Harbour Energy : Annual Report and Accounts 2022

Harbour Energy plc

Harbour Energy's aim is to build a diversified, global independent oil and gas company, focused on safe and responsible operations, and creating value for our stakeholders.

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Strategic report

• 1 2022 highlights

• 2 Chairman's statement

• 3 Chief Executive Officer's statement

• 4 Our purpose

• 6 Meeting energy demand through the transition

• 8 Market overview

• 10 Our strategy

• 12 How we create value

• 14 Engaging with our stakeholders

• 18 Key performance indicators

• 20 Performance review

• 22 Operational review

• 30 ESG review

• 42 Our leadership team

• 44 Financial review

• 50 Risk management

• 54 Principal risks

60

Governance

• 60 Chairman's introduction

• 62 Governance at a glance

• 64 Board of directors

• 68 Audit and Risk Committee report

• 72 Nomination Committee report

• 76 HSES Committee report

• 78 Directors' remuneration report

• 100 Compliance disclosures

• 104 Directors' report

• 106 Non-financial and sustainability information statement

• 107 Statement of directors' responsibilities

108

Financial statements

• 108 Independent auditor's report

• 118 Consolidated income statement

• 119 Consolidated statement of comprehensive income

• 120 Consolidated balance sheet

• 121 Consolidated statement of changes in equity

• 122 Consolidated statement of cash flows

• 123 Notes to the consolidated financial statements

• 173 Company balance sheet

• 174 Company statement of changes in equity

• 175 Notes to the company financial statements

177

Additional information

177 UK Government payment reporting

180 Group reserves and resources

181 Worldwide licence interests

183 Glossary

186 Shareholder information

Strategic report

Governance

Financial statements

Additional information

Harbour Energy plc

Annual Report & Accounts 2022

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Chairman's statement

I am pleased to report that in its first full year as a publicly listed company, Harbour Energy has performed very strongly, and shown strength and resilience in the face of a very challenging geopolitical and economic backdrop that included extreme price volatility and government intervention in markets.

The energy sector has had an extremely eventful three years. Before the pandemic struck in 2020, the sector had been through a period of sustained under-investment, the impact of which was not immediately apparent due to the collapse in demand caused by Covid-19 restrictions. This resulted in oil prices briefly turning negative for the first time in my lifetime.

As economies reopened, the extent of the under-investment was exposed as supply was unable to respond to increasing demand, causing prices to rise. The invasion of Ukraine, which has been a tragedy for the country, exacerbated these pressures and has precipitated an energy crisis worldwide. Energy prices reached record highs, fuelling inflationary pressures, and fears of a global slowdown remain. Where prices will settle is hard to predict, but long-term structural under-investment gives cause for concern. Meanwhile, energy security is at the front of everyone's minds.

Alongside these recent seismic events, longer-term trends are also impacting our sector. As the impact of climate change becomes more apparent, stakeholders - from shareholders, lenders and governments, to colleagues and wider society - expect rapid progress on the transition to lower carbon energy sources. It is imperative that energy companies engage in finding solutions that will enable this transition, even if the path to it, which will require time, technological advances and huge infrastructure investment, remains unclear. At Harbour, we consider the energy transition in every significant decision we make today and we are committed to being part of the solution and not part of the problem.

The energy sector faces other challenges too, including from windfall taxes and economic nationalism as governments seek to protect consumers from high prices and, oftentimes, from the consequences of bad policy. This creates unwelcome fiscal instability in the sector and will drive investors and capital out of the industry at a time when energy security is so high on the agenda.

In its first full year as a publicly listed company, Harbour Energy has performed very strongly, and shown strength and resilience in the face of complex challenges.

The simple truth is that capital will go where it is welcome and avoid places that have onerous tax regimes or regulatory regimes that stifle the market. As such, Harbour has reduced its future activity and investment levels in the UK as a direct result of a windfall tax introduced by the government.

Despite these many and varied challenges, we continue to believe that oil and gas companies like Harbour, who have scale, a commitment to producing safely and responsibly and a strong balance sheet, have a good future, and an important role to play through the energy transition. The path to net zero will be uneven, it will take time and it will require pragmatism from governments and their citizens. Global energy demand continues to grow. Renewables account for only a small proportion of supply today. That means responsibly produced oil and gas will play a key role in 'keeping the lights on' while we build low carbon capacity. We see a further role for companies like ours in repurposing depleted fields and existing infrastructure for CO2 transport and storage. Harbour is committed to playing both roles during this transition, as you will see later in this report.

Against this backdrop, we are lucky to have a highly experienced Board and leadership team to help us navigate this complex environment and to deliver for our shareholders. Among other things, during the year we've advanced our ESG agenda and net zero strategy. We've also delivered against our capital allocation priorities, including paying down debt and making our first shareholder distributions, totalling $553 million for the year, while continuing to invest. Our growth and diversification ambitions remain intact and even more relevant given current UK fiscal instability, and we continue to actively review M&A opportunities for value-creating transactions which would be a good strategic fit with our business.

