension post-employment benefit plan was $13 million (2013 $13 million). Non-pension post-employment benefits include medical, dental and life insurance benefits for certain current and future Canadian retired employees.
During the year ended December 31, 2014, net benefit expense for non-pension post-employment benefits of $3 million (2013 $nil; 2012 $1 million) was included in the Consolidated Statements of Income (Loss).
A 1% increase or decrease in the assumed medical cost trend rate would have an immaterial impact on the accrued benefit obligation at December 31, 2014.
Other Risks
For the Norwegian plan, actions taken by the local regulator or changes to European legislation could result in stronger local funding standards, which could affect the Company's cash flow from this plan.
There is a risk that changes in discount rate, assumptions made for life expectancy, price inflation or other assumptions used to value the defined benefit obligation could result in increased obligations for the plans.
Other Information
Although there are no plans to do so, if the Norwegian plans were to wind up, any surplus assets would be used to improve benefits. If there was a deficit, the insurance would be responsible for the deficits, with the Company only being responsible for premiums up to the date of the plan termination.
The pension and non-pension post-employment benefits of key management personnel are disclosed in note 33.
60 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
Talisman's activities are conducted in four geographic segments: North America, the North Sea, Southeast Asia and Other. The North America segment includes operations and exploration in Canada and the US. The Southeast Asia segment includes operations and exploration activities in Indonesia, Malaysia, Vietnam, Papua New Guinea and in Australia/Timor-Leste. The North Sea segment includes operations and exploration activities in the UK and Norway. The Company also has non-operated production in Algeria, operations and exploration activities in Colombia, and exploration activities in the Kurdistan Region of Iraq. In 2013, the Company exited Poland and received government approval to transfer its interests in Sierra Leone. Furthermore, the Company is in the process of exiting Peru. For ease of reference, all of the activities in Algeria, Colombia, Peru, Poland, Sierra Leone and the Kurdistan Region of Iraq are referred to collectively as the Other geographic segment. All activities relate to the exploration, development, production and transportation of oil, liquids and natural gas.
North America(1) | Southeast Asia(2) | North Sea(3) | Other(4) | Total | |||||||||||||||||||||||||||
(millions of US$) | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | ||||||||||||||||
Revenue | |||||||||||||||||||||||||||||||
Sales | 1,804 | 1,643 | 1,435 | 2,050 | 2,202 | 2,190 | 527 | 577 | 2,922 | 272 | 230 | 220 | 4,653 | 4,652 | 6,767 | ||||||||||||||||
Other income | 60 | 45 | 72 | 3 | 1 | 3 | 31 | 23 | 9 | 56 | 40 | | 150 | 109 | 84 | ||||||||||||||||
Income (loss) from joint ventures and associates, after tax | | | | | | | (1,055 | ) | (450 | ) | (46 | ) | 15 | 175 | 361 | (1,040 | ) | (275 | ) | 315 | |||||||||||
Total revenue and other income | 1,864 | 1,688 | 1,507 | 2,053 | 2,203 | 2,193 | (497 | ) | 150 | 2,885 | 343 | 445 | 581 | 3,763 | 4,486 | 7,166 | |||||||||||||||
Segmented expenses | |||||||||||||||||||||||||||||||
Operating | 517 | 568 | 564 | 494 | 532 | 418 | 332 | 302 | 1,350 | 62 | 30 | 29 | 1,405 | 1,432 | 2,361 | ||||||||||||||||
Transportation | 89 | 103 | 92 | 56 | 56 | 53 | 29 | 25 | 69 | 32 | 8 | 7 | 206 | 192 | 221 | ||||||||||||||||
DD&A | 1,109 | 1,211 | 1,140 | 473 | 486 | 427 | 302 | 195 | 774 | 52 | 30 | 30 | 1,936 | 1,922 | 2,371 | ||||||||||||||||
Impairment, net of reversals | 593 | 332 | 363 | 60 | 55 | | 741 | 543 | 1,942 | 374 | 16 | 284 | 1,768 | 946 | 2,589 | ||||||||||||||||
Dry hole | 11 | | 22 | 92 | 60 | 77 | (1 | ) | 18 | 45 | 38 | 11 | 94 | 140 | 89 | 238 | |||||||||||||||
Exploration | 21 | 39 | 29 | 108 | 59 | 92 | 37 | 39 | 46 | 66 | 123 | 179 | 232 | 260 | 346 | ||||||||||||||||
Other | 54 | 69 | 81 | 19 | 8 | (19 | ) | 4 | 16 | 41 | 14 | 2 | (12 | ) | 91 | 95 | 91 | ||||||||||||||
Total segmented expenses | 2,394 | 2,322 | 2,291 | 1,302 | 1,256 | 1,048 | 1,444 | 1,138 | 4,267 | 638 | 220 | 611 | 5,778 | 4,936 | 8,217 | ||||||||||||||||
Segmented income (loss) before taxes | (530 | ) | (634 | ) | (784 | ) | 751 | 947 | 1,145 | (1,941 | ) | (988 | ) | (1,382 | ) | (295 | ) | 225 | (30 | ) | (2,015 | ) | (450 | ) | (1,051 | ) | |||||
Non-segmented expenses | |||||||||||||||||||||||||||||||
General and administrative | 405 | 434 | 510 | ||||||||||||||||||||||||||||
Finance costs | 352 | 331 | 272 | ||||||||||||||||||||||||||||
Share-based payments expense (recovery) | 27 | 49 | (63 | ) | |||||||||||||||||||||||||||
Currency translation | (42 | ) | 18 | 33 | |||||||||||||||||||||||||||
(Gain) loss on held-for-trading financial instruments | (1,427 | ) | 140 | 93 | |||||||||||||||||||||||||||
Gain on disposals | (550 | ) | (100 | ) | (1,624 | ) | |||||||||||||||||||||||||
Total non-segmented expenses | (1,235 | ) | 872 | (779 | ) | ||||||||||||||||||||||||||
Loss before taxes | (780 | ) | (1,322 | ) | (272 | ) | |||||||||||||||||||||||||
Capital expenditures(5) | |||||||||||||||||||||||||||||||
Exploration | 116 | 76 | 157 | 139 | 129 | 59 | 22 | 49 | 85 | 149 | 144 | 223 | 426 | 398 | 524 | ||||||||||||||||
Development | 1,206 | 1,207 | 1,404 | 300 | 353 | 362 | 130 | 332 | 1,064 | 12 | 17 | 7 | 1,648 | 1,909 | 2,837 | ||||||||||||||||
Midstream | | | 1 | | | | | | | | | | | | 1 | ||||||||||||||||
Exploration and development | 1,322 | 1,283 | 1,562 | 439 | 482 | 421 | 152 | 381 | 1,149 | 161 | 161 | 230 | 2,074 | 2,307 | 3,362 | ||||||||||||||||
Acquisitions | 35 | 111 | 160 | ||||||||||||||||||||||||||||
Proceeds on dispositions | (1,517 | ) | (146 | ) | (964 | ) | |||||||||||||||||||||||||
Other non-segmented | 47 | 41 | 138 | ||||||||||||||||||||||||||||
Net capital expenditures | 639 | 2,313 | 2,696 | ||||||||||||||||||||||||||||
Property, plant and equipment | 6,321 | 6,636 | 7,145 | 2,223 | 2,318 | 2,582 | 256 | 537 | 460 | 264 | 261 | 275 | 9,064 | 9,752 | 10,462 | ||||||||||||||||
Exploration and evaluation assets | 1,345 | 1,579 | 2,078 | 667 | 717 | 527 | 125 | 289 | 254 | 407 | 580 | 460 | 2,544 | 3,165 | 3,319 | ||||||||||||||||
Goodwill | 110 | 118 | 133 | 169 | 170 | 170 | | 287 | 472 | | | | 279 | 575 | 775 | ||||||||||||||||
Investments in joint ventures and associates | | | | | | | | 206 | 259 | 523 | 920 | 803 | 523 | 1,126 | 1,062 | ||||||||||||||||
Other | 555 | 677 | 685 | 740 | 740 | 637 | 2,051 | 1,911 | 1,418 | 301 | 402 | 905 | 3,647 | 3,730 | 3,645 | ||||||||||||||||
Assets held for sale | | 776 | | | | | | | | | | | | 776 | | ||||||||||||||||
Segmented assets | 8,331 | 9,786 | 10,041 | 3,799 | 3,945 | 3,916 | 2,432 | 3,230 | 2,863 | 1,495 | 2,163 | 2,443 | 16,057 | 19,124 | 19,263 | ||||||||||||||||
Non-segmented assets | 1,273 | 37 | 74 | ||||||||||||||||||||||||||||
Total assets(5) | 17,330 | 19,161 | 19,337 | ||||||||||||||||||||||||||||
Decommissioning liabilities(5) | 381 | 450 | 476 | 334 | 280 | 347 | 1,176 | 1,009 | 688 | 37 | 30 | 46 | 1,928 | 1,769 | 1,557 | ||||||||||||||||
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 61
1 | North America | 2014 | 2013 | 2012 | ||||
Canada | 766 | 810 | 853 | |||||
US | 1,098 | 878 | 654 | |||||
Total revenue and other income | 1,864 | 1,688 | 1,507 | |||||
Canada | 2,507 | 2,544 | 3,588 | |||||
US | 3,814 | 4,092 | 3,557 | |||||
Property, plant and equipment | 6,321 | 6,636 | 7,145 | |||||
Canada | 871 | 905 | 1,070 | |||||
US | 474 | 674 | 1,008 | |||||
Exploration and evaluation assets | 1,345 | 1,579 | 2,078 | |||||
2 | Southeast Asia | 2014 | 2013 | 2012 | ||||
Indonesia | 1,015 | 1,175 | 1,157 | |||||
Malaysia | 576 | 534 | 549 | |||||
Vietnam | 358 | 322 | 72 | |||||
Australia | 104 | 172 | 415 | |||||
Total revenue and other income | 2,053 | 2,203 | 2,193 | |||||
Indonesia | 941 | 1,023 | 1,040 | |||||
Malaysia | 698 | 707 | 852 | |||||
Vietnam | 308 | 460 | 494 | |||||
Papua New Guinea | 143 | 40 | 44 | |||||
Australia | 133 | 88 | 152 | |||||
