NEW
DIRECTIONS
AWE LIMITED ANNUAL REPORT 2011

NEW DIRECTIONS
The Chairman’s Report 2
The Managing Director’s Report 6

RECENT PERFORMANCE
Review of 2010-11 Operations 8
Directors’ Report 26
Corporate Governance 43
Financial Statements 49

2

010-11 was a challenging year for AWE shareholders and a year in which the Board and Management of the Company has

been transformed.
AWE completed the tail end of its major exploration program. The lack of major success over this two year program coincided with the global financial crisis, and the announcement of a new Carbon Tax and a new onshore Petroleum Resource
Rent Tax in Australia. This combination of factors resulted in the Company’s share price underperforming.
However, the Company has implemented changes to address its recent underperformance and to build a foundation for future growth and success. AWE is now in a sound financial position, with an excellent portfolio of diverse production assets delivering strong, long term cash flows.
The Company’s strategy has been revised and a number of Board and Management changes have been implemented. The forward strategy will involve a greater technical and commercial focus aimed at maximising the value of the Company’s assets and delivering a profitable and sustainable future. AWE will pursue growth through selective exploration and acquisition opportunities. This will include opportunities in the broader energy industry as well as in conventional upstream oil and gas.
The Company’s recent successful entry into unconventional gas through the Adelphi takeover represents an initial investment in the broader energy area.
AWE appointed a new Chairman, Bruce Phillips, and a new Managing Director, Bruce Clement, during the year. Two new
Non-Executive Directors, Nick Jukes and Vijoleta Braach-Maksvytis, were also appointed. These appointments provide a wealth of additional industry and business experience for the Board, bringing renewed energy and direction for the future.

WITH A RENEWED BOARD
AND MANAGEMENT COMES
A NEW DIRECTION AND
IMPROVED EXPECTATIONS
FOR THE FUTURE

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DURING THE YEAR, AWE APPOINTED A NEW CHAIRMAN
BRUCE PHILLIPS
Bruce Phillips is a Petroleum Explorationist with over 30 years of technical, financial and managerial experience in the upstream sector of the energy industry. He has broad exploration and production experience throughout Australia, South-East Asia, Africa and South America.
Bruce was elected as a Director of AWE on 19 November 2009 and appointed Chairman of the
Board of AWE on 18 November 2010. He also currently serves as Non-Executive Chairman of
Platinum Capital Limited and is a Non-Executive Director of AGL Energy Limited.

“

“

The fundamentals of the upstream oil and gas industry remain strong,

with AWE’s benchmarked international oil prices above their historical trends and increasing domestic and international demand for gas.

R

ecently, we have seen renewed uncertainty in the global financial markets, including poor economic performance from

the USA and Europe. However, the fundamentals of the upstream oil and gas industry remain strong, with AWE’s benchmarked international oil prices above their historical trends and increasing domestic and international demand for gas. AWE is well positioned to take advantage of opportunities to build on its existing business and to grow as an energy company.
AWE already has a strong core business and a talented and capable workforce. The Company holds an excellent long term oil and gas reserves position, within a portfolio of diverse and valuable production and development assets. AWE expects to continue to deliver strong operating cash flow over the next decade to support the growth of the business. In addition to its conventional oil and gas business, the Company is focussed on growing as an energy company and has already made successful initial investments in unconventional gas. Our recent investment in shale gas in the USA has delivered a substantial return for shareholders and AWE’s planned tight gas and shale gas exploration and appraisal program in the onshore Perth Basin has the potential to transform the Company.
The Board and Management will continue to target superior returns for shareholders. We recognise that the recent share price performance has not been satisfactory, but believe that AWE now has the foundation in place with its core assets, its management team and its growth initiatives for a successful future.

AWE – WHO WE ARE,
WHAT WE DO, WHAT
WE ARE TRYING TO
ACHIEVE

BRUCE PHILLIPS
CHAIRMAN

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FELLOW SHAREHOLDERS, It is with mixed

than just a conventional oil and gas company.

reduced compared to prior years. One of

feelings that I report to you in my first year as

This strategy is already paying off, with the

management’s goals for the next year, on

chairman of AWE.

successful investment in the USA Sugarloaf

which activity has already commenced,

shale gas and liquids project;

will be the rebuilding of the Company’s

Chairman and look forward to working with

A revitalised Management team, with the

exploration portfolio, with the emphasis

my colleagues to restore the fortunes of the

appointment of Bruce Clement as Managing

on selective, high quality prospects.

Company. On the other hand, 2010-11 was a

Director and a new General Manager of

very turbulent year for the general investment

Exploration and Geoscience;

assets.

community, and as you know, AWE was not

A review of the Company’s assets, including an

expenditures are now at historic low

I am delighted to have been elected as

immune from it. Apart from the continued

– Significant write down of exploration

uncertainty in global financial markets,
Australia’s energy sector also found itself

these disappointing circumstances

the proposed introduction of a new Carbon

and repositioned the Company

Tax and a new Mineral Resource Rent Tax

for a brighter future.

adversely impacting the industry.

capitalised

exploration

levels, representing less than 8% of total

Your Board has responded to

in a difficult political reform situation, with

Our

assets, a level much more conservative than AWE’s peers;
– Closing the UK office; and
An overhaul of the Company’s corporate governance regime, including restructuring board

committees

independent review of our oil and gas reserves.

and revising committee charters, making

the tail end of its unsuccessful two year

This comprehensive review resulted in:

directors more accountable. The Company

exploration program, which combined to result

– Reducing our 2P reserves position in the

also changed its auditors after the previous

in the Company’s very disappointing share price

Otway and Taranaki Basins, but offset

auditors had served shareholders since 1997.

performance, both in absolute terms (down

by increased reserves in the Sugarloaf

ENCOURAGEMENT FROM 2010-11: 2010-

28%) and relative to our peers.

shale gas project in the USA. Whilst the

11 did deliver good long term news for AWE

REPOSITIONING THE COMPANY: Your

reserve reductions were disappointing,

shareholders.

