Our approach to risk management
Risk management is an integral part of the Group’s business activities and our ability to identify, assess, monitor and manage our business risks is fundamental to Savannah’s ability to deliver long-term performance.
Risk management framework
Savannah’s risk management framework is made up of six components which combine to create an effective system of risk management and internal control. It is through the application of the risk management framework that clear procedures for risk identification, assessment, measurement, mitigation, monitoring and reporting are aligned with the Group’s strategic aims and the Board’s risk appetite. The Group considers both prevailing and emerging risks in the risk identification process. Every risk has a designated Risk Owner and a member of the Executive Team has responsibility for oversight of each risk. Whilst the Board is ultimately responsible for the management of risk, the Group is structured in such a way that risk management is conducted at all levels of the Group and is embedded in our business practices:
- The Board sets the risk appetite for the Group, establishes and monitors the risk management strategy and is responsible for maintaining a robust and effective internal control system;
- The Executive Team runs the business in line with the risk management strategy established by the Board and is responsible for the day-to-day application of this strategy; and
- Managers and staff are responsible for identifying and assessing risks relevant to their functions, roles or activities and for managing and reporting those risks in line with the Group’s policies and procedures.
Risk registers are maintained at the business and functional levels, and are consolidated into the corporate risk register. These risks are assessed, after taking into account mitigation plans and actions, on two levels: the likelihood of the risk arising and the potential impact of such risk.
Risk Factors | Trend |
---|---|
Strategic | |
1. Country | |
2. Acquisitions | |
3. Reserves and resources | |
4. Exploration and appraisal | |
Operational | |
5. Capital projects | |
6. Industrial action | |
7. Supply interruption |
Risk Factors | Trend |
---|---|
Financial | |
8. Foreign exchange | |
9. Gas sales agreements | |
10. Liquidity | |
Sustainability | |
11. Ethical conduct | |
12. HSE&S and our social “licence to operate” | |
13. Cyber security and digitalisation | |
14. Climate change | |
15. Organisation |
Principal risks – strategic
Set out below are the risks which the Directors consider particularly relevant to the Group’s business activities at the date of the 2022 Annual Report and the mitigating actions that are being taken to manage these risks1. This section is not intended to be an exhaustive list of all the risks that may arise, nor is the order of the content intended to be any indication of priority. In a changing business environment, other risks are assessed as part of the Group’s risk management framework and are mitigated as they arise.
Description
The Group’s assets and operations are located in Cameroon, Niger and Nigeria, countries which are classified as emerging markets. These markets are typically seen as being at heightened risk of adverse changes to the political, economic, fiscal or regulatory environments and for the rule of law to be less predictable than in developed markets.
Savannah’s entry into Cameroon through the acquisition of an indirect 41.06% interest in COTCo increases the number of countries in which the Group operates and provides greater portfolio diversification.
Country risk has been assessed as stable compared to last year.
Strategy link:
Risk movement:
Direct oversight: Chief Executive Officer
Strategic objectives legend
Deliver value safely and sustainably
Optimise existing portfolio performance
Deliver organic growth
Deliver value accretive inorganic growth
Provide cash returns to shareholders
Risk movement legend
Increased
Stable
Reduced
Potential impact
A change in the political, fiscal or regulatory environment in our countries of operation may result in us being unable to meet one or more of our strategic objectives.
In Nigeria, the Group is particularly sensitive to any changes impacting the country’s gas and power sector.
Key mitigants
- Continuous, open engagement with regulators and other authorities and agencies in our countries of operation, particularly in the Nigerian power sector.
- Principal contractual arrangements subject to international arbitration provisions where possible.
- Largest Nigerian gas sales agreements benefit from credit enhancements associated with investment-grade(e) international bank guarantees.
- Various state sponsored (and World Bank assisted) initiatives to improve operating efficiency in the Nigerian power sector.
Description
The success of the Group’s acquisition strategy depends on identifying suitable targets, procuring the necessary financing and obtaining any consents or authorisations required to carry out the acquisition. Furthermore, there is a risk in M&A transactions that they do not close and the Group suffers aborted transaction expenses, which can be material. There is also a risk that actual performance of the
acquired assets or businesses does not meet expectations.