Property, plant and equipment | 2,223 | 2,318 | 2,582 | |||||
Indonesia | 37 | 19 | 11 | |||||
Malaysia | 41 | 83 | 72 | |||||
Vietnam | 191 | 145 | 14 | |||||
Papua New Guinea | 398 | 470 | 430 | |||||
Exploration and evaluation assets | 667 | 717 | 527 | |||||
3 | North Sea | 2014 | 2013 | 2012 | ||||
UK(6) | 28 | 23 | 2,017 | |||||
Norway | 530 | 577 | 914 | |||||
Loss from TSEUK | (1,055) | (450) | (46) | |||||
Total revenue and other income | (497) | 150 | 2,885 | |||||
UK | | | | |||||
Norway | 256 | 537 | 460 | |||||
Property, plant and equipment | 256 | 537 | 460 | |||||
UK | | | | |||||
Norway | 125 | 289 | 254 | |||||
Exploration and evaluation assets | 125 | 289 | 254 | |||||
4 | Other | 2014 | 2013 | 2012 | ||||
Algeria | 182 | 207 | 213 | |||||
Colombia(7) | 161 | 238 | 368 | |||||
Total revenue and other income | 343 | 445 | 581 | |||||
Algeria | 224 | 260 | 273 | |||||
Colombia | 40 | 1 | 2 | |||||
Property, plant and equipment | 264 | 261 | 275 | |||||
Colombia | 208 | 203 | 124 | |||||
Kurdistan Region of Iraq | 199 | 377 | 323 | |||||
Other | | | 13 | |||||
Exploration and evaluation assets | 407 | 580 | 460 | |||||
62 TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014
Major Subsidiaries
The Consolidated Financial Statements include the financial statements of Talisman Energy Inc. and the directly or indirectly owned subsidiaries. Transactions between subsidiaries are eliminated on consolidation. Other than transactions with joint ventures and associates, there were no related party transactions with entities or other parties outside the consolidated group during the years ended December 31, 2014 and 2013. The following table lists the material operating subsidiaries owned directly or indirectly by Talisman as at December 31:
Name of Subsidiary | Jurisdiction of Incorporation |
Percentage of Voting Securities Owned |
||
Talisman Energy Canada(1) | Alberta | 100% | ||
Talisman Energy USA Inc. | Delaware | 100% | ||
Talisman Alberta Shale Partnership | Alberta | 100% | ||
Talisman Energy Norge AS | Norway | 100% | ||
Talisman (Corridor) Ltd. | Barbados | 100% | ||
Talisman (Vietnam15-2/01) Ltd. | Alberta | 100% | ||
Talisman Malaysia Limited | Barbados | 100% | ||
Talisman Malaysia (PM3) Limited | Barbados | 100% | ||
Talisman (Algeria) B.V. | The Netherlands | 100% | ||
Joint Venture and Associates
Transactions with joint ventures and associates are classified as related party transactions and are disclosed as part of note 8 and note 25.
Key Management Personnel Compensation
The compensation of key management personnel, consisting of the Company's directors and members of the executive committee, is as follows:
Years ended December 31 | 2014 | 2013 | 2012 | |||
Short-term benefits | 14 | 15 | 15 | |||
Pension and other post-employment benefits | 5 | 5 | 6 | |||
Termination benefits | 3 | 6 | 15 | |||
Share-based payments | 3 | 9 | 13 | |||
25 | 35 | 49 | ||||
Short-term benefits comprise salaries and fees, annual bonuses, cash, vehicle and other benefits.
The amount of pension benefits reported represents the attributable amount of the net benefit expense of the plans in which the key management personnel participate.
Termination benefits comprise amounts paid and accrued.
The share-based payments amount reported represents the cost to the Company of key management's participation in share-based payment plans, as measured by the fair value that the individual received based on the value of the shares exercised in the current period.
TALISMAN ENERGY CONSOLIDATED FINANCIAL STATEMENTS 2014 63
TALISMAN ENERGY INC.
Suite 2000, 888 3rd Street SW
Calgary, Alberta, Canada T2P 5C5
P 403.237.1234 F 403.237.1902
E tlm@talisman-energy.com
www.talisman-energy.com
SUPPLEMENTAL RESERVES INFORMATION
The following disclosures have been prepared in accordance with FASB Accounting Standards Codification 932, "Extractive Activities Oil and Gas."
References in tables in this Exhibit to "Consolidated Entities" relate to Talisman Energy Inc. and the direct or indirect subsidiaries of Talisman Energy Inc. and partnership interests held by Talisman Energy Inc. and its subsidiaries. Effective January 1, 2013, the Company adopted International Financial Reporting Standards ("IFRS") 11 Joint Arrangements which requires Talisman to account for its investments in Talisman Sinopec Energy UK Limited ("TSEUK") and Equion Energía Limited ("Equion") using the equity method of accounting. References in tables in this exhibit to "Share of Equity Investees" relates to Talisman's 51% equity interest in TSEUK and Talisman's 49% equity interest in Equion respectively.
Unless the context indicates otherwise, references in this Exhibit 99.8 to "Talisman" or the "Company" include, for reporting purposes only, the direct or indirect subsidiaries of Talisman Energy Inc., partnership interests held by Talisman Energy Inc. and its subsidiaries, and also include Talisman's equity interests in TSEUK and Equion. Such use of "Talisman" or the "Company" to refer to these other legal entities, partnership interests and equity interests does not constitute a waiver by Talisman Energy Inc. or such entities or partnerships of their separate legal status, for any purpose.
Note that the numbers in each column of the tables throughout this Exhibit may not add due to rounding.
Please refer to the Advisories and Abbreviations section at the end of this Exhibit.
Reserves Estimates
Summary of Oil and Gas Reserves as of Fiscal Year-End Based on Average Fiscal Year Prices
The following table sets forth Talisman's estimates of its proved developed, proved undeveloped and total proved reserves as at December 31, 2014. The reserves estimates included in this table were prepared using the standards of the US Securities and Exchange Commission ("SEC"), which requires that proved reserves be estimated using existing economic conditions. The price used for calculating reserves is an unweighted arithmetic average of the historic first-day-of-the-month price for each month within the completed 12-month period unless the prices are defined by contractual obligations (excluding escalations based on future conditions).
Year ended December 31, 2014 | Net(4) Proved(1) Developed(2)(5) |
Net(4) Proved(1) Undeveloped(3)(5) |
Net(4) Total Proved(1)(5) |
|||
CONSOLIDATED ENTITIES | ||||||
Oil and Natural Gas Liquids (mmbbls) | ||||||
North America | ||||||
Canada | 46.1 | 2.7 | 48.8 | |||
United States | 25.4 | 24.9 | 50.3 | |||
North Sea(6) | ||||||
Norway | 4.4 | | 4.4 | |||
Southeast Asia | ||||||
Indonesia | 3.4 | 1.0 | 4.4 | |||
Malaysia | 8.2 | 0.1 | 8.3 | |||
Australia | 1.5 | | 1.5 | |||
Papua New Guinea | | 1.8 | 1.8 | |||
Vietnam | 6.1 | 0.5 | 6.6 | |||
Latin America | ||||||
Colombia(6) | 3.7 | 3.5 | 7.2 | |||
Other | ||||||
Algeria | 8.9 | | 8.9 | |||
Total | 107.7 | 34.5 | 142.2 | |||
TALISMAN ENERGY 40-F SUPPLEMENTAL RESERVES INFORMATION 1
Year ended December 31, 2014 | Net(4) Proved(1) Developed(2)(5) |
Net(4) Proved(1) Undeveloped(3)(5) |
Net(4) Total Proved(1)(5) |
|||
Natural Gas (bcf) | ||||||
North America | ||||||
Canada | 411.4 | 35.3 | 446.7 | |||
United States | 1,067.4 | 665.4 | 1,732.8 | |||
North Sea(6) | ||||||
Norway | 7.6 | | 7.6 | |||
Southeast Asia | ||||||
Indonesia | 514.5 | 286.8 | 801.3 | |||
Malaysia | 82.9 | 11.5 | 94.4 | |||
Australia | | | | |||
Papua New Guinea | | | | |||
Vietnam | 3.5 | 0.3 | 3.8 | |||
Latin America | ||||||
Colombia(6) | | | | |||
Other | ||||||
Algeria | | | | |||
Total | 2,087.3 | 999.3 | 3,086.6 | |||
SHARE OF RESERVES OF EQUITY INVESTEES | ||||||
Oil and Natural Gas Liquids (mmbbls) | ||||||
North Sea (TSEUK) | 31.9 | 13.2 | 45.1 | |||
Latin America (Equion) | 8.0 | 2.1 | 10.1 | |||
Total | 39.9 | 15.3 | 55.2 | |||
Natural Gas (bcf) | ||||||
North Sea (TSEUK) | 2.4 | 22.3 | 24.7 | |||
Latin America (Equion) | 44.9 | | 44.9 | |||
Total | 47.3 | 22.3 | 69.6 | |||
PROVED RESERVES OF CONSOLIDATED ENTITIES AND SHARE OF RESERVES OF EQUITY INVESTEES | ||||||
Oil and Natural Gas Liquids (mmbbls) | ||||||
Total | 147.6 | 49.8 | 197.4 | |||
Natural Gas (bcf) | ||||||
Total | 2,134.6 | 1,021.6 | 3,156.2 | |||
Talisman does not file estimates of its total oil and gas reserves with any US agency or federal authority other than the SEC and the US Energy Information Administration.