Board has responded to these disappointing

AWE’s overall reserve position at year

AWE

circumstances and repositioned the Company for

end is strong, with over 66 million BOE of

success with its shale gas acquisition in

a brighter future. This transformation resulted in

remaining 2P Reserves within a portfolio

the USA. The takeover of Adelphi Energy

a number of initiatives during the year, including:

of very profitable production assets. The

Limited, which was completed during the year,

A renewed board of directors. Over 75% of the

Company also holds Contingent Resources

delivered the Company a 10% working interest

board has changed in the 18 months prior to

of 78 million BOE;

in the Sugarloaf AMI. This has become a new

Against this backdrop, AWE also finished

has

experienced

considerable

– Relinquishing a number of peripheral

cornerstone asset for AWE and has been the

A revised strategy, resulting in a decision to

exploration blocks. The Company’s 2011-

catalyst for the Company’s unconventional gas

reposition AWE as an energy company rather

12 exploration program has also been

initiatives. Since the Sugarloaf acquisition, AWE

year end, including a new Chairman;

THE CHAIRMAN INTRODUCES THE AWE BOARD REPRESENTATIVES

BRUCE CLEMENT

DAVE McEVOY

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has seen continued growth in the shale gas

gas in Australia because of concerns over

risk opportunities adjacent to existing assets

industry in the USA and internationally. Recent

potential impact on the environment, particularly

and infrastructure. Longer term growth as

transactions to acquire shale gas assets in the

in relation to coal seam gas in the eastern

an energy company will come from selective

US have confirmed a significant increase in the

states. AWE has an excellent record of safety

exploration and acquisition opportunities in

value of AWE’s Sugarloaf interest. Importantly,

and environmental management with its existing

the conventional oil and gas business, as well as

the Company has used Sugarloaf to successfully

operations in New Zealand and the onshore

from other investments in the broader energy

develop its own shale gas engineering and

Perth Basin and the Company has committed to

industry, such as unconventional tight gas and

geoscience expertise. This is now being applied

open and transparent management of its shale

shale gas and liquids.

to the onshore Perth Basin in Western Australia

gas operations. Environmental management

Despite the current uncertainty in financial

where the Company is operating an exploration and appraisal program to evaluate known tight gas and shale gas opportunities

markets, the oil and gas sector

The Company is engaged with regulators,

AWE’s presence in Indonesia also began to pay dividends in 2010-11. The acquisition of

for AWE’s premium crudes above

local councils and landowners in open

their historical trends, and strong

communications, working to ensure

within AWE’s existing acreage.

remains buoyant, with oil prices

domestic and international gas

environmental risks will be properly managed during the exploration and appraisal program.

an interest in the Titan PSC

markets. The Company is well funded to meet its existing development and exploration plans and

the

Directors

in Indonesia provides the Company with an

guidelines, specific to shale gas activities, have

believe AWE is positioned to take advantage of

exciting exploration prospect for drilling in the

been established to ensure the already high

opportunities in the current uncertain financial

next year. AWE is also actively evaluating shale

standard of operation will continue on AWE’s

environment.

gas and liquids opportunities, leveraging off the

shale gas project. The Company is engaged

Finally, I wish to acknowledge the efforts

Company’s operational expertise in Australia.

with regulators, local councils and landowners

of my fellow Directors and the Management

SUSTAINABILITY: A key element of AWE’s

in open communications, working to ensure

team led by Bruce Clement. This last year

business strategy is to ensure the Company has

environmental risks will be properly managed

has been a challenging one, particularly for

a sustainable business, particularly in relation

during the exploration and appraisal program.

management, but they have not deviated in

to the management of safety, environment and

OUTLOOK: Under the renewed Board and

their drive to restore the Company’s fortunes.

community relations. Your Board understands

Management, the Company’s strategy will include

On behalf of the shareholders, I thank them.

that our safety and environmental management

greater emphasis on technical and commercial

and performance are critical to our future

discipline. AWE will be focussed on delivering

business success. Recently, we have seen growing

maximum value from its existing production

resistance to the exploitation of unconventional

and development assets and pursuing lower

Bruce J Phillips
Chairman
October 2011

KEN WILLIAMS

NICK JUKES

VIJOLETA BRAACH MAKSVYTIS

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AWE ALSO APPOINTED A NEW MANAGING DIRECTOR
BRUCE CLEMENT
Bruce Clement is an engineer with over 30 years experience in the Australian and international petroleum industry. His career has included senior technical, financial and managerial roles with small and large energy companies, including ExxonMobil, Ampolex, and Roc Oil.
Bruce was appointed Managing Director of AWE Limited on 1 February 2011.

“

“

If successful, the tight gas and shale gas initiative

in the Perth Basin has the potential to significantly increase the reserves base and value of the Company.

T

he Company’s goal is to be the leading energy company in Australia, with a sustainable business providing superior returns

to shareholders.
AWE’s future strategy will focus on technical and commercial excellence and discipline. The strategy comprises a number of key elements including maximising the value of the Companies core assets, exploiting opportunities adjacent to AWE’s existing assets and infrastructure and achieving growth through selective exploration and acquisition in the energy industry.
The Company is focussed on delivering a sustainable business: one in which we work openly with our stakeholders and which is capable of operating and growing within the future low carbon environment.
AWE consolidated its financial position over the latter part of 2010-11 and has chosen to reduce its near term investment in exploration. The focus for exploration during 2011-12 will be on exploration for gas in Australia and Indonesia, including unconventional gas in the onshore Perth Basin in Western Australia. If successful, the tight gas and shale gas initiative in the
Perth Basin has the potential to significantly increase the reserves base and value of the Company.
Delivery of the BassGas Mid Life Enhancement Project (“MLE”) in the offshore Bass Basin will be a major focus for
AWE over the next two years and will involve a substantial capital investment for the Company. The MLE will deliver improved production capability and provide the opportunity for the joint venture to exploit additional potential oil and gas resources within the Yolla field. The enhanced facilities will also be capable of supporting the future potential development of contingent resources near Yolla, such as the Trefoil gas and condensate field.
AWE is in a sound position, with a strong financial foundation. The Company holds an excellent portfolio of production assets, which will generate substantial cashflow for more than the next 10 years, and growth opportunities in its unconventional gas business in Australia and the USA and in already discovered Contingent Resources. Management and the Board will seek to leverage this position to secure additional growth opportunities and deliver improved returns for shareholders.

OUR STRATEGY,
OUR PROGRESS
AND OUR FUTURE

BRUCE CLEMENT
MANAGING DIRECTOR

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BUSINESS REVIEW AND MANAGEMENT

core assets except Tui, where a reduction

and the Pateke well workover successfully

CHANGES: During the year, the Company

in remaining reserves was reported. The

restored production to the Tui project. The

completed comprehensive reviews of its

review also confirmed significant reserves

Company has established its exploration plans

recent exploration performance and a review

growth in the Sugarloaf shale gas project

for 2011-12, targeting opportunities within its

of its current portfolio of production and

from development drilling during the year and

existing portfolio, adjacent to discoveries and

development assets. As a result of this work,

identified potential resource opportunities in

existing facilities.

a number of exploration permits

New management processes

have been relinquished and the

Opportunities within existing fields

have been introduced, which have

scale of near term exploration

have been identified and production

established

activities has been reduced to align with internal funding capacity. A new

successful workovers.