This has been assessed to be stable this year
Strategy link:
Risk movement:
Direct oversight: Chief Executive Officer
Strategic objectives legend
Deliver value safely and sustainably
Optimise existing portfolio performance
Deliver organic growth
Deliver value accretive inorganic growth
Provide cash returns to shareholders
Risk movement legend
Increased
Stable
Reduced
Potential impact
If anticipated benefits are not realised or performance of the acquired businesses is below expectations, this may affect the Group’s overall financial performance.
Key mitigants
- Structured and appropriate due diligence undertaken on potential targets.
- Appropriate vendor risk and reward sharing arrangements embedded in the acquisition agreements.
- Strong operating platform designed to enable successful asset or business integration to deliver transaction benefits.
- Experienced Board and management team.
2023 objectives or KPIs
- Completion of the proposed acquisition of the South Sudan Assets(m)
- Deliver at least one significant M&A opportunity.
Description
Hydrocarbon reserve and resource estimates are highly subjective and no assurance can be given that the hydrocarbons will be recovered at the rates, or in the quantities, estimated or that they can be brought into profitable production. Hydrocarbon reserve and resource estimates can, therefore, be subject to revision.
Group 2P Reserves reduced due to production in the year from 78 MMboe (YE2021) to 72 MMboe (YE2022). In Niger, the proposed R3 East development is based upon an unchanged estimated 2C resource base of at least 30 MMstb.
This risk has been assessed as unchanged.
Strategy link:
Risk movement:
Direct oversight: Chief Operating Officer
Strategic objectives legend
Deliver value safely and sustainably
Optimise existing portfolio performance
Deliver organic growth
Deliver value accretive inorganic growth
Provide cash returns to shareholders
Risk movement legend
Increased
Stable
Reduced
Potential impact
In Nigeria, if the Group’s gas reserve and resource estimates were to be revised downwards, it could impact on production and revenue, and the Group might be unable to meet its downstream contractual commitments.
In Niger, if the R3 East oil resources are lower than
currently estimated, the field development could prove to be uneconomic.
Key mitigants
- Extensive internal and independent sub-surface and engineering studies undertaken throughout the assets’ life cycles.
2023 objectives or KPIs
- Business development activities to access additional gas resources or supply sources.
- Commence R3 East well testing programme.
Description
Exploration and appraisal of oil and gas is speculative and involves a high degree of subjectivity in the assessment of risk.
Strategy link:
Risk movement:
Direct oversight: Chief Operating Officer
Strategic objectives legend
Deliver value safely and sustainably
Optimise existing portfolio performance
Deliver organic growth
Deliver value accretive inorganic growth
Provide cash returns to shareholders
Risk movement legend
Increased
Stable
Reduced
Potential impact
The Group may not discover hydrocarbons in anticipated
commercial quantities and those discovered may not be
developed into profitable production.
Key mitigants
- The Group has rigorous processes and procedures in place to assess the risks associated with its exploration and appraisal activities and engages appropriate consultants to supplement its in-house expertise.
2023 objectives or KPIs
- Commence R3 East well testing programme.
Principal risks – operational
Description
There are both operational and financial risks to the delivery of capital projects safely, on time and budget. In Nigeria, the CPF compression project commenced in 2021and is ongoing to sustain the production capacity from the Uquo Field.
This risk was upgraded in 2021 due to the planned increased in capital expenditure and is unchanged for 2022 in view of the ongoing compression project over the next 12 months.
Strategy link:
Risk movement:
Direct oversight: Chief Operating Officer
Strategic objectives legend
Deliver value safely and sustainably
Optimise existing portfolio performance
Deliver organic growth
Deliver value accretive inorganic growth
Provide cash returns to shareholders
Risk movement legend
Increased
Stable
Reduced
Potential impact
Capital projects typically bring additional HSE&S risks with third party contractors. Failure to manage these risks could lead to an HSE&S incident, additional costs and reputational damage.
Project delays may result in a negative impact on future anticipated cash flows.
Key mitigants
- Robust project execution planning, scope of work definition and project management procedures over the full project life cycle.
- Competitive tendering for services and contractor selection.
2023 objectives or KPIs
- Progress the compression project in Nigeria for completion in 2024.