2 TALISMAN ENERGY 40-F SUPPLEMENTAL RESERVES INFORMATION
The following tables reflect activities from assets that are classified as both continuing operations and, until disposed of, discontinued operations for financial reporting purposes.
Continuity of Net Proved Reserves
Canada | US | UK | Norway | Indonesia | Other Southeast Asia |
Latin America |
Other | Total | |||||||||||||
CONSOLIDATED ENTITIES(2) | |||||||||||||||||||||
Oil and Liquids (mmbbls) | |||||||||||||||||||||
Total Proved | |||||||||||||||||||||
Proved reserves at December 31, 2011 | 62.0 | 17.3 | 245.0 | 52.7 | 15.5 | 30.3 | 12.8 | 15.5 | 451.1 | ||||||||||||
Discoveries, additions and extensions | 10.3 | 11.4 | 9.4 | (26.2 | ) | 0.2 | 1.5 | 0.2 | (0.9 | ) | 5.9 | ||||||||||
Purchase of reserves | | | | | | 1.1 | | | 1.1 | ||||||||||||
Sale of reserves | (11.8 | ) | | (114.5 | ) | (2.7 | ) | (1.1 | ) | | | | (130.1 | ) | |||||||
Revisions to previous estimates | 5.1 | (1.5 | ) | (121.4 | ) | (2.1 | ) | (2.0 | ) | 1.5 | (12.8 | ) | 0.2 | (133.0 | ) | ||||||
2012 Production | (5.7 | ) | (2.5 | ) | (18.5 | ) | (7.2 | ) | (2.1 | ) | (7.2 | ) | (0.1 | ) | (1.9 | ) | (45.2 | ) | |||
Proved reserves at December 31, 2012 | 59.9 | 24.7 | | 14.5 | 10.5 | 27.2 | 0.1 | 12.9 | 149.8 | ||||||||||||
Discoveries, additions and extensions | 5.8 | 23.2 | | 0.0 | | 2.9 | 2.1 | | 34.0 | ||||||||||||
Purchase of reserves | 0.1 | | | | | | | | 0.1 | ||||||||||||
Sale of reserves | (1.0 | ) | | | | | | | | (1.0 | ) | ||||||||||
Revisions to previous estimates | | (4.2 | ) | | 1.2 | (2.5 | ) | (0.3 | ) | 0.4 | 1.1 | (4.3 | ) | ||||||||
2013 Production | (4.8 | ) | (4.9 | ) | | (5.0 | ) | (1.4 | ) | (7.2 | ) | (0.3 | ) | (1.8 | ) | (25.4 | ) | ||||
Proved reserves at December 31, 2013 | 60.0 | 38.8 | | 10.7 | 6.6 | 22.6 | 2.3 | 12.2 | 153.2 | ||||||||||||
Discoveries, additions and extensions | 6.3 | 15.4 | | | | 3.3 | 4.2 | | 29.2 | ||||||||||||
Purchase of reserves | | | | | | | | | | ||||||||||||
Sale of reserves | (1.4 | ) | | | | (1.0 | ) | | | | (2.4 | ) | |||||||||
Revisions to previous estimates | (9.5 | ) | 2.2 | | (1.9 | ) | (0.1 | ) | 1.5 | 1.7 | (1.2 | ) | (7.3 | ) | |||||||
2014 Production(1) | (6.6 | ) | (6.1 | ) | | (4.4 | ) | (1.1 | ) | (9.2 | ) | (1.0 | ) | (2.1 | ) | (30.5 | ) | ||||
Proved reserves at December 31, 2014 | 48.8 | 50.3 | | 4.4 | 4.4 | 18.2 | 7.2 | 8.9 | 142.2 | ||||||||||||
Proved developed | |||||||||||||||||||||
December 31, 2011 | 59.9 | 7.3 | 201.9 | 17.0 | 9.9 | 19.0 | 6.7 | 9.0 | 330.7 | ||||||||||||
December 31, 2012 | 55.8 | 10.3 | | 8.4 | 7.0 | 15.0 | 8.8 | 7.6 | 112.9 | ||||||||||||
December 31, 2013 | 54.8 | 16.1 | | 6.9 | 4.8 | 21.0 | 2.3 | 10.3 | 116.2 | ||||||||||||
December 31, 2014 | 46.1 | 25.4 | | 4.4 | 3.4 | 15.8 | 3.7 | 8.9 | 107.7 | ||||||||||||
Natural Gas (bcf) | |||||||||||||||||||||
Total Proved | |||||||||||||||||||||
Proved reserves at December 31, 2011 | 1,292.7 | 1,985.8 | 18.7 | 67.6 | 1,107.2 | 188.8 | 83.5 | | 4,744.3 | ||||||||||||
Discoveries, additions and extensions | 65.4 | (550.0 | ) | 35.6 | 17.1 | 0.3 | 2.7 | | | (428.9 | ) | ||||||||||
Purchase of reserves | | | | | | 1.9 | | | 1.9 | ||||||||||||
Sale of reserves | (97.2 | ) | | (20.3 | ) | | (9.1 | ) | | | | (126.6 | ) | ||||||||
Revisions to previous estimates | (101.4 | ) | 66.0 | (32.1 | ) | (42.0 | ) | (3.9 | ) | 7.5 | (83.5 | ) | | (189.4 | ) | ||||||
2012 Production | (137.2 | ) | (176.8 | ) | (1.9 | ) | (9.6 | ) | (99.8 | ) | (32.3 | ) | | | (457.6 | ) | |||||
Proved reserves at December 31, 2012 | 1,022.3 | 1,325.0 | | 33.1 | 994.7 | 168.6 | | | 3,543.7 | ||||||||||||
Discoveries, additions and extensions | 151.7 | 459.8 | | 0.0 | 6.5 | 3.3 | | | 621.3 | ||||||||||||
Purchase of reserves | 4.0 | | | | | | | | 4.0 | ||||||||||||
Sale of reserves | (14.6 | ) | | | | | | | | (14.6 | ) | ||||||||||
Revisions to previous estimates | 65.8 | 26.3 | | (12.3 | ) | (10.2 | ) | (7.1 | ) | | | 62.5 | |||||||||
2013 Production | (110.0 | ) | (159.4 | ) | | (3.1 | ) | (101.0 | ) | (25.8 | ) | | | (399.3 | ) | ||||||
Proved reserves at December 31, 2013 | 1,119.2 | 1,651.7 | | 17.7 | 890.0 | 139.0 | | | 3,817.6 | ||||||||||||
Discoveries, additions and extensions | 77.5 | 391.6 | | | 21.7 | 6.2 | | | 497.0 | ||||||||||||
TALISMAN ENERGY 40-F SUPPLEMENTAL RESERVES INFORMATION 3
Canada | US | UK | Norway | Indonesia | Other Southeast Asia |
Latin America |
Other | Total | ||||||||||
Purchase of reserves | | | | | | | | | | |||||||||
Sale of reserves | (624.1 | ) | (1.1 | ) | | | (6.7 | ) | | | | (631.9 | ) | |||||
Revisions to previous estimates | (48.0 | ) | (142.0 | ) | | (2.1 | ) | (3.9 | ) | (20.1 | ) | | | (216.1 | ) | |||
2014 Production(1) | (77.9 | ) | (167.4 | ) | | (8.0 | ) | (99.8 | ) | (26.9 | ) | | | (380.0 | ) | |||
Proved reserves at December 31, 2014 | 446.7 | 1,732.8 | | 7.6 | 801.3 | 98.2 | | | 3,086.6 | |||||||||
Proved developed | ||||||||||||||||||
December 31, 2011 | 936.5 | 814.7 | 18.2 | 63.1 | 688.5 | 149.7 | 62.3 | | 2,733.0 | |||||||||
December 31, 2012 | 712.3 | 839.6 | | 13.8 | 591.5 | 125.3 | | | 2,282.5 | |||||||||
December 31, 2013 | 760.6 | 821.6 | | 7.6 | 632.4 | 114.1 | | | 2,336.3 | |||||||||
December 31, 2014 | 411.4 | 1,067.4 | | 7.6 | 514.5 | 86.4 | | | 2,087.3 | |||||||||
UK (TSEUK) |
Latin America (Equion) |
Total | ||||||||
SHARE OF RESERVES OF EQUITY INVESTEES(2) | ||||||||||
Oil and Liquids (mmbbls) | ||||||||||
Total Proved | ||||||||||
Proved reserves at December 31, 2011 | | | | |||||||
Discoveries, additions and extensions | | 3.7 | 3.7 | |||||||
Purchase of reserves | | | | |||||||
Sale of reserves | | | | |||||||
Revisions to previous estimates | 99.8 | 12.9 | 112.7 | |||||||
2012 Production | (0.4 | ) | (3.2 | ) | (3.6 | ) | ||||
Proved reserves at December 31, 2012 | 99.4 | 13.4 | 112.8 | |||||||
Discoveries, additions and extensions | 2.0 | 0.4 | 2.4 | |||||||
Purchase of reserves | 8.5 | | 8.5 | |||||||
Sale of reserves | | | | |||||||
Revisions to previous estimates | (27.6 | ) | | (27.6 | ) | |||||
2013 Production | (6.8 | ) | (2.9 | ) | (9.7 | ) | ||||
Proved reserves at December 31, 2013 | 75.5 | 10.9 | 86.4 | |||||||
Discoveries, additions and extensions | (0.1 | ) | 1.5 | 1.4 | ||||||
Purchase of reserves | 0.5 | | 0.5 | |||||||
Sale of reserves | | | | |||||||
Revisions to previous estimates | (25.0 | ) | 0.5 | (24.5 | ) | |||||
2014 Production(1) | (5.8 | ) | (2.8 | ) | (8.6 | ) | ||||
Proved reserves at December 31, 2014 | 45.1 | 10.1 | 55.2 | |||||||
Proved developed | ||||||||||
December 31, 2011 | | | | |||||||
December 31, 2012 | 84.0 | 8.8 | 92.8 | |||||||
December 31, 2013 | 60.5 | 8.3 | 68.8 | |||||||
December 31, 2014 | 31.9 | 8.0 | 39.9 | |||||||
4 TALISMAN ENERGY 40-F SUPPLEMENTAL RESERVES INFORMATION
UK (TSEUK) |
Latin America (Equion) |
Total | ||||||||
