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H E R I T A G E O I L P L C Corporate Governance 2013

Heritage Oil Plc is an independent oil and gas exploration and production company with a Premium Listing on the London Stock Exchange (“LSE”) (symbol HOIL). The Company is a member of the FTSE 250 Index and has Exchangeable Shares listed on the Toronto Stock Exchange (“TSX”) (symbol HOC) and the LSE (symbol HOX).

Heritage is a versatile organisation, dedicated to creating and increasing shareholder value with a portfolio of quality assets managed by a highly experienced team with excellent technical, commercial and financial skills. The Company has producing assets in Nigeria and Russia and exploration assets in Tanzania, Papua New Guinea, Malta, Libya and Pakistan.

C O n T E n T S T H E H E R I TA G E O I L P L C A n n U A L R E P O R T A n d A C C O U n T S 2 0 1 3 C O n S I S T S O F F O U R d O C U M E n T S .

Highlights 2013 01Outlook 2014 01Annual General Meeting 01Chairman’s Statement 02Summary of Changes to the Code 04Statement of Compliance 05Board of Directors 06In memory – General Sir Michael Wilkes 08Report of the Directors 10Report of the Remuneration Committee 22 Policy Report 24 Annual Report on Remuneration 30Report of the Audit Committee 36Other Committee Reports 41Appendix: UK Corporate Governance Code 47Corporate governance glossary 63Advisers and financial calendar IBC

s t r a t e g i c r e p o r tThe Strategic Report provides an overview of Heritage, its processes and a Business Review.

c o r p o r a t e s o c i a l r e s p o n s i b i l i t yThe CSR Report provides detailed information concerning Heritage’s CSR strategy, policies, systems and performance.

c o r p o r a t e g o v e r n a n c eThe Corporate Governance Report provides detailed information on all aspects of Heritage’s corporate governance.

F i n a n c i a l s t a t e m e n t sThe Financial Statements Report provides detailed information on Heritage’s financial position.

H e r i t a g e O i l P l C

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Corporate Governance 2013

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a n n u a l g e n e r a l m e e t i n g

– Heritage’s operations have been transformed by the acquisition of an interest in OML 30, Nigeria, in 2012

– The Board and Remuneration Committee have reviewed changes in UK executive remuneration reporting

– Amendments to the UK Corporate Governance Code, which came into effect for financial years beginning on or after 1 October 2012, have been actioned

– Consideration has been given to changes in UK narrative reporting requirements to ensure the Company complies with best practice

– Continue to embed good governance practices and procedures into the Nigerian and other new operations

– Review of the outcome of the Financial Conduct Authority’s (“FCA”) consultation on Listing Rule changes concerning protection for minority shareholders and implementation of appropriate actions

– The Audit Committee to keep under review its expanding remit and strengthened reporting requirements

– Continued focus on risk management

The 2014 Annual General Meeting (“AGM”) will be held at 22 Grenville Street, St Helier, JE4 8PX, Jersey, Channel Islands on 30 June 2014. Formal notice of the AGM, including details of any special business, will be set out in the Notice of AGM to be dispatched to shareholders at least 20 working days before the meeting. The notice of AGM will also be available on the Company’s website at www.heritageoilplc.com.

All dollars are US dollars unless otherwise stated.


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C h a i r m a n ’ s s tat e m e n t

a r e s p o n s i b l e b u s i n e s s

m i C h a e l J . h i b b e r dC h a i r m a n

Dear Shareholder,Following the acquisition of a significant interest in the OML 30 licence through Shoreline Natural Resources Limited (“Shoreline”), one of our Nigerian joint venture companies, we have focused on ensuring that our values, policies, internal controls and best practices are integrated into this new operation and other new areas of activity.

I am pleased to report that our operations in Nigeria are proceeding well and over the next year we are looking to expand our footprint through our joint venture company Petrobay Energy Limited (“Petrobay”). In addition we have started to build our exploration portfolio in Papua New Guinea over the course of the year with interests in four licences. Over the coming year we will be looking to enhance our portfolio whilst building on our achievements in respect of all our existing operations.

t h e b o a r dIt was with great sadness that we announced the death of Sir Michael Wilkes in October 2013. Sir Michael had a distinguished military and corporate career and was appointed to the Board of Heritage in 2008. As well as being the Senior Independent Director, Sir Michael was a member of the Audit, Remuneration, Nomination and Anti-Bribery and Corruption Committees. Our condolences are extended to his family and friends.

The Nomination Committee is seeking to appoint a new Non-Executive Director and is considering the appropriate candidate to fulfil the role of Senior Independent Director.

The Board was strengthened during 2012 with the appointment of two new independent Non-Executive Directors. There is now a balance between the longer serving Directors and fresh perspective of the new Directors and the Board is working well together.

b o a r d e V a l u at i o nThis year we carried out an externally facilitated evaluation of our Board and Committees. I am pleased to report that overall the Board has had a positive assessment of its performance, capability and operational effectiveness although some actions have been identified for improvement. More information is given on the results of the evaluation on page 17.


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n a r r at i V e r e p o r t i n GIn the UK, the last year has seen significant changes in the reporting regime with new regulations on remuneration reporting and the introduction of the new Strategic Report which replaces the Business Review. Heritage continues to apply best practice principles in its reporting and has implemented changes to its reporting as a result. This includes new information provided in the Strategic Report on the breakdown of gender information of employees, information about the Group’s Human Rights Policy and information in both the Strategic Report and CSR Report on emissions.

We will continue to review our narrative reporting to ensure it meets new developments and best practice.

l i s t i n G r u l e sThe FCA is consulting on a number of measures designed to enhance protection for minority shareholders (FCA: Enhancing the effectiveness of the Listing Regime). As a Company with a controlling shareholder (a shareholder who owns 30% or more of the voting shares in a company), Heritage will be paying close attention to the new requirements. One of the most important changes will be the requirement for companies with a controlling shareholder to have in place a relationship agreement to regulate interactions between the company and the controlling shareholder to ensure that the company is able to operate independently. Heritage had a relationship agreement in place when it first listed in 2008 (which has now expired) and is therefore used to this form of arrangement. In addition there will be new voting powers for independent shareholders when electing independent directors of companies with a controlling shareholder. Independent directors will need to be elected separately by both i) all shareholders and ii) the minority shareholders. The new rules are expected to come into force mid-2014, although there will be transitional provisions to allow companies time to comply. We will monitor this closely and put in place actions at the appropriate time.

o u r F o C u s F o r 2 0 1 4With the acquisition of our new Nigerian operations and continued search for development opportunities in line with our strategy, it is important that we have robust risk management review processes in place. This will remain a focus for the forthcoming year. We will also implement actions identified from the Board evaluation exercise and those that may be necessary arising from changes to the Listing Rules concerning controlling shareholders as discussed above.

We continue to support open and constructive dialogue with all of our shareholders on governance, strategy and executive remuneration and welcome any feedback.

m i C h a e l J . h i b b e r dC h a i r m a n2 9 a p r i l 2 0 1 4


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S U M M A R Y O F C H A N G E S T O T H E C O D E W H I C H C A M E I N T O E F F E C T F O R F I N A N C I A L Y E A R S B E G I N N I N G O N O R A F T E R 1 O C T O B E R 2 0 12

D E V E L O P M E N T S I N R E M U N E R AT I O N A N D N A R R AT I V E R E P O R T I N G

The Nomination Committee should include a description of the Board’s policy on diversity, including gender, any measurable objectives that it has set for implementing the policy and progress on achieving the objectives.

Carmen Rodriguez was appointed as the first woman Director on the Board in 2012. The Nomination Committee will continue to develop a broad approach to the recruitment of Directors to ensure a wide variety of sectors, talents and backgrounds are represented.

New regulations were introduced for UK registered and quoted companies relating to reporting on directors’ remuneration and the production of a Strategic Report which became effective for reporting years ending after 30 September 2013. As a Jersey registered company these requirements do not strictly apply to Heritage. However, the Company has always sought to comply with best practice and we have, therefore, reflected these changes in our reporting as appropriate.

The directors should state that they consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy.

The Board does, and will continue to, involve the Audit Committee, and where appropriate other committees, to confirm this statement for the Annual Reports and Accounts.

FTSE 350 companies should put the external audit contract out to tender at least every ten years.

The Company’s current auditors, KPMG, have been in position since the Company first listed in March 2008. In addition KPMG were the auditors of Heritage Oil Corporation (“HOC”). Information on the assessment of the external auditor is provided in the Report of the Audit Committee on pages 36 to 40. Having assessed the current auditors to be effective in their role, there is no current intention to put the contract out to tender. The audit partner rotates every five years and in 2013 a new partner took over the role.

There are additional requirements for information that should be included in the Report of the Audit Committee. These include reporting on significant issues that the Audit Committee considered in relation to the financial statements, how these were addressed, and an explanation of how the Committee assessed the effectiveness of the external audit process and the approach taken to the appointment or reappointment of the external auditor. Information on the length of tenure of the current audit firm and when a tender was last conducted is also required.

This information is included in the Report of the Audit Committee on pages 36 to 40.

D I V E R S I T Y A N D G E N D E R

D I R E C T O R S ’ R E M U N E R AT I O N R E P O R T A N D T H E S T R AT E G I C R E P O R T

A N N U A L R E P O R T A N DA C C O U N T S

A U D I T O R S

A U D I T C O M M I T T E E R E P O R T I N G


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S TAT E M E N T O F C O M P L I A N C E

C O M P L I A N C E W I T H T H E C O D EAs a company with a Premium Listing on the LSE, the Company is subject to the Financial Conduct Authority’s Listing Rules and the requirement to explain how it has applied the Main Principles of the Code. A copy of the Code is available from the FCA’s website, www.fca.org.uk. The Listing Rules also require a company to confirm that it has complied with all the provisions of the Code or explain areas of non-compliance. The Board considers that the Company has complied with all the provisions of the Code, save in respect of the following item:

– Code Provision C.3.1: The Chairman of the Company is a member of, and chairs, the Audit Committee. The Board believes the current Chairman is the most appropriate person to be a member of, and chair, the Audit Committee given his extensive financial experience. The current Chairman is also considered by the Board to have maintained his independent status. The Board and Nomination Committee have reviewed the continued chairing of the Audit Committee by the Chairman. Given the size of the Company and of the Board, the decision was reached that this is still the most appropriate Audit Committee leadership role to maintain.

The sad and untimely death of Sir Michael Wilkes in October 2013 means that the Company also currently does not comply with following provisions of the Code:

– Code Provisions A.4.1: The Company does not currently have a Senior Independent Director.

– Code Provisions A.4.2 and B.6.3: The Senior Independent Director to meet with the Non-Executive Directors and lead the performance evaluation of the Chairman.

– Code Provision B.2.1: The majority of members on the Nomination Committee are now not independent Non-Executive Directors.

– Code Provision D.2.1: The Remuneration Committee consists of two, rather than three, independent Non-Executive Directors.

The Nomination Committee is addressing the appointment of a new Senior Independent Director and is reviewing the requirements of the Board and its Committees as part of this process. It is the view of the Nomination Committee and Board as a whole that it is vital to make the right appointment given the additional responsibilities of the Senior Independent Director.

The following sections of this report describe how the Company has applied the Main Principles of the Code:

– Leadership – Effectiveness – Accountability – Remuneration – Relations with Shareholders

The Appendix, at the back of this document, sets out additional disclosure requirements and detailed compliance with provisions of the Code.

The following statements may be found on page 7 of the Financial Statements Report:

i) Statement of the Directors’ Responsibilities for preparing the Annual Report and Accounts 2013;

ii) Responsibility Statement of the Directors that the financial statements and management report (which is incorporated in the Strategic Report and in the Corporate Social Responsibility (“CSR”) Report) give a fair review of the Company’s business;

iii) Statement that the Board consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable;

iv) Going Concern Statement; andv) Statement concerning audit information.

For and on behalf of the Board

M I C H A E L J . H I B B E R DC H A I R M A N2 9 A P R I L 2 0 1 4


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B O A R D O F D I R E C T O R S

M I C h A E l h I B B E R DChairman and Non-Executive Director

A n T h O n y B u C k I n g h A MChief Executive Officer

PA u l AT h E R T O nChief Financial Officer

g R E g O R y T u R n B u l l , Q CNon-Executive Director

J O h n M C l E O DNon-Executive Director

C A R M E n R O D R I g u E zNon-Executive Director

M A R k E R w I nNon-Executive Director

Joined Heritage March 2006Appointed to the Board March 2008

Founder of HeritageAppointed to the Board February 2008

Joined Heritage March 2000Appointed to the Board February 2008

Joined Heritage 1997Appointed to the Board March 2008

Appointed to the Board March 2008 Appointed to the Board March 2012 Appointed to the Board May 2012

S k I l l S A n D E x PER I En C E Mr. Hibberd has extensive international energy project planning and capital markets experience. Mr. Hibberd has been president and CEO of MJH Services Inc., a corporate finance advisory company, since 1995, prior to which he spent 12 years with ScotiaMcLeod in corporate finance and held the position of director and senior vice-president, corporate finance.

Mr. Buckingham commenced involvement in the oil industry as a North Sea diver and subsequently became a concession negotiator acting for several companies including Ranger and Premier Oil plc. He was previously a security adviser to various governments.

Mr. Atherton is a qualified accountant, qualifying with Deloitte & Touche, and holds a degree in geology from Imperial College London. He has a corporate finance background with specific experience in the international mining and resource sectors.

Mr. Turnbull is a Senior Partner of the Calgary office of the law firm of McCarthy Tétrault LLP. Mr. Turnbull has extensive knowledge of corporate governance issues and has acted for many boards of directors and special committees in that regard. Mr. Turnbull started his career with the law firm of MacKimmie Matthews in 1979. From 1987 to 2001, he was a partner with Gowlings LLP (formerly Code Hunter LLP). In 2001 and 2002, he was a partner with the law firm of Donahue LLP. Mr. Turnbull has been a partner with the law firm of McCarthy Tétrault LLP since July 2002 and was appointed Queen’s Counsel in 2010.w

Mr. McLeod is a Professional Engineer with over 40 years of varied resource extraction experience. He has held positions and has served on various boards including Constellation Oil & Gas Ltd., Ranger Energy Ltd. and CanArgo Energy Inc., as president and CEO of Arakis Energy Company, as vp, operations of Pengrowth Gas Company, CEO and director of Rally Energy Corp. and Canoro Resources. He is a member and past president of the Association of Professional Engineers and Geoscientists of Alberta.

Ms. Rodriguez has most recently held the position of Chairperson and CEO (from 2007 to 2012) of Sociedad Estatal Española P4R, S.A., a Spanish government owned consultancy firm specialising in foreign trade, investment and co-operation. She was also, until recently, a trustee of the Spain-China Council Foundation, the Spain-India Council Foundation and Casa Arabe. She has previously held many other senior executive positions including at commodities trading companies. Ms. Rodriguez was awarded the prestigious Órden de Isabel la Católica by King Juan Carlos of Spain in 1990, in recognition of her services to the Spanish people and work with the international community.

Mr. Erwin served in the United States Army for over 25 years, culminating his career as the Chief of Staff of the United States Army Special Operations Command. He became a specialist in building teams of joint, interagency partners working closely with other nations’ leadership, both military and civilian. In 2011, Mr Erwin started Long Walk Enterprise, LLC, a service-disabled veteran-owned small business providing consulting and operational support services. Mr. Erwin served on the board of A&K Global Health, a medical travel services company operating globally, as CEO.

E x T ER n A l A PP O I n T M En T S – President and CEO of MJH Services Inc

– Chairman of Canacol Energy Ltd – Chairman of Greenfields

Petroleum Corporation – Co-chairman of Sunshine

Oilsands Ltd – Director of Montana Exploration

Corp – Director of Pan Orient Energy

Corp – Director of PetroFrontier Corp

None None – Non-executive director of Crescent Point Energy Corp

– Non-executive director of Hyperion Exploration Corp

– Non-executive director of Marquee Energy Ltd

– Non-executive director of Storm Resources Ltd

– Non-executive director of Sunshine Oilsands Ltd

– Director of United Hydrocarbon International Corp

– Director of Paris Energy Inc – Director of Tuscany Energy Ltd – Director of Diaz Resources Ltd – Director of Kallisto Energy Corp – Director of Emperor Oil Ltd

– Spanish Committee of the United Nations Relief and Works Agency

– Plan International/Spain Foundation

– Long Walk Enterprise, LLC

CO M M I T T EE M E M B ER S h I P – Audit Committee – Nomination Committee – Reserves Committee – Corporate Social Responsibility

Committee – Anti-Bribery and Corruption

Committee

– Nomination Committee – Corporate Social Responsibility

Committee

– Reserves Committee – Corporate Social Responsibility


Committee

None – Audit Committee – Remuneration Committee – Reserves Committee

– Audit Committee – Remuneration Committee

– Corporate Social Responsibility Committee

– Anti-Bribery and Corruption Committee

H E R I T A G E O I L P L C

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M I C H A E L H I B B E R DChairman and Non-Executive Director

A N T H O N Y B U C K I N G H A MChief Executive Officer

P A U L AT H E R T O NChief Financial Officer

G R E G O R Y T U R N B U L L , Q CNon-Executive Director

J O H N M C L E O DNon-Executive Director

C A R M E N R O D R I G U E ZNon-Executive Director

M A R K E R W I NNon-Executive Director

Joined Heritage March 2006Appointed to the Board March 2008

Founder of HeritageAppointed to the Board February 2008

Joined Heritage March 2000Appointed to the Board February 2008

Joined Heritage 1997Appointed to the Board March 2008

Appointed to the Board March 2008 Appointed to the Board March 2012 Appointed to the Board May 2012

S K I L L S A N D E X PER I EN C E Mr. Hibberd has extensive international energy project planning and capital markets experience. Mr. Hibberd has been president and CEO of MJH Services Inc., a corporate finance advisory company, since 1995, prior to which he spent 12 years with ScotiaMcLeod in corporate finance and held the position of director and senior vice-president, corporate finance.

Mr. Buckingham commenced involvement in the oil industry as a North Sea diver and subsequently became a concession negotiator acting for several companies including Ranger and Premier Oil plc. He was previously a security adviser to various governments.

Mr. Atherton is a qualified accountant, qualifying with Deloitte & Touche, and holds a degree in geology from Imperial College London. He has a corporate finance background with specific experience in the international mining and resource sectors.

Mr. Turnbull is a Senior Partner of the Calgary office of the law firm of McCarthy Tétrault LLP. Mr. Turnbull has extensive knowledge of corporate governance issues and has acted for many boards of directors and special committees in that regard. Mr. Turnbull started his career with the law firm of MacKimmie Matthews in 1979. From 1987 to 2001, he was a partner with Gowlings LLP (formerly Code Hunter LLP). In 2001 and 2002, he was a partner with the law firm of Donahue LLP. Mr. Turnbull has been a partner with the law firm of McCarthy Tétrault LLP since July 2002 and was appointed Queen’s Counsel in 2010.

Mr. McLeod is a Professional Engineer with over 40 years of varied resource extraction experience. He has held positions and has served on various boards including Constellation Oil & Gas Ltd., Ranger Energy Ltd. and CanArgo Energy Inc., as president and CEO of Arakis Energy Company, as vp, operations of Pengrowth Gas Company, CEO and director of Rally Energy Corp. and Canoro Resources. He is a member and past president of the Association of Professional Engineers and Geoscientists of Alberta.

Ms. Rodriguez has most recently held the position of Chairperson and CEO (from 2007 to 2012) of Sociedad Estatal Española P4R, S.A., a Spanish government owned consultancy firm specialising in foreign trade, investment and co-operation. She was also, until recently, a trustee of the Spain-China Council Foundation, the Spain-India Council Foundation and Casa Arabe. She has previously held many other senior executive positions including at commodities trading companies. Ms. Rodriguez was awarded the prestigious Órden de Isabel la Católica by King Juan Carlos of Spain in 1990, in recognition of her services to the Spanish people and work with the international community.

Mr. Erwin served in the United States Army for over 25 years, culminating his career as the Chief of Staff of the United States Army Special Operations Command. He became a specialist in building teams of joint, interagency partners working closely with other nations’ leadership, both military and civilian. In 2011, Mr Erwin started Long Walk Enterprise, LLC, a service-disabled veteran-owned small business providing consulting and operational support services. Mr. Erwin served on the board of A&K Global Health, a medical travel services company operating globally, as CEO.