Description
Labour disputes, unrest or strike activity (“Industrial Action”) could adversely affect the Group’s ongoing operations and the Group’s ability to produce and market oil and gas production. Industrial Action in our countries of operation could be on a company, industry or
national scale.
Due to continued employee engagements and other initiatives this risk has been evaluated as stable this year.
Strategy link:
Risk movement:
Direct oversight: Group Head of HR
Strategic objectives legend
Deliver value safely and sustainably
Optimise existing portfolio performance
Deliver organic growth
Deliver value accretive inorganic growth
Provide cash returns to shareholders
Risk movement legend
Increased
Stable
Reduced
Potential impact
Business interruptions caused by Industrial Action could have a negative impact on anticipated future cash flows.
Key mitigants
- The Group actively engages with its staff and has in place competitive remuneration packages for its employees.
- The Group has made and will continue to make significant investments in employee training and development programmes.
Description
The integrity of the Group’s wells, processing facilities and pipelines is central to our ability to continue to supply hydrocarbons in a safe and socially responsible manner and to meet contractual obligations.
We assessed this risk to be higher in 2021 due to the risk of delays to major capital projects in Nigeria and longer than anticipated shutdowns during maintenance programmes that could impact on our ability to meet contractual supply obligations.
The risk is unchanged this year.
Strategy link:
Risk movement:
Direct oversight: Chief Operating Officer
Strategic objectives legend
Deliver value safely and sustainably
Optimise existing portfolio performance
Deliver organic growth
Deliver value accretive inorganic growth
Provide cash returns to shareholders
Risk movement legend
Increased
Stable
Reduced
Potential impact
Failure to proactively maintain the Group’s assets could lead to HSE&S issues (see Risk Factor 12) and/or a failure to meet contractual obligations, leading to a negative impact on future anticipated cash flows.
Key mitigants
- Comprehensive maintenance programme in place to ensure integrity of facilities and continuous operations.
- Regular inspection, clearing and maintenance of pipelines and their rights of way.
- Additional gas wells to be drilled and compression to be installed to maintain gas production capacity to meet contractual obligations.
2023 objectives or KPIs
- Progress the compression project in Nigeria for completion in 2024.
Principal risks – financial
Description
The Group is exposed to fluctuations in foreign currency exchange rates and liquidity, particularly as it relates the Nigerian Naira, the West African CFA, the Central African Franc XAF, the US Dollar and the British Pound Of particular significance for the Group is the Nigerian Naira and the ability to convert Naira into US Dollars because, under the terms of our GSAs, our customers are able to pay in Naira even though the contracts are US Dollar-denominated.
This risk is assessed to have increased this year as the Naira continues to see an extended period of relative illiquidity compared to other currencies. This is somewhat offset by greater USD-denominated income from Cameroon operations.
.
Strategy link:
Risk movement:
Direct oversight: Chief Financial Officer
Strategic objectives legend
Deliver value safely and sustainably
Optimise existing portfolio performance
Deliver organic growth
Deliver value accretive inorganic growth
Provide cash returns to shareholders
Risk movement legend
Increased
Stable
Reduced
Potential impact
Significant movements in the exchange rates of our operating currencies may result in exchange rate losses and consequently may impact our anticipated cash flows.
Key mitigants
- Foreign exchange true-up mechanism in the Calabar gas sales agreement reduces exposure to foreign exchange losses.
- Significant proportion of Nigerian cost base is currency matched.
Description
The Group’s revenues from gas production in Nigeria are currently principally derived from two long-term contracts with Calabar NIPP and Lafarge Africa PLC. The contract counterparties may fail to fulfil their contractual obligations, particularly in respect of the payment of invoices in accordance with the contractual terms.
The signing of four new gas sales agreements with new customers diversifies the sources of revenue and as a result this risk is assessed lower this year.
Strategy link:
Risk movement:
Direct oversight: Managing Director, Savannah Nigeria
Strategic objectives legend
Deliver value safely and sustainably
Optimise existing portfolio performance
Deliver organic growth
Deliver value accretive inorganic growth
Provide cash returns to shareholders
Risk movement legend
Increased
Stable
Reduced
Potential impact
The delayed or non-payment of invoices could have a material impact on the Group’s anticipated cash flows.
Key mitigants
- The Group has credit support arrangements with investment grade(e) banks covering c. 85% of its contracted gas sales revenues.