Natural Gas (bcf) | ||||||||||
Total Proved | ||||||||||
Proved reserves at December 31, 2011 | | | | |||||||
Discoveries, additions and extensions | | (9.6 | ) | (9.6 | ) | |||||
Purchase of reserves | | | | |||||||
Sale of reserves | | | | |||||||
Revisions to previous estimates | 33.0 | 87.3 | 120.3 | |||||||
2012 Production | | (11.5 | ) | (11.5 | ) | |||||
Proved reserves at December 31, 2012 | 33.0 | 66.2 | 99.2 | |||||||
Discoveries, additions and extensions | 1.4 | 4.3 | 5.7 | |||||||
Purchase of reserves | | | | |||||||
Sale of reserves | | | | |||||||
Revisions to previous estimates | (1.6 | ) | (0.4 | ) | (2.0 | ) | ||||
2013 Production | (0.6 | ) | (11.7 | ) | (12.3 | ) | ||||
Proved reserves at December 31, 2013 | 32.2 | 58.4 | 90.6 | |||||||
Discoveries, additions and extensions | (0.1 | ) | | (0.1 | ) | |||||
Purchase of reserves | | | | |||||||
Sale of reserves | | | | |||||||
Revisions to previous estimates | (6.9 | ) | (2.1 | ) | (9.0 | ) | ||||
2014 Production(1) | (0.5 | ) | (11.4 | ) | (11.9 | ) | ||||
Proved reserves at December 31, 2014 | 24.7 | 44.9 | 69.6 | |||||||
Proved developed | ||||||||||
December 31, 2011 | | | | |||||||
December 31, 2012 | 8.2 | 66.2 | 74.4 | |||||||
December 31, 2013 | 6.0 | 58.4 | 64.4 | |||||||
December 31, 2014 | 2.4 | 44.9 | 47.3 | |||||||
The narrative in the remainder of this subsection references a total of consolidated entities and Talisman's share of equity investees on a combined oil and natural gas liquids and natural gas or barrels of oil equivalent (boe) basis.
Discussion of Continuity of Net Proved Reserves
In 2014, the Company's net proved reserves decreased by 168 mmboe. Additions and technical revisions, primarily in the US and Canada, replaced 99% of the 104 mmboe produced during 2014. Major negative revisions due to price and economic factors resulted in a decrease of 60 mmboe. These revisions occurred predominantly in the United Kingdom and the US. Net acquisitions and divestments, almost entirely in Canada, resulted in a further reduction of 107 mmboe.
Proved Undeveloped Reserves
Talisman's proved undeveloped reserves related to its consolidated entities and its share of equity investees were 34.5 mmbbls of oil and natural gas liquids and 999.3 bcf of natural gas as at December 31, 2014, a decrease of 2.5 mmbbls and 482 bcf, respectively,
TALISMAN ENERGY 40-F SUPPLEMENTAL RESERVES INFORMATION 5
compared to year-end 2013. The following table and subsequent discussion reflects the changes to the gross proved undeveloped reserves during the year ended December 31, 2014.
Oil and Natural Gas Liquids (mmbbls) |
Natural Gas (bcf) |
Total BOE (mmbbls) |
||||||
CONSOLIDATED ENTITIES | ||||||||
Proved Undeveloped Reserves at December 31, 2013 | 37.0 | 1,481.3 | 284.0 | |||||
Discoveries, Additions and Extensions | 13.4 | 250.0 | 55.1 | |||||
Purchase of Reserves | 0.0 | 0.0 | 0.0 | |||||
Sale of Reserves | (1.0 | ) | (293.2 | ) | (49.9 | ) | ||
Revisions to previous estimates | (4.4 | ) | (253.4 | ) | (46.6 | ) | ||
Conversion to Proved Developed Reserves | (10.5 | ) | (185.4 | ) | (41.5 | ) | ||
Proved Undeveloped Reserves at December 31, 2014 | 34.5 | 999.3 | 201.1 | |||||
SHARE OF EQUITY INVESTEES | ||||||||
Proved Undeveloped Reserves at December 31, 2013 | 17.6 | 26.2 | 22.0 | |||||
Discoveries, Additions and Extensions | 0.6 | 0.0 | 0.6 | |||||
Purchase of Reserves | 0.0 | 0.0 | 0.0 | |||||
Sale of Reserves | 0.0 | 0.0 | 0.0 | |||||
Revisions to previous estimates | (1.5 | ) | (3.8 | ) | (2.2 | ) | ||
Conversion to Proved Developed Reserves | (1.4 | ) | (0.1 | ) | (1.4 | ) | ||
Proved Undeveloped Reserves at December 31, 2014 | 15.3 | 22.3 | 19.0 | |||||
The Company developed 14% of proved undeveloped reserves in 2014. On a total proved undeveloped reserves basis, 42.9 mmboe were converted out of a starting balance of 306 mmboe. Talisman spent approximately $544 million in 2014 to develop its proved undeveloped reserves. Major areas for conversion were several projects in Marcellus and Eagle Ford.
Talisman also had total discoveries, additions, and extensions of 55.7 mmboe. Major areas for additions were also Marcellus and Eagle Ford. All of Talisman's proved undeveloped reserves as at December 31, 2014 are scheduled for development within five years of original booking, except for the special circumstances described below. Undeveloped reserves are booked only when all criteria including technical, commercial, and development plans were met. Talisman reviews the economics of its properties containing undeveloped reserves using evaluation techniques commonly accepted in the industry, fully compliant with all regulations, and also with its own pricing and economic assumptions. Through this active management process, Talisman selects some properties for further development activities while others are held in abeyance, sold, or swapped. Actual timing of the development of undeveloped reserves is based on various factors including economic conditions, technical performance and capital availability and allocation of necessary resources.
As of December 31, 2014 the only material proved undeveloped reserves that were five years or older were in Indonesia, Malaysia and the UK. The Indonesia and Malaysia undeveloped gas reserves will be developed as needed in the next five years to meet gas deliverability requirements for existing gas contracts. The UK undeveloped oil reserves are located in new offshore projects that are underway and where significant capital has already been spent.
Talisman booked certain of its proved undeveloped reserves in North America, in fields where there exists reliable technology that established reasonable certainty of economic producibility at distances greater than directly offsetting development spacing. Talisman utilized a combination of 3D seismic, core analysis, borehole logs, well tests, production history and numerical simulation in order to attain the reasonable certainty required to book proved undeveloped reserves.
6 TALISMAN ENERGY 40-F SUPPLEMENTAL RESERVES INFORMATION
Discounted Future Net Cash Flows
Standardized Measure of Discounted Future Net Cash Flows from Proved Reserves
Future net cash flows were calculated by applying the prescribed average annual prices to the Company's estimated future production of proved reserves and deducting estimates of future development, asset retirement, production and transportation costs, and income taxes. Future costs have been estimated based on existing economic and operating conditions. Future income taxes have been estimated based on statutory tax rates enacted at year-end using existing tax and cost pools. The present values of the estimated future cash flows were determined by applying a 10% discount rate prescribed by the US Financial Accounting Standards Board.