E X T ER N A L A PP O I N T M EN T S – President and CEO of MJH Services Inc

– Chairman of Canacol Energy Ltd – Chairman of Greenfields

Petroleum Corporation – Co-chairman of Sunshine

Oilsands Ltd – Director of Montana Exploration

Corp – Director of Pan Orient Energy

Corp – Director of PetroFrontier Corp

None None – Non-executive director of Crescent Point Energy Corp

– Non-executive director of Hyperion Exploration Corp

– Non-executive director of Marquee Energy Ltd

– Non-executive director of Storm Resources Ltd

– Non-executive director of Sunshine Oilsands Ltd

– Director of United Hydrocarbon International Corp

– Director of Paris Energy Inc – Director of Tuscany Energy Ltd – Director of Diaz Resources Ltd – Director of Kallisto Energy Corp – Director of Emperor Oil Ltd

– Spanish Committee of the United Nations Relief and Works Agency

– Plan International/Spain Foundation

– Long Walk Enterprise, LLC

CO M M I T T EE M E M B ER S H I P – Audit Committee – Nomination Committee – Reserves Committee – Corporate Social Responsibility


Committee

– Nomination Committee – Corporate Social Responsibility

Committee

– Reserves Committee – Corporate Social Responsibility


Committee

None – Audit Committee – Remuneration Committee – Reserves Committee

– Audit Committee – Remuneration Committee

– Corporate Social Responsibility Committee

– Anti-Bribery and Corruption Committee


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I n M E M O R y

We were very saddened at the sudden death of General Sir Michael Wilkes, who was a great friend and colleague. Sir Michael was an honourable man with a highly distinguished military career and approached all aspects of life with great enthusiasm and integrity. He will be remembered as an exceptional individual who inspired those around him and made a tremendous contribution to everything he did.

General Sir Michael Wilkes, KCB, CBE, KStJ served in the British Army for 35 years, retiring in 1995 as Adjutant General and Middle East Adviser to the British government on defence matters. As Adjutant General, Sir Michael was the most senior administrative officer within the Army. During his distinguished career, he saw active service across the world while also commanding at every level from Platoon to Field Army, including commanding the 22nd Special Air Service Regiment and serving as the Director of Special Forces. In addition, he held a number of senior staff appointments in the Ministry of Defence, including membership of the Army Board.

The son of an Artillery officer, Michael John Wilkes was born at Steep, Hampshire, on June 11, 1940 and educated at King’s School, Rochester, where he played rugby for the 1st XV. After attending RMA Sandhurst, he was commissioned into the Royal Artillery in 1960 and joined 7 Parachute Regiment Royal Horse Artillery (RHA) the following year.

In 1977, he took command of 22 SAS at the age of 36. One of the key roles for the unit at that time was to develop new techniques for, and deal with, increasingly common hostage situations, negotiating with those making demands and delivering precision assaults when it was judged that talks had broken down. Under his leadership, the regiment became adept at responding rapidly to the different tactics employed by terrorists. He also set up a robust liaison system linking the SAS commander to the police, the security services and the Cabinet Office Briefing Rooms (Cobra).

gEnER Al SIR MIChAEl wIlkES19 4 0 – 2 0 13


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In 1980, he became military assistant to the Chief of the General Staff, the head of the Army. In 1986, after appointments as Chief of Staff 3 Armoured Division and then command of 22 Armoured Brigade, he was appointed Director of Special Forces where he remained until 1988.

He was appointed OBE in 1980 and advanced to CBE in 1988. In 1990, he was promoted to Lieutenant General and knighted KCB, becoming Commander UK Field Army and Inspector-General of the Territorial Army.

In 1992, he was appointed Middle East Adviser, reporting to the Chief of Defence Staff. His advice on the reorganisation of Jordan’s armed forces earned him the country’s Order of Merit, 1st Class. He became a full General in 1993. As Adjutant General, among his responsibilities as a member of the Army Board, were the Army’s terms and conditions of service, individual training, recruitment levels, discipline, education and reports on the state of morale of the Army.

He was Colonel Commandant of the Honourable Artillery Company 1992-98, vice-president of the SAS Association from 2002 to 2011, president Army Cadet Forces Association from 1993 and president of the Special Forces Club, the Travellers’ Club and the Royal Channel Islands Yacht Club.

In 1995, he retired from the Army and for the next five years was Lieutenant-Governor and Commander-in-Chief of Jersey.

Throughout his career he gained extensive commercial and corporate governance experience which led to his appointment as non-executive director for many private and public companies. At the time of his death he had external appointments as non-executive director on AIM listed companies Stanley Gibbons Group and Blue Star Capital plc as well as non-executive positions on a number of private companies including Britam Defence.

As well as being Senior Independent Director for Heritage, Sir Michael was a member of the Audit Committee, Remuneration Committee, Nomination Committee and Anti-Bribery and Corruption Committee. The Board considered him to be a highly valuable member of the team.

General Sir Michael Wilkes, KCB, CBE, KStJ was born on June 11, 1940. He died on October 27, 2013 aged 73.

FinanceLegalMining/exploration/engineeringSecurity/defence

S K I L L S A N D E X P E R I E N C E O F T H E B O A R D

1-4 years4-5 years

L E N G T H O F T E N U R E O F T H E N O N - E X E C U T I V E D I R E C T O R S

33%67%

Non-Executive ChairmanExecutive Directors Independent Non-ExecutiveDirectorsNon-Independent Non-Executive Director

B A L A N C E O F N O N - E X E C U T I V E A N D E X E C U T I V E D I R E C TO R S


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R e p o R t o f t h e d i R e c t o R s

Directors of the Company who served in 2013 and up to the date of the signing of this report, unless indicated otherwise, are:

Appointment dates

M i c h a e l h i b b e R d 1

Chairman and Non-Executive Director 18 March 2008

a n t h o n y b u c k i n g h a M 2

Chief Executive Officer 25 February 2008

pa u l at h e R t o n 2

Chief Financial Officer 6 February 2008

M a R k e R w i nNon-Executive Director 1 May 2012

J o h n M c l e o d 1

Non-Executive Director 18 March 2008

c a R M e n R o d R i g u e zNon-Executive Director 22 March 2012

g R e g o R y t u R n b u l l 1

Non-Executive Director 18 March 2008

s i R M i c h a e l w i l k e s 1

Non-Executive Director and Senior Independent Director

18 March 2008Died: October 2013

1 The Director was appointed on 18 March 2008 and this became effective on the Company’s listing on the LSE on 28 March 2008.

2 The Director was appointed as indicated and this became effective on the Company’s listing on the LSE on 28 March 2008.

Biographical details of all current Directors can be found on pages 6 to 7 of this report. With the exception of Carmen Rodriguez and Mark Erwin, all the Directors were previously, and continue to be, Directors of HOC.

c o M p o s i t i o n o f t h e b o a R d There are currently seven Directors, five of whom are Non-Executive Directors. The Chairman and three of the Non-Executive Directors are deemed to be independent under the terms of the Code.

The current composition is assessed by the Board to be highly effective. There is a balanced mix of skills and experience, a variance in length of tenure of Non-Executive Directors which ensures continuity and new perspectives, and a good balance between Executive and independent Non-Executive Directors. The variety of experience of the Directors, brings a balanced diversity of thought to Board deliberations.

a p p o i n t M e n t s t o t h e b o a R dIt is crucial that the appropriate skills and balance of talents are represented on the Board. This is an area of ongoing focus for the Board which has delegated the tasks of reviewing Board composition, searching for appropriate candidates and making recommendations to the Board on appointment of Directors to the Nomination Committee. The Board composition was refreshed in 2012 with the appointment of Carmen Rodriguez and Mark Erwin. The appointments process and role of the Nomination Committee is described more fully in the Report of the Nomination Committee on pages 41 to 42.

l e a d e R s h i p


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R e - e l e c t i o nWith regard to retirement and re-election of Directors, the Company is governed by its Articles, the Code and the Jersey Companies Law. Under the Articles, Directors have the power to appoint a Director to the Board during the year but any person so appointed must stand for election at the next AGM. All Directors retire and stand for re-election annually in compliance with the Code. Directors re-elected at the AGM are appointed for a one year term.

i n d e p e n d e n c eThe Board’s assessment of the independence and effectiveness of the Non-Executive Directors is made regularly. In addition to the requirements of the Code, this assessment includes the Directors’ total number of commitments, relationships with major suppliers or with charities or other entities receiving material support from the Company.

The Board considers that Michael Hibberd, John McLeod, Carmen Rodriguez and Mark Erwin and are independent in character and judgement and free from relationships or circumstances which may affect their judgement. On appointment, the Chairman was considered to be independent and continues to be so.

The Board acknowledges that John McLeod does not meet the strict independence criteria set out in the Code as he has served as a Director of HOC, the prior holding company of the Group, for more than nine years and was previously granted options. However, the Board has satisfied itself that neither of these factors impact John McLeod’s independence in character and judgement. His length of service on the Board enhances his ability to perform his duties effectively and helps maintain an appropriate balance between experienced Non-Executive Directors and those more recently appointed to the Board. John McLeod, like all Directors, stood for re-election at the last Annual General Meeting and received overwhelming support from shareholders and was re-elected.

Gregory Turnbull does not meet the independence criteria set out by the Code as he is a partner of McCarthy Tétrault LLP, the Canadian legal advisers to the Company.

c o n f l i c t s o f i n t e R e s t a n d R e l at e d p a R t y t R a n s a c t i o n sUnder the Articles, a Director may be a party to, or otherwise interested in, any transaction or arrangement with the Company as long as they have disclosed to the Directors the nature and extent of any interests at the first meeting of the Directors at which a transaction is considered or as soon as practical after that meeting by notice in writing to the Secretary. Where disclosure is made to the Secretary, the Secretary must inform the other Directors that it has been made and table the notice at the next meeting of the Directors. Any such disclosure at a meeting of the Directors must be recorded in the minutes of the meeting. Any potential or actual conflicts of interest are regularly reviewed by the Board.

The Company’s Code of Business Conduct and Ethics also requires Directors (and employees) to avoid conflicts of interest which may interfere or appear to interfere with the obligation to act in the best interests of the Company.

Related party transactions with Directors are disclosed in note 23 of the notes to the consolidated financial statements in the Financial Statements Report. The current related party transactions relate to provision and personal use of transportation services.

R e l at i o n s h i p a g R e e M e n tThe Company had in place a Relationship Agreement between Albion Energy Limited, the Company’s largest shareholder and Anthony Buckingham in March 2008 as part of the process to list on the Main Market. This agreement has now expired but it is likely that a new relationship agreement will be required in the near future under FCA proposed changes to the Listing Rules. The purpose of the relationship agreement will be to ensure that transactions with any controlling shareholder can be conducted at arm’s length and on normal commercial terms and that the controlling shareholder cannot take any action which would have the effect of preventing the Company from complying with its obligations under the Listing Rules.

R o l e o f t h e b o a R dThe Board’s principal roles are direction, supervision and stewardship. How the Board fulfilled these responsibilities during the year, for example by directing strategy and objectives and upholding the values and culture of the Group, are shown in the table on page 15 which summarises the Board’s activities for the year. The detailed responsibilities of the Board are set out in a schedule of matters reserved for its attention which is reviewed on a regular basis. The most recent review was carried out in 2013.

R e s p o n s i b i l i t i e s o f t h e b o a R d

The schedule of matters reserved for the Board sets out its responsibilities. These include:

– approval of strategy and long-term objectives; – establishing and communicating the Company’s values and

standards; – determining the nature and extent of risks that the Board is

willing to take to achieve its objectives; – approval of annual budgets, business plans, annual and half

year reports and dividends; – review of press releases and all financial information to be

released to the market; – reviewing performance in light of strategy, objectives and

business plans and ensuring corrective action is put in place if necessary;

– approving changes to Board composition; – approval of material acquisitions, disposals and contracts; – considering items of major litigation; – ensuring the effectiveness of the Company’s system of internal

controls including managing risks; and – approval of Group policies including the Code of Ethics,

Anti-Bribery and Corruption, Code of Conduct, health, safety and environmental policies.


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d i V i s i o n o f R e s p o n s i b i l i t i e s There is a clear division of responsibility between the roles of the Chairman, Michael Hibberd, and the Chief Executive Officer (“CEO”), Anthony Buckingham, to ensure an appropriate balance of responsibility and accountability. The Senior Independent Director (“SID”) was Sir Michael Wilkes and a replacement is being sought. The responsibilities of the Chairman, CEO and SID, which have been formalised in writing, were reviewed by the Board during the year. The key responsibilities are summarised below.

c h a i R M a n ’ s R o l e

c h i e f e x e c u t i V e o f f i c e R ’ s R o l e

s e n i o R i n d e p e n d e n t d i R e c t o R ’ s R o l e

g o V e R n a n c e

Upholding the highest standards of integrity, probity and corporate governance throughout the Group, particularly at Board level.

b u s i n e s s s t R at e g y a n d M a n a g e M e n t

Development and implementation of Board approved objectives and strategy. Oversight and management of all operations, business activities and performance.

g e n e R a l

To act as a sounding board for the Chairman and serve as an intermediary for the other Directors when necessary.

R u n n i n g o f t h e b o a R d

Leading the Board and setting its agenda, ensuring adequate time is given to matters under consideration and ensuring Directors receive accurate, timely and clear information in order to carry out their responsibilities. Managing the Board to allow enough time for discussion of complex or contentious items and, in particular, strategic issues.

i n V e s t M e n t a n d f i n a n c i n g

Recommending annual budgets and business plans to the Board and identifying new business opportunities in line with strategic plans.

s h a R e h o l d e R s

To be available to shareholders if they have concerns which contact through the normal channels of Chairman, CEO or Chief Financial Officer (“CFO”) has failed to resolve.

To attend sufficient meetings with major shareholders and analysts to obtain a balanced understanding of the issues and concerns of such shareholders.

d i R e c t o R s ’ i n d u c t i o n , d e V e l o p M e n t a n d e V a l u at i o n

Facilitating constructive relationships between Directors and induction, training and development needs of Directors. Ensuring that the performance of the Board, its committees and individual Directors is evaluated annually and acting on the results of such evaluation.

R i s k M a n a g e M e n t a n d c o n t R o l s

Ensuring appropriate risk management and internal control systems are in place.

c h a i R M a n

To meet with the other Non-Executive Directors at least once a year to appraise the Chairman’s performance and on such other occasions as deemed appropriate.

R e l at i o n s w i t h s h a R e h o l d e R s

Ensuring communication and dialogue is entered into with shareholders and the effective use of the AGM and Extraordinary General Meetings.

e x e c u t i V e t e a M a n d M a n a g e M e n t

Leading the management team, ensuring Group policies and procedures are followed and the development of a succession plan for senior management.

R e p o R t o f t h e d i R e c t o R s c o n t i n u e d


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S U P E R V I S I O NReview of performance against strategyReview of financial informationReview of effectiveness of internal controls and risk management

S T E WA R D S H I PApproval of strategyValues and standardsApproval of Group policies

b o a R dThe Board is supported by the work of its committees and delegates day-to-day

management of the Group to senior management

b o a R d c o M M i t t e e s

A U D I T C O M M I T T E E

R E M U N E R AT I O N C O M M I T T E E

N O M I N AT I O N C O M M I T T E E

R E S E R V E S C O M M I T T E E

A N T I -B R I B E R Y A N D C O R R U P T I O N C O M M I T T E E

C S R C O M M I T T E E

Monitors integrity of financial statements

Reviews accounting policies

Manages relationship with and oversees external auditor

Considers auditor independence

Sets remuneration policy

Reviews and approves remuneration of Executive Directors

Reviews and approves LTIP schemes

Makes recommendations on Board composition

Reviews succession planning

Reviews Board performance

Oversight responsibilities with respect to the Company’s oil and gas reserves evaluation process

Considers independence of the technical evaluator

Oversees anti-bribery programme and ethical policies and practices

Sets CSR Policy Framework

Reviews internal CSR programme

s e n i o R M a n a g e M e n t/ l e a d e R s h i p t e a M

g o V e R n a n c e s t R u c t u R e

The Board delegates management of business and day-to-day operational decisions to executives and is responsible for monitoring performance. The Executive Directors have close involvement with the operations of the business through their operational roles and the Board is supported by a strong and experienced senior management team.

n o n - e x e c u t i V e d i R e c t o R s The importance of the role of a Non-Executive Director is recognised by the Board. The responsibilities of the Non-Executive Directors to constructively challenge and help develop strategy are set out in the individual letters of appointment of each Non-Executive Director. Non-Executive Directors are also specifically tasked with responsibilities in the areas of strategy, performance, risk and people to ensure the effective operation of the Board. Non-Executive Directors are aware of their responsibilities and feel able to raise any concerns at Board meetings, which are minuted accurately in the Board meeting minutes.

c o M M i t t e e sThe Board has delegated certain responsibilities to its Committees in line with recommendations of the Code, to facilitate progressing the business of the Board. These are the Audit, Remuneration, Nomination, Reserves, Anti-Bribery and Corruption and CSR Committees. The duties of these Committees are set out in formal Terms of Reference approved by the Board which are available on the Company’s website www.heritageoilplc.com. Attendance of non-Committee member Directors is encouraged at all Committee meetings except where matters associated with their own interests are being discussed.

H e r i t a g e O i l P l C Corporate Governance 2013

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h o w t h e b o a R d o p e R at e st h e b o a R d c h a R t e ROur Board Charter details the basic operation and processes governing the running of the Board. It sets out the Directors’ responsibilities and conduct of Directors. It also covers Board meeting procedures concerning agenda, papers, minutes, conflict of interest procedures and other governance matters, such as the procedure for Directors to take independent advice if required.

b o a R d M e e t i n g sBoard and Committee meeting attendance in 2013.

Board (8 meetings)

Audit Committee

(4 meetings)

Remuneration Committee

(5 meetings)

Nomination Committee

(2 meetings)

Reserves Committee

(2 meetings)

Anti-Bribery Committee

(2 meetings)

CSR Committee

(2 meetings)

Michael Hibberd 8 4 – 2 2 2 2

Anthony Buckingham 8 – – 2 – – 2

Paul Atherton 8 – – – 2 2 2

Mark Erwin 8 – – – – 2 2

John McLeod 8 4 5 – 2 – –

Carmen Rodriguez 6 4 5 – – – –

Gregory Turnbull 8 – – – – – –

Sir Michael Wilkes1 6 3 4 2 – 2 –

1 Sir Michael Wilkes died in October 2013.

A report on the Committee activities can be found later in this report on pages 22 to 46.

The Board met in formal meetings 8 times during the year and is scheduled to meet at least four times a year. It also engaged informally in numerous ad hoc information calls which were not convened as formal meetings. The Board believes that one of its strengths is in having open communication channels that enable its Directors to engage informally on a variety of topics.

The attendance record of each Director at formal Board meetings is shown in the table above. As well as formal meetings, the Chairman, CEO and CFO maintained frequent contact with other Directors to discuss any issues they may have had relating to the Group or as regards their areas of responsibility and to keep them fully briefed on the Group’s operations and initiatives. Additionally, the Chairman and Non-Executive Directors met and spoke regularly during the year, and on an ad hoc basis, without the Executive Directors being present.


e f f e c t i V e n e s s

H e r i t a g e O i l P l CCorporate Governance 2013

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w h at t h e b o a R d d i d d u R i n g t h e y e a RHow the Board fulfilled its responsibilities of direction, supervision and stewardship is highlighted in the summary of the key items reviewed and discussed at Board meetings during the year.

s t R at e g y – consideration of business opportunities; – discussions re PetroFrontier Corp. (“PetroFrontier”); – review of development opportunities and market activity; and – presentation from technical team and corporate presentation.

p e R f o R M a n c e / R i s k – operational updates; – review of operational issues in Nigeria; and – update reports on Ugandan tax issue.

g o V e R n a n c e / c s R – AGM arrangements and Notice; – review of Schedule of Matters; – discussion on community building campaign in Nigeria and review of political and

social issues; – reports from Board Committees and Senior Independent Director reports; – review of related party transactions and conflicts of interest; – review of UK Code compliance; – approval of amended Disclosure Policy; – review of Whistle-blowing Policy; – approval of announcements to the market; and – review of need for further independent Non-Executive Directors.

f i n a n c e – approval of Group’s budget; – consideration of need for internal audit function; – Nigeria re-financing; – financing arrangements to be entered into by Shoreline; – consideration of Letter of Credit; – consideration of share buyback proposals; and – approval of Annual Report and Accounts and financial statements.