- The Calabar gas sales agreement, representing c. 65% of contracted gas sales revenues, is supported by a IDA World Bank Partial Risk Guarantee.
- Regular engagement at operational and executive level with counter-party executives and other key stakeholders
Description
The Group manages its liquidity to be able to fund its ongoing operations, capital expenditure programmes and to service its debt facilities, but there is a risk that it is unable to meet its financial obligations as they fall due or to fund growth projects in a timely manner.
Strategy link:
Risk movement:
Direct oversight: Chief Financial Officer
Strategic objectives legend
Deliver value safely and sustainably
Optimise existing portfolio performance
Deliver organic growth
Deliver value accretive inorganic growth
Provide cash returns to shareholders
Risk movement legend
Increased
Stable
Reduced
Potential impact
If the Group is unable to fund its activities and to service its debt, this could lead to financial restructuring. If the Group is unable to fund new projects or acquisitions it will not realise its strategic objectives.
Key mitigants
- Close monitoring of the liquidity position and forecast cash flows to manage its risk exposures at both a Group and individual entity level.
- Project specific financing allows tailoring of repayment profiles and contributes to effective liquidity management.
- Regular engagement with the Group’s lenders.
- Tight cost control and working capital management.
2023 objectives or KPIs
- Refinancing of the Accugas debt facility.
- Completion of the proposed acquisition of the South Sudan Assets(m) will provide further diversity of income streams.
Principal risks – sustainability
Description
Ethical conduct, including compliance with relevant anti-bribery and corruption laws, is a risk common to the global energy industry and to the Group, which operates in some of the lower ranking countries on the Transparency International Corruption Index.
Strategy link:
Risk movement:
Direct oversight: Chief Compliance Officer
Strategic objectives legend
Deliver value safely and sustainably
Optimise existing portfolio performance
Deliver organic growth
Deliver value accretive inorganic growth
Provide cash returns to shareholders
Risk movement legend
Increased
Stable
Reduced
Potential impact
A major breach of our values or code of conduct could damage the Company’s reputation, have legal implications
or impact our financial position.
Key mitigants
- Integrity is one of Savannah’s core “SEE-IT” values and is placed at the heart of everything we do.
- The Group has robust compliance policies and procedures in place, including a Compliance Committee at Board level, and the Group operates a confidential whistleblowing service accessible to all employees.
- Staff and contractors are given regular and extensive training in these policies and procedures to raise awareness at all levels.
- Savannah is an active member of the Extractive Industries Transparency Initiative (“EITI”).
Description
The Group’s operations are subject to all the health, safety and environmental hazards and risks common to the global energy industry.
Political instability, religious differences, ethnicity, internal security, militant activity and labour unrest pose security risks that could also impact the Group’s operations.
Strategy link:
Risk movement:
Direct oversight: Chief Operating Officer
Strategic objectives legend
Deliver value safely and sustainably
Optimise existing portfolio performance
Deliver organic growth
Deliver value accretive inorganic growth
Provide cash returns to shareholders
Risk movement legend
Increased
Stable
Reduced
Potential impact
A failure to adhere to the Group’s HSE&S policies could result in significant non-financial and financial impacts and harm to our peopl our host communities or our contractors.
If the business was unable to operate in a safe and secure and HSE&S compliant manner, we would have to suspend operations at the impacted locations. This could have an adverse effect on the Company’s earnings and cash flow
and be reputationally damaging.
Key mitigants
- Standards and clear policies defined in our Health, Safety, Security, Environment and Social Management Systems.
- Regular engagement with local communities and memoranda of understanding in place for employment, capacity building and infrastructure development.
- 24/7 security on all assets, security monitoring and intelligence.
- Comprehensive insurance in place.
2023 objectives or KPIs
- Operate safely and in an environmentally appropriate manner
- Maintain social licence to operate
Description
The threats from cyber-attack on the Group’s digital infrastructure, information technology security breaches and data protection are ongoing risks that are continuously evolving and could increase as the Group’s continues to grow. Keeping cyber defences fit for purpose is increasingly important given the rapid advances in artificial intelligence (“AI”).
This risk was assessed higher last year given the implementation of a new Enterprise Resource Planning (“ERP”) system. The risk is assessed as stable this year.