Geoscience, Dave Gaudoin, has been

executive

management review of operational

improvement achieved through

General Manager Exploration and

greater

and investment decisions. A Contract
Committee has been established to review and approve all material

appointed and the Company is renewing its

the BassGas project which will be targeted as

contracts

exploration portfolio as well as pursuing its near

part of the second phase of the MLE project.

established which is responsible for review and

term exploration plans. These plans include the

PROGRESS ON STRATEGY: Technical and

approval of reported reserves.

evaluation of unconventional gas opportunities

commercial reviews of the Company’s assets

UNCONVENTIONAL GAS: Part of AWE’s

in the onshore Perth Basin and drilling the Atlas

were completed in the second half of the

strategy is to pursue targeted growth

gas prospect in Indonesia.

year. Opportunities within existing fields have

opportunities as an energy company. This

been identified and production improvement

includes opportunities outside the Company’s

achieved through successful workovers.

conventional oil and gas operations. The

The

review

of

production

and

development assets completed during the latter part of the financial year confirmed

The workover of the Cliff Head-12 well

AWE’s existing reserves estimates for all its

has increased production by 1,500 bopd

and

a

Reserves

Committee

Company’s shale gas initiative is a key part of this strategy.

AWE OPERATIONS
TUI OIL PROJECT
AWE 42.5%

BASSGAS PROJECT
AWE 57.5%

The Tui oil project produced 2.8 million barrels of gross oil during the year and reported net revenue of $105 million to
AWE. With a low cost structure for the field operations, at current oil prices, the field will provide valuable cash flow for a number of years.

The BassGas project continued strong production operations during the year, with gross gas sales reaching 17.7 PJ, an improvement on the previous period.
Highly valuable condensate and LPG output improved the returns for the project. Phase 1 MLE has commenced and offshore installation of compression and accommodation modules is scheduled for the end of calendar year 2011.

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THE CASINO/
HENRY/NETHERBY
GAS PROJECT
AWE 25%
Casino/Henry continued a strong operating performance, with gross gas sales reaching 33.1 PJ for the year.
Anticipated improvements in the east coast domestic gas market has the potential to add significant value to uncontracted gas production after 2017.

AWE’s acquisition of an interest in the

environmental management and open and

and operating capability to expand in both

Sugarloaf shale gas project in the USA was

transparent relationships with our stakeholders.

conventional oil and gas as well as its new

completed during the year and represented a

The Company has established clear budget

first significant step into unconventional gas.

goals for the year, including a production target

AWE holds an excellent portfolio of

Since then, the Company has developed its

of 5.0 to 5.5 million BOE and a revenue target

production and development assets which

own technical and operational capability in

of $270 to $300 million at a Brent oil price of

includes a diverse mix of conventional oil and

unconventional gas and is applying this to the

$100 per barrel. This will provide the basis for

gas assets and unconventional gas assets, with

onshore Perth Basin exploration and

unconventional gas and liquids business.

a current reserves to production ratio

to the evaluation of other investment

During 2011-12, AWE will

opportunities, including opportunities

focus on delivering its base business

in Indonesia.
An added benefit from AWE’s shale gas business has been the application of shale gas technology to the Company’s

plan while pursuing opportunities for growth.

greater than 10 years.
Within

this

portfolio,

Management believes there will be further opportunities to add value through its focus on fully exploiting the underlying assets and

existing tight gas discoveries in the Perth Basin,

the generation of strong cash flow during the

maximising the use of existing facilities. This

where two discovered fields with up to 80 BCF

year, which together with existing cash assets

will include pursuing opportunities to exploit

gross Contingent Resources are planned to be

will fund the Company’s planned development

the Company’s 78 million BOE of Contingent

evaluated during 2011-12.

and exploration activities.

Resources.

FUTURE PLANS: During 2011-12, AWE will

The Company’s growth strategy is being

The Company is well positioned for the

focus on delivering its base business plan while

pursued through the active regeneration of

future, and Management is confident it can

pursuing opportunities for growth. A key part

its exploration acreage, targeting both new

build on AWE’s existing position to deliver

of this base business will be ensuring AWE’s

acreage and potential farm-in opportunities.

growth for the Company and increased value for

business is sustainable, with sound safety and

The Company will seek to leverage its technical

shareholders.

CLIFF HEAD OIL
PROJECT
AWE 57.5%

ONSHORE PERTH
BASIN OPERATIONS
AWE 33-100%

Gross oil production of 1.1 million barrels was achieved at Cliff Head over the year, maintaining a strong contribution to AWE’s production. Successful replacement of the electric submersible pump in the CH-12 well, subsequent to year end, has resulted in field production capacity being increased to over
4,000 bopd.

The onshore Perth Basin production assets continued to contribute modest volumes of oil and gas over the year.
Gas production was increased following the hook up and commissioning of the
Redback field. AWE is actively evaluating unconventional gas exploration and appraisal opportunities in the Perth
Basin which have the potential to materially change the Company.

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SUGARLOAF AMI
AWE 10% PRE ROYALTY
The recently acquired Sugarloaf asset commenced production during the year and the development phase has seen a number of new development wells drilled and brought on line. Gross production from the AMI was 5.3 PJ of gas, with approximately 900,000 barrels of associated liquids. Development drilling planned for 2011-12 is expected to further increase production and convert
Contingent Resources to 2P Reserves.

RESULTS IN BRIEF
Group Operating Performance
Year to June

2011

2010

Production (million BOE)

6.12

6.09

Sales Revenue ($ million)

304.9

354.2

70.5

128.7

Pre-tax profit/(loss)

(160.5)

(23.9)

Statutory profit/(loss)

(117.6)

(28.9)

(16.1)

(21.1)

Year to June

2011

2010

Starting Cash ($ million)

135.3

343.9

Net Operating Cashflow

139.9

86.7

Net Investing Cashflow

(157.7)

(286.1)

Gross profit

Underlying profit/(loss)

Group Cashflow Summary

Net Financing Cashflow

9.6

1.8

Net Foreign exchange

(9.9)

(11.0)

Closing cash

117.2

to $305 million. Operating cashflow after tax of $140 million was up 61% on the prior year.

“

“

Sales revenue for the year was down slightly

135.3

A

WE’s core business delivered a strong operational performance in the year to June, 2011, with oil and gas production

of 6.1 million BOE at similar levels to the previous year. The mix of production saw increased gas production and lower oil production. As a result, sales revenue for the year was down slightly to $305 million with an average oil price received of A$91 per barrel.
Operating cashflow after tax of $140 million was up 61% on the prior year, partly due to lower tax payments in New Zealand.
The Company reported a statutory loss for the year of $117.6 million. This reported loss included a number of significant one-off factors, primarily asset impairments and the derecognition of tax losses. After adjustments for these one-off factors, the Company recorded an underlying loss of $16.1 million, which included $63 million of exploration expense.
AWE’s year-end financial position was strong, with cash of $117 million and no debt (and with a $150 million undrawn corporate debt facility available if required).