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c o M M i t M e n t, d e V e l o p M e n t, i n f o R M at i o n a n d s u p p o R tIt is in the whole Board’s interest to ensure that all Directors have sufficient time to commit to their duties and that they receive the training and information they require in order to perform effectively. Further information on how the Company applies the provisions of the UK Corporate Governance Code may be found in the Appendix on pages 47 to 62.

The Non-Executive Directors’ letters of appointment set out the duties of the Director and commitment expected. A summary of the typical terms of appointment for a Non-Executive Director is set out below.

s u M M a R y o f n o n - e x e c u t i V e d i R e c t o R s ’ l e t t e R o f a p p o i n t M e n t

Area Comment

t e R M Appointed for initial three year term with typical tenure expected of two three year terms, subject to annual re-election by shareholders.

t i M e c o M M i t M e n t At least 20 days per annum.

e x p e c t e d d u t i e s Attendance at Board meetings, AGM, meetings of the Non-Executive Directors, meetings with shareholders, training if needed, meetings as part of the Board evaluation process.

R e s p o n s i b i l i t i e s o f a l l d i R e c t o R s The Board provides entrepreneurial leadership within a framework of effective controls, sets the Company’s strategic aims, ensures necessary financial and human resources are in place, reviews management performance, sets the Company’s values and standards and ensures obligations to its shareholders and others are understood and met.

R o l e o f t h e n o n - e x e c u t i V e d i R e c t o R Key elements of the Non-Executive Director’s role are: – strategy – Constructively challenge and develop proposals; – performance – Scrutinise the performance of management in

meeting agreed goals and objectives and monitor reporting of performance;

– risk – Satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust; and

– people – Determine appropriate levels of remuneration of Executive Directors and take a lead role in appointing Executive Directors and succession planning.

o u t s i d e i n t e R e s t s / c o n f l i c t s o f i n t e R e s t

Disclose significant commitments to the Board and notify any changes to these in advance. Disclose any potential or actual conflicts of interest.

p R i c e s e n s i t i V e i n f o R M at i o n a n d s h a R e d e a l i n g

Compliance with Model Code, Company’s Share Dealing Code and Disclosure and Transparency Rules on insider dealing required.

e V a l u at i o n / t R a i n i n g Individual Directors, the Board and its Committees are subject to annual review. Arrangements for training on an ongoing basis are made available if required.

c o n f i d e n t i a l i t y Duties set out in respect of confidential information of the Company.

i n d u c t i o nAn induction plan is in place for new Directors joining the Board. No Directors joined the Board in 2013 but a typical induction process covers the following areas:

Area Facilitated by

b o a R d p R o c e d u R e s , d u t i e s o f a d i R e c t o R , c o R p o R at e g o V e R n a n c e

Chairman

s t R at e g y a n d b u s i n e s s d e V e l o p M e n t s Chief Executive Officer

f i n a n c i a l p e R f o R M a n c e , f i n a n c i a l R e p o R t i n g , b u d g e t s , R i s k

Chief Financial Officer

i n V e s t o R R e l at i o n s Head of Investor Relations

c o M pa n y a n d i n d u s t R y s p e c i f i c Visits to Head Office in Jersey and meetings with the Company’s technical team to provide overview of operations



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e V a l u at i o nThe Board undertakes regular evaluations of its own performance as well as that of the various Board Committees. Evaluations carried out with the assistance of an external facilitator, Hay Group, were carried out in 2009 and 2010. Internal reviews were conducted by the Chairman in 2011 and 2012. As required by the Code, an externally facilitated evaluation was again conducted in 2013 and is reported on below.

c h o i c e o f e V a l u at o RThe choice of external evaluator was a key consideration for Heritage. The brief was to find a company used to dealing with board members who would provide a bespoke service to address the specific requirements of the evaluation. Hay Group was chosen to conduct the process due to their experience, knowledge, flexibility in approach and ability to engage meaningfully with the Directors. Hay Group also provide remuneration advice to the Remuneration Committee. Hay Group’s knowledge of the background and development of Heritage was also an important factor enabling them to carry out an effective and targeted process.

e V a l u at i o n p R o c e s s The evaluation was carried out using a detailed questionnaire that covered the following areas:

– role of the Board; – Board information and Board meetings; – Board composition; – Board dynamics and leadership; – effectiveness of Board Committees; and – self assessment.

The findings from the evaluation exercise were discussed with the Chairman and reviewed by the whole Board before a set of actions were agreed.

M a i n R e c o M M e n d at i o n sSummary Overall, the Board is satisfied with its performance, capability and operational effectiveness. All Board members have a positive view of the elements assessed in the survey. However, some areas received fewer positive responses and certain areas have been identified for improvement which are detailed below.

The Board’s strengthsA number of strengths emerged from the evaluation exercise which were:

– Board meeting agendas and presentations are effective and relevant; – Board members feel that their fellow Directors are knowledgeable about the industry and market; – good Board relations and strong support for the Chairman; – the three principal Board committees are considered to be effective; and – Board members are confident in their understanding of the business and ability to carry out their roles.

Theme Actions to be taken

t h e c o M pa n y c o u l d b e n e f i t f R o M h a V i n g a M o R e d e ta i l e d s u c c e s s i o n p l a n f o R t h e c e o

Nomination Committee to review the existing CEO succession plan to ensure it is current, appropriately detailed and all Directors are aware of it.

e n s u R e c o M pa n y i s f u l ly p R e p a R e d f o R e M e R g e n c y o R c R i s i s s i t u at i o n s

Review the crisis disaster plan to ensure it is robust.

t i M i n g o f R e c e i p t o f b o a R d M at e R i a l s Implement a timetable for the circulation of preparatory material prior to Board meetings.

f R e q u e n c y o f M e e t i n g s Establish a “minimum contact” threshold and agree a schedule which dictates that, where Board meetings are in excess of this threshold, progress updates or teleconference meetings are organised.

t h e b o a R d c o u l d b e n e f i t f R o M h a V i n g a n a d d i t i o n a l M e M b e R w i t h s t R o n g f i n a n c i a l b a c k g R o u n d w h o c o u l d a l s o a c t a s a n e w c h a i R M a n f o R t h e a u d i t c o M M i t t e e

Nomination Committee to begin formal proceedings for the hire of a Board member with an appropriate financial background.

b e n e f i t o f h a V i n g t R a i n i n g s e s s i o n s o n u k b o a R d M at t e R s

Provide external training for Board members on UK corporate governance, board effectiveness and UK executive remuneration.

p R o p o s a l s f o R n e x t y e a R ’ s e V a l u at i o nEvaluation in 2014 will follow up the action points highlighted from 2013’s evaluation to ensure they have been addressed.


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Under the Code the Directors must state that they consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy. The Board requested the Audit Committee lead this assessment. Factors considered were the carrying value of intangible assets and property, plant and equipment, the appropriate consolidation percentage of Shoreline and the completeness and accuracy of the accounting for the non-operated interest in OML 30 given its materiality for the Group. The statement in compliance with this provision of the Code appears in the Financial Review on page 7.

It is also the responsibility of the Board to ensure that there is in place a system of checks and balances to manage risk across the Group. It has well established internal control procedures which are described below. The Audit Committee is responsible for reviewing and reporting on the effectiveness of the Group’s control systems.

f i n a n c i a l a n d b u s i n e s s R e p o R t i n gIt is essential that shareholders are provided with a clear assessment of the Group’s position and prospects. The Annual Report and Accounts, half yearly report and other periodic financial or trading statements provide this information to shareholders and the market. Financial reporting is controlled principally through the policies set out in the Financial Reporting Procedures Memorandum (the “Board Memorandum”). This was first established as part of the process to become listed on the Main Market of the LSE and is reviewed and updated on an annual basis. The Board Memorandum was specifically updated in 2012 to ensure that established procedures allow the Directors to continue to make proper and informed judgements on the financial position and prospects of the Group following the acquisition of an interest in the OML 30 licence in Nigeria. The Directors recognise the need to maintain financial reporting procedures, to review them on an ongoing basis and to adapt them to changing circumstances and will use the Board Memorandum as a basis for further developing control processes.

In fulfilling its responsibility to monitor the integrity of financial reports to shareholders, the Audit Committee reviews accounting principles, policies and practices adopted in the preparation of public financial information and examines documentation in relation to the Annual Report and Accounts and annual financial report announcements. The ultimate responsibility for reviewing and approving the half year and annual financial statements remains with the Board.

The Company’s internal controls and reporting procedures and systems are being implemented by Shoreline, the joint venture company incorporated in Nigeria that owns an interest in OML 30. Good progress has been made with the implementation of financial controls that are used by Heritage Oil Plc and the same consultants are being used for advisory work.

R i s k M a n a g e M e n t a n d i n t e R n a l c o n t R o lIt is the Board’s responsibility to determine the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. It also has overall responsibility for the Group’s system of internal control and risk management and has established processes for identifying, evaluating and managing the significant risks that the Group faces. This includes significant risks that may arise from environmental, social and governance matters. The Group’s system of internal control is designed to manage, rather than eliminate, the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. The risk assessment and internal control procedures were in place from the start of 2013 to the date of approval of this report and have been reviewed by the Board in accordance with the Financial Reporting Council’s guidance on internal control (the “Turnbull Guidance”).

The Audit Committee reviews regularly, on behalf of the Board, the effectiveness of the Group’s system of internal control. The review covers all controls, including financial, operational and risk management processes. Appropriate actions are put into place to remedy any weaknesses identified by the review. One weakness identified in its financial procedures reporting concerns accounting for complex financial transactions and so the Company ensures that it seeks third party advice to mitigate this weakness.

i n t e R n a l c o n t R o l f R a M e w o R kThe Board Memorandum sets out the internal control systems of the Group including governance, high level financial controls, budgeting and forecasting procedures, controls of resources, accounting and information systems and treasury management. The Board Memorandum also specifically includes OML 30 acquisition risks and controls and integration plans. In addition to high level controls, controls are in place at an operational level. These systems are based on established management structures with defined lines of responsibility and clear delegation of authority.

High level controls include:

– review of management accounts with comparison of actual performance against prior periods and budget;

– approval of orders, authorisation of invoices and two signatories required to make a transfer from the principal bank accounts;

– quarterly reconciliation of all control accounts; – prior approval by the Board for major investments; and – segregation of duties between relevant functions and

departments.

Entity-level controls set the tone and establish the expectations of the Group’s control environment and are used to monitor the extent to which that tone and expectations are being fulfilled. These include controls within each of the following elements:

– control environment; – risk assessment; – information and communication; and – monitoring.

a c c o u n ta b i l i t y



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R i s k a s s e s s M e n tFormal risk assessments are conducted periodically during the year which cover all material controls, including financial and operational, and risk management systems. A risk matrix has been developed which aids identification of the primary risks the Group faces and likelihood of their occurrence. The primary risks are collated from this assessment with recommended controls to mitigate these risks and presented to the Audit Committee for review. The Board receives reports of the Audit Committee’s review of the internal control system, risk assessment process and any reports made under its whistle-blowing policy.

Details of principal risks and uncertainties, which are those reviewed by the Audit Committee during the year, are discussed on pages 32 to 34 of the Strategic Report.

w h i s t l e - b l o w i n g p o l i c yAn important part of the Company’s control processes is having a reporting system that can be used by employees to report possible fraud or wrongdoing. The whistle-blowing policy and procedures in place were reviewed during the year. Information is available to all employees advising them that they can raise concerns in confidence about possible wrongdoing by contacting the Chairman of the Audit Committee. In addition, the Board and Audit Committee receive reports of any information reported under the whistle-blowing procedures and appropriate action is taken as a result.

The Chairman, with input from the SID and Executive Directors, is responsible for ensuring effective communication of shareholders’ views to the Board as a whole and will update the rest of the Board accordingly. Board members are expected to use their best endeavours to attend meetings with a broad range of shareholders or otherwise keep in touch with shareholder opinion and discuss strategy and governance issues with them as time progresses. In addition, the Company employs an investor relations specialist and an investor relations programme is in place for the Company to meet major shareholders and analysts.

Once the appointment of a new Senior Independent Director has been finalised it will be within his/her remit to maintain sufficient contact with major shareholders to help develop a balanced understanding of their issues and concerns. They will also be expected to be available to shareholders who have concerns that have not been, or cannot be, resolved through discussion with the Chairman, CEO or CFO or where such contact is inappropriate.

Throughout 2013, Executive Directors and senior management met with institutional investors in London and across the UK as well as other European and North American cities. These roadshows, combined with the attendance of various Directors and/or senior management at several conferences, provided for comprehensive and engaging dialogue with shareholders. In addition, the Company and its advisers entered into discussions with major shareholders in respect of the resolutions put to its 2013 AGM, particularly in respect of the resolution concerning the Rule 9 waiver. This enabled shareholders to fully understand the reasons for this resolution.

The Company engages with and considers the views of investor voting advisory services such as that provided by the Institutional Voting Information Service and RREV Proxy Advisory Services.

The Board is aware of its reporting responsibilities and, where necessary, takes advice to ensure that material information is released on a timely basis. A Disclosure Policy is in place to ensure Directors and management remain aware of their responsibilities in relation to the release of price sensitive information. It is the Company’s policy not to comment on market rumours or press speculation.

The Group issues its results and other news releases promptly and publishes them on the Company’s website at www.heritageoilplc.com. Other corporate information, including the Annual Report, any prospectus and circulars issued during the year and other financial presentations are also available on the website. Shareholders and other interested parties can subscribe to receive news updates by email by registering online on the website.

R e l at i o n s w i t h s h a R e h o l d e R s


2 0


a R t i c l e s o f a s s o c i at i o nThe Articles govern, amongst other things, the rights and obligations relating to the Company’s shares, powers of the Directors, proceedings at general meetings, and the appointment and resignation of the Directors. The Articles may only be amended by a special resolution of the Company’s shareholders.

s h a R e c a p i ta lThe Company has two classes of shares, namely the Ordinary Shares and the special voting share of HOC (the “Special Voting Share”). HOC, the Company’s indirect subsidiary, has Exchangeable Shares outstanding that are convertible into Ordinary Shares of the Company.

The Ordinary Shares and the Special Voting Share carry no right to fixed income. The Ordinary Shares have a right to one vote for every share at general meetings. The holders of Exchangeable Shares have rights through the Special Voting Share held by the trustee of the Voting and Exchange Trust to one vote at general meetings for every Exchangeable Share on the same basis as if they had exchanged them for Ordinary Shares. For clarity, the Voting and Exchange Trust is a Canadian Trust that holds the Special Voting Share for the benefit of the registered holders of the Exchangeable Shares pursuant to the terms of a Voting and Exchange Trust Agreement dated 27 February 2008, as amended on 24 April 2008.

Subject to applicable statutes, shares in the Company may be issued with such rights or restrictions as the Company may by Special Resolution determine. Unissued shares are at the disposal of the Board. The issued share capital of the Company and total voting rights of the Company as at 29 April 2014 are as follows:

– 275,669,060 Ordinary Shares of the Company are issued and outstanding, which constitutes 99.2% of the total voting rights of the Company; and

– 2,256,518 Exchangeable Shares of HOC, each carrying one voting right in the Company, are issued and outstanding, which constitutes 0.8% of the total voting rights of the Company.

p u R c h a s e o f o w n s h a R e sAt the AGM held on 20 June 2013, a Special Resolution was passed by shareholders authorising the Company to make market purchases of its own shares up to the date of the next AGM. Any shares which have been so purchased may be held as treasury shares or cancelled immediately upon completion of the purchase. The Company proposes to buy back shares at low price levels if it is in the best economic interests of the Company to do so. The Directors consider that it is in the best interests of the Company and its Shareholders generally to allow the Company to make market purchases of Ordinary Shares and to allow the Company to hold such Ordinary Shares in treasury.

As at 31 December 2013, the Company held a total of 34,602,442 Ordinary Shares in treasury equal to 13.4% of the issued share capital as at 1 January 2013. As at 29 April 2014, 34,602,442 Ordinary Shares were held in treasury.

s h a R e h o l d e R a n a ly s i sAnalysis of the Company’s shareholder base, shown on the following two graphs, indicates that there has been a small change in the profile of those holding shares in Heritage in 2013. There has been an increase in retail shareholders and those classified as value investors and a decline in Hedge Fund holdings. The increase in management shareholding is due to the exercise of options and LTIPs which were taken up.

D E C E M B E R 2 0 12

34.1%12.2%11.6%

9.7%

7.5%9.9%

9.2%4.0%1.8%

Source: J.P. Morgan Securities Ltd. Other consists of trading positions, custody and unclassified.

ManagementRetailOtherValue

GrowthMultiple

Hedge FundIndexQuantitative

D E C E M B E R 2 0 13

Source: J.P. Morgan Securities Ltd. Other consists of trading positions, custody and unclassified.

ManagementRetail OtherValue

GrowthMultiple

Hedge FundIndex

36.4%13.1%12.6%12.3%

5.9%9.4%

4.7%3.8%

Quantitative 1.8%

M a J o R s h a R e h o l d e R sAs at 29 April 2014, the Company had been notified in accordance with the Disclosure and Transparency Rules, of the following interests in voting rights in its issued share capital:

NameOrdinary

Shares held % held1

Albion2 94,669,850 34.06Capital Research and Management Company 24,547,051 8.83London and Capital Asset Management Ltd 10,475,045 3.77

1 Includes voting rights attaching to the Special Voting Share as well as the Ordinary Shares. 2 Number of Ordinary Shares held by Anthony Buckingham either directly or indirectly

through Albion.



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V o t i n gUnder the Articles, every member and every duly appointed proxy present at a general meeting has, upon a show of hands, one vote. If voting at a general meeting is carried out by poll, every member present in person or by proxy has a vote for each share held.

t R a n s f e R sSubject to the Articles, any member may transfer certificated shares by an instrument of transfer in writing in any usual form or in any other form acceptable to the Directors. Directors may refuse to register any transfer of certificated shares which are not fully paid or where the register of transfer is not in the acceptable form.

p o w e R s o f t h e d i R e c t o R sSubject to the Articles, relevant statutory law and any direction that may be given by shareholders in general meetings, the business of the Company is managed by the Directors who may exercise all powers of the Company.

c h a n g e o f c o n t R o l a g R e e M e n t sThe Company confirms that it is not party to any significant agreements that would take effect, alter or terminate upon a change of control following a takeover bid except those disclosed below:the Executive Directors’ service contracts contain certain provisions in relation to change of control as disclosed in the Remuneration Report; and the LTIP rules contain a provision whereby in the event of a change of control all awards will vest in their entirety subject to the achievement or otherwise of the performance conditions.

R e s u lt s a n d d i V i d e n d sThe Group’s financial results for the year ended 31 December 2013 are set out in the Financial Statements Report of the Company’s 2013 Annual Report and Accounts.

The Company has not declared or paid any dividends since incorporation other than a special dividend paid in 2010 to return part of the sale proceeds from the disposal of Heritage Oil & Gas Limited’s 50% interest in Blocks 1 and 3A in Uganda (the “Ugandan Assets”).

It is the intention of the Directors that the Company becomes a long-term sustainable dividend payer. Future payments of dividends are expected to depend on the earnings and financial condition of the Company and such other factors as the Board of Directors of the Company consider appropriate.

i M p o R ta n t e V e n t sLikely future developments are discussed in the Strategic Report on pages 12 to 31.

R e g i s t R a RThe Company’s share registrar is Computershare Investor Services (Jersey) Limited of Queensway House, Hilgrove Street, St Helier, JE1 1ES, Jersey, Channel Islands. a n n u a l g e n e R a l M e e t i n gThe 2014 AGM will be held at 22 Grenville Street, St Helier, JE4 8PX, Jersey, Channel Islands on 30 June 2014. Formal notice of the AGM, including details of special business, is set out in the Notice of AGM and dispatched to shareholders at least 20 working days before the meeting. The Notice of AGM will also be available on the Company’s website at www.heritageoilplc.com.