As we look ahead to 2023, your Board remains vigilant in its responsibility to ensure the long-term sustainability of the business in the interests of not only our shareholders, but our employees, our value chain and wider society. Thank you to you all for your support for Harbour Energy in 2022.

R. Blair Thomas

Chairman

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Harbour Energy plc

Annual Report & Accounts 2022

Strategic report

Governance

Chief Executive Officer's statement

Harbour Energy was formed with this purpose: to play a significant role in meeting the world's energy needs through the safe, efficient and responsible production of hydrocarbons while creating value for all stakeholders. In 2022 we were constantly reminded of the importance of this purpose as we navigated a world of geopolitical and economic volatility, grappling with concerns over energy security while holding steadfast to the need to transition to a lower carbon economy.

Amidst these challenges, we met or exceeded our targets for safety, the environment, operational delivery, financial performance and shareholder distributions. While there is always more to do, I am proud of all the team has accomplished in our first full year of operations.

Most importantly we've improved our safety record, reducing our recordable incident rate and the number of process safety events. Our first company-wide employee engagement survey also highlighted the strength of our safety culture within the company.

Operationally we had a strong year. Production was up by almost 20 per cent versus 2021, aided by improved operating efficiency, additions from our drilling programme, and a full-year contribution from the Premier Oil assets. Operating costs improved significantly, benefiting from higher production and exchange rate movements. Our capital programme delivered new wells across our asset base, including from Tolmount in April providing a timely increase to UK domestic gas production. In addition, we made a material gas discovery at our Timpan-1 prospect in the Andaman Sea in Indonesia. In a region with growing energy demand, we are excited about the prospects for further drilling on our Andaman licences.

These results helped our cash flow generation. In spite of our hedging programme which muted the impact of high commodity prices, and after making tax payments of $551 million, we delivered $2.1 billion in free cash flow, allowing us to pay down debt and deliver increased shareholder distributions of $553 million. However, our share price under-performed that of our peers - largely due to our significant exposure to the UK and the recently enacted Energy Profits Levy (EPL) for oil and gas companies.

Internally, we made significant progress with the integration of our processes and systems from previous acquisitions. This included implementing a new enterprise management system, allowing us to retire numerous legacy systems and providing a scalable platform for our future growth ambitions. While doing this, we continued to build our culture, based around our core values and supported by employee engagement and feedback.

Financial statements

Additional information

Harbour's purpose has never been more relevant: we are playing a significant role in meeting the world's energy needs, producing oil and gas safely and efficiently, and creating value for our stakeholders.

We matured our net zero strategy, clarifying our pathway to achieving our Net Zero 2035 goal, and establishing an interim target to halve emissions by 2030. We also built significant momentum in our flagship Viking CO2 transport and storage project in the UK, announcing partnerships with major domestic customers as well as with the Port of Immingham to enable imports. By repurposing oil and gas infrastructure in the heavily industrialised Humber region, Viking CCS has the potential to meet one third of the UK Government's target to capture and store 30 mtpa of CO2 by 2030.

We faced a number of headwinds during the year, the biggest of which was the introduction of the UK Energy Profits Levy (EPL) in May, which was increased and extended in November, taking our UK tax rate to 75 per cent. This had the impact of all but extinguishing our profit after tax for 2022, to essentially zero driven largely by a material one-off non-cash deferred tax charge associated with the introduction of the EPL. Going forwards, the EPL reduces our cash flow, makes it harder to attract investors, and impacts the availability of debt. In an industry that invests over the long term, the EPL has already had serious consequences on our UK activity levels: we pulled out of the latest UK licensing round and halted certain projects. In early 2023, we initiated a review of our UK organisation to align it with lower anticipated investment levels which will, regrettably, lead to significant job losses in the country.

Fiscal uncertainty in our largest producing region reinforces our strategic goal of diversification and the ambition to establish a material base of production in at least one other region via acquisitions. The opportunity set remains rich, with major oil companies optimising their portfolios for the energy transition, publicly listed independent oil and gas companies seeking scale, and private companies looking for a route to liquidity for their investors. While market conditions made it challenging to reach a shared view on value during a volatile 2022, there are signs of a more active market for acquisitions in 2023. With our track record of successful M&A, our experienced Board and management, and our strong balance sheet, we are well-positioned to execute. Investors and lenders should rest assured we will remain disciplined and focused on strategic fit and value creation.

In this volatile world, we are confident that Harbour's strategy remains valid. Although 2022 brought challenges, we rose to them and performed well. We could not have done this without the support of all our stakeholders - our employees, shareholders, investors, lenders, partners and suppliers. Thank you for your contributions throughout the year and for your ongoing support.

Linda Z. Cook

Chief Executive Officer

Harbour Energy plc

Annual Report & Accounts 2022

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