THE RESULTS WE
ACHIEVED
IN 2010-11

9.9

2008
2009
2010

6.1

2011

8.8

6.1

OIL AND GAS PRODUCTION MILLION BOE

821

2008

590

2009

354

2010

305

2011

SALES REVENUE $ MILLION

509

2008(1)

392

2009

(1)

2010 87
2011

140

OPERATING CASHFLOW $ MILLION
(1) Not adjusted for exploration expense now included in operating cash ow.

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2011

140

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“

AWE plans to reinvest approximately $150 million in development projects during 2011-12.

W

hile the latter part of 2010-11 was a period of consolidation and review for the Company, 2011-12 will see the

implementation of key elements of strategy aimed at positioning AWE for growth. Part of this work will include evaluation of opportunities to exploit the Company’s substantial Contingent Resources of 78 million BOE.
A large part of the Company’s exploration program will focus on opportunities to exploit conventional gas, tight gas and shale gas in the onshore Perth Basin. This will include initial testing of the significant shale gas potential in the basin and the tight gas potential where two discovered fields contain 80 BCF gross Contingent Resources. A further conventional gas exploration well is planned to be drilled in the area adjacent to the Redback discovery. AWE is also planning to drill the Atlas exploration well offshore Indonesia which, together with the existing Lengo discovery, has the potential to hold up to one TCF of recoverable gas.
AWE plans to reinvest approximately $150 million in development projects during 2011-12.
On the Company’s Sugarloaf shale gas asset in the USA, development drilling will continue, aimed at increasing production and converting part of the Company’s 8.7 million BOE Contingent Resource in the project to 2P Reserves.
The BassGas MLE Phase 1 will be a key project for AWE in 2011-12, with installation of the compression module and accommodation module planned for the end of 2011. On completion of commissioning, the enhanced platform facilities will provide capacity to produce the Yolla Field over the remainder of its life. In parallel with this work, planning and engineering for Phase 2 of the MLE, involving the drilling of at least two further development wells will be undertaken. This work will also include evaluation of upside potential for oil recovery from reservoir sands already intersected by existing wells.
Delivery of the core operating business will be an important focus, with a production target of 5.0 to 5.5 million BOE and an emphasis on improving operating efficiency and reducing operating costs.
AWE will target selective growth opportunities to add to the asset portfolio for growth beyond 2011-12. This will include the rebuilding of the exploration portfolio with new acreage. The Company will also consider opportunities for growth as an energy company, including further unconventional gas opportunities, where AWE has already experienced significant success.

WHERE WE
GO FROM HERE

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and gas companies, including Marathon Oil,

complete major acquisitions of acreage in the region.

“

“

More recently, we have seen larger upstream oil

A

WE’s investment in the Sugarloaf shale gas project in the USA has been a success for the Company. At the time, it

represented a significant investment for AWE in a new and developing business.
AWE acquired a minority equity interest in Adelphi, as part of the 2008 merger with Arc Energy Limited. In 2008, Adelphi acquired an interest in the US shale gas industry in a largely unknown play called the “Eagle Ford Shale” in southern
Texas. Initial exploration drilling was undertaken during 2008 and 2009, which AWE supported through additional capital investment. Based on the assessment of the public data, AWE made a takeover offer for Adelphi in May 2010 which valued
Adelphi at $75 million. At that time, the proposed takeover was considered, by a part of the investment community, to include significant risk.
AWE completed the takeover of Adelphi in September 2010 and subsequent drilling of the acreage during 2010-11 has delivered commercial production and increased the Company’s 2P reserves by 8.5 million BOE at 30 June 2011.
Development drilling is planned to continue for a number of years, targeting increased production and development of AWE’s 8.7 million BOE of additional Contingent Resources. More recently, we have seen larger upstream oil and gas companies, including Marathon Oil, complete major acquisitions of acreage in the region at comparative prices well above the initial acquisition cost for AWE.
The Sugarloaf acquisition has provided AWE with a valuable investment in the relatively new unconventional gas industry. The Company is leveraging the technical knowledge and experience it is gaining from Sugarloaf and applying this to its shale gas and tight gas project in the onshore Perth Basin and to initial joint study opportunities with the government in onshore Indonesia. The investment is a good example of managing risk and delivering value for shareholders in the energy industry.

INVESTMENTS FOR
THE FUTURE – THE
RISK, THE REWARD

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to continue to deliver significant production

and cash flow to AWE over the next two decades.

“

“

The BassGas Project has the potential

T

he BassGas Mid Life Enhancement (“MLE”) project is a major development investment for AWE.

The Company holds a 57.5% interest in the project and AWE’s share of development expenditure during
2011-12 is forecast to be approximately $135 million.
The MLE Project was planned as part of the original BassGas development and will be undertaken in two phases over the next two years. Phase 1 involves the construction and installation on the existing platform of gas compression and accommodation modules, scheduled for the end of 2011. Phase 2 will include the drilling of at least two additional gas production wells on the Yolla Field during 2012-13.
Once completed, the BassGas facilities will be capable of producing the remaining reserves of the project over an asset life extending well past 2020. With gas compression and additional production wells, the platform facilities will be capable of producing at rates well above the current rate of approximately
50 TJ per day.
During the MLE Project, AWE will be pursuing additional value from BassGas through evaluation of oil discovered in the Upper EVCM sand in the Yolla Field which could be developed during Phase 2 MLE. With the forecast strengthening in Australian east coast gas prices over the next few years, additional potential value for AWE also exists in the sale of uncontracted gas beyond 2017 and the potential development of the neighbouring Trefoil and White Ibis discoveries in that time frame.
The BassGas Project has the potential to continue to deliver significant production and cash flow to AWE over the next two decades.

INVESTMENTS FOR
THE FUTURE – THE
RISK, THE REWARD

“

The Perth Basin shale gas operations

will be undertaken at depths below 2,500 metres, providing over 1,000 metres of separation

“

between shale reservoirs and the deepest fresh water aquifers.