The AGM gives shareholders an opportunity to hear about business developments and ask questions of the Directors. Shareholders are encouraged to send questions, prior to the meeting, to the Company’s registered office in Jersey. For those shareholders not able to attend the meeting, any presentation given at the meeting together with results of voting will be available on the Company’s website. All of the Directors are expected to attend the AGM and be available to answer questions. Voting at the AGM will be by poll, which the Directors believe is the most representative way of conducting voting, giving shareholders one vote for each share held and enabling those shareholders not able to attend the meeting in person an opportunity to vote by lodging a proxy vote. Details of how to vote and deadlines for exercising voting rights are set out in the Notice of AGM.


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D e l i v e r i n gs u c c e s s

j o h n m c l e o Dc h a i r m a n o f t h e r e m u n e r at i o n c o m m i t t e e

Dear Shareholder, On behalf of the Board and the Remuneration Committee, I am delighted to present this year’s Remuneration Report for Heritage.

Our consideration of remuneration has been reviewed in the contextof developments during the year. Over the past 12 months, Heritage has increased production through the successful acquisition in November 2012 of a major interest in the world class OML 30 Field through our joint venture Shoreline with Shoreline Power Company Limited (“Shoreline Power”). This has transformed the cash flow generation of the Company and in due course it is the intention for Heritage to pay a sustainable dividend. We have made great progress over the year with production net to Heritage increasing by 256% and operating cash flows, net to Heritage of $235 million. We have extended our footprint further in Nigeria by establishing an indigenous Nigerian oil company Petrobay Energy Limited (“Petrobay”), a joint venture agreement with two local companies including Bayelsa Oil Company, owned by the Bayelsa State government. Through Petrobay and Shoreline, Heritage expects to be a significant contributor to the future development of the oil and gas industry in Nigeria. The exploration portfolio continues to increase and Papua New Guinea has been added as a core area. Over the course of the year four licences were farmed into and the work programmes are progressing with three exploration wells planned to be drilled for 2014. Our work programmes in Tanzania have also advanced and the drilling programme will now be expanded to include two wells across the licences in 2014/2015.

At the end of October we were very saddened by the death of General Sir Michael Wilkes who had been a Non-Executive Director of the Company since its listing in the UK in 2008. As well as being the Senior Independent Director, Sir Michael was a member of various committees, including the Remuneration Committee. The Board is considering appointing a replacement to the Committee.

r e p o r t o f t h e r e m u n e r at i o n c o m m i t t e e


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We are committed to providing a clear explanation of the underlying principles of our reward policy and ensuring our Executive Directors’ remuneration arrangements support the delivery of our business strategy and reward for exceptional Company performance. On 1 October 2013, the UK Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 came into effect. These new regulations governing the disclosure and approval of directors’ remuneration require the remuneration report to be split into three parts: the annual statement, the Policy Report and the Annual Report on Remuneration. The Policy Report, which is not required to be audited, contains the particular reference of the link between our reward policy and the business strategy. The Annual Report on Remuneration, or Implementation Report, which contains audited information in accordance with the Regulations, provides details of the Executive Directors’ emoluments, performance share awards, options and pension arrangements.

We have made great progress over the year with production net to Heritage increasing by 256% and operating cash flows, net to Heritage, of $235 million.

In accordance with the new regulations, the remuneration policy, as outlined in the following Policy Report, will be subject to a binding vote. The Annual Report on Remuneration will be subject to an advisory vote. Both resolutions will be put to shareholders at the AGM on 30 June 2014.

We are mindful that the market for experienced and talented oil executives remains highly competitive and believe that retaining the current Executive Directors protects the best interests of the Company and our shareholders.

Against the background of this year’s Company performance, the Remuneration Committee considers the remuneration paid to our management team to be a fair reflection of performance. In particular, we have performed well against the key measures of the bonus and, as a result, bonuses were paid out at 50% of the maximum.

The key challenge faced this year by the Committee was to ensure that existing remuneration arrangements for the Board were fully explained in the new Directors’ Remuneration Report format as stipulated by the new regulations. No changes were made to the remuneration policy during the year; however, the process of calculating bonus payouts has been defined in more detail than previously.

Other Committee activities carried out during the year were an interim review of the Company’s performance against the awards made under the 2011, 2012 and 2013 long-term incentive plans and a remuneration review to determine the competitiveness of the Executive Directors’ remuneration arrangements against the market.

Normal stakeholder engagement has been carried out through the Investor Relations function as in previous years.

Together with the rest of the Board I look forward to hearing your views on these matters as well as any other questions you may have concerning the Group’s executive remuneration policy.

j o h n m c l e o Dc h a i r m a n o f t h e r e m u n e r at i o n c o m m i t t e e2 9 a p r i l 2 0 1 4


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r e p o r t o f t h e r e m u n e r at i o n c o m m i t t e e c o n t i n u e D

This section of the Directors’ Remuneration Report sets out Heritage’s remuneration policy for the current financial year and future financial years and has been prepared in accordance with the UK Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013. When developing this policy, we have also taken into account the principles of the UK Corporate Governance Code 2012 and the views of our major shareholders.

The Directors’ Remuneration Policy will be put to a binding vote at the Company’s AGM on 30 June 2014 and, subject to shareholder approval, will take effect from that date. It will continue in effect until a new policy is approved by shareholders, no later than three years after January 2015. The Annual Report on Remuneration continues to be subject to an advisory vote by shareholders at the AGM.

e X e c u t i v e r e m u n e r at i o n p o l i c YThe Committee continues to monitor the Executive Directors’ reward policy and principles to ensure that they remain appropriate and continue to support the business strategy. These broad principles for the Executive Directors’ reward policy, which the Committee believes remain appropriate in the current climate, are designed to ensure that the Company:

– has an executive reward framework to help drive future value growth;

– retains and, when necessary, recruits management talent of the required ability and experience;

– provides overall levels of reward that are appropriate for the Company given its Premium Listing in London, international operations and the global nature of the oil and gas industry;

– follows UK best practice in so far that such standards support and enhance the Company’s ability to generate value for shareholders; and

– maintains a balance between fixed (base package and benefits) and variable reward (short and long-term incentives) that is appropriate and motivates the right behaviours (see chart on page 28).

It remains the Remuneration Committee’s opinion that, in light of the geographic areas in which the Company operates, the relatively small number of executives at the Company and the roles conducted by the Executive Directors, an upper quartile level of total reward is appropriate. However, whilst the policy allows for upper quartile levels of reward, these will only be realised for truly exceptional levels of performance.

The Committee considers that the Executive Directors’ remuneration policy should be sufficiently flexible to reward outstanding performance, in line with the performance-driven culture of the Group.

c o n s i D e r at i o n o f e m p l o Y m e n t c o n D i t i o n s e l s e w h e r e i n t h e c o m pa n YThe Company does not actively consult with employees on executive remuneration as we have a dispersed workforce operating around the world which makes direct consultation impractical. However, when setting the remuneration policy for Executive Directors, the Committee takes into account the pay and employment conditions for other employees in the Company. We aim to ensure that any increase to the basic pay of Executive Directors is not out of line with that proposed for other employees and aim to use consistent principles in determining the other elements of the remuneration package.

c o n s i D e r at i o n o f s h a r e h o l D e r v i e w sWe take into account the views of our major shareholders when setting the Executive Directors’ remuneration policy. If required to discuss potential issues, we would offer to meet with them, as appropriate, to understand any concerns they may have. At the Company’s 2013 AGM, over 84% of the votes in respect of the Directors’ Remuneration Report were in favour of the resolution.

p o l i c Y r e p o r t


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s u m m a r Y o f r e m u n e r at i o n c o m p o n e n t sThe table below summarises the main elements of the Executive Directors’ and Non-Executive Directors’ remuneration packages and their alignment to Heritage’s business strategy.

Component of executive reward Policy for Executive Directors Alignment to corporate strategy

e X e c u t i v e D i r e c t o r s

B a s e pa c k a g e 1 – Base packages are typically reviewed annually, with any increases becoming effective in the first quarter of the relevant financial year.

– Salaries are benchmarked against a peer group of UK and international oil and gas companies.

– The maximum salary for existing role holders is as the current one, plus a percentage increase in line with our policy for review, which takes into account pay in the rest of the organisation.

– Salaries are set at market competitive pay levels to enable the Company to recruit and retain high-calibre individuals in a highly competitive market where there is a shortage of experienced executives.

– This is crucial for protecting and generating shareholder value and ensuring the long-term success of the Company.

– Consideration is also made of wider employee pay increases, views of institutional shareholders and the desire to emphasise the importance of the performance-related elements of the package.

p e n s i o n – Executive Directors receive an allowance of 10% of base package.

– This is paid into a personal pension scheme as nominated by the executive.

– The pension is set below the market lower quartile and in line with our high-performance culture.

o t h e r B e n e f i t s – Executives are entitled to receive private medical insurance, life insurance and school fees for dependents. Housing allowances are also provided.

– The benefits plan does not include other benefits in kind such as a company car.

– The maximum receivable is as the current arrangements, subject to any additional costs introduced by our providers.

– The benefits package is set at market competitive levels to allow for the recruitment and retention of the best available talent for Heritage.

1 Fixed, guaranteed cash amounts paid for work performed, irrespective of performance and exclusive of benefits-in-kind.


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a n n u a l B o n u s – The annual bonus is based on exceptional financial, operational and non-financial achievements and is measured in three categories:

– value creation/strategic delivery, – operational performance and

safety, and – personal objectives.

– Performance measures are chosen to reflect the overall performance of the Company in the current year.

– The weightings assigned to each measure for the year ahead, as well as details of performance against targets for the previous year, are disclosed in the Annual Report on Remuneration.

– Any award in excess of 150% of salary will be deferred for 12 months. Of this award, 50% will be payable in share price-indexed cash and the remainder will be payable in cash.

– All unvested deferred bonus awards are subject to clawback (at the Remuneration Committee’s discretion):

– in the event of material misstatement of financial results or dismissal for serious misconduct; or

– if there is later found to be an error in assessing the extent to which bonus payments were made.

– The maximum opportunity is 300% of base package; this is only available in the event of exceptional performance. The target performance level is one third of the maximum i.e. 100% of base package.

– The bonus is designed to promote Heritage’s high-performance culture. The performance measures chosen represent key strategic and operational objectives for the Company.

– This encourages further alignment between Executive Directors and shareholders and strengthens the long-term strategic focus of the Board.

– The use of clawback reflects the Company’s proactive approach to risk management; this, together with our deferral policy, has been introduced to comply with UK best practice.


s u m m a r Y o f r e m u n e r at i o n c o m p o n e n t s c o n t i n u e D


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lt i p – The Company makes awards of long-term equity-based incentives to those employees with the ability to influence shareholder value.

– Executives receive annual awards of performance shares.

– These shares are conditional on the achievement of relative Total Shareholder Return (“TSR”) performance targets measured against a bespoke group of companies over three years.

– Awards begin to vest for median performance (at which point 25% vests); there is full vesting for upper quartile performance and straight-line vesting between these two points.

– The comparator group companies are selected on the basis of their size and scale of operations, market capitalisation and geographic spread and are reviewed annually. Please refer to the Annual Report on Remuneration for the relevant year to see the comparator group used.

– Under the plan, there is a maximum award of 300% of base package (this may be exceeded in exceptional circumstances).

– However, it is the Committee’s intention that the Executive Directors will not annually receive the maximum level of award under the plan.

– There is an additional holding period of one year following the vesting of any awards.

– In line with the Company’s high-performance culture, the plan allows for upper quartile levels of reward to be delivered, but only for upper quartile performance.

– The use of TSR aligns executives’ interests with long-term corporate performance and shareholder value.

– The vesting schedule of awards made under the LTIP is in line with typical market practice.

– An annual awarding and vesting schedule avoids a gap in remuneration arrangements and assists the Committee in keeping, retaining and incentivising the very best talent in a highly competitive sector.

n o n - e X e c u t i v e D i r e c t o r s

f e e s – Non-Executive Director fee levels are determined by the Chairman and the Executive members of the Board.

– They are reviewed regularly against market data. There is a flat fee for each Director, except for the Chairman who receives higher fees to reflect the additional responsibilities of the role.

– Additional fees are paid for each day worked in excess of the agreed 20 days per annum.

– Non-Executive Directors do not participate in the Company’s pension arrangements. Since the Company’s listing on the London Stock Exchange in 2008, they have been ineligible to participate in long-term incentive plans.

– Fee levels are set to ensure that the remuneration is sufficient to attract, retain and motivate high-quality suitable Directors.

Notes:The same principles were used in determining the remuneration policies for the Executive Directors as for employees generally. In the case of the bonus and the LTIP, performance measures and targets were chosen specifically to ensure that incentives are aligned to short and long-term business performance.In the case of the bonus and the LTIP, the Committee retains discretion to determine the level of vesting of awards, make any adjustments in the event of certain corporate events, and in respect of recruitment or termination arrangements (such as the classification of a good or bad leaver to determine incentive plan payouts).


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r e c r u i t m e n t r e m u n e r at i o nThe below table sets out the key elements of the Company’s recruitment remuneration policy.

External hire Internal promotion

B a s e pa c k a g e In line with Heritage’s remuneration policy, taking into account the experience of the individual; typically set in accordance with market rates in comparable organisations.

May be set at a level to allow for growth in the role, with a series of increases given over the following few years as the individual develops.

B e n e f i t s Where necessary, relocation expenses may be paid and other benefits considered.

p e n s i o n Only as provided to current Executive Directors.

a n n u a l B o n u s As for Executive Directors, however, it may be necessary to amend performance measures and targets depending on where the appointment falls within the financial year. The maximum awards will be as for current Executive Directors.

l o n g - t e r m i n c e n t i v e s As provided to current Executive Directors. The maximum awards will be as for current Executive Directors.

As provided to current Executive Directors. Any existing awards would be carried over and remain subject to their terms as at the date of grant. The maximum awards will be as for current Executive Directors.

B u Y - o u t a w a r D s If the executive is to forfeit awards upon leaving their previous employer, an equivalent of the same value may be provided under the same timescales of the remuneration being forfeited.

N/A.

B a l a n c e B e t w e e n f i X e D a n D p e r f o r m a n c e - r e l at e D r e w a r DThe Remuneration Committee firmly believes in “pay for performance” as demonstrated by the charts below. These illustrate the balance between fixed (base package and benefits, including pension) and variable (bonus and long-term incentives) elements of reward for each of the Executive Directors assuming three scenarios: below-threshold performance (minimum remuneration payable), on-target or threshold performance and exceptional performance (maximum remuneration payable).

C O M P O N E N T S O F C E O ’ S R E W A R D

MaxOn-plan

Fixed payAnnual bonusLTIP

41%

41%

25%

17%

33%

42%

Min

100%Total £977

Total £2,352

Total £5,591

Total £864

Total £1,882

Total £4,356

C O M P O N E N T S O F C F O ’ S R E W A R D

MaxOn-plan

Fixed payAnnual bonusLTIP

40%

40%

23%

20%

31%

46%

Min

100%

£5,000

£6,000

£4,000

£3,000

£2,000

£1,000

£-

Tho

usan

ds

£4,000

£5,000

£3,000

£2,000

£1,000

£-

Tho

usan

ds

Notes:1 Fixed pay consists of the following three elements: – Base salaries as at 1 January 2014 – Pension allowances of 10% of 2014 base salaries – Benefits equal to those received in 2013, as taken from the single total figure table on page 33.2 Target annual bonus is 100% of base salary and maximum annual bonus is 300% of base salary.3 Target LTIP is based on threshold vesting which is 25% of the total award. 4 Under the LTIP rules, the maximum award is 300% of base salary; however, this is only granted in exceptional circumstances and historically, LTIP grants to executives have been lower.

The charts illustrate the maximum awards.5 The scenario charts exclude any share price appreciation or dividends.



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s e r v i c e a g r e e m e n t se X e c u t i v e D i r e c t o r sThe Executive Directors’ service agreements with the Company are for no fixed term. In normal circumstances, the new agreements may be terminated by the Company giving no less than 12 months’ notice and the Director giving six months’ notice.

Executive Director Date of contract Unexpired term Notice period by Company Notice period by Director

Anthony Buckingham1,2 28 March 2008 Rolling contract 12 months 6 monthsPaul Atherton1,2 28 March 2008 Rolling contract 12 months 6 months

1 The Executive Director was appointed previously as indicated on page 10 and this became effective on the Company’s listing on the LSE on 28 March 2008.2 The contracts were amended in 2012 to reflect the new notice period by the Company. In line with best practice the notice periods in the contracts for the Executive Directors were reduced to

12 months from 24 months.

l o s s o f o f f i c e p a Y m e n t sIn the event of a change of control of the Company, if the Executive Directors resign or the Company terminates their appointment within 12 months of such an event, they will each be entitled to an immediate payment in lieu of notice of a sum equivalent to one times their annual base package. In addition, they will be entitled to a payment of Cdn$75,000 in the event they are asked to resign from the Board of HOC in any event other than as a result of a change of control. The Company also may terminate the agreements and make payments in lieu of notice.

Currently the Executive Directors’ service contracts do not provide for mitigation in the event of early termination. The Remuneration Committee has a duty to ensure that contractual terms on termination, and any payments made, are fair to the individual and the Company, that failure is not rewarded and that the duty to mitigate loss is fully recognised. The Executive Directors do not have service contracts with any Group subsidiary.

n o n - e X e c u t i v e D i r e c t o r sThe Non-Executive Directors do not have service contracts but their terms are set out in a letter of appointment. Their appointment may be terminated by each party giving three months’ notice in writing.

Michael Hibberd, Gregory Turnbull and John McLeod, being Directors of HOC, will be entitled to a payment of Cdn$75,000 in the event they are asked to resign from the Board of HOC in any event other than as a result of a change of control.

Terms of appointment and reappointment for the Non-Executive Directors are set out below:

Non-Executive Directors Date of contract Notice period Last re-election

Michael Hibberd1 28 March 2008 3 months 2013 AGMMark Erwin 1 May 2012 3 months 2013 AGMJohn McLeod1 28 March 2008 3 months 2013 AGMCarmen Rodriguez 22 March 2012 3 months 2013 AGMGregory Turnbull1 28 March 2008 3 months 2013 AGM

1 The Non-Executive Director was appointed on 18 March 2008 and this became effective on the Company’s listing on the LSE on 28 March 2008.


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a n n u a l r e p o r t o n r e m u n e r at i o n

This report has been prepared with reference to the UK Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (the “Regulations”) and meets the relevant requirements of the Financial Conduct Authority’s Listing Rules.

In preparing this report, consideration has also been given to the Code and the Association of British Insurers “Principles of Remuneration” guidelines and it is split into audited and unaudited information.

u n a u D i t e D i n f o r m at i o nr e m u n e r at i o n c o m m i t t e eThe Committee met 5 times during 2013 and the attendance record of individual Committee members is shown below.

m e m B e r s o f t h e r e m u n e r at i o n c o m m i t t e e a n D at t e n D a n c e at m e e t i n g s

Attendance at meetings (5 meetings held)

John McLeod, Chairman 5Carmen Rodriguez 5Sir Michael Wilkes1 4


The Committee was saddened by the passing of Sir Michael Wilkes in October 2013. Under the Terms of Reference for the Committee, the quorum necessary for the transaction of business is two members. The Board is considering appointing a replacement member to join the Committee.

All members of the Remuneration Committee, including John McLeod, the Committee Chairman, are considered by the Board to be independent, as explained in this Corporate Governance Report on page 11.

The Chairman of the Board, CEO and CFO provide internal supportto the Remuneration Committee and attend meetings at theCommittee’s invitation except where matters associated with theirown remuneration are being discussed.

a D v i c e t o t h e r e m u n e r at i o n c o m m i t t e eThe Remuneration Committee has access to external advice as required. During the year, the Committee continued to receive independent advice from external executive reward consultants, Hay Group, on matters under consideration by the Committee. In addition, Hay Group provided updates on market practice. Hay Group was appointed by the Remuneration Committee in 2008. It is a founding member of the Remuneration Consultants’ Group and a signatory of its code of conduct; as such, the Committee can be satisfied that the advice received is objective and independent. Hay Group’s fees for material work conducted during the year were £50,000.