Strategy link:
Risk movement:
Direct oversight: Chief Information Officer
Strategic objectives legend
Deliver value safely and sustainably
Optimise existing portfolio performance
Deliver organic growth
Deliver value accretive inorganic growth
Provide cash returns to shareholders
Risk movement legend
Increased
Stable
Reduced
Potential impact
Failure to prevent or respond to a cyber-attack could have far reaching consequences and could result in business interruption through disruption to networks and industrial control systems. It could also result in the loss of sensitive personal or business data, reputational damage and financial loss.
Key mitigants
- 24/7 network, email and device monitoring, access authentication and controls in place to protect against phishing attacks.
- GDPR and Acceptable Use device policies.
- Continued research and monitoring of the latest and most sophisticated cyber security threats including from AI.
- Increased staff training relating to data security and GDPR.
Description
There continues to be increased attention from stakeholders on climate change, greenhouse gas emissions and sustainability ratings generally. We recognise that this is a material risk for the business and that there is the potential for climate related risks including regulatory constraints, carbon pricing mechanisms or access to capital to affect our ability to implement our strategy.
This risk has been assessed as stable.
Strategy link:
Risk movement:
Direct oversight: Chief Executive Officer
Strategic objectives legend
Deliver value safely and sustainably
Optimise existing portfolio performance
Deliver organic growth
Deliver value accretive inorganic growth
Provide cash returns to shareholders
Risk movement legend
Increased
Stable
Reduced
Potential impact
This is likely to lead to increased regulations which could impact on our financial performance. Poor sustainablity ratings could result in reputational damage, increased costs, including the costs of capital and issues with retaining and attracting talent. Limited access to capital could result in us being unable to meet one or more of our strategic objectives. Change in climate could result in operational downtime affecting future anticipated cashflows.
Key mitigants
- Ongoing implementation of our sustainability strategy and monitoring and reporting systems and policies.
- Promotion of efficient energy use in activities with business partners and service providers.
- Robust operational planning and budgeting processes in place.
2023 objectives or KPIs
- Up to 1GW of renewable energy projects in motion.
- Publish disclosure reports for our chosen ESG standards.
Description
The ongoing growth and success of Savannah is driven by a strong performance-based culture and the quality of talent that we can attract and retain. We have significantly strengthened the team over the course of the last 30 months but it is recognised that strength and depth in organisational competence is critical to delivering our strategy and that the impact of this risk could still be
significant.
Our focus in the short term is on the recruitment of the in-country management team ahead of completion of the proposed acquisition of the South Sudan Assets(m). Risk is assessed to be stable this year.
Strategy link:
Risk movement:
Direct oversight: Group Head of HR
Strategic objectives legend
Deliver value safely and sustainably
Optimise existing portfolio performance
Deliver organic growth
Deliver value accretive inorganic growth
Provide cash returns to shareholders
Risk movement legend
Increased
Stable
Reduced
Potential impact
The loss of key personnel, or the failure to plan adequately for succession, or to develop and recruit new talent has an opportunity cost, is a barrier to growth and may, therefore, impact on the Group’s ability to deliver its strategic objectives.
Key mitigants
- The Group has a competitive compensation and retention package in place which is reviewed against the market regularly.
- Key employees participate in equity and performance-based reward schemes that contribute towards retention.
- Contractual arrangements and personal development plans have been put in place to support the retention and development of key employees.
- Key employees are part of ongoing talent review processes to ensure the risk of leaving is mitigated.
- Management document and reflect on lessons learned from each project undertaken to ensure continuous process improvement.
2023 objectives or KPIs
- Recruitment of in-country management team for the proposed acquisition of the South Sudan Assets(m).
- Continued focus on developing our people through employee engagement, training and talent management.
(e) Investment grade indicates credit support from an entity which holds an investment grade rating from either Standard & Poor’s, Moody’s or Fitch Ratings.
(m) South Sudan Assets means the assets that Savannah proposes to acquire from PETRONAS International Corporation Ltd, as announced on 12 December 2022. These assets comprise interests in three Joint Operating Companies which operate Block 3/7 (40% working interest (“WI”)), Block 1/2/4 (30% WI) and Block 5A (67.9% WI), in South Sudanm