A

WE recognises the fundamental importance of operating a sustainable business, particularly with regards to safety and

environmental management. This applies to its conventional oil and gas operations and to its unconventional gas business.
In Australia we have seen growing public concern over the potential environmental impact of unconventional gas exploration and development activities in relation to coal seam methane projects in the eastern states. The industry is faced with the challenge of both properly managing environmental risks and ensuring community understanding of these risks.
AWE plans to undertake exploration and appraisal activities on its onshore Perth Basin acreage during 2011-12, including the hydraulic stimulation of wells. The Company is working in an open and transparent manner with all the stakeholders in the areas in which these operations will take place and has engaged in communication with government regulators, local councils and landowners.
Shale gas operations planned for the Perth Basin differ significantly from coal seam methane operations. Whereas coal seam gas extraction is typically undertaken at depths less than 1,000 metres, the Perth Basin shale gas operations will be undertaken at depths greater than 2,500 metres, providing over 1,000 metres of separation between shale reservoirs and the deepest fresh water aquifers. If exploration is successful and development proceeds, the number of operating locations will be significantly less than that required for coal seam methane development. The use of horizontal wells, with lengths of up to 1,500 metres, and the drilling of multiple wells from each site will ensure much greater separation of surface locations. In addition, while flow back of fluids used during well stimulation is planned and will be managed through retention ponds, shale gas production does not involve the production of significant volumes of water and exposure to the environment from run-off.
AWE has established management plans to minimise environmental risk. The Company has an excellent record of environmental management with its existing business and will continue to work openly with all stakeholders in all its future activities.

WHAT ISSUES
DO WE FACE,
OUR REACTION
AND THE OUTCOME

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“

“

The Board believes that the Company’s

fundamental value is not fully recognised in the current share price.

A

WE’s share price performance over the 2010-11 financial year has been disappointing. The Company’s share price

performance was impacted by the lack of success from AWE’s two year exploration program completed during the year which did not deliver material results. This was compounded by the increased volatility in global financial markets and the announcements of the introduction of a Carbon Tax and new onshore Petroleum Tax in Australia.
The Board believes that the Company’s fundamental value is not fully recognised in the current share price. The Company has a valuable portfolio of development and production assets and significant potential value in its shale gas initiatives. The exploration portfolio and the 78 million BOE of Contingent Resources add further potential value for the Company.
The Board and Management are confident that AWE has an excellent platform for growth in place and that the initiatives being taken by the Company will provide an enhanced share price performance in the future.

AWE AS AN
INVESTMENT –
THE SHARE PRICE
IN PERSPECTIVE
AWE Share Price
$2.00
$1.90
$1.80

$ per share

$1.70
$1.60
$1.50
$1.40
$1.30
$1.20
$1.10
$1.00
01 Jul 10

AWE ANNUAL REPO RT

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01 Oct 10

01 Jan 11

Y EAR ENDED 30 JUNE 2011

01 Apr11

01 Jul 11

“

“

AWE reported a reduction in greenhouse gas

emissions across its operations, following a similar reduction in emissions over the previous corresponding period.

A

WE initiated formal sustainability reporting in 2008. The Company has structured processes and procedures in place

to capture key data with regards to the sustainable performance of the Company. The data collected includes measurable progress in relation to the Safety, Community, Team and Environmental performance of AWE-Operated and Non-Operated activities. The results of this work have been published in a separate report, titled the “2011 AWE Sustainability Report”, which is now available on the AWE website.
AWE reported a reduction in greenhouse gas emissions across its operations, following a similar reduction in emissions over the previous year. Importantly, the Company’s safety performance improved markedly across Operated and Non-Operated sites during the year, with only a single Lost Time Injury being recorded.
In AWE’s operated activities, the Company has established strong and open relationships with its stakeholders, including government regulators, local councils and communities in which it operates. This particularly applies to AWE’s unconventional gas operations where the Company has communicated openly with government regulators and landowners and established protocols under which its operations will be managed.

MEASURING OUR
SUSTAINABLE
BUSINESS

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AWE JOINT VENTURE INTERESTS
JOINT VENTURE INTERESTS AT 30 JUNE 2011
JOINT
VENTURE

AREA

INTEREST
(%)

AREA

Production

JOINT
VENTURE

INTEREST
(%)

Exploration

Australia

Australia

Bass Basin

T/L1

57.50

Otway Basin

VIC/P 44

25.00

Perth Basin

WA 31 L

57.50

Bass Basin

T/18 P

47.50

T/44 P

40.00

L1/L2 Dongara
L1/L2 Hovea & Eremia

100.00

EP 320

33.00

L4/L5/PL 6 Woodada

100.00

50.00

EP 413

44.25

L7 Mt Horner

100.00

EP 455

90.00

L11 Beharra Springs

33.00

L14 Jingemia

Perth Basin

44.14

New Zealand
Taranaki Basin

Otway Basin

PEP 381202

100.00

VIC/L 24

25.00

PEP 38481

53.75

VIC/L 30

25.00

PEP 38524

60.00

PEP 51321

44.32

PEP 38259

25.00

Bulu PSC

42.50

New Zealand
(1)

Taranaki Basin

Canterbury Basin
PMP 38158

42.50
Indonesia

Argentina
Neuquen Basin

East Java Basin
LBEC

15.00

East Muriah PSC
Terumbu PSC

United States of America

50.00
100.00

Titan PSC
North Madura PSC

19.25

Block no. 74

10.00

50.00

Block no. 7

Sugarloaf AMI

40.00

29.75

Yemen

Notes:
1. Subject to a Net Cash Interest payable to the previous owners of a subsidiary of the Company (AWE Taranaki Limited, previously New Zealand Overseas Petroleum Limited), if returns from the Tui
A rea oil project in PMP 38158 exceed certain benchmark levels.
2. The Company is also entitled to a Net Profits Royalty at rates varying from 7.5% to 8.3% from the Tintaburra field in ATP 299P. This royalty will be received when gross revenues from the permit exceed the sum of total expenditures from the permit.

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Y EAR ENDED 30 JUNE 2011

AWE RESERVES AND RESOURCES
PROVED PLUS PROBABLE RESERVES AT 30 JUNE 2011 (AWE SHARE)

AREA

South East Australia
Bass Basin
Otway Basin
Western Australia
Offshore Perth Basin
Onshore Perth Basin
New Zealand
Taranaki Basin
United States of America
Sugarloaf AMI
Total

SALES GAS
(PJ)

LPG
(KTONNES)

CONDENSATE
(MILLION
BARRELS)

OIL
(MILLION
BARRELS)

TOTAL
MMBOE

NOTES

148.4
63.4

467.3
–

5.7
0.1

0.5
–

36.3
10.6

1
2

–
14.8

–
–

–
–

4.0
0.1

4.0
2.6

3

–

–

–

4.1

4.1

4

25.6
252.2

–
467.3

4.3
10.0

–
8.6

8.5
66.1

Notes:
1. W hite Ibis and Trefoil fields not classified with proved or probable reserves pending future appraisal/commercialisation. Oil reserves in Yolla only include recovery from initial gas development well Yolla-03.
2. V IC/P44 Reserves adjusted following added production data. Henry Field adjusted downward. Netherby and Casino adjusted upward from June 2010 figures.
3. Includes the following fields – Hovea, Jingemia,Dongara, Corybas, Beharra Springs and Redback Terrace.
4. Tui, Amokura and Pateke fields reserves revised down as a result of Static and Dynamic Modelling.