The Remuneration Committee has clearly defined Terms of Reference, summarised below, which conform to the requirements of the Code and are available on the Company’s website www.heritageoilplc.com.

r e s p o n s i B i l i t i e s o f t h e r e m u n e r at i o n c o m m i t t e e

The Terms of Reference set out the responsibilities of the Remuneration Committee. These include:

– to set the remuneration policy for the Chairman, Executive Directors and senior executives;

– to assess and determine total compensation packages available to the Executive Directors;

– to monitor the remuneration of senior management other than the Executive Directors;

– to determine policy and scope for pension rights and any compensation payments;

– in determining remuneration to give due regard to the Code, UK Listing Rules and associated guidance; and

– to make recommendations to the Board for its approval, and that of shareholders, on the design of incentives and making recommendations for the grant of awards to executives under such plans.

w h at D i D t h e r e m u n e r at i o n c o m m i t t e e D o D u r i n g t h e Y e a r ?

During the year the Remuneration Committee considered the following items of business:

r e m u n e r at i o n

Approval of salary increase for Executive Directors; review of Non-Executive Director fees.

B o n u s e s

Agreed greater definition of annual bonus performance conditions; review of Hay Group recommendations concerning deferral of a proportion of annual bonus.

l o n g - t e r m i n c e n t i v e p l a n ( “ lt i p ” )

Approval of 2012 LTIP awards; review of performance of previous year LTIP awards; review of 2013 LTIP comparator group; review of proposed 2013 LTIP awards, and subsequent approval.

r e p o r t i n g a n D g o v e r n a n c e

Consideration of Terms of Reference of the Committee; approval of Remuneration Committee Report in Annual Report; consideration of AGM voting on the Remuneration Report and possible responses; discussion regarding disclosure requirements for executive remuneration.


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e X e c u t i v e D i r e c t o r s ’ r e w a r D p o l i c YIn setting the remuneration policy and total compensation package levels for Executive Directors and other senior executives, the Remuneration Committee gives consideration to the economic environment, the financial and operational performance of the Group and the remuneration policy and levels for the wider employee population. In particular, the Remuneration Committee considers how pay levels in the wider employee population compare against the market and is mindful of the pay differentials between top executives and roles at different levels in the structure. In line with our Terms of Reference, no individual is involved in setting their own pay.

B a s e pa c k a g eSalaries are reviewed annually with any increases becoming effective in the first quarter of the relevant financial year. To ensure informed decision-making, the Remuneration Committee is provided with independent benchmark data which is considered along with other factors when determining pay levels. As part of the Remuneration Committee’s review last year, the Company was compared against two pre-determined peer groups, namely UK and international oil and gas companies of a similar size and scale to Heritage.

For 2014, the Committee has recommended an increase of 2.5% of salary for Executive Directors.

The table below details the 2014 and 2013 base packages of the Executive Directors.

Name2014

base package 2013

base package Increase

Anthony Buckingham £785,700 £766,500 2.5%Paul Atherton £582,000 £567,800 2.5%

B o n u s e s pa Ya B l e f o r 2 0 1 3 p e r f o r m a n c eThe Remuneration Committee recommends the level of annual bonuses paid to the Executive Directors and in doing so considers a wide range of financial and non-financial performance indicators over the year. These include, but are not limited to, environmental, health and safety issues, the time dedicated by Directors in developing and expanding Heritage’s portfolio as well as the financial performance of the Company.

The maximum bonus available is 300% of salary and the target performance level is one third of the maximum i.e. 100% of base salary. 2013 was a strong year for Heritage in terms of financial and operational achievements with record production and cash flows. In view of the milestones reached, the Committee elected to award bonuses of 50% of the maximum. The maximum award under the bonus plan is 300% of salary, so the bonuses received by the Executive Directors were 150% of salary. Our bonus policy dictates that any awards over 150% of salary be deferred for 12 months and that these unvested awards be subject to clawback, at the committee’s discretion. The 2013 awards were not above 150% of salary, therefore no part was deferred.

During the year, the annual bonus plan was reviewed and it was decided to give increased definition to the performance measures used. Three categories were identified as encompassing the measures that could be used to determine company performance and, therefore, affect annual incentive payments: value creation, operational performance and safety, and personal objectives. The Company determines the relative weighting of each measure at the start of the year.

For 2014, the weightings of the performance measures have been allocated as follows:

– Value creation/strategic delivery 40% – Operational performance and safety 35% – Personal objectives 25%

The Remuneration Committee retains discretion to amend any awards in the event of exceptional circumstances.

l o n g - t e r m i n c e n t i v e sIn order to align the executives’ interests with those of the long-term success of the Company and value delivered to shareholders, the Company makes awards of long-term equity-based incentives to those employees with the ability to influence shareholder value.

Long-term incentives are made under the 2011 LTIP, except in the case of Anthony Buckingham, who continues to hold his LTIP award under the 2008 LTIP on amended performance conditions, revised to reflect substantially the same terms and conditions as those under the rules of the 2011 LTIP.

The rules of the 2011 LTIP allow for annual awards of performance shares of up to 300% of base package to be made to Executive Directors. To date awards of 275% have been made. Awards vest subject to three-year TSR performance measured against a bespoke group of peer companies. There is an additional holding period of one year following the vesting of any awards. The comparator group companies are selected on the basis of their size and scale of operations, market capitalisation and geographic spread. They are reviewed annually.

During 2013 the Remuneration Committee reviewed the LTIP peer group and made one amendment to the constituents of this group; the full list of comparator organisations can be seen below.

Aminex PLC Maurel et Prom

Afren Plc Petroceltic International plc

Bowleven plc Premier Oil plc

Cadogan Petroleum PLC RusPetro plc

DNO International Asa Salamander Energy plc

EnQuest PLC SOCO International plc

Exillon Energy plc Sterling Energy Plc

Hardy Oil & Gas Plc Tullow Oil plc

JKX Oil & Gas Plc Eland Oil & Gas Plc


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D i r e c t o r s ’ i n t e r e s t s i n s h a r e o p t i o n s h e l D u n D e r t h e r e p l a c e m e n t s c h e m e HOC implemented The Heritage Oil Corporation Plan (the “Original Plan”) following approval by its shareholders in 2004 and granted options under the Original Plan to its Executive and Non-Executive Directors and other employees and consultants at that time. The grant of options included all the then current Executive and Non-Executive Board members and so did not include Carmen Rodriguez and Mark Erwin. As a result of the Group reorganisation and subsequent listing on the Main Market of the LSE, all the Board members were entitled to retain their options under the Original Plan and exchange them for options to acquire ten Ordinary Shares of the Company for every one Common Share they held under option. The Original Plan was then cancelled and, on 18 March 2008, the Company adopted The Heritage Oil Limited 2008 Replacement Share Option Scheme (the “Replacement Scheme”) which is substantially in the same form as the Original Plan. The purpose of the Replacement Scheme is to act as a replacement to the Original Plan and to honour the options granted under it by granting holders the option to purchase Ordinary Shares. The Replacement Scheme is administered by the Board and no further options will be granted under it.

The maximum number of Ordinary Shares which may be issued under the Replacement Scheme was 24,545,340, being the equivalent number of shares required to replace the options granted under the Original Plan that were still in existence prior to their cancellation.

All options under the Replacement Scheme have now vested and were exercised when the Company came out of a close period in September 2013.

p e n s i o n s a n D o t h e r B e n e f i t sExecutive Directors receive pension contributions of an annual amount equal to 10% of their base package into a personal pension scheme nominated by the executives.

They also receive private medical insurance, life insurance and school fees for dependents. They also receive housing allowances of £100,000 (Anthony Buckingham) and £77,500 (Paul Atherton).

No changes have been made to the current arrangements in respect of pensions and other benefits for 2014.

n o n - e X e c u t i v e D i r e c t o r sFee levels for Non-Executive Directors remain at 2013 levels and are set out below. Actual fees paid for the year ended 31 December 2013 are shown in the Single Total Figure table on page 33.

Non-Executive Directors 2014 2013

Michael Hibberd £126,000 £126,000Mark Erwin £84,000 £84,000John McLeod £84,000 £84,000Carmen Rodriguez £84,000 £84,000Gregory Turnbull £84,000 £84,000Sir Michael Wilkes1 N/A £84,000Additional fee for each day worked in excess of the agreed 20 days per annum £2,000 £2,000




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a u D i t e D i n f o r m at i o ns i n g l e t o ta l f i g u r e f o r r e m u n e r at i o nFor the year ended 31 December 2013

Base package/fees1 £’000

Benefits2 £’000

Annual bonus £’000

Long-term incentives4 £’000

Pensions £’000

Total £’000

2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012

Executive DirectorsAnthony Buckingham 766.5 744.2 112.5 117.1 1,149.8 2,232.63 – – 76.7 74.4 2,105.5 3,168.3Paul Atherton 567.8 551.3 223.7 179.0 851.7 1,653.83 – – 56.8 55.1 1,700.0 2,439.2

Non-Executive DirectorsMichael Hibberd 126.0 126.0 – – – – – – – – 126.0 126.0Mark Erwin 84.0 56.0 – – – – – – – – 84.0 56.0John McLeod 84.0 84.0 – – – – – – – – 84.0 84.0Carmen Rodriguez 84.0 67.3 – – – – – – – – 84.0 67.3Gregory Turnbull 84.0 84.0 – – – – – – – – 84.0 84.0Sir Michael Wilkes5 84.0 84.0 – – – – – – – – 84.0 84.0

Total 1,880.3 1796.8 336.2 296.1 2,001.5 3,886.4 – – 133.5 129.5 4,351.5 6108.8

1 Base package refers to fixed, guaranteed cash amounts paid for work performed, irrespective of performance and exclusive of benefits-in-kind. 2 Shows the taxable value of benefits, comprising private medical insurance, life insurance, school fees and housing allowances of £100,000 (Anthony Buckingham) and £77,500 (Paul Atherton),

but excludes pension contributions. 3 As bonus awards were not above 150% of salary no part was deferred. Bonuses paid in respect of 2013 were subject to the performance conditions detailed in the Company’s 2012 Annual Report.

Bonuses are based on exceptional financial, operational and non-financial achievements. Heritage achieved record production and cash flows in 2013 and, in view of this, it was agreed to award bonuses of 150% in respect of the year. From 2014, there will be greater definition of the performance measures and weightings of the annual bonus: value creation and strategic delivery, operational performance and safety, and personal objectives. Further detail is provided in the Remuneration Policy Report.

4 Long-term incentive values show awards that have vested in 2013. Awards granted in the year are shown in the next section of the report. 5 Sir Michael Wilkes died in October 2013.

s h a r e h o l D i n g g u i D e l i n e sAt present the Committee has not established formal Executive Director shareholding guidelines as, in the opinion of the Committee, these would be superfluous at this time. The Executive Directors hold a substantial number of shares in the Company and have interests in shares under various share incentive arrangements as shown in the table below as at 29 April 2014:

Anthony Buckingham Paul Atherton

Shares held 94,669,850 4,015,000Interest in shares under the 2011 LTIP schemes1 3,617,757 2,679,820

Total number of shares 98,287,607 6,694,820

Notional value of shares at year end, £2 146,202,817 9,958,545Total value as a multiple of base package 191 times 17.5 times

1 Subject to performance conditions. Shares will vest subject to three year TSR performance conditions measured against a bespoke group of peer companies (see page 31).2 Based on a year-end share price of 148.75 pence, assuming full vesting of outstanding LTIP awards.


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lt i p p e r f o r m a n c e s h a r e sConditional awards of performance shares were granted to Executive Directors on 22 June 2013 as shown below.

e X e c u t i v e D i r e c t o r s ’ i n t e r e s t s i n p e r f o r m a n c e s h a r e s

Date of award Earliest vesting

Share price at date of

grantAwarded in

the period2Vested in

the period

Face value of awards at grant

date3

Percentage of award

vesting at threshold4

Lapsed in the period

Number of shares as at

31 December 2013

Number of shares as at

1 January 2013

Anthony Buckingham1 20 June 2011 20 June 2014 212.8p – – – – – 915,913 915,913

19 June 2012 19 June 2015 129.3p – – – – – 1,582,765 1,582,76522 June 2013 22 June 2016 133.0p 1,119,079 – 1,488,375 25.0% 1,119,079 –

Paul Atherton1 20 June 2011 20 June 2014 212.8p – – – – – 678,454 678,45419 June 2012 19 June 2015 129.3p – – – – – 1,172,419 1,172,41922 June 2013 22 June 2016 133.0p 828,947 – 1,102,500 25.0% – 828,947 –

1 Anthony Buckingham continues to hold his LTIP award under the 2008 LTIP on amended performance conditions, revised to reflect substantially the same terms and conditions as those under the rules of the 2011 LTIP and as set out on page 31 of this report.

2 Size of the awards are determined by the Remuneration Committee with reference to the Company’s share price performance in the year, using discretion within the rules of the plan.3 Face value has been calculated using the share price at the date of grant 22 June 2013 which was 133p.4 Minimum vesting under the plan is 0%. Threshold vesting is the minimum level at which any part of the awards are paid out and occurs when Heritage achieves median TSR relative to the

comparator group listed on page 31. There is straight line vesting from median to upper quartile performance at which point awards vest in full.

D i r e c t o r s ’ i n t e r e s t s i n s h a r e o p t i o n s h e l D u n D e r t h e r e p l a c e m e n t s c h e m e

DirectorAt date

of grant

At 1 January

2013Options

exercised

At 31 December

2013Exercise

prices Vesting periods Expiry date

Michael Hibberd 750,000 750,000 750,000 – £1.43 14 Dec 06–14 Dec 08 14 Dec 111

250,000 250,000 250,000 – £2.45 21 Dec 07–21 Dec 09 21 Dec 12

Anthony Buckingham 9,129,510 9,129,510 9,129,510 – £1.43 14 Dec 06–14 Dec 08 14 Dec 111

500,000 500,000 500,000 – £2.45 21 Dec 07–21 Dec 09 21 Dec 12

Paul Atherton 1,125,000 1,125,000 1,125,000 – £1.43 14 Dec 06–14 Dec 08 14 Dec 111

500,000 500,000 500,000 – £2.45 21 Dec 07–21 Dec 09 21 Dec 12

Gregory Turnbull 300,000 300,000 300,000 – £1.43 14 Dec 06–14 Dec 08 14 Dec 111

150,000 150,000 150,000 – £2.45 21 Dec 07–21 Dec 09 21 Dec 12

John McLeod 300,000 125,000 125,000 – £1.43 14 Dec 06–14 Dec 08 14 Dec 111

150,000 150,000 150,000 – £2.45 21 Dec 07–21 Dec 09 21 Dec 12

1 The Company was in a close period between summer 2011 and summer 2013 with the result that the term of options which expired had been extended until shortly after the close period lifted in September 2013. Please see page 32 for further information.

Notes:On exercise of each option, the holder was entitled to receive the 100 pence per share dividend paid in August 2010.The final exercise prices were converted into GB pounds sterling on the Company’s reorganisation and listing on the Main Market of the LSE using the exchange rate in effect on that date.

The table below sets out the direct and indirect interests of the Directors in the share capital of the Company as at 29 April 2014:

Director

Number of Ordinary

Shares1

Percentage of voting share

capital

Michael Hibberd 1,375,000 0.49%Anthony Buckingham2 94,669,850 34.06%Paul Atherton 4,015,000 1.44%Gregory Turnbull 1,000,070 0.36%John McLeod 80,000 0.03%Mark Erwin 0 0.00%Carmen Rodriguez 0 0.00%

1 Includes Exchangeable Shares. 2 Anthony Buckingham’s Ordinary Shares include the Ordinary Shares held by Albion as at the date of this document, a company owned and controlled by Anthony Buckingham.



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There have been no changes in the interests of Directors in the share capital of the Company between the end of the financial year and 29 April 2014.

No options were granted or lapsed during the year under the Replacement Scheme.

The closing share price on 31 December 2013 was 148.75 pence. During the year the highest closing share price was 224.70 pence per share and the lowest closing price was 121.70 pence per share.

a D D i t i o n a l i n f o r m at i o nInformation in this section is not required to be audited.

r e l at i v e s p e n D o n c h i e f e X e c u t i v e ’ s r e m u n e r at i o nPerformance graphThe following graph shows the Company’s TSR over the five year period to 31 December 2013, against the FTSE 250 Index. The Remuneration Committee has selected the FTSE 250 Index as it represents a broad equity market index and therefore provides a good indication of the Company’s general performance.

t s r

Dec 13Dec 12Dec 11Dec 10Dec 09Dec 08

300

250

200

150

100

50

Heritage Oil Plc FTSE 250

Notes:Heritage’s TSR assumes reinvestment of the 100 pence per share special dividend paid in August 2010.

The below table gives details of the Chief Executive Officer’s remuneration during the past five years.

Financial Year CEO Total Pay

CEO Annual Bonus (as a

percentage of max bonus

opportunity)

CEO LTIP payout

(percentage of shares

vesting against maximum LTI

opportunity)

2013 £2,105,500 50% 0%2012 £3,168,300 100% 0%2011 £1,434,800 25% 0%2010 £2,632,400 82% 0%2009 £1,896,300 50% 0%

p e r c e n ta g e c h a n g e i n r e m u n e r at i o n f o r c e o a n D e m p l o Y e e sThe table below shows the percentage change in remuneration for the CEO and the average employee from 2012 to 2013.

Base packagepercentage

change

Benefits percentage

change

Annual bonus percentage

change

Chief Executive Officer 3.0% (3.9)% (48.5)%Average employee1 6.0% 8.0% (50.0)%

1 Data for the average salaried employee for Heritage Oil Plc, thereby excluding contractors.

r e l at i v e i m p o r ta n c e o f s p e n D o n pa Y

Remuneration paid to all employees

£million

Distributions to shareholders

through dividends and share buyback

2013 28.6 02012 32.2 0

s tat e m e n t o n v o t i n g at 2 0 1 3 a g mAt the Company’s 2013 AGM, the percentage of votes cast in respect of the Directors’ Remuneration Report were as follows:

– Votes in favour: 84% – Votes against: 16% – Votes withheld: under 1%

(Figures to nearest whole number).

We remain committed to shareholder dialogue and take an active interest in voting outcomes. If there are any particular shareholders opposed to our policy, we would endeavour to meet with them, as appropriate, to understand any issues they may have.

This report was approved by the Board on 29 April 2014 and signed on its behalf by:

j o h n m c l e o Dc h a i r m a n o f t h e r e m u n e r at i o n c o m m i t t e e2 9 a p r i l 2 0 1 4


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R e p o R t o f t h e a u d i t c o m m i t t e e

a d d R e S S f R o m t h e a u d i t c o m m i t t e e c h a i R m a N The Audit Committee has had another busy year keeping under review items from the past, such as the ongoing tax dispute in Uganda, and the future with the consolidation of the OML 30 Licence in Nigeria into the Group’s operations. Following on from the acquisition of this licence the continued focus of the Committee has been to ensure that Group policies and procedures are embedded into the Nigerian operations and that the Nigerian assets are properly accounted for. Internal controls and procedures have been high on the items considered during the year. The Audit Committee has expressed its view on the importance that Company policies, such as its Anti-Bribery and Corruption Policy, are adhered to and compliance is an active process which goes beyond a paper exercise.

The Committee has taken on board the requirements to report more extensively on any significant issues raised by the audit details of which are provided below.

Expected changes in the regulatory environment such as in respect of going concern disclosures will be monitored during the year by the Audit Committee.

The report below sets out details of the Audit Committee’s responsibilities, how it operated during the year, business reviewed at meetings and information on the audit process and external auditors.

m i c h a e L J . h i B B e R dc h a i R m a N , a u d i t c o m m i t t e e

m e m B e R S o f t h e a u d i t c o m m i t t e e a N d at t e N d a N c e at m e e t i N g S


Michael Hibberd, Chairman 4Carmen Rodriguez 4John McLeod 4Sir Michael Wilkes1 3


All members of the Audit Committee, including the Chairman, are independent Non-Executive Directors. Other members of the Board may be invited to attend meetings as and when appropriate. KPMG Audit Plc regularly attend Audit Committee meetings and the Audit Committee also meets with KPMG Audit Plc, the external auditors, without management present from time to time.

The Chairman of the Company, Michael Hibberd, is a member of, and chairs, the Audit Committee, which is not in line with the recommendations made in the Code. However, the Board continues to believe that his recent and relevant financial experience, including his experience in corporate financial matters, is invaluable in supporting the Audit Committee in performing its role.

The Terms of Reference of the Audit Committee, as summarised below, were reviewed and updated during early 2014. The amendments included updating the Committee’s remit for new requirements introduced in changes to the Code. The review also involved consideration of developments in governance matters and good practice in other listed companies. The Terms of Reference of the Committee are available on the Company’s website www.heritageoilplc.com.