In order to increase the comparability between companies, the standardized measure of discounted future net cash flows necessarily employs uniform assumptions that do not necessarily reflect management's best estimate of future events and anticipated outcomes. There are numerous uncertainties inherent in estimating quantities of proved reserves and projecting future rates of production and timing of development expenditures. Accordingly, the Company does not believe that the standardized measure of discounted future net cash flows will be representative of actual future net cash flows and should not be considered to represent the fair market value of the oil and gas properties. Actual future net cash flows will differ significantly from estimates due to, but not limited to, the following:
The standardized measure of discounted future net cash flows was prepared using the following prices:
Average Prices | 2014 | 2013 | 2012 | |||
CONSOLIDATED ENTITIES(4) | ||||||
Crude oil & liquids (US$/bbl) | ||||||
Canada(1) | 58.05 | 56.17 | 61.51 | |||
US(1) | 60.33 | 63.10 | 73.76 | |||
UK | | | | |||
Norway | 94.57 | 100.67 | 103.21 | |||
Indonesia | 91.51 | 90.67 | 102.57 | |||
Other Southeast Asia(2) | 103.21 | 112.68 | 115.83 | |||
Latin America | 89.29 | 97.52 | 90.00 | |||
Other(3) | 98.88 | 106.60 | 108.59 | |||
Total | 73.05 | 78.79 | 88.18 | |||
Natural gas (US$/mcf) | ||||||
Canada | 4.37 | 3.12 | 2.48 | |||
US | 3.97 | 3.67 | 2.81 | |||
UK | | | | |||
Norway | 8.88 | 10.04 | 6.78 | |||
Indonesia | 9.97 | 9.34 | 8.31 | |||
Other Southeast Asia(2) | 6.71 | 7.14 | 7.78 | |||
Latin America | | | | |||
Other(3) | | | | |||
Total | 5.90 | 5.25 | 4.86 | |||
TALISMAN ENERGY 40-F SUPPLEMENTAL RESERVES INFORMATION 7
Average Prices | 2014 | 2013 | 2012 | |||
SHARE OF EQUITY INVESTEES(4) | ||||||
Crude oil & liquids (US$/bbl) | ||||||
UK (TSEUK) | 100.33 | 107.78 | 111.19 | |||
Latin America (Equion) | 82.66 | 98.52 | 104.36 | |||
Total Share of Equity Investees | 96.47 | 106.35 | 110.21 | |||
Natural gas (US$/mcf) | ||||||
UK (TSEUK) | 7.78 | 8.59 | 7.75 | |||
Latin America (Equion) | 3.56 | 3.56 | 4.09 | |||
Total Share of Equity Investees | 4.85 | 5.13 | 5.13 | |||
In order to derive the prices in the cash flow, the following benchmark prices and exchange rates were used:
2014 | 2013 | 2012 | ||||
WTI (US$/bbl) | 94.99 | 96.94 | 94.71 | |||
Dated Brent (US$/bbl) | 101.27 | 108.02 | 111.13 | |||
HH gas (US$/mmbtu) | 4.31 | 3.66 | 2.76 | |||
AECO-C (C$/GJ) | 4.38 | 2.95 | 2.23 | |||
US$/C$ | 0.91 | 0.97 | 1.00 | |||
US$/£ | 1.65 | 1.56 | 1.59 | |||
Standardized Measure of Discounted Future Net Cash Flows from Proved Reserves
December 31 ($ millions) | Canada | US | UK | Norway | Indonesia | Other SEA(2) |
Latin America |
Other(3) | Total | ||||||||||
CONSOLIDATED ENTITIES | |||||||||||||||||||
2014 | |||||||||||||||||||
Future Cash Inflows | 4,833 | 9,905 | | 476 | 8,435 | 2,523 | 643 | 876 | 27,691 | ||||||||||
Future Costs | |||||||||||||||||||
Transportation | (127 | ) | (452 | ) | | (54 | ) | (466 | ) | (24 | ) | (165 | ) | (22 | ) | (1,310 | ) | ||
Production | (1,940 | ) | (2,598 | ) | | (226 | ) | (824 | ) | (1,167 | ) | (222 | ) | (181 | ) | (7,158 | ) | ||
Development and Site Restoration | (1,246 | ) | (1,759 | ) | | (676 | ) | (393 | ) | (371 | ) | (30 | ) | (7 | ) | (4,482 | ) | ||
Future costs | (3,313 | ) | (4,809 | ) | | (956 | ) | (1,683 | ) | (1,562 | ) | (417 | ) | (210 | ) | (12,950 | ) | ||
Future Inflows before Income taxes | 1,520 | 5,096 | | (480 | ) | 6,752 | 961 | 226 | 666 | 14,741 | |||||||||
Future Income & Production revenue taxes | (185 | ) | (114 | ) | | 1,534 | (2,783 | ) | (262 | ) | (12 | ) | (187 | ) | (2,009 | ) | |||
Net cash flows | 1,335 | 4,982 | | 1,054 | 3,969 | 699 | 214 | 479 | 12,732 | ||||||||||
Less 10% annual discount for estimated timing of cash flows | (66 | ) | (2,189 | ) | | (939 | ) | (1,382 | ) | (88 | ) | (51 | ) | (113 | ) | (4,828 | ) | ||
Discounted cash flows | 1,269 | 2,793 | | 115 | 2,587 | 611 | 163 | 366 | 7,904 | ||||||||||
8 TALISMAN ENERGY 40-F SUPPLEMENTAL RESERVES INFORMATION
December 31 ($ millions) | Canada | US | UK | Norway | Indonesia | Other SEA(2) |
Latin America |
Other(3) | Total | ||||||||||
2013 | |||||||||||||||||||
Future Cash Inflows(1) | 6,952 | 8,583 | | 1,249 | 8,857 | 3,548 | 223 | 1,288 | 30,700 | ||||||||||
Future Costs | |||||||||||||||||||
Transportation | (278 | ) | (417 | ) | | (59 | ) | (405 | ) | (2 | ) | (32 | ) | (31 | ) | (1,224 | ) | ||
Production | (2,960 | ) | (2,186 | ) | | (629 | ) | (999 | ) | (1,376 | ) | (81 | ) | (239 | ) | (8,470 | ) | ||
Development and Site Restoration | (1,595 | ) | (2,046 | ) | | (1,202 | ) | (527 | ) | (372 | ) | (21 | ) | (43 | ) | (5,806 | ) | ||
Future costs | (4,833 | ) | (4,649 | ) | | (1,890 | ) | (1,931 | ) | (1,750 | ) | (134 | ) | (313 | ) | (15,500 | ) | ||
Future Inflows before Income taxes | 2,119 | 3,934 | | (641 | ) | 6,926 | 1,798 | 89 | 975 | 15,200 | |||||||||
Future Income & Production revenue taxes | (19 | ) | | | 1,565 | (2,911 | ) | (519 | ) | | (306 | ) | (2,190 | ) | |||||
Net cash flows | 2,100 | 3,934 | | 924 | 4,015 | 1,279 | 89 | 669 | 13,010 | ||||||||||
Less 10% annual discount for estimated timing of cash flows | (547 | ) | (1,604 | ) | | (821 | ) | (1,347 | ) | (200 | ) | (20 | ) | (155 | ) | (4,694 | ) | ||
Discounted cash flows | 1,553 | 2,330 | | 103 | 2,668 | 1,079 | 69 | 514 | 8,316 | ||||||||||
2012 | |||||||||||||||||||
Future Cash Inflows(1) | 6,192 | 5,625 | | 1,720 | 9,241 | 4,479 | 7 | 1,403 | 28,667 | ||||||||||
Future Costs | | | | | | | | | |||||||||||
Transportation | (262 | ) | (438 | ) | | (36 | ) | (489 | ) | (26 | ) | (1 | ) | (36 | ) | (1,288 | ) | ||
Production | (2,644 | ) | (1,538 | ) | | (1,031 | ) | (1,397 | ) | (1,540 | ) | (1 | ) | (248 | ) | (8,399 | ) | ||
Development and Site Restoration | (1,517 | ) | (1,406 | ) | | (832 | ) | (613 | ) | (547 | ) | | (52 | ) | (4,967 | ) | |||
Future costs | (4,423 | ) | (3,382 | ) | | (1,899 | ) | (2,499 | ) | (2,113 | ) | (2 | ) | (336 | ) | (14,654 | ) | ||
Future Inflows before Income taxes | 1,769 | 2,243 | | (179 | ) | 6,742 | 2,366 | 5 | 1,067 | 14,013 | |||||||||
Future Income & Production revenue taxes | (104 | ) | | | 1,209 | (2,803 | ) | (715 | ) | (1 | ) | (379 | ) | (2,793 | ) | ||||
Net cash flows | 1,665 | 2,243 | | 1,030 | 3,939 | 1,651 | 4 | 688 | 11,220 | ||||||||||
Less 10% annual discount for estimated timing of cash flows |
(462 | ) | (816 | ) | | (736 | ) | (1,386 | ) | (342 | ) | (1 | ) | (165 | ) | (3,908 | ) | ||
Discounted cash flows | 1,203 | 1,427 | | 294 | 2,553 | 1,309 | 3 | 523 | 7,312 | ||||||||||
December 31 ($ millions) | North Sea (TSEUK) |
Other (Equion) |
Total | |||||
SHARE OF EQUITY INVESTEES(4) | ||||||||
2014 | ||||||||
Future Cash Inflows(1) | 4,716 | 993 | 5,709 | |||||
Future Costs | ||||||||
Transportation | (72 | ) | (56 | ) | (128 | ) | ||
Production | (3,066 | ) | (179 | ) | (3,245 | ) | ||
Development and Site Restoration | (2,379 | ) | (111 | ) | (2,490 | ) | ||