CONTINGENT RESOURCES (2C) AT 30 JUNE 2011 (AWE SHARE)
AREA

South East Australia
Bass Basin
Otway Basin

SALES GAS
(PJ)

LPG
(KTONNES)

CONDENSATE
(MILLION
BARRELS)

OIL
(MILLION
BARRELS)

TOTAL
MMBOE

NOTES

138.3
28.9

308.1
–

6.8
–

6.6
–

40.0
4.8

1
2

–
42.1

–
–

–
0.4

1.2
0.9

1.2
8.2

3
4

New Zealand
Taranaki Basin

–

–

–

1.4

1.4

5

Indonesia
East Java Basin

81.2

–

–

–

13.5

6

26.5
316.9

–
308.1

4.3
11.5

–
10.0

8.7
77.8

Western Australia
Offshore Perth Basin
Onshore Perth Basin

United States of America
Sugarloaf AMI
Total
Notes:
1.
2.
3.
4.
5.
6.

Includes Upper and mid EVCM in Yolla field and Trefoil,White Ibis and Rockhopper discoveries.
Comprises the Netherby additional potential and the Martha and Black Watch discoveries.
Comprises the Cliff Head West High and in-field volumes.
Comprises tight gas resources for Elegans (Corybas), Senecio and Snottygobble, and contingent oil resources from Drakea and Centella. Excludes onshore Perth Basin shale potential.
Comprises infill opportunities in existing fields.
Relates to gas in Lengo discovery.
Conversion Factors used: Gas 6 PJ = 1 mmboe LPG: 1 tonne = 11.6 boe Oil 1 barrel = 1 boe Condensate 1 barrel = 1 boe

AWE ANNUAL REPO RT

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Y EAR ENDED 30 JUNE 2011

DIRECTORS’ REPORT
David is currently a non-executive director of Woodside Petroleum Ltd, Po Valley
Energy Ltd and ACER Energy Limited (formerly Innamincka Petroleum Ltd).

The directors present their report of the consolidated entity (“AWE”), being the Company and its controlled entities, for the year ended 30 June 2011 and the auditor’s report thereon.

David was appointed a non-executive director of AWE on 22 June 2006. He is a member of the Audit and Governance Committee and Chairman of the Sustainability Committee.

BOARD CHANGES
Bruce McKay retired as Chairman and Non-Executive Director of AWE at the conclusion of the 2010 Annual General Meeting and has been replaced by Bruce Phillips.

Andy J. Hogendijk, Independent Non-executive Director, AAUQ,
FCPA, FAICD

Nick Jukes was appointed a Director of AWE on 24 August 2010. Mr Jukes has extensive construction and project management experience and has a strong understanding of project risk.

Andy Hogendijk has had an extensive senior financial management career with
Suncorp Metway, Commonwealth Bank and the John Fairfax Group and roles with
Shell Company of Australia and Australian Paper Manufacturers.

Vijoleta Braach-Maksvytis was also appointed to the Board on 7 October 2010. Dr.
Braach-Maksvytis has forged a distinguished scientific career in technology, spanning interests across the areas of research, business, science, commercialisation, community partnerships and the mentoring of young entrepreneurs and senior executives.

Andy is a fellow of CPA Australia and is a non-executive director of Magellan
Flagship Fund Limited. He was formerly Chairman of Gloucester Coal Limited and a non-executive director of Aditya Birla Minerals Limited. He was appointed as a non-executive director of AWE on 4 October 2007 and is Chairman of the Audit and
Governance Committee and a member of the People Committee.

Bruce Wood announced his intention to retire as Managing Director of the Company in
July, 2010. The Board concluded a global search for his replacement with the appointment of Bruce Clement as Managing Director of the Company, effective 1 February 2011.

Ken G. Williams, Independent Non-executive Director, BEc (Hons)
Ken Williams has over 20 years operational experience in corporate finance with an emphasis on treasury and financial risk management as well as diverse experience in mergers, acquisitions, divestments and corporate reconstructions. During his executive career he has worked for significant Australian enterprises including
Renison Goldfields, Qantas, Normandy Mining and Newmont Australia.

BOARD COMMITTEES
As a consequence of the retirement of the Chairman and changes made to board members during the year the Board reviewed and subsequently made changes to the structure and membership of its Committees.

Ken has an Honours degree in Economics and a Masters of Applied Finance and is a member of the Australian Institute of Company Directors. Ken is a non-executive director of Havilah Resources NL, Curnamona Energy Limited and Geothermal
Resources Limited.

Board Committees have been renamed as follows:
The Audit Committee has been renamed and is now known as the Audit and
Governance Committee.
The Remuneration Committee has been renamed and is now known as the
People Committee.
The Operations Risk Committee has been renamed and is now known as the Sustainability Committee.

He was appointed as a non-executive director of AWE on 26 August 2009 and is a member of the Audit and Governance Committee and is Chairman of the People Committee.

Nicholas N. Jukes, Independent Non-executive Director
Nick Jukes is a civil engineer with 30 years experience in the engineering, construction and mining sectors and was formerly a senior executive with Thiess Pty Ltd.

For further details refer to the Remuneration Report set out on pages 33 to 42 and the Corporate Governance Statement set out on pages 43 to 48.

He is a fellow of the Institute of Engineers Australia. During his career with
Thiess Pty Ltd and BHP Billiton Limited, he was actively involved in the planning, development, construction and operations of major coal and metalliferours projects throughout Australia and South East Asia. He is currently Managing Director of
Sedgman Limited and was formerly a non-executive director of Australasian
Resources Limited.

DIRECTORS
The directors of the Company at any time during or since the end of the financial year are:

Bruce J. Phillips, Non-executive Chairman, BSc (Hons) Geol
Bruce Phillips is a petroleum explorationist who has more than 30 years of technical, financial and managerial experience in the upstream energy sector of the oil and gas industry. He has broad domestic and international exploration and production experience throughout Australia, South East Asia, Africa and South America. Bruce is an active member of PESA and the Australian Society of Exploration Geophysicists.

Nicholas was appointed a non-executive director of AWE on 24 August 2011 and is a member of the Sustainability Committee.

Bruce is currently a non-executive director of AGL Energy Limited and non-executive
Chairman of Platinum Capital Limited. He was formerly a non-executive director of
Sunshine Gas Limited.
Bruce was founder and Managing Director of AWE, he retired as Managing Director on 31 August 2007 and was appointed as a non-executive director on 19 November
2009. He is a member of the People Committee.