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R e S p o N S i B i L i t i e S o f t h e a u d i t c o m m i t t e e

The Terms of Reference set out the responsibilities of the Audit Committee. These include:

– to monitor the integrity of the financial statements, including annual and half-yearly reports and any other formal announcement relating to the Group’s financial performance;

– to review and challenge, where necessary, the consistency of and any changes to accounting policies, methods used to account for significant or unusual transactions, whether the Company has followed appropriate accounting standards and clarity of disclosures in the Company’s financial reports;

– where requested by the Board, to review the content of the Annual Report and Accounts and advise the Board on whether, taken as a whole, it is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy;

– to review and approve the annual audit plan; – to review the findings of the audit with the external auditor; – to review the Group’s budgets; – to consider the establishment of an internal audit function; – to review the Group’s internal control procedures and risk

management systems, including review of the Group’s risk matrix;

– to oversee the relationship with the external auditors and review the effectiveness of the external audit process;

– to make recommendations to the Board on the appointment, review and removal of external auditors and approve the external auditors’ remuneration;

– oversee the selection process for new auditors and ensure the external audit contract is put out to tender at least once every ten years;

– to assess annually the external auditors’ independence taking into account relevant professional and regulatory requirements including reviewing the policy on provision of non-audit services;

– to review whistle-blowing arrangements and the Company’s procedures to prevent bribery and corruption;

– to review a report to shareholders on its activities to be included in the Company’s Annual Report; and

– to report to the Board on its proceedings, identifying any matters in respect of which it considers that action or improvement is needed and making recommendations as to improvements needed.

h o W t h e a u d i t c o m m i t t e e o p e R at e SThe Audit Committee meets formally at least twice a year to discharge its responsibilities and also engages in numerous ad hoc discussions. The Audit Committee has a planned annual cycle with scheduled meetings fixed at appropriate times during the financial reporting calendar. The agenda is agreed with the Audit Committee Chairman and includes a number of standard items, such as consideration of the financial statements and the audit process. Other items may be added to the agenda by the Chairman, CFO, auditors or other members of the Committee. An aide memoire checklist is used to ensure that the Committee fully covers its remit during the year.

The Chairman ensures that there is adequate time for discussions and members receive full briefing papers before each meeting.

The performance of the Audit Committee was reviewed during the year as part of the external Board performance review and it was concluded that the operation of the Audit Committee continued to remain effective.

W h at d i d t h e a u d i t c o m m i t t e e d o d u R i N g t h e Y e a R ?

During the year the Audit Committee considered the following main items of business:

f i N a N c i a L a N d B u S i N e S S R e p o R t i N g

Potential changes to accounting methods in respect of Nigerian assets following proposed changes to accounting standards; Consideration of consolidation of Shoreline and impairments in Mali and Tanzania; Review of related party transactions; Consideration of financial statements; Approval of the Annual Report; and Review of operational activities.

f i N a N c e

Review of working capital report, Consideration of reserve based lending facility, reserve cash positions, the balance sheet, inventory balances and cash flow; Proposed restructuring of Letter of Credit; Changes to IFRS.

R i S K a N d i N t e R N a L c o N t R o L

Review of Ugandan tax dispute; Discussions about business risks and compliance with the UK Code; Review of Whistle-blowing Policy and any reports; Confirmation of focus on operations in Nigeria to ensure it is being managed in accordance with Company policies.

a u d i t a N d e X t e R N a L a u d i t o R

Consideration of audit findings, key accounting and audit matters; Approval of Representation Letter and consideration of engagement letter; Review of audit fees; Consideration of independence of the external auditor; Retirement of current audit partner and introduction of new audit partner; Review of Audit Plan; Discussions on internal audit function and role.

o t h e R

Review of chairmanship of the Committee; Adoption of Company policies by Shoreline; Consideration of general, administrative and Executive Directors’ expenses; Review of Audit Committee Terms of Reference.


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a u d i t o R Si N t e R N a L a u d i tAt present there is no internal audit function established. The Committee reviewed the need for an internal audit function in 2012 and again in 2013. The Committee advised the Board that it believed the Company maintains current control systems that are effective and that management oversight is sufficient to highlight any areas of weaknesses in the financial reporting systems. The need for an internal audit function is reviewed at least annually.

a u d i t p R o c e S S a N d a u d i t i N f o R m at i o NThe auditors prepare an Audit Plan for their review of the full year and half year financial statements. The Audit Plan sets out the scope of the audit, areas to be targeted and audit timetable. This plan is reviewed and agreed in advance by the Audit Committee.

Following their review the auditors presented their findings to the Audit Committee for discussion. No major areas of concern were highlighted by the auditors during the year although they drew attention to the uncertainty surrounding the outcome of the ongoing tax dispute in Uganda. Significant issues considered in relation to the financial statements include the Shoreline transaction, the disputes with the Ugandan government and Tullow Oil plc in relation to disposal of the Group’s Ugandan Assets and the valuation of intangible exploration assets and property, plant and equipment. Actions taken to address these issues were to ensure that they were accounted for appropriately in accordance with EU IFRS and fully disclosed in the accounts.

R e p o R t o f t h e a u d i t c o m m i t t e e c o N t i N u e d

S i g N i f i c a N t a u d i t i S S u e S ta B L e f o R a u d i t c o m m i t t e e R e p o R t

Significant Issue Description Audit Committee Assessment and Conclusion

ta X L i t i g at i o N The ongoing tax dispute in Uganda in relation to disposal of the Group’s Ugandan Assets in 2010 remains a matter that the Group is still pursuing.

As an award was granted and paid to Tullow Oil plc in 2013, it was decided by the Committee and Management that it would be prudent to recognise a bad debt provision against the receivable due from the Ugandan Revenue Authority. Therefore, amounts have been paid or fully provided for in the 2013 balance sheet.

t h e c a R R Y i N g v a L u e o f S h o R e L i N e R e L at e d p R o p e R t Y, p L a N t a N d e q u i p m e N t ( “ p p & e ” )

Assessment of the carrying value of the assets in Nigeria to ensure that there are no indicators for impairment as a result of political risk in Nigeria, fluctuations in price or other factors.

Valuation of the assets is based upon a third party report of the reserves acquired in Nigeria. The reserves estimates which support the valuation are assessed and updated to analyse whether there are any indicators for impairment. The results are discussed and agreed with the Committee to ensure that there is agreement on the judgements made. After assessing the information, the Committee agrees with the position that there are no indicators of impairment in 2013.

v a L u at i o N o f i N ta N g i B L e a S S e t S

The valuations of intangible exploration assets and property, plant and equipment are subject to judgements and assumptions made by management.

Management prepares assessments of the carrying value of the intangible exploration assets. The Committee reviews and assesses the judgements made to ensure that the value in the balance sheet can be supported. For 2013, after assessing and reviewing the material, the Committee concurred with the management view that no impairments were required in 2013.

R e p o R t i N g i N R e S p e c t o f t h e R e S u Lt S o f S h o R e L i N e N at u R a L R e S o u R c e S L i m i t e d ( “ S h o R e L i N e ” )

From January 2014, IFRS 11 Joint Arrangements is effective. The implications of this for Heritage is that Shoreline will no longer be proportionally consolidated into the results of Heritage but it will require to be equity accounted, as a one line item rather than being proportionally consolidated on a line by line basis.

A number of proposals were discussed. It was agreed to give more detailed information about Shoreline and its financial performance in the notes to the Financial Statements. The Committee concurred with this approach.


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Significant Issue Description Audit Committee Assessment and Conclusion

a S S e t R e t i R e m e N t o B L i g at i o N ( “a R o ” )

Shoreline and the Nigerian operator of OML 30 are required to restore the land covered by the licence to its original state at the end of the licence period. The ARO represents the Group’s estimated share of the future restoration costs at net present value.

The Committee assessed the cashflow estimates and assumptions used by management to calculate the obligation. It confirmed that the cash flow assumptions are based on the most up to date third party information. It concluded that the estimated future costs held in the financial statements at net present value are appropriate.

c o m p L e t e N e S S o f c o S t S a v a i L a B L e f o R S h o R e L i N e ’ S i N t e R e S t i N o m L 3 0

Shoreline has a 45% interest in OML 30 and the Group consolidates 90% of Shoreline into its results. The results of Shoreline are material for the Group. Shoreline is a non-operator and therefore reliant on the information provided by the operator.

The Committee clearly outlined its requirement that the records for Shoreline’s interest in OML 30 should be accurate and as complete as possible on the progress of that requirement. Shoreline has put in extensive procedures and controls and built good relationships with the operator.

c o N S o L i d at i o N o f S h o R e L i N e p e R c e N ta g e t o B e a p p L i e d

Change of accounting for the share in Shoreline by the long-term economic interest of 90%.

Fourteen months after the acquisition of the interest in OML 30, the Committee decided that 90% more accurately reflects the long-term interest in Shoreline and represented a more prudent approach to accounting for the operations. Therefore, it concurred with the decision to recognise the eventual economic rights of 90% now and accounting for the additional 7.5% initially due separately. This change in policy has led to a restatement of 2012 numbers.

a c c o u N t i N g f o R ta X The Group is subject to tax in certain territories that it operates. Provisions made are subject to review and confirmation by government.

Tax provisions are based upon the latest information available to the Company and advice from external tax advisers. The provisions and underlying assumptions are discussed with the Committee in order that they can monitor the provisions made to ensure it does represent the best estimate available.


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e X t e R N a L a u d i t o R S a N d a u d i t o R i N d e p e N d e N c eThe Audit Committee and Board recognise the importance of the independence and objectivity of the Group’s external auditors, KPMG Audit Plc, when performing their role in the Group’s reporting to shareholders. The Audit Committee has in place policies on:

– the independence and objectivity of the external auditor; – employment of former employees of the external auditor; and – use of the external auditors for non-audit services.

These policies are reviewed regularly to ensure they remain in line with ethical standards published by the Accounting Practices Board and best practice with appropriate amendments made.

The Audit Committee’s annual review of the independence of the external auditors includes consideration of information provided by the external auditors on policies and processes for maintaining independence and monitoring compliance with current regulatory requirements, including those regarding the rotation of audit partners and staff. The external auditors are required to rotate the audit partner responsible for the Group audit every five years and the current audit partner had served for five years. Consequently a new audit partner was put in place in 2013. In addition, in its assessment of the auditors’ independence, the levels of non-audit services provided by the external auditors were reviewed by the Audit Committee.

As well as considering independence and objectivity of the external auditor, their overall performance and effectiveness is reviewed regularly by the Audit Committee. This review considers the audit planning process, quality of the audit report, feedback from management and from KPMG Audit Plc as part of their own control systems.

The policy on provision of non-audit services to the Company by the external auditor sets down which non-audit services it would be unacceptable for the auditor to provide. These include:

– preparation of accounting records and financial statements that will be subject to external audit;

– actuarial services; – investment advice; – secondments to management or financial reporting positions

that involve decision making; – advice to the Remuneration Committee; and – valuation services.

Proposals for the external auditors to carry out all other non-audit services are pre-approved by the Audit Committee to ensure independence of the external auditors is not impaired. Other accounting firms are used for the provision of non-audit services wherever possible except where the knowledge and expertise of the external auditors means that it is more efficient and effective for them to carry out the work. This is on the overriding principle that the external auditors’ independence will remain unaffected. In 2012 non-audit services included fees for transaction services which largely related to the acquisition of an interest in OML 30, Nigeria, and were reviewed by the Audit Committee.

Fees billed by KPMG Audit Plc, the Company’s auditors and its associates, during 2012 and 2013, are summarised below:

2013 $

2012 $

Audit and audit-related servicesGroup audit of annual statements and review of interim statements 371,779 300,643Audit of subsidiary financial statements 127,724 49,555

499,503 350,198

Non-audit servicesTax compliance 30,335 15,854Advisory services 84,782 41,884Transaction services1 – 1,244,936

115,117 1,302,674

1 The majority of 2012 costs related to the acquisition of an interest in OML 30.

The current auditors, KPMG Audit Plc, have been the Company’s auditors since 2008, when the Company listed on the LSE, and previously were auditors to HOC.

Having reviewed the independence and effectiveness of the auditors and being satisfied that the auditors remain independent and effective in their role, the Audit Committee has not considered it necessary to carry out a tender process this year. The Audit Committee therefore has recommended to the Board that the existing auditors, KPMG Audit Plc, be reappointed. KPMG Audit Plc have expressed their willingness to continue as auditors. Ordinary resolutions to reappoint KPMG Audit Plc as auditors of the Company and authorise the Directors to set their remuneration will be proposed at the forthcoming AGM. The Company will comply with the Code requirement for the external audit contract to be put out to tender at least once every ten years. If felt appropriate by the Audit Committee the process will be carried out at more frequent intervals.

R e p o R t o f t h e a u d i t c o m m i t t e e c o N t i N u e d


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R e p o R t o f t h e N o m i N at i o N c o m m i t t e e

m e m B e R S o f t h e N o m i N at i o N c o m m i t t e e a N d at t e N d a N c e at m e e t i N g S


Michael Hibberd, Chairman 2Anthony Buckingham 2Sir Michael Wilkes1 2


The majority of the members of the Nomination Committee were independent Non-Executive Directors until the death of Sir Michael Wilkes. External advisers may also be invited to attend meetings as and when appropriate. The Nomination Committee has the power to request the attendance of any other Director or member of management, for all or part of any meeting, as may be considered appropriate by the Chairman of the Committee. The Nomination Committee meets formally at least once a year and also engages in numerous ad hoc discussions.

The Terms of Reference of the Nomination Committee, as summarised below, were reviewed during 2013. Part of that review involved consideration of developments in governance matters and good practice in other listed companies. The Terms of Reference of the Committee are available on the Company’s website www.heritageoilplc.com.

R e S p o N S i B i L i t i e S o f t h e N o m i N at i o N c o m m i t t e e

The Terms of Reference set out the responsibilities of the Nomination Committee. These include:

– to review the structure, size and composition (including the balance of knowledge, skills and experience) of the Board in order to recommend changes to the Board and to ensure the orderly succession of Directors;

– to give full consideration to succession planning for Directors and other senior executives;

– to identify, evaluate and recommend candidates for appointment or reappointment as Directors taking into account the challenges and opportunities facing the Company and the need for sector and gender representation;

– to review outside directorships and time commitments of Non-Executive Directors;

– to ensure that on appointment Non-Executive Directors receive a formal letter of appointment setting out what is expected of them in terms of time commitment, Committee service and involvement outside Board meetings;

– to make recommendations to the Board on suitable candidates for the Senior Independent Director and membership of the Audit and Remuneration Committees, in consultation with the Committee Chairmen; and

– to make recommendations to the Board annually on the re-appointment of any Non-Executive Directors, giving due regard to their performance and ability to continue to contribute to the Board.

a p p o i N t m e N t p R o c e d u R eThe Nomination Committee ensures, amongst other things, that there is a formal, rigorous and transparent procedure for the appointment of new Directors. Recommendations are made objectively taking into account the balance of skills, knowledge and independence of a candidate. The Nomination Committee will ensure that candidates from a wide range of backgrounds are considered and take into account the diversity and gender make-up of the Board. It is recognised that use of outside advertising or external search consultants will produce a wider range of candidates and the Committee may use these to facilitate the recruitment process as appropriate.

During the year the Nomination Committee discussed and considered the make-up and skill set of the Board. The Committee also took into account the need for diversity and gender mix on the Board and it was important that any candidate could demonstrate that they had sufficient time to dedicate to their role. Towards the end of the year the Committee initiated a search for a replacement for Sir Michael Wilkes.

An external search consultancy will be used for Board appointments where it is believed this will result in obtaining the best quality and mix of candidates. However, given the international nature of the Company’s operations and its very specific requirements it was not felt appropriate to use an external search consultancy or open advertising for recruiting the last Board appointments made in 2012. Instead, recommendations were sought through an extensive network of contacts. A number of candidates from a wide range of backgrounds were considered by the Committee and a short list prepared. Of these, the Nomination Committee recommended Carmen Rodriguez and Mark Erwin for appointment as Non-Executive Directors.

d i v e R S i t Y a N d g e N d e RThe Nomination Committee supports the importance of having diversity of thought and representation on its Board. However, in terms of gender, the Company operates in an environment with low representation of women at all levels of the industry. In some countries of operation cultural differences in particular mean that women are under-represented in the workforce. In order to address this, the Company operates equal opportunity policies in all its areas of activity and seeks to encourage the employment of women. The aim is that over time, women as a percentage of the workforce will increase and lead to a larger pool of potential talent from which to recruit to senior positions. We have developed information systems in order to collate information on female representation and pay within Heritage which will help to inform future policy developments. The first female Board member, Carmen Rodriguez, was appointed in March 2012. In addition, there are already a number of senior women in posts throughout the Group with direct lines of communication to members of the Board. The Board has discussed at some length the Davies Report and succession planning, as a result of which it will actively seek to have female candidates to consider when making Board appointments.

A diversity policy has been approved by the Board which states that the Company will work towards further female appointments to senior management positions and the Board. The Company will continue to encourage increasing diversity across operations and support equal opportunity policies across the Group.


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The Nomination Committee is responsible for the Board Diversity Policy and monitoring its progress.

W h at d i d t h e N o m i N at i o N c o m m i t t e e d o d u R i N g t h e Y e a R ?

The following main items of business were considered by the Nomination Committee during the year:

R e S u Lt S o f B o a R d e v a L u at i o N

Review of outcome of external Board Evaluation Report by Hay Group.

R e p o R t i N g

Review and approval of content of Nomination Committee Report in the Company’s Annual Report.

S u c c e S S i o N p L a N N i N g

Review of CEO succession plan and that this remained valid; review of need for further independent Non-Executive Director.

R e v i e W o f c o m p o S i t i o N o f t h e B o a R d a N d c o m m i t t e e S

Review of requirements for additional Non-Executive Director with financial skills.

o t h e R

Review and approval of Diversity Policy; Review of Remuneration Committee.

R e p o R t o f t h e N o m i N at i o N c o m m i t t e e c o N t i N u e d


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m e m B e R S o f t h e R e S e R v e S c o m m i t t e e a N d at t e N d a N c e at m e e t i N g S


John McLeod, Chairman 2Michael Hibberd 2Paul Atherton 2Brian Smith, VP Exploration 0

Under its Terms of Reference the Reserves Committee will have at least three members, at least one of which will have relevant technical experience. The Chairman will be an independent Non-Executive Director. The Reserves Committee engages in numerous ad hoc discussions and meets formally at least once a year. External advisers may also be invited to attend meetings as and when required.

The Terms of Reference of the Committee, which are summarised below, are available on the Company’s website www.heritageoilplc.com.

R e S p o N S i B i L i t i e S o f t h e R e S e R v e S c o m m i t t e e

The primary function of the Reserves Committee is to assist the Board in fulfilling its oversight responsibilities generally with respect to the oil and natural gas reserves evaluation process and public disclosure of reserves data and related information in connection with oil and gas activities. In order to do this the Committee carries out the responsibilities set out in its Terms of Reference. These include:

– to review, at least annually, the Company’s procedures relating to disclosure of information with respect to oil and gas activities, including its procedures for complying with any disclosure requirements and restrictions;

– to review annually the qualifications and independence of the independent qualified reserves evaluator(s) to be appointed or reappointed by the Board and, in the case of any proposed change in the independent qualified reserves evaluator(s), to determine the reasons for the proposed change and whether there have been any disputes between the appointed qualified reserves evaluator(s) and management of the Company;

– to review the content of a) any statement of reserves data and other information, and b) any report of the independent qualified reserves evaluator(s) and make a recommendation to the Board on approval of such information; and

– to review any public disclosure or regulatory filings with respect to any reserves evaluation and oil and gas activities.

W h at d i d t h e R e S e R v e S c o m m i t t e e d o d u R i N g t h e Y e a R ?

During the year the Reserves Committee considered the following items of business:

i N d e p e N d e N t R e S e R v e S e v a L u at o R S

Consideration of timetable for next independent report; Consideration of independent reserves auditor.

R e p o R t i N g

Review and recommendation to the Board for the approval of reserves information in the Company’s Annual Report.

o t h e R

Review of Reserves Committee’s Terms of Reference.