Future costs | (5,517 | ) | (346 | ) | (5,863 | ) | ||
Future Inflows before Income taxes | (801 | ) | 647 | (154 | ) | |||
Future Income & Production revenue taxes | 603 | (149 | ) | 454 | ||||
Net cash flows | (198 | ) | 498 | 300 | ||||
Less 10% annual discount for estimated timing of cash flows | 222 | (94 | ) | 128 | ||||
Discounted cash flows | 24 | 404 | 428 | |||||
TALISMAN ENERGY 40-F SUPPLEMENTAL RESERVES INFORMATION 9
December 31 ($ millions) | North Sea (TSEUK) |
Other (Equion) |
Total Company |
|||||
2013 | ||||||||
Future Cash Inflows(1) | 8,419 | 1,288 | 9,707 | |||||
Future Costs | ||||||||
Transportation | (120 | ) | (74 | ) | (194 | ) | ||
Production | (5,390 | ) | (236 | ) | (5,626 | ) | ||
Development and Site Restoration | (3,205 | ) | (204 | ) | (3,409 | ) | ||
Future costs | (8,715 | ) | (514 | ) | (9,229 | ) | ||
Future Inflows before Income taxes | (296 | ) | 774 | 478 | ||||
Future Income & Production revenue taxes | 495 | (178 | ) | 317 | ||||
Net cash flows | 199 | 596 | 795 | |||||
Less 10% annual discount for estimated timing of cash flows | (75 | ) | (135 | ) | (210 | ) | ||
Discounted cash flows | 124 | 461 | 585 | |||||
2012 | ||||||||
Future Cash Inflows(1) | 11,305 | 1,662 | 12,967 | |||||
Future Costs | ||||||||
Transportation | (200 | ) | (58 | ) | (258 | ) | ||
Production | (6,465 | ) | (225 | ) | (6,690 | ) | ||
Development and Site Restoration | (3,428 | ) | (185 | ) | (3,613 | ) | ||
Future costs | (10,092 | ) | (468 | ) | (10,561 | ) | ||
Future Inflows before Income taxes | 1,212 | 1,193 | 2,406 | |||||
Future Income & Production revenue taxes | (990 | ) | (316 | ) | (1,306 | ) | ||
Net cash flows | 223 | 877 | 1,100 | |||||
Less 10% annual discount for estimated timing of cash flows | 78 | (198 | ) | (120 | ) | |||
Discounted cash flows | 301 | 679 | 980 | |||||
Principal Sources of Changes in Standardized Measure of Discounted Future Net Cash Flows
Year ended December 31 ($ millions) | 2014 | 2013 | 2012 | ||||
CONSOLIDATED ENTITIES(1) | |||||||
Sales of oil & gas produced net of production costs | (3,052 | ) | (3,038 | ) | (4,165 | ) | |
Net change in prices | 1,096 | 1,328 | (2,259 | ) | |||
Net change in transportation costs | (120 | ) | 45 | (91 | ) | ||
Net changes in production costs | (97 | ) | (23 | ) | (654 | ) | |
Net changes in future development & site restoration costs | (230 | ) | (389 | ) | (878 | ) | |
Development costs incurred during year | 844 | 911 | 2,018 | ||||
Extensions, discoveries and improved recovery | 1,104 | 1,194 | (432 | ) | |||
Revisions of previous reserve estimates | (187 | ) | 46 | (646 | ) | ||
Net purchases | | 2 | 2 | ||||
Net sales of reserves in place | (1,110 | ) | (38 | ) | (3,066 | ) | |
Accretion of discount | 1,051 | 970 | 1,909 | ||||
Net change in taxes | 282 | 106 | 3,974 | ||||
Other | 7 | (110 | ) | (416 | ) | ||
Net change | (412 | ) | 1,004 | (4,704 | ) | ||
10 TALISMAN ENERGY 40-F SUPPLEMENTAL RESERVES INFORMATION
Year ended December 31 ($ millions) | 2014 | 2013 | 2012 | ||||
SHARE OF EQUITY INVESTEES(1) | |||||||
Sales of oil & gas produced net of production costs | (145 | ) | (347 | ) | (373 | ) | |
Net change in prices | (368 | ) | (122 | ) | 61 | ||
Net change in transportation costs | 6 | (28 | ) | | |||
Net changes in production costs | (18 | ) | (467 | ) | (15 | ) | |
Net changes in future development & site restoration costs | (612 | ) | (390 | ) | (9 | ) | |
Development costs incurred during year | 657 | 546 | 158 | ||||
Extensions, discoveries and improved recovery | 49 | 92 | 237 | ||||
Revisions of previous reserve estimates | 150 | (860 | ) | 4 | |||
Net purchases | | 65 | | ||||
Net sales of reserves in place | | | | ||||
Accretion of discount | 59 | 194 | 78 | ||||
Net change in taxes | 53 | 953 | (28 | ) | |||
Other | 12 | (31 | ) | 309 | |||
Net change | (157 | ) | (395 | ) | 422 | ||
TALISMAN ENERGY 40-F SUPPLEMENTAL RESERVES INFORMATION 11
Other Oil and Gas Information
Results of Operations from Oil and Gas Producing Activities
North America(2) |
North Sea |
Southeast Asia(4) |
||||||||||||||||
Years ended December 31 ($ millions) | Canada | USA | UK | North Sea (Norway)(3) |
Indonesia | Other SEA | Other(5) | Total | ||||||||||
CONSOLIDATED ENTITIES | ||||||||||||||||||
2014 | ||||||||||||||||||
Net oil and gas revenue derived from proved reserves(1) | 734 | 1,065 | | 527 | 1,015 | 1,035 | 272 | 4,648 | ||||||||||
Less: | ||||||||||||||||||
Production costs | 232 | 270 | | 332 | 119 | 375 | 62 | 1,390 | ||||||||||
Transportation | 29 | 60 | | 29 | 56 | | 32 | 206 | ||||||||||
Exploration and dry hole expense | 20 | 12 | | 35 | 35 | 165 | 105 | 372 | ||||||||||
Depreciation, depletion, amortization, accretion and impairment expense | 288 | 1,366 | | 1,067 | 116 | 410 | 293 | 3,540 | ||||||||||
Tax expense (recovery) | 25 | 9 | | (270 | ) | 307 | 146 | 22 | 239 | |||||||||
Results of operations | 140 | (652 | ) | | (666 | ) | 382 | (61 | ) | (242 | ) | (1,099 | ) | |||||
North Sea (TSEUK) |
Other (Equion) |
Total | ||||||||||||||||
SHARE OF EQUITY INVESTEES(6) | ||||||||||||||||||
2014 | ||||||||||||||||||
Net oil and gas revenue derived from proved reserves(1) | 600 | 293 | 893 | |||||||||||||||
Less: | ||||||||||||||||||
Production costs | 718 | 49 | 767 | |||||||||||||||
Transportation | 10 | 18 | 28 | |||||||||||||||
Exploration and dry hole expense | 18 | | 18 | |||||||||||||||
Depreciation, depletion, amortization, accretion and impairment expense | 2,102 | 132 | 2,234 | |||||||||||||||
Tax expense (recovery) | (1,147 | ) | 70 | (1,077 | ) | |||||||||||||
Results of operations | (1,101 | ) | 24 | (1,077 | ) | |||||||||||||
TOTAL CONSOLIDATED ENTITIES AND SHARE OF EQUITY INVESTEES | 140 | (652 | ) | (1,101 | ) | (666 | ) | 382 | (61 | ) | (218 | ) | (2,176 | ) | ||||
12 TALISMAN ENERGY 40-F SUPPLEMENTAL RESERVES INFORMATION
North America(2) |
North Sea |
Southeast Asia(4) |
||||||||||||||||
Year ended December 31 ($ millions) | Canada | US | UK | North Sea (Norway)(3) | Indonesia | Other SEA | Other(5) | Total | ||||||||||
CONSOLIDATED ENTITIES | ||||||||||||||||||
2013 | ||||||||||||||||||
Net oil and gas revenue derived from proved reserves(1) | 752 | 880 | | 577 | 1,176 | 1,026 | 230 | 4,641 | ||||||||||
Less: | ||||||||||||||||||
Production costs | 305 | 252 | | 292 | 171 | 361 | 31 | 1,412 | ||||||||||
Transportation | 48 | 55 | | 25 | 55 | | 8 | 191 | ||||||||||
Exploration and dry hole expense | 11 | 28 | | 56 | 18 | 101 | 134 | 348 | ||||||||||
Depreciation, depletion, amortization, accretion and impairment expense | 770 | 724 | | 751 | 121 | 410 | 45 | 2,821 | ||||||||||
Tax expense (recovery) | (95 | ) | (16 | ) | | (221 | ) | 389 | 109 | 64 | 230 | |||||||
Results of operations | (287 | ) | (163 | ) | | (326 | ) | 422 | 45 | (52 | ) | (361 | ) | |||||
North Sea (TSEUK) |
Other (Equion) |
Total | ||||||||||||||||
SHARE OF EQUITY INVESTEES(6) | ||||||||||||||||||
2013 | ||||||||||||||||||
Net oil and gas revenue derived from proved reserves(1) | 718 | 357 | 1,075 | |||||||||||||||
Less: | ||||||||||||||||||
Production costs | 648 | 47 | 695 | |||||||||||||||
Transportation | 12 | 21 | 33 | |||||||||||||||
Exploration and dry hole expense | 40 | 1 | 41 | |||||||||||||||
Depreciation, depletion, amortization, accretion and impairment expense | 1,193 | 101 | 1,294 | |||||||||||||||
Tax expense (recovery) | (748 | ) | 63 | (685 | ) | |||||||||||||
Results of operations | (427 | ) | 124 | (303 | ) | |||||||||||||
TOTAL CONSOLIDATED ENTITIES AND SHARE OF EQUITY INVESTEES | (287 | ) | (163 | ) | (427 | ) | (326 | ) | 422 | 45 | 72 | (664 | ) | |||||
TALISMAN ENERGY 40-F SUPPLEMENTAL RESERVES INFORMATION 13
North America(2) |
North Sea |
Southeast Asia(4) |
||||||||||||||||
Canada | US | UK | North Sea (Norway)(3) |
Indonesia | Other SEA | Other(5) | Total | |||||||||||
CONSOLIDATED ENTITIES | ||||||||||||||||||
2012 | ||||||||||||||||||
Net oil and gas revenue derived from proved reserves(1) | 755 | 654 | 2,009 | 912 | 1,157 | 1,033 | 220 | 6,740 | ||||||||||
Less: | ||||||||||||||||||
Production costs | 333 | 222 | 1,002 | 348 | 167 | 251 | 31 | 2,354 | ||||||||||
Transportation | 34 | 58 | 28 | 41 | 52 | 1 | 7 | 221 | ||||||||||
Exploration and dry hole expense | 39 | 12 | 11 | 80 | 28 | 142 | 272 | 584 | ||||||||||
Depreciation, depletion and amortization, accretion and impairment expense | 909 | 610 | 611 | 2,166 | 96 | 326 | 315 | 5,033 | ||||||||||
Tax expense (recovery) | (130 | ) | | 215 | (1,429 | ) | 372 | 167 | (1 | ) | (806 | ) | ||||||
Results of operations | (430 | ) | (248 | ) | 142 | (294 | ) | 442 | 146 | (404 | ) | (646 | ) | |||||
North Sea (TSEUK) |
Other (Equion) |
Total | ||||||||||||||||
SHARE OF EQUITY INVESTEES(6) | ||||||||||||||||||
2012 | ||||||||||||||||||
Net oil and gas revenue derived from proved reserves(1) | 59 | 403 | 462 | |||||||||||||||
Less: | ||||||||||||||||||
Production costs | 33 | 56 | 89 | |||||||||||||||
Transportation | | | | |||||||||||||||
Exploration and dry hole expense | 1 | 31 | 32 | |||||||||||||||
Depreciation, depletion, amortization, accretion and impairment expense | 177 | 110 | 287 | |||||||||||||||
Tax expense (recovery) | (110 | ) | 68 | (42 | ) | |||||||||||||
Results of operations | (42 | ) | 138 | 96 | ||||||||||||||
TOTAL CONSOLIDATED ENTITIES AND SHARE OF EQUITY INVESTEES | (430 | ) | (248 | ) | 100 | (294 | ) | 442 | 146 | (266 | ) | (550 | ) | |||||
14 TALISMAN ENERGY 40-F SUPPLEMENTAL RESERVES INFORMATION
Capitalized Costs Relating to Oil and Gas Activities
North America(1) |
North Sea |
Southeast Asia(3) |
|||||||||||||||
Years ended December 31 ($ millions) | Canada | USA | UK | North Sea (Norway)(2) |
Indonesia | Other SEA | Other(4) | Total | |||||||||
CONSOLIDATED ENTITIES | |||||||||||||||||
2014 | |||||||||||||||||
Proved properties | 5,107 | 7,317 | | 3,732 | 1,642 | 3,851 | 611 | 22,260 | |||||||||
Unproved properties | 871 | 475 | | 125 | 37 | 630 | 406 | 2,544 | |||||||||
5,978 | 7,792 | | 3,857 | 1,679 | 4,481 | 1,017 | 24,804 | ||||||||||
Less: | |||||||||||||||||
Accumulated depreciation, depletion and amortization | 3,127 | 3,532 | | 3,478 | 701 | 2,561 | 347 | 13,746 | |||||||||
Net capitalized costs | 2,851 | 4,260 | | 379 | 978 | 1,920 | 670 | 11,058 | |||||||||
North Sea (TSEUK) |
Other (Equion) |
Total | |||||||||||||||
SHARE OF EQUITY INVESTEES(5) | |||||||||||||||||
2014 | |||||||||||||||||
Proved properties | 6,946 | 953 | 7,899 | ||||||||||||||
Unproved properties | 54 | | 54 | ||||||||||||||
7,000 | 953 | 7,953 | |||||||||||||||
Less: | |||||||||||||||||
Accumulated depreciation, depletion and amortization | 5,659 | 424 | 6,083 | ||||||||||||||
Net capitalized costs | 1,341 | 529 | 1,870 | ||||||||||||||
TOTAL CONSOLIDATED ENTITIES AND SHARE OF EQUITY INVESTEES | 2,851 | 4,260 | 1,341 | 379 | 978 | 1,920 | 1,199 | 12,928 | |||||||||
TALISMAN ENERGY 40-F SUPPLEMENTAL RESERVES INFORMATION 15
North America(1) |
North Sea |
Southeast Asia(3) |
|||||||||||||||
Years ended December 31 ($ millions) | Canada | USA | UK | North Sea (Norway)(2) |
Indonesia | Other SEA | Other(4) | Total | |||||||||
CONSOLIDATED ENTITIES | |||||||||||||||||
2013 | |||||||||||||||||
Proved properties | 6,369 | 6,383 | | 3,555 | 1,726 | 3,454 | 555 | 22,042 | |||||||||
Unproved properties | 905 | 675 | | 289 | 19 | 698 | 579 | 3,165 | |||||||||
7,274 | 7,058 | | 3,844 | 1,745 | 4,152 | 1,134 | 25,207 | ||||||||||
Less: | |||||||||||||||||
Accumulated depreciation, depletion and amortization | 4,381 | 2,324 | | 3,020 | 702 | 2,161 | 290 | 12,878 | |||||||||
Net capitalized costs | 2,893 | 4,734 | | 824 | 1,043 | 1,991 | 844 | 12,329 | |||||||||
North Sea (TSEUK) |
Other (Equion) |
Total | |||||||||||||||
SHARE OF EQUITY INVESTEES(5) | |||||||||||||||||
2013 | |||||||||||||||||
Proved properties | 5,597 | 855 | 6,452 | ||||||||||||||
Unproved properties | 207 | | 207 | ||||||||||||||
5,804 | 855 | 6,659 | |||||||||||||||
Less: | |||||||||||||||||
Accumulated depreciation, depletion and amortization | 4,067 | 293 | 4,360 | ||||||||||||||
Net capitalized costs | 1,737 | 562 | 2,299 | ||||||||||||||
TOTAL CONSOLIDATED ENTITIES AND SHARE OF EQUITY INVESTEES | 2,893 | 4,734 | 1,737 | 824 | 1,043 | 1,991 | 1,406 | 14,628 | |||||||||
16 TALISMAN ENERGY 40-F SUPPLEMENTAL RESERVES INFORMATION
North America(1) |
North Sea |
Southeast Asia(3) |
|||||||||||||||
Years ended December 31 ($ millions) | Canada | USA | UK | North Sea (Norway)(2) |
Indonesia | Other SEA | Other(4) | Total | |||||||||
CONSOLIDATED ENTITIES | |||||||||||||||||
2012 | |||||||||||||||||
Proved properties | 6,938 | 5,171 | | 2,902 | 1,457 | 3,503 | 364 | 20,335 | |||||||||
Unproved properties | 1,194 | 1,006 | | 1,970 | 196 | 336 | 1,061 | 5,763 | |||||||||
| |||||||||||||||||
8,132 | 6,177 | | 4,872 | 1,653 | 3,839 | 1,425 | 26,098 | ||||||||||
Less: | |||||||||||||||||
Accumulated depreciation, depletion and amortization | 4,075 | 1,646 | | 4,165 | 602 | 1,792 | 692 | 12,972 | |||||||||
Net capitalized costs | 4,057 | 4,531 | | 707 | 1,051 | 2,047 | 733 | 13,126 | |||||||||
North Sea (TSEUK) |
Other (Equion) |
Total | |||||||||||||||
SHARE OF EQUITY INVESTEES(5) | |||||||||||||||||
2012 | |||||||||||||||||
Proved properties | 4,778 | 704 | 5,482 | ||||||||||||||
Unproved properties | 197 | | 197 | ||||||||||||||
4,975 | 704 | 5,679 | |||||||||||||||
Less: | |||||||||||||||||
Accumulated depreciation, depletion and amortization | 2,795 | 158 | 2,953 | ||||||||||||||
Net capitalized costs | 2,180 | 546 | 2,726 | ||||||||||||||
TOTAL CONSOLIDATED ENTITIES AND SHARE OF EQUITY INVESTEES | 4,057 | 4,531 | 2,180 | 707 | 1,051 | 2,047 | 1,279 | 15,852 | |||||||||
TALISMAN ENERGY 40-F SUPPLEMENTAL RESERVES INFORMATION 17
Costs Incurred in Oil and Gas Activities
North America(1) |
North Sea |
Southeast Asia(3) |
|||||||||||||||
Years ended December 31 ($ millions) | Canada | USA | UK | North Sea (Norway)(2) |
Indonesia | Other SEA | Other(4) | Total | |||||||||
CONSOLIDATED ENTITIES | |||||||||||||||||
2014 | |||||||||||||||||
Property acquisition costs | |||||||||||||||||
Proved | | | | | | | | | |||||||||
Unproved | 5 | 14 | | | 23 | 18 | | 60 | |||||||||