Bruce F. W. Clement, Managing Director, BSc, BEng (Hons), MBA
Bruce Clement has 30 years of oil and gas industry experience, including banking sector exposure, having held engineering and project management, commercial and supervisory roles with Exxon Corporation and Ampolex Limited, before joining AIDC
Limited (Australian resource bank). Bruce joined ROC Oil Limited in 1997 and held the positions of Commercial Manager, Company Secretary and Chief Financial Officer, and Chief Operating Officer before being appointed Chief Executive Officer in 2008.

Vijoleta Braach-Maksvytis, Independent Non-executive
Director, BSc PhD MAICD
Dr Vijoleta Braach-Maksvytis is an innovation strategist with more than 20 years experience in organisational change, formation of cross-sectoral and global partnerships, the commercialisation of technology, and intellectual property strategy.
Previous roles include Head of the Office of the Chief Scientist of Australia, Senior
Executive and Director Global Development for CSIRO, and most recently, Deputy
Vice Chancellor Innovation and Development at the University of Melbourne, and she is currently an advisor in the area of social innovation.
Dr Vijoleta Braach-Maksvytis is a Member of the Australian Federal Government’s
Green Car Innovation Fund Committee, on the advisory board of the Intellectual
Property Research Institute of Australia, and is also a member of other public interest boards. She is currently a non-executive director of Orbital Corporation Limited.
Vijoleta was appointed a non-executive director of AWE on 7 October 2011 and is a member of the People Committee and the Sustainability Committee.

Bruce was appointed Managing Director of AWE on 1 February 2011.

David I. McEvoy, Independent Non-executive Director, BSc
(Physics), Grad Dip (Geophysics)
David McEvoy has a petroleum geoscience background with almost 40 years experience in international exploration and development. He has held several senior executive positions in affiliates of ExxonMobil, most recently Vice President,
Business Development in ExxonMobil Exploration Company from 1997 to 2002.

AWE ANNUAL REPO RT

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Y EAR ENDED 30 JUNE 2011

DIRECTORS’ REPORT
Directors of the Company who resigned during the financial year are listed below:

Bruce G. McKay, Independent Non-executive Chairman, BSc (Hons) Geol, FIEAust, FAICD
Bruce McKay is a geologist with almost 40 years experience in professional, management and executive roles in the upstream oil and gas industry.
Bruce is an Honorary Life Member of APPEA, a member of PESA and the American Association of Petroleum Geologists, a Fellow of the Institution of Engineers Australia and a
Fellow of the Australian Institute of Company Directors. He is the non-executive Chairman of KUTh Energy Limited, Epic Energy Holdings Pty Ltd and Digitalcore Pty Ltd and an executive coach with the Stephenson Mansell Group.
Bruce was appointed Chairman of the Board of AWE on 19 March 1997. He was Chairman of the Remuneration Committee and was a member of the Sustainability Committee.
Bruce retired as a director on 18 November 2010.

Bruce J. W. Wood, Managing Director, BE (Hons) Mining
Bruce Wood is a petroleum engineer with over 30 years of technical, commercial and management experience in the upstream oil and gas industry. In addition to extensive experience in Australia, he has also lived and worked in Holland, France, the United States of America and Central America.
Prior to joining AWE, Bruce was the General Manager and a director of Delhi Petroleum Pty Ltd.
Bruce was appointed executive director of AWE on 11 April 2007 and retired as Managing Director on 31 January 2011.

COMPANY SECRETARY
Neville Kelly – Chief Financial Officer and Company Secretary, BCom (Merit), CPA
Neville Kelly is an accountant with 29 years commercial experience including over 20 years in the upstream sector of the Australian oil and gas industry, including 12 years experience with Bridge Oil Limited. Neville is also the Chief Financial Officer of AWE and joined the Company on its public listing in 1997. He is responsible for all aspects of AWE’s financial, accounting and secretarial operations.
Neville was appointed to the position of Company Secretary in October 1999.

DIRECTORS’ MEETINGS
The number of directors’ meetings (including meetings of committees of directors) and the number of meetings attended by each of the directors of the Company during the financial year were:
AUDIT AND GOVERNANCE
COMMITTEE
MEETINGS

DIRECTORS’
MEETINGS

DIRECTOR

PEOPLE
COMMITTEE
MEETINGS

SUSTAINABILITY
COMMITTEE
MEETINGS

A

B. J. Phillips
B. F. W. Clement
D. I. McEvoy
A. J. Hogendijk
K. G. Williams
N. N. Jukes
V. Braach-Maksvytis
B. G. McKay
B. J. W. Wood

B

A

B

A

B

A

B

13
5
12
13
13
10
8
6
8

13
5
13
13
13
10
10
6
8

–
–
5
5
5
–
–
–
–

–
–
5
5
5
–
–
–
–

2
–
–
3
3
–
2
1
–

2
–
–
3
3
–
2
1
–

1
–
3
–
–
2
2
1
–

1
–
3
–
–
2
2
1
–

A – Number of meetings attended.
B – The number of meetings held during the time that the director held office during the financial year.

REMUNERATION REPORT
The Remuneration Report is set out on pages 33 to 42 and forms part of the Directors’ Report for the financial year ended 30 June 2011.

CORPORATE GOVERNANCE STATEMENT
Details of the Company’s corporate governance practices are included in the Corporate Governance Statement that is set out on pages 43 to 48 and forms part of the Directors’
Report for the financial year ended 30 June 2011.

PRINCIPAL ACTIVITIES
The principal activities of the consolidated entity during the course of the financial year included: exploration for oil and gas; appraisal and development of oil and gas properties; and production and sale of oil, gas and condensate.

AWE ANNUAL REPO RT

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Y EAR ENDED 30 JUNE 2011

DIRECTORS’ REPORT
OPERATING AND FINANCIAL REVIEW
Overview of the consolidated entity
YEAR TO JUNE

2011

2010

Gas production (PJ)
LPG production (tonnes)
Condensate production (bbls)
Oil production (bbls)
Total production (‘000 BOE)

20.6
25,888
427,000
1,968,000
6,123

15.8
14,315
229,000
3,059,000
6,089

% CHANGE

Sales revenue ($’000)
Net field contribution ($’000)*
Pre-tax loss ($’000)

304,870
171,810
(160,535)

354,161
223,945
(23,892)

(14)
(23)
N/A

Net loss after tax ($’000)

(117,555)

(28,930)

N/A

30
81
86
(36)
–

* Sales revenue less production costs and royalties. Refer also to Note 10 for information by segment.