R e p o R t o f t h e R e S e R v e S c o m m i t t e e


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R e p o R t o f t h e a N t i - B R i B e R Y a N d c o R R u p t i o N c o m m i t t e e

m e m B e R S o f t h e a N t i - B R i B e R Y a N d c o R R u p t i o N c o m m i t t e e a N d at t e N d a N c e at m e e t i N g S


Sir Michael Wilkes, Chairman1 2Michael Hibberd 2Paul Atherton 2Mark Erwin 2


Under its Terms of Reference the Anti-Bribery and Corruption Committee will consist of at least three members, consisting of Directors or other senior management. The Chairman of the Board will not be the Chair of the Committee. The Anti-Bribery and Corruption Committee oversees the Group’s anti-bribery programme and its ethical policies and practices. The Committee meets formally at least once a year. External advisers may also be invited to attend meetings as and when required.

The Terms of Reference of the Anti-Bribery and Corruption Committee, as summarised below, were reviewed during 2013 and are available on the Company’s website www.heritageoilplc.com.

R e S p o N S i B i L i t i e S o f t h e a N t i - B R i B e R Y a N d c o R R u p t i o N c o m m i t t e e

The Terms of Reference set out the responsibilities of the Anti-Bribery and Corruption Committee. These include:

– to maintain the Company’s anti-bribery and corruption policy framework in line with best practice and the appropriate international standards and guidelines;

– to maintain the Company’s Anti-Bribery and Corruption Code of Conduct;

– to maintain the Company’s anti-bribery and whistle-blowing procedures;

– to monitor related information reported through the Company’s whistle-blowing systems and other communications mechanisms and, where necessary, make policy and systems enhancement recommendations to the Board;

– to assess and monitor bribery and corruption risks in the territories in which the Company operates and plans to operate in the future;

– to assess and monitor bribery and corruption risks relating to new projects and major transactions involving the Company;

– to foster knowledge sharing about bribery prevention around the Group, with peer group companies and interested third parties such as non-governmental organisations;

– to ensure that employees, contractors, agents and suppliers are fully aware of the Company’s anti-bribery policies and prevention systems (particularly whistle-blowing procedures); and

– to ensure that the Company’s Annual and CSR Reports and website contain information that is a fair and coherent reflection of its anti-bribery approach, policies, systems and performance.


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W h at d i d t h e a N t i - B R i B e R Y a N d c o R R u p t i o N c o m m i t t e e d o d u R i N g t h e Y e a R ?

During the year the Anti-Bribery and Corruption Committee considered the following main items of business:

R e p o R t i N g

Review and recommendation to the Board for the approval of Anti-Bribery and Corruption Report in the Company’s Annual Report.

R e g u L at i o N

Review of any changes to applicable anti-bribery and corruption legislation.

e d u c at i o N a L p R o g R a m m e S

Review of educational programmes and implementation in Nigeria.

R i S K a S S e S S m e N t

Review of Nigerian acquisition and operations in Libya.

t e R m S o f R e f e R e N c e

Review and approval of Terms of Reference.

u K B R i B e R Y a c t a N d c o d e o f e t h i c SThe Company has a zero tolerance policy to bribery which extends to employees, agents, partners and contractors.

The Company has carried out a number of actions in response to the introduction of the UK Bribery Act which became effective in July 2011. During 2013 the Company continued in its anti-bribery educational programmes and undertook an annual risk assessment. Furthermore, its anti-bribery procedures have been rolled out in Nigeria and this is also being done in Papua New Guinea.

As a result of the actions taken, the Company has developed robust bribery prevention procedures that include:

– rigorous financial management systems that aim to prevent instances of bribery;

– an established whistle-blowing system to assist employees and contractors in reporting any related concerns they may have;

– training and human resource systems to ensure employees and contractors are aware of Company procedures concerning the Code of Ethics, corporate entertaining and related policies;

– internal communications systems to disseminate and inform employees and contractors on Company policies and procedures;

– review of operations and risk assessment; – regular consultation and discussion with peer group companies,

investors, non-governmental organisations and regulatory authorities in the territories in which it operates; and

– regular review of the Company’s related policies, processes and performance by senior management, the CSR Committee, Audit Committee and Anti-Bribery and Corruption Committee.

The Anti-Bribery and Corruption Committee is aware of the need to keep the momentum of the initial launch in place. Attention in the forthcoming year will continue to be to ensure processes are properly embedded throughout the Group, training of new employees and refresher training for existing employees as appropriate. The programmes in new areas will be monitored and reviewed and adjustments made as appropriate.


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R e p o R t o f t h e c o R p o R at e S o c i a L R e S p o N S i B i L i t Y c o m m i t t e e

m e m B e R S o f t h e c S R c o m m i t t e e a N d at t e N d a N c e at m e e t i N g S


Paul Atherton, Chairman 4Anthony Buckingham 4Michael Hibberd 4Mark Erwin 4

The CSR Committee meets formally at least once a year and also engages in numerous ad hoc discussions. External advisers may also be invited to attend meetings as and when required.

The Terms of Reference of the CSR Committee, as summarised below, were reviewed during 2013 and are available on the Company’s website www.heritageoilplc.com.

R e S p o N S i B i L i t i e S o f t h e c S R c o m m i t t e e

The Terms of Reference set out the responsibilities of the CSR Committee. These include:

– to maintain the Company’s CSR Policy Framework in line with best practice and appropriate international standards and guidelines;

– to receive reports and review activities from executives and specialist groups managing CSR matters across the Company’s operation;

– to develop a framework for submission, assessment and approval of discretionary and obligatory community, social, educational and charitable expenditures undertaken by the Company worldwide;

– to prepare an annual Group CSR Report and ensure it reflects the Company’s CSR strategy, policies, systems and performance, is coherent and published in a timely manner and in accordance with best practice;

– to consider and propose an annual budget for CSR activities as part of the overall Group budget process; and

– to review the internal CSR programme of the Company and ensure it has the appropriate standing within the Company.

W h at d i d t h e c S R c o m m i t t e e d o d u R i N g t h e Y e a R ?

During the year the CSR Committee considered the following main items of business:

R e p o R t i N g

Review and recommendation to the Board for the approval of Corporate Social Responsibility Report in the Company’s Annual Report including GRI G3.1 information.

c S R p R o g R a m m e S

Review of corporate stewardship programmes; Update on progress in implementing programmes in Nigeria and Papua New Guinea.

t e R m S o f R e f e R e N c e

Review and approval of Terms of Reference.


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A P P E N D I X U K C O R P O R AT E G O V E R N A N C E C O D E

As a Premium Listed company on the LSE, the Company is subject to the UK Corporate Governance Code. The provisions of the Code, and disclosures in relation to how the Company has applied these provisions, is set out below. It is the intention that, by covering routine disclosures in this appendix concerning items that change little from year to year, the main body of the Corporate Governance Report will focus on key items of importance to the Board and Committees during the year.

R E f E R E N C E R E Q U I R E M E N T C O M M E N TA R YL O C AT I O N O f D I S C L O S U R E S

A.A.1

L E A D E R S H I PThe Role of the BoardEvery company should be headed by an effective board, which is collectively responsible for the success of the company.

The board’s role is to provide entrepreneurial leadership of the company within a framework of prudent and effective controls which enables risk to be assessed and managed. The board should set the company’s strategic aims, ensure that the necessary financial and human resources are in place for the company to meet its objectives and review management performance. The board should set the company’s values and standards and ensure that its obligations to its shareholders and others are understood and met.

These responsibilities are set out in the Schedule of Matters Reserved for the Board, which are summarised on page 11 of this report.

All directors must act in what they consider to be the best interests of the company, consistent with their statutory duties.

Directors are made aware of their statutory duties on joining the Board.

A.1.1 The board should meet sufficiently regularly to discharge its duties effectively. There should be a formal schedule of matters specifically reserved for its decision. The annual report should include a statement of how the board operates, including a high-level statement of which types of decisions are to be taken by the board and which are to be delegated to management.

A revised Schedule of Matters was reviewed and adopted early in 2012, and reviewed again in 2013.

Board procedures are well established and details of the Board’s operation are provided in this report.

Page 11

Page 15

A.1.2 The annual report should identify the chairman, the deputy chairman (where there is one), the chief executive, the senior independent director and the chairmen and members of the board committees. It should also set out the number of meetings of the board and its committees and individual attendance by directors.

Details of members of the Board and their roles are set out in this report and the table showing number and attendance at Board and Committee meetings is shown on page 14.

Attendance at Committee meetings is shown in the respective Committee Reports.

Pages 6 to 7

Pages 24 to 44


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A.1.3 The company should arrange appropriate insurance cover in respect of legal action against its directors.

The Company recognises the potential personal liabilities to which the Directors are subject and believes that it is appropriate to protect Directors from innocent errors or emissions. A Directors’ and Officers’ Liability insurance policy is maintained to provide the Directors with an indemnity under certain circumstances. This is reviewed annually. Directors are not covered where they have acted fraudulently or dishonestly.

Under the Articles, Directors are indemnified out of the assets of the Company against any loss or liability incurred by reasons of having been a Director of the Company.

A.2 Division of ResponsibilitiesThere should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision.

Michael Hibberd is the Chairman of the Board and Anthony Buckingham is the CEO.

A.2.1 The roles of chairman and chief executive should not be exercised by the same individual. The division of responsibilities between the chairman and chief executive should be clearly established, set out in writing and agreed by the board.

A summary of the separate duties of the Chairman and CEO is provided in this report.

Page 12

A.3 The ChairmanThe chairman is responsible for leadership of the board and ensuring its effectiveness on all aspects of its role.

The chairman is responsible for setting the board’s agenda and ensuring that adequate time is available for discussion of all agenda items, in particular strategic issues. The chairman should also promote a culture of openness and debate by facilitating the effective contribution of non-executive directors in particular and ensuring constructive relations between executive and non-executive directors.

The chairman is responsible for ensuring that the directors receive accurate, timely and clear information. The chairman should ensure effective communication with shareholders.

These responsibilities are reflected in the written responsibilities of the Chairman.

Page 12

A.3.1 The chairman should, on appointment, meet the independence criteria set out in B.1.1 below. A chief executive should not go on to be chairman of the same company. If, exceptionally, a board decides that a chief executive should become chairman, the board should consult major shareholders in advance and should set out its reasons to shareholders at the time of the appointment and in the next annual report.

The Chairman was considered to be independent on appointment.

A P P E N D I XU K C O R P O R AT E G O V E R N A N C E C O D E C O N T I N U E D


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A.4 Non-executive directorsAs part of their role as members of a unitary board, non-executive directors should constructively challenge and help develop proposals on strategy.

Non-executive directors should scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance. They should satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible. They are responsible for determining appropriate levels of remuneration of executive directors and have a prime role in appointing and, where necessary, removing executive directors, and in succession planning.

These responsibilities are set out in the Non-Executive Directors’ letters of appointment.

A.4.1 The board should appoint one of the independent non-executive directors to be the senior independent director. The senior independent director should be available to shareholders if they have concerns which contact through the normal channels of chairman, chief executive or finance director has failed to resolve or for which such contact is inappropriate.

After the death of Sir Michael Wilkes, a new Senior Independent Director is being sought. Details of the role of the Senior Independent Director are provided in this report.

Page 12

A.4.2 The chairman should hold meetings with the non-executive directors without the executives present. Led by the senior independent director, the non-executive directors should meet without the chairman present at least annually to appraise the chairman’s performance and on such other occasions as are deemed appropriate.

The Chairman and Non-Executive Directors met and spoke regularly during the year, and on an ad hoc basis, without the Executive Directors being present.

The Non-Executive Directors appraised the Chairman’s performance as part of the annual performance evaluation undertaken during the year.

A.4.3 Where the directors have concerns which cannot be resolved about the running of the company or a proposed action, they should ensure that their concerns are recorded in the board minutes. On resignation, a non-executive director should provide a written statement to the chairman, for circulation to the board, if they have such concerns.

The Board Charter sets out Directors’ responsibilities relating to the operation of the Board and conduct of Directors. It includes the right to ensure Directors’ concerns are recorded in Board minutes and that Non-Executive Directors, on resignation, should provide a written statement to the Chairman of any concerns.


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BB.1

E f f E C T I V E N E S SThe Composition of the BoardThe board and its committees should have the appropriate balance of skills, experience and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively.

The board should be of a sufficient size that the requirements of the business can be met and that changes to the board’s composition and that of its committees can be managed without undue disruption and should not be so large as to be unwieldy.

The board should include an appropriate combination of executive and non-executive directors (and, in particular, independent non-executive directors) such that no individual or small group of individuals can dominate the board’s decision taking.

Details of the skill sets and experience of the Directors are provided in this report, together with the split between Executive Directors, independent and non-independent Non-Executive Directors.

Pages 6 to 7

The value of ensuring that committee membership is refreshed and that undue reliance is not placed on particular individuals should be taken into account in deciding chairmanship and membership of committees.

Committee membership was reviewed by the Nomination Committee and individual committees during the year.

No one other than the committee chairman and members is entitled to be present at a meeting of the nomination, audit or remuneration committee, but others may attend at the invitation of the committee.

This is reflected in the Terms of Reference of all the Committees which may be found on the Company’s website atwww.heritageoilplc.com.

B.1.1 The board should identify in the annual report each non-executive director it considers to be independent. The board should determine whether the director is independent in character and judgement and whether there are relationships or circumstances which are likely to affect, or could appear to affect, the director’s judgement. The board should state its reasons if it determines that a director is independent notwithstanding the existence of relationships or circumstances which may appear relevant to its determination, including if the director:

– has been an employee of the company or group within the last five years;

– has, or has had within the last three years, a material business relationship with the company either directly, or as a partner, shareholder, director or senior employee of a body that has such a relationship with the company;

– has received or receives additional remuneration from the company apart from a director’s fee, participates in the company’s share option or a performance-related pay scheme, or is a member of the company’s pension scheme;

– has close family ties with any of the company’s advisers, directors or senior employees;

– holds cross-directorships or has significant links with other directors through involvement in other companies or bodies;

– represents a significant shareholder; or – has served on the board for more than nine years from

the date of their first election.

The independence of Directors is discussed in this report.

Page 11


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B.1.2 Except for smaller companies, at least half the board, excluding the chairman, should comprise non-executive directors determined by the board to be independent. A smaller company should have at least two independent non-executive directors.

There were eight Directors in total, prior to the death of Sir Michael Wilkes, for whom a replacement is being sought. The Board considers that four of the Non-Executive Directors and the Chairman are independent.

Pages 10 to 11

B.2 Appointments to the BoardThere should be a formal, rigorous and transparent procedure for the appointment of new directors to the board.

The search for board candidates should be conducted, and appointments made, on merit against objective criteria with due regard for the benefits of diversity on the board, including gender.

The board should satisfy itself that plans are in place for orderly succession for appointments to the board and to senior management, so as to maintain an appropriate balance of skills and experience within the company and on the board and to ensure progressive refreshing of the board.

These responsibilities are part of the Nomination Committee’s remit and are included in its Terms of Reference. Appointments are made on merit and the Nomination Committee considers diversity as part of this process. Succession planning is regularly discussed at Nomination Committee meetings.

Page 41

B.2.1 There should be a nomination committee which should lead the process for board appointments and make recommendations to the board. A majority of members of the nomination committee should be independent non-executive directors. The chairman or an independent non-executive director should chair the committee, but the chairman should not chair the nomination committee when it is dealing with the appointment of a successor to the chairmanship. The nomination committee should make available its terms of reference, explaining its role and the authority delegated to it by the board.

The Report of the Nomination Committee is detailed in this report.

Pages 41 to 42

B.2.2 The nomination committee should evaluate the balance of skills, experience, independence and knowledge on the board and, in the light of this evaluation, prepare a description of the role and capabilities required for a particular appointment.

The Nomination Committee will undertake a review of the skills, experience, independence and knowledge on a regular basis and prepare a description of the role and capabilities for any identified appointments.

B.2.3 Non-executive directors should be appointed for specified terms subject to re-election and to statutory provisions relating to the removal of a director. Any term beyond six years for a non-executive director should be subject to particularly rigorous review, and should take into account the need for progressive refreshing of the board.

Non-Executive Directors are appointed for specified terms subject to annual re-election by shareholders. The length of tenure of the Non-Executive Directors is set out in this report.

Page 10

B.2.4 A separate section of the annual report should describe the work of the nomination committee, including the process it has used in relation to board appointments. This should include a description of the board’s policy on diversity, including gender, any measurable objectives that it has set for implementing the policy and progress on achieving the objectives. An explanation should be given if neither an external search consultancy nor open advertising has been used in the appointment of a chairman or a non-executive director.

The Report of the Nomination Committee is detailed in this report.

Pages 41 to 42


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B.3 CommitmentAll directors should be able to allocate sufficient time to the company to discharge their responsibilities effectively.

B.3.1 For the appointment of a chairman, the nomination committee should prepare a job specification, including an assessment of the time commitment expected, recognising the need for availability in the event of crises. A chairman’s other significant commitments should be disclosed to the board before appointment and included in the annual report. Changes to such commitments should be reported to the board as they arise, and their impact explained in the next annual report.

The Nomination Committee will prepare a job specification in the event of the appointment of a new Chairman.

The Chairman’s other significant commitments are disclosed to the Board and may be found in the Directors’ biographies in this report. During the year the Chairman was appointed a director of PetroFrontier Corp as the Company’s representative.

Pages 6 to 7

B.3.2 The terms and conditions of appointment of non-executive directors should be made available for inspection. The letter of appointment should set out the expected time commitment. Non-executive directors should undertake that they will have sufficient time to meet what is expected of them. Their other significant commitments should be disclosed to the board before appointment, with a broad indication of the time involved and the board should be informed of subsequent changes.

The terms and conditions of appointment of the Non-Executive Directors are available on request.

The letters of appointment of the Non-Executive Directors set out the terms of appointment, including the agreed expected time commitment. This is then assessed as part of performance evaluation to ensure they continue to be able to devote sufficient time to their duties. The key terms of a Non-Executive Director’s letter of appointment may be found in this report.

Prior to appointment, all Directors are expected to disclose their other time commitments in order to demonstrate that they have sufficient time to fulfil their role as a Director.

Page 16

B.3.3 The board should not agree to a full time executive director taking on more than one non-executive directorship in a FTSE 100 company nor the chairmanship of such a company.

The policy on Executive Directors taking on external roles is set out in the Board Charter. It is the Company’s policy that Executive Directors are permitted to accept directorships of other quoted companies provided that they have prior permission of the Chairman. However, an Executive Director will not be permitted to take on more than one non-executive directorship of a FTSE 100 company nor the chairmanship of such a company.


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B.4 DevelopmentAll directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge.

The chairman should ensure that the directors continually update their skills and the knowledge and familiarity with the company required to fulfil their role both on the board and on board committees. The company should provide the necessary resources for developing and updating its directors’ knowledge and capabilities.

To function effectively, all directors need appropriate knowledge of the company and access to its operations and staff.

A typical induction programme used by the Company is described in this report.

All Directors are actively encouraged to question, examine and review the Group’s operations and to undertake training applicable to their roles. Non-Executive Directors develop an understanding of the views of major shareholders through various channels, including briefings by the Executive Directors and the Senior Independent Director and by information provided at Board meetings on investor relations strategy.

All Directors have the opportunity to update their skills and knowledge on a regular basis through briefings at Board meetings on issues including changes in law and regulation, corporate governance, financial reporting and operational matters.

Directors are in regular communication with senior executives through both formal and informal ad hoc meetings, to ensure an exchange of knowledge and experience between management and Directors.

Pages 12 and 16


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B.4.1 The chairman should ensure that new directors receive a full, formal and tailored induction on joining the board. As part of this, the directors should avail themselves of opportunities to meet major shareholders.

It is part of the Chairman’s written responsibilities to ensure that new Directors receive a full, formal and tailored induction on joining the Board.

Upon joining the Board a Director will participate in an induction programme covering the principles and legal and regulatory duties required of them. This training is tailored to an individual’s needs, taking into account their qualifications and experience. In addition, meetings are arranged with senior management to enable Non-Executive Directors to develop a detailed understanding of the Company’s business, its strategy and the key risks and challenges facing the Company.

Page 12

B.4.2 The chairman should regularly review and agree with each director their training and development needs.

The Chairman regularly reviews the training and development needs of Directors as part of the annual evaluation process.

B.5 Information and SupportThe board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties.