Exploration costs | 105 | 13 | | 59 | 32 | 210 | 215 | 634 | |||||||||
Development costs | 325 | 890 | | 124 | 58 | 231 | 8 | 1,636 | |||||||||
Asset retirement costs | 33 | (8 | ) | | 158 | 6 | 44 | 11 | 244 | ||||||||
Total costs incurred | 468 | 909 | | 341 | 119 | 503 | 234 | 2,574 | |||||||||
North Sea (TSEUK) |
Other (Equion) |
Total | |||||||||||||||
SHARE OF EQUITY INVESTEES(5) | |||||||||||||||||
2014 | |||||||||||||||||
Property acquisition costs | |||||||||||||||||
Proved | 2 | | 2 | ||||||||||||||
Unproved | | | | ||||||||||||||
Exploration costs | 56 | | 56 | ||||||||||||||
Development costs | 549 | 103 | 652 | ||||||||||||||
Asset retirement costs | 946 | (5 | ) | 941 | |||||||||||||
Total costs incurred | 1,553 | 98 | 1,651 | ||||||||||||||
18 TALISMAN ENERGY 40-F SUPPLEMENTAL RESERVES INFORMATION
North America(1) |
North Sea |
Southeast Asia(3) |
|||||||||||||||
Years ended December 31 ($ millions) | Canada | USA | UK | North Sea (Norway)(2) |
Indonesia | Other SEA | Other(4) | Total | |||||||||
CONSOLIDATED ENTITIES | |||||||||||||||||
2013 | |||||||||||||||||
Property acquisition costs | |||||||||||||||||
Proved | 6 | | | | | 105 | | 111 | |||||||||
Unproved | 2 | 17 | | | | | | 19 | |||||||||
Exploration costs | 99 | 26 | | 88 | 27 | 162 | 238 | 640 | |||||||||
Development costs | 283 | 925 | | 337 | 133 | 220 | 11 | 1,909 | |||||||||
Asset retirement costs | 12 | (7 | ) | | 310 | (5 | ) | (65 | ) | 6 | 251 | ||||||
Total costs incurred | 402 | 961 | | 735 | 155 | 422 | 255 | 2,930 | |||||||||
North Sea (TSEUK) |
Other (Equion) |
Total | |||||||||||||||
SHARE OF EQUITY INVESTEES(5) | |||||||||||||||||
2013 | |||||||||||||||||
Property acquisition costs | |||||||||||||||||
Proved | | | | ||||||||||||||
Unproved | | | | ||||||||||||||
Exploration costs | 60 | | 60 | ||||||||||||||
Development costs | 491 | 118 | 609 | ||||||||||||||
Asset retirement costs | 287 | 1 | 288 | ||||||||||||||
Total costs incurred | 838 | 119 | 957 | ||||||||||||||
TALISMAN ENERGY 40-F SUPPLEMENTAL RESERVES INFORMATION 19
North America(1) |
North Sea |
Southeast Asia(3) |
|||||||||||||||
Years ended December 31 ($ millions) | Canada | USA | UK | North Sea (Norway)(2) |
Indonesia | Other SEA | Other(4) | Total | |||||||||
CONSOLIDATED ENTITIES | |||||||||||||||||
2012 | |||||||||||||||||
Property acquisition costs | |||||||||||||||||
Proved | | 2 | | | | 19 | | 21 | |||||||||
Unproved | 7 | 37 | | | | 91 | 66 | 201 | |||||||||
Exploration costs | 191 | 11 | 53 | 79 | 32 | 117 | 351 | 834 | |||||||||
Development costs | 324 | 1,097 | 584 | 502 | 103 | 264 | 8 | 2,882 | |||||||||
Asset retirement costs | 81 | 53 | 152 | 156 | 3 | 78 | 34 | 557 | |||||||||
Total costs incurred | 603 | 1,200 | 788 | 737 | 138 | 569 | 459 | 4,494 | |||||||||
North Sea (TSEUK) |
Other (Equion) |
Total | |||||||||||||||
SHARE OF EQUITY INVESTEES(5) | |||||||||||||||||
2012 | |||||||||||||||||
Property acquisition costs | |||||||||||||||||
Proved | | ||||||||||||||||
Unproved | | ||||||||||||||||
Exploration costs | | | |||||||||||||||
Development costs | 24 | 97 | 121 | ||||||||||||||
Asset retirement costs | 153 | (1 | ) | 152 | |||||||||||||
Total costs incurred | 178 | 96 | 274 | ||||||||||||||
20 TALISMAN ENERGY 40-F SUPPLEMENTAL RESERVES INFORMATION
Acreage
Years ended December 31, 2014 (thousand acres) | Developed |
Undeveloped |
Total |
||||||||||
Property | Gross | Net | Gross | Net | Gross | Net | |||||||
CONSOLIDATED | |||||||||||||
North America(1) | |||||||||||||
Canada (Including Frontier)(2) | 627.3 | 417.0 | 6,756.4 | 4,228.1 | 7,383.7 | 4,645.1 | |||||||
United States | 122.5 | 95.0 | 505.4 | 412.8 | 627.9 | 507.8 | |||||||
Total North America | 749.8 | 512.0 | 7,261.8 | 4,640.9 | 8,011.6 | 5,152.9 | |||||||
North Sea(3) | |||||||||||||
Norway | 43.0 | 18.0 | 743.1 | 363.8 | 786.1 | 381.8 | |||||||
Total North Sea | 43.0 | 18.0 | 743.1 | 363.8 | 786.1 | 381.8 | |||||||
Southeast Asia | |||||||||||||
Indonesia | 249.5 | 62.5 | 7,821.7 | 4,095.2 | 8,071.2 | 4,157.7 | |||||||
Malaysia | 96.1 | 40.7 | 2,098.9 | 1,341.6 | 2,195.0 | 1,382.3 | |||||||
Vietnam | 30.7 | 5.4 | 13,559.7 | 7,636.6 | 13,590.4 | 7,642.0 | |||||||
Australia/Timor-Leste | 11.0 | 4.0 | 50.5 | 18.8 | 61.5 | 22.8 | |||||||
Papua New Guinea | 0.0 | 0.0 | 6,433.8 | 4,049.9 | 6,433.8 | 4,049.9 | |||||||
Total Southeast Asia | 387.3 | 112.6 | 29,964.6 | 17,142.1 | 30,351.9 | 17,254.7 | |||||||
Latin America | |||||||||||||
Colombia(4) | 24.3 | 10.9 | 8,845.9 | 4,246.2 | 8,870.2 | 4,257.1 | |||||||
Peru | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |||||||
Total Latin America | 24.3 | 10.9 | 8,845.9 | 4,246.2 | 8,870.2 | 4,257.1 | |||||||
Other | |||||||||||||
Algeria | 113.5 | 17.9 | 82.4 | 16.5 | 196.0 | 34.4 | |||||||
Rest of World(5) | 0.0 | 0.0 | 227.6 | 119.8 | 227.6 | 119.8 | |||||||
Total Other | 113.5 | 17.9 | 310.0 | 136.3 | 423.6 | 154.2 | |||||||
TOTAL CONSOLIDATED | 1,317.9 | 725.4 | 47,125.4 | 26,529.3 | 48,443.4 | 27,200.7 | |||||||
EQUITY INVESTMENTS | |||||||||||||
TSEUK | 252.0 | 95.1 | 564.7 | 176.6 | 816.7 | 271.7 | |||||||
Equion | 141.3 | 28.1 | 0.0 | 0.0 | 141.3 | 28.1 | |||||||
TOTAL EQUITY INVESTMENTS | 393.3 | 123.2 | 564.7 | 176.6 | 958.0 | 299.8 | |||||||
TOTAL TALISMAN(6) | |||||||||||||
Total Worldwide | 1,711.2 | 848.6 | 47,690.1 | 26,705.9 | 49,401.4 | 27,500.5 | |||||||
TALISMAN ENERGY 40-F SUPPLEMENTAL RESERVES INFORMATION 21
The references to reserves volumes in this Exhibit are to reserves volumes estimated in accordance with US disclosure standards.
Talisman's oil and gas reserves are evaluated internally. Talisman has obtained an exemption from Canadian securities regulators that exempts Talisman from the requirement under Canadian disclosure standards to have its reserves evaluated or audited by independent reserves evaluators. The reserves information in this Exhibit is provided pursuant to the requirements of the exemption. Please refer to Talisman's Annual Information Form under the heading "Internal Evaluation" for additional information.
Natural gas is converted to a barrel of oil equivalent (boe) at the ratio of six thousand cubic feet (mcf) to one barrel (bbl) of oil. Oil is converted to natural gas equivalent (mcfe) at the ratio of one bbl to six mcf of natural gas. The boe and mcfe measures may be misleading, particularly if used in isolation. A boe conversion ratio of six mcf to one bbl and an mcfe conversion ratio of one bbl to six mcfe are based on an energy equivalent conversion method primarily applicable at the burner tip and do not represent a value equivalence at the wellhead.
bbl | barrel | |
bbls | barrels | |
bcf | billion cubic feet | |
boe | barrels of oil equivalent | |
C$ | Canadian dollar | |
HH | Henry Hub | |
mcf | thousand cubic feet | |
mcfe | thousand cubic feet equivalent | |
mmbbls | million barrels | |
mmboe | million barrels of oil equivalent | |
UK | United Kingdom | |
US | United States of America | |
US$ or $ | United States dollar | |
WTI | West Texas Intermediate | |
£ | Pound sterling |
22 TALISMAN ENERGY 40-F SUPPLEMENTAL RESERVES INFORMATION