Summary of financial performance
AWE’s sales revenues fell 14% to $305 million; net field contribution also fell by 23% to $172 million. Average received oil prices were higher at A$91 per barrel against A$83 per barrel in the prior year. Total production volumes, although in line with the previous year, include a lower percentage contribution from high margin oil production. Production costs of $129.9 million included costs associated with the Pateke workover at the Tui Area oil project (approximately $22 million).
A net oil and gas asset impairment charge of $14.8 million ($35.7 million pre-tax, $20.9 million tax effect) impacted the results for the year. This impairment is mainly in relation to the Cliff Head oil field and is primarily due to a reassessment of long term operating costs over the life of the field.
In accordance with AWE’s successful efforts accounting policy, $63.2m of exploration and evaluation costs were expensed during the period compared to $102.8m in the prior year. All costs incurred during the period in relation to the drilling of the Kahu, Tuatara, Jebel Al Milh and Silvereye exploration wells were expensed. In addition, a net exploration and evaluation asset impairment charge of $60.7 million ($101.3 million pre-tax, $40.6 million tax effect) impacted the results. This impairment is mainly in relation to the ARC Energy Limited merger purchase price allocated to the Bass Basin and Yemen exploration assets in 2008.
The taxation benefit for the year totals $43.0 million. Taxation includes the tax effect of the consolidated entity’s Australian Petroleum Resource Rent Tax (“PRRT”) and New
Zealand Accounting Profits Royalty (“APR”) projects. As a producer of oil and gas in Australian and New Zealand offshore waters, the consolidated entity is subject to, in addition to income tax, additional government imposts in the form of PRRT in Australia and APR in New Zealand. Exploration costs incurred outside Australia or New Zealand are not deductible.
As a consequence of the impairments made to “oil and gas” and “exploration and evaluation” assets during the current financial year, following a reassessment of the future cash flow expected to be generated from these assets, $20.3 million has been included in taxation expense during the current financial year, which is related to the derecognition of tax losses previously brought to account as a deferred tax asset.
During the year, the Company generated $140 million in cash flow from operating activities, including $21 million of exploration expense. Together with existing cash assets, the
$161 million cash flow excluding exploration expense was re-invested in acquisition ($32 million), development ($80 million) and exploration ($69 million) activities, including major investments in the BassGas Mid Life Enhancement (MLE) project ($52 million) and the acquisition of the remaining shareholding in Adelphi Energy Limited ($32 million) which delivered a 10% interest in the Sugarloaf shale gas project in the USA.

Summary of financial position
AWE’s balance sheet remains strong, with $117 million of cash as at 30 June 2011. In addition to the available cash, AWE retains a $150 million corporate debt facility which remains undrawn at the end of June 2011.

Cornerstone assets
In New Zealand, the Tui Area oil project (PMP 38158, offshore Taranaki Basin, New Zealand, AWE share 42.5%) completed another year of safe production. Gross oil production totalled 2.81 million barrels (AWE share 1.19 million barrels), down 42% on the corresponding period. Production performance was impacted by natural field decline and the shut-in towards the end of the previous financial year of the Pateke-3H well where a minor leak was identified in the well’s gas lift system which was successfully repaired.
Pateke-3H oil production resumed on 23 October 2010.
The BassGas project (T/L1, Bass Basin, offshore southern Australia, AWE share 57.5%) continued its routine production operations during the year, achieving gross gas sales of
17.7 PJ and strong condensate and LPG yields. AWE’s share of production for the year was 10.2 Petajoules (PJ) of gas with approximately 354,000 barrels of associated condensate, and 26,000 tonnes of LPG. The execution strategy for the BassGas Mid Life Enhancement (MLE) project has been reassessed by the joint venture with the view to establishing a lower risk for project delivery. The BassGas MLE Project is now being progressed in two separate phases: Phase One comprising installation of additional compression facilities and an accommodation module on the platform; and Phase Two comprising the drilling of additional development wells. Work on Phase One has commenced, with engineering and procurement and the budget of $346 million (based on a US$ exchange rate of 0.95) (AWE share $199 million) for Phase One has been approved by the Joint Venture. Of this amount approximately $87 million (AWE share $50.0 million) has been incurred to 30 June 2011. Preliminary engineering and planning for Phase Two drilling is in progress and is focussed on determining the optimal approach for development drilling. The budget for Phase Two is being prepared as part of this work.
The Casino gas project (VIC/L 24, Otway Basin, offshore southern Australia, AWE share 25%) continued its strong production performance during the year, producing in excess of 33.1 PJ of gross gas production, in line with the long-term contracted rates. AWE’s share of production for the year was 8.3 PJ of gas with approximately 8,000 barrels of associated condensate.
The Cliff Head oil project (WA 31 L, Perth Basin, offshore Western Australia, AWE share 57.5%) contributed gross production of 1.1 million barrels of oil. AWE’s net share of production was approximately 651,000 barrels for the year. Work on the installation of a higher capacity pump for the Cliff Head-12 well began during the year. These operations were completed subsequent to year end, with the well restored to production in August 2011.

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DIRECTORS’ REPORT
AWE Limited, via its wholly-owned subsidiary ARC Energy Limited, finalised the acquisition of an interest in a US shale gas play (Sugarloaf AMI) through the takeover of Adelphi
Energy Limited. AWE reported net condensate production of approximately 65,000 barrels and net gas production was 398 TJ. AWE’s working interest in the Sugarloaf AMI is approximately 10% and AWE has a Net Revenue Interest of approximately 7.5% after deduction of landowner royalties.
The Onshore Perth Basin operations (AWE share 33.0% to 100%) continued to contribute modest levels of oil and gas production through the year, totalling 0.12 million barrels of oil and condensate and 1.7 PJ of natural gas.

Drilling activity
The wells drilled during the year are summarised as follows:
WELL NAME

LOCATION

AWE SHARE

COMMENTS

Kahu-1
Tuatara-1
Wolf-1
Jebel Al Milh-1
Al Meashar-2
Silvereye-1
Arrowsmith-2
14 wells in Sugarloaf AMI

Taranaki
Taranaki
Perth
Shabwa (Yemen)
Shabwa (Yemen)
Bass
Perth
Eagle Ford Shale

42.5%
60%
33.0%
19.25%
19.25%
40.0%
44.25%
10.0%

Plugged and abandoned
Plugged and abandoned
Successful gas appraisal well
Gas shows, well suspended
Successful oil appraisal well
Plugged and abandoned
Cores cut, future hydraulic stimulation planned
All wells cased and suspended as successful production wells

Future performance and strategy
The Company has maintained its focus on maximising the value of existing assets during the year. Significant work was undertaken on key assets, including the Perth Basin shale gas project, BassGas and Cliff Head. A substantial amount of work was successfully concluded on workover activities during the year which restored production capacity at three of AWE’s offshore operations and has removed some of the risk to the forward cash flows.
The BassGas MLE project has moved forward with the commitment to capital expenditures for the first phase of the development, incorporating the offshore construction and installation