The chairman is responsible for ensuring that the directors receive accurate, timely and clear information. Management has an obligation to provide such information but directors should seek clarification or amplification where necessary.

Under the direction of the chairman, the company secretary’s responsibilities include ensuring good information flows within the board and its committees and between senior management and non-executive directors, as well as facilitating and assisting with professional development as required.

The company secretary should be responsible for advising the board through the chairman on all governance matters.

The Chairman, supported by the CEO and CFO, ensures that all Directors receive accurate, timely and clear information to support informed discussions at Board meetings.

See disclosure under B.5.2 below in relation to the Company Secretary.

B.5.1 The board should ensure that directors, especially non-executive directors, have access to independent professional advice at the company’s expense where they judge it necessary to discharge their responsibilities as directors. Committees should be provided with sufficient resources to undertake their duties.

The right of all Directors to access independent professional advice whenever it is required and at the Company’s expense is written into the Board Charter. The Terms of Reference of each of the Board Committees sets out that they must be provided with sufficient resources for them to undertake their duties.


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B.5.2 All directors should have access to the advice and services of the company secretary, who is responsible to the board for ensuring that board procedures are complied with. Both the appointment and removal of the company secretary should be a matter for the board as a whole.

Given the size of the Company, the Board feels that it is in the shareholders’ best interests not to employ a full-time Company Secretary at this stage in the Company’s development. The current Company Secretary is a corporate entity based in Jersey that deals with the normal statutory compliance for the Company. The Board and its Committees are, therefore, serviced by the Company Secretary or its nominee. The other duties that would normally be carried out by the Company Secretary, such as the provision of information flows to the Board, are dealt with by the Chairman, the CEO or CFO or their nominee. In terms of corporate governance issues, the Board is advised by McCarthy Tétrault, a firm of registered foreign lawyers and solicitors with offices in North America and in London. The Board monitors the provision of company secretarial duties and takes any action as appropriate to ensure its requirements are met. The appointment or removal of the Company Secretary is a matter for the Board as a whole.

B.6 EvaluationThe board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.

The chairman should act on the results of the performance evaluation by recognising the strengths and addressing the weaknesses of the board and, where appropriate, proposing new members be appointed to the board or seeking the resignation of directors.

Individual evaluation should aim to show whether each director continues to contribute effectively and to demonstrate commitment to the role (including commitment of time for board and committee meetings and any other duties).

B.6.1 The board should state in the annual report how performance evaluation of the board, its committees and its individual directors has been conducted.

A review of how performance evaluation has been carried out may be found in this report.

Page 17


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B.6.2 Evaluation of the board of FTSE 350 companies should be externally facilitated at least every three years. A statement should be made available of whether an external facilitator has any other connection with the company.

In 2013 the performance review was externally facilitated by Hay Group.

Page 17

B.7 Re-electionAll directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance.

B.7.1 All directors of FTSE 350 companies should be subject to annual election by shareholders. All other directors should be subject to election by shareholders at the first annual general meeting after their appointment, and to re-election thereafter at intervals of no more than three years. Non-executive directors who have served longer than nine years should be subject to annual re-election. The names of directors submitted for election or re-election should be accompanied by sufficient biographical details and any other relevant information to enable shareholders to take an informed decision on their election.

With regard to retirement and re-election of Directors, the Company is governed by its Articles, the Code and the Jersey Companies Law. Under the Articles, Directors have the power to appoint a Director to the Board during the year but any person so appointed must stand for election at the next AGM. However, in line with the Code, all Directors will retire and stand for re-election annually. Directors re-elected at the AGM will be appointed for a one-year term.

B.7.2 The board should set out to shareholders in the papers accompanying a resolution to elect a non-executive director why they believe an individual should be elected. The chairman should confirm to shareholders when proposing re-election that, following formal performance evaluation, the individual’s performance continues to be effective and to demonstrate commitment to the role.

The Notice of Annual General Meeting includes in the notes accompanying the resolutions to elect Non-Executive Directors why the Board believes that individual should be elected.


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C.C.1

A C C O U N TA B I L I T Y A N D A U D I TFinancial and Business ReportingThe board should present a balanced and understandable assessment of the company’s position and prospects.

The board’s responsibility to present a balanced and understandable assessment extends to interim and other price-sensitive public reports and reports to regulators as well as to information required to be presented by statutory requirements.

C.1.1 The directors should explain in the annual report their responsibility for preparing the annual report and accounts and state that they consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the company’s performance, business model and strategy. There should be a statement by the auditors about their reporting responsibilities.

The responsibility statements of the Directors and the Independent Auditor’s Report may be found in the Financial Statements Report.

Pages 7 to 10

C.1.2 The directors should include in the annual report an explanation of the basis on which the company generates or preserves value over the longer term (the business model) and the strategy for delivering the objectives of the company.

A full review and report on the Company’s business model and strategy may be found in the Strategic Report, which accompanies this Corporate Governance Report.

C.1.3 The directors should report in annual and half-yearly financial statements that the business is a going concern, with supporting assumptions or qualifications as necessary.

A statement on going concern may be found in the Financial Statements Report.

Page 7

C.2 Risk Management and Internal ControlThe board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. The board should maintain sound risk management and internal control systems.

The Board’s responsibilities for risk and internal control are set out in the Schedule of Matters Reserved for the Board.

C.2.1 The board should, at least annually, conduct a review of the effectiveness of the group’s risk management and internal control systems and should report to shareholders that they have done so. The review should cover all material controls, including financial, operational and compliance controls.

Details of the Group’s risk management and internal control systems may be found in this report and further details may be found in the Strategic Report.

Pages 32 to 34

C.3 Audit Committee and AuditorsThe board should establish formal and transparent arrangements for considering how they should apply the corporate reporting and risk management and internal control principles and for maintaining an appropriate relationship with the company’s auditors.

C.3.1 The board should establish an audit committee of at least three, or in the case of smaller companies two, independent non-executive directors. In smaller companies the company chairman may be a member of, but not chair, the committee in addition to the independent non-executive directors, provided he or she was considered independent on appointment as chairman. The board should satisfy itself that at least one member of the audit committee has recent and relevant financial experience.

The Audit Committee Report may be found in this report.

Pages 36 to 40


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C.3.2 The main role and responsibilities of the audit committee should be set out in written terms of reference and should include:

– to monitor the integrity of the financial statements of the company, and any formal announcements relating to the company’s financial performance, reviewing significant financial reporting judgements contained in them;

– to review the company’s internal financial controls and, unless expressly addressed by a separate board risk committee composed of independent directors, or by the board itself, to review the company’s internal control and risk management systems;

– to monitor and review the effectiveness of the company’s internal audit function;

– to make recommendations to the board, for it to put to the shareholders for their approval in general meeting, in relation to the appointment, re-appointment and removal of the external auditor and to approve the remuneration and terms of engagement of the external auditor;

– to review and monitor the external auditor’s independence and objectivity and the effectiveness of the audit process, taking into consideration relevant UK professional and regulatory requirements; and

– to develop and implement policy on the engagement of the external auditor to supply non-audit services, taking into account relevant ethical guidance regarding the provision of non-audit services by the external audit firm; and to report to the board, identifying any matters in respect of which it considers that action or improvement is needed and making recommendations as to the steps to be taken.

The Audit Committee’s Terms of Reference include these responsibilities. A summary of the Terms of Reference of the Audit Committee may be found in this report.

Page 37

C.3.3 The terms of reference of the audit committee, including its role and the authority delegated to it by the board, should be made available. A separate section of the annual report should describe the work of the committee in discharging those responsibilities.

The Terms of Reference of the Audit Committee are available on the Company’s websitewww.heritageoilplc.com.

The Report of the Audit Committee can be found in this report.

Pages 36 to 40

C.3.4 Where requested by the board, the audit committee should provide advice on whether the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the company’s performance, business model and strategy.

The Audit Committee, at the request of the Board, assessed the Annual Report and Accounts as a whole to assess whether they were fair, balanced and understandable and provides information necessary for shareholders to assess the Company’s performance, business model and strategy. The Audit Committee considered in particular the consistency between the various parts of the report, content and risk.


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C.3.5 The audit committee should review arrangements by which staff of the company may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters. The audit committee’s objective should be to ensure that arrangements are in place for the proportionate and independent investigation of such matters and for appropriate follow-up action.

A whistle-blowing policy is in operation across the Group. Any feedback from these arrangements is regularly reviewed by the Audit Committee along with the operation of the policy.

C.3.6 The audit committee should monitor and review the effectiveness of the internal audit activities. Where there is no internal audit function, the audit committee should consider annually whether there is a need for an internal audit function and make a recommendation to the board, and the reasons for the absence of such a function should be explained in the relevant section of the annual report.

Information on internal audit can be found in this report.

Page 38

C.3.7 The audit committee should have primary responsibility for making a recommendation on the appointment, re-appointment and removal of the external auditors. FTSE 350 companies should put the external audit contract out to tender at least every 10 years. If the board does not accept the audit committee’s recommendation, it should include in the annual report, and in any papers recommending appointment or re-appointment, a statement from the audit committee explaining the recommendation and should set out reasons why the board has taken a different position.

Information on the external auditors can be found in this report.

Pages 40

C.3.8 A separate section of the annual report should describe the work of the committee in discharging its responsibilities. The report should include:

– the significant issues that the committee considered in relation to the financial statements, and how these were addressed;

– an explanation of how it has assessed the effectiveness of the external audit process and the approach taken to the appointment or reappointment of the external auditor, and information on the length of tenure of the current audit firm and when a tender was last conducted; and

– if the auditor provides non-audit services, an explanation of how auditor objectivity and independence is safeguarded.

Disclosures in respect of the significant issues considered by the Audit Committee, how it has assessed the effectiveness of the external audit process and auditor objectivity and independence may be found in the Report of the Audit Committee.

Pages 36 to 40


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D.D.1

R E M U N E R AT I O NThe Level and Components of RemunerationLevels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose. A significant proportion of executive directors’ remuneration should be structured so as to link rewards to corporate and individual performance.

The performance-related elements of executive directors’ remuneration should be stretching and designed to promote the long-term success of the company.

The remuneration committee should judge where to position their company relative to other companies. But they should use such comparisons with caution, in view of the risk of an upward ratchet of remuneration levels with no corresponding improvement in performance.

They should also be sensitive to pay and employment conditions elsewhere in the group, especially when determining annual salary increases.

Disclosures relating to remuneration and the provisions of Section D of the Code may be found in the Report of the Remuneration Committee.

Pages 22 to 35

D.2 ProcedureThere should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding his or her own remuneration.

The remuneration committee should consult the chairman and/or chief executive about their proposals relating to the remuneration of other executive directors. The remuneration committee should also be responsible for appointing any consultants in respect of executive director remuneration. Where executive directors or senior management are involved in advising or supporting the remuneration committee, care should be taken to recognise and avoid conflicts of interest.

The chairman of the board should ensure that the company maintains contact as required with its principal shareholders about remuneration.

Page 24


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E.E.1

R E L AT I O N S W I T H S H A R E H O L D E R SDialogue with ShareholdersThere should be a dialogue with shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place.

Whilst recognising that most shareholder contact is with the chief executive and finance director, the chairman should ensure that all directors are made aware of their major shareholders’ issues and concerns.

The board should keep in touch with shareholder opinion in whatever ways are most practical and efficient.

Regular investor reports are made to the whole Board to ensure that any major issues raised by shareholders are reviewed.

Page 19

E.1.1 The chairman should ensure that the views of shareholders are communicated to the board as a whole. The chairman should discuss governance and strategy with major shareholders. Non-executive directors should be offered the opportunity to attend scheduled meetings with major shareholders and should expect to attend meetings if requested by major shareholders. The senior independent director should attend sufficient meetings with a range of major shareholders to listen to their views in order to help develop a balanced understanding of the issues and concerns of major shareholders.

Regular investor relation reports are made to the Board.

E.1.2 Constructive Use of the AGMThe board should use the AGM to communicate with investors and to encourage their participation.

E.2.1 At any general meeting, the company should propose a separate resolution on each substantially separate issue, and should in particular propose a resolution at the AGM relating to the report and accounts. For each resolution, proxy appointment forms should provide shareholders with the option to direct their proxy to vote either for or against the resolution or to withhold their vote. The proxy form and any announcement of the results of a vote should make it clear that a “vote withheld” is not a vote in law and will not be counted in the calculation of the proportion of the votes for and against the resolution.

Proxy forms allow shareholders to vote for or against a resolution or to withhold their vote. It is made clear on the proxy form that a vote withheld is not a vote in law and will not be counted as a vote either for or against the resolution.


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E.2.2 The company should ensure that all valid proxy appointments received for general meetings are properly recorded and counted. For each resolution, where a vote has been taken on a show of hands, the company should ensure that the following information is given at the meeting and made available as soon as reasonably practicable on a website which is maintained by or on behalf of the company:

– the number of shares in respect of which proxy appointments have been validly made;

– the number of votes for the resolution; – the number of votes against the resolution; and – the number of shares in respect of which the vote

was directed to be withheld.

The collation of proxy votes is undertaken by the Company’s Registrar, Computershare. Information on proxy voting, including votes for, against and votes withheld, are released to the market after the AGM or any general meeting. Where voting is carried out by poll, the Company releases details of the poll voting as soon as possible after the meeting.

E.2.3 The chairman should arrange for the chairmen of the audit, remuneration and nomination committees to be available to answer questions at the AGM and for all directors to attend.

All the Directors, including the chairmen of the Board Committees, attended the AGM in 2013 and it is intended will do so again in 2014.

E.2.4 The company should arrange for the Notice of the AGM and related papers to be sent to shareholders at least 20 working days before the meeting.

Formal notice of the AGM, including details of special business, is set out in the Notice of AGM and dispatched to shareholders at least 20 working days before the meeting. The Notice of AGM will also be available on the Company’s website www.heritageoilplc.com.


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C o r p o r at e G o v e r n a n C e G l o s s a r y

$ US dollars unless otherwise stateda G M Annual General Meetinga l B I o n Albion Energy Limiteda p I a specific gravity scale developed by the American Petroleum Institute for measuring the

relative density of various petroleum liquids, expressed in degreesa r t I C l e s Articles of Association of the CompanyB B l / B B l s barrel/barrelsB B l s / D o r B o p D barrels per day or barrels of oil per dayB C F billion cubic feetB o e barrels of oil equivalent1

B o e / D o r B o e p D barrels of oil equivalent per dayC o D e UK Corporate Governance CodeC o M pa n y Heritage Oil PlcC s r Corporate Social ResponsibilityD av I e s r e p o r t report issued in February 2011 concerning the representation of women on company boardsDt r Financial Conduct Authority’s Disclosure and Transparency Rulese U European UnionF C a Financial Conduct AuthorityG r o U p, H e r I ta G e the Company and all of its subsidiariesH o C o r C o r p o r at I o n Heritage Oil Corporation, incorporated in Canada and a wholly owned subsidiary

of the CompanyI F r s International Financial Reporting StandardsJ e r s e y C o M pa n I e s l a W Companies (Jersey) Law 1991K p I Key Performance Indicatorl I s t I n G r U l e s Financial Conduct Authority’s Listing Rulesl s e London Stock Exchangelt I Lost Time Injurylt I F r Lost Time Injury Frequency Ratelt I p Long-Term Incentive PlanM metresM 3 cubic metresM B B l s thousand barrelsM M B B l s million barrelsM B o e thousands of barrels of oil equivalentM M B o e millions of barrels of oil equivalentM C F thousand cubic feetM C F/ D thousand cubic feet per dayM M B t U million british thermal unitsM M s C F million standard cubic feetM M s C F/ D million standard cubic feet per dayM M s t B million stock tank barrelsn /a not applicableo M l 3 0 Oil Mining Licence 30o r I G I n a l p l a n HOC planp e t r o l e U M any mineral, oil or relative hydrocarbon (including condensate and natural gas liquids) and

natural gas existing in its natural condition in strata (but not including coal or bituminous shale or other stratified deposits from which oil can be extracted by destructive distillation)

p s a o r p s C production sharing agreement or production sharing contract

1 boes may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.


6 4

r e G U l at I o n s UK Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008

r e p l a C e M e n t s C H e M e the Heritage Oil Limited 2008 Replacement Share Option Schemes H o r e l I n e Shoreline Natural Resources Limiteds p e C I a l v o t I n G s H a r e Special Voting Share of HOCt s r Total Shareholder Returnt s X Toronto Stock Exchanget U r n B U l l G U I D a n C e FRC’s guidance on internal controlU K B r I B e r y a C t The UK Bribery Act 2010 which was introduced in July 2011U K s t e Wa r D s H I p C o D e code introduced by the FRC in July 2010 which aims to enhance the quality of engagement

between institutional investors and companies2 0 0 8 lt I p 2008 Long-Term Incentive Plan2 0 11 lt I p 2011 Long-Term Incentive Plan

C o n v e r s I o n ta B l eThe following table sets forth standard conversions from Standard Imperial Units to the International System of Units (or metric units).

To convert from To Multiply by

boe mcf 6mcf cubic metres 28.316cubic metres cubic feet 35.315bbls cubic metres 0.159cubic metres bbls oil 6.290feet metres 0.305metres feet 3.281miles kilometres 1.609kilometres miles 0.621acres hectares 0.405

C o r p o r at e G o v e r n a n C e G l o s s a r y C o n t I n U e D

H E R I T A G E O I L P L CCorporate Governance 2013

A d v I S E R S A n d F I n A n C I A L C A L E n d A R

C O M PA n Y S E C R E TA R YWoodbourne Secretaries (Jersey) LimitedOrdnance House31 Pier RoadSt Helier JE4 8PW JerseyChannel Islands

R E G I S T E R E d O F F I C E O F T H E C O M P A n YOrdnance House31 Pier RoadSt Helier JE4 8PW Jersey Channel Islands

H E A d O F F I C E A n d d I R E C T O R S ’ B U S I n E S S A d d R E S SFourth Floor Windward HouseLa Route de la Liberation St Helier JE2 3BQ Jersey Channel Islands

U K O F F I C E O F T H E C O M P A n Y34 Park Street London W1K 2JD United Kingdom

B R O K E R A n d F I n A n C I A L A d v I S E R SJ.P. Morgan Securities Limited 25 Bank StreetCanary WharfLondon E14 5JPUnited Kingdom

E n G L I S H L E G A L A d v I S E R S T O T H E C O M P A n YMcCarthy TétraultRegistered Foreign Lawyers & Solicitors 125 Old Broad Street, 26th Floor London EC2N 1ARUnited Kingdom

J E R S E Y L E G A L A d v I S E R S T O T H E C O M P A n YMourant Ozannes22 Grenville StreetSt Helier JE4 8PX Jersey Channel Islands

C A n A d I A n L E G A L A d v I S E R S T O T H E C O M PA n YMcCarthy Tétrault LLPSuite 4000421–7th Avenue SWCalgary AlbertaT2P 4K9Canada

A U d I T O R S O F T H E C O M PA n YKPMG Audit Plc15 Canada SquareCanary WharfLondon E14 5GLUnited Kingdom

R E G I S T R A R S O F T H E C O M PA n YComputershare Investor Services (Jersey) Ltd Queensway HouseHilgrove StreetSt Helier JE1 1ES Jersey Channel Islands

P R I n C I PA L B A n K E R S O F T H E C O M PA n YStandard Bank (Europe) Barclays BankInvestecBank of Scotland (Europe)

I n d E P E n d E n T P E T R O L E U M E n G I n E E R I n G C O n S U LTA n T S T O T H E C O M PA n YRPS Energy Consultants Limited309 Reading RoadHenley-on-Thames Oxfordshire RG9 1EL United Kingdom

P R E S S A G E n T SFTI Consulting200 Aldersgate Aldersgate Street London EC1A 4HDUnited Kingdom

F I n A n C I A L C A L E n d A RGroup results for the year to 31 December are announced in March/April. The Annual General Meeting is held during the second quarter. Half year results to 30 June are announced in August. Additionally, the Group will issue an Interim Management Statement between ten weeks after the beginning and six weeks before the end of each half year period.

W E B S I T E www.heritageoilplc.com

H E R I TA G E O I L P L C . C O M

H E R I T A G E O I L P L C

Fourth Floor, Windward HouseLa Route de la LiberationSt Helier JE2 3BQ JerseyChannel Islands

T: +44 (0) 1534 835 400 F: +44 (0) 1534 835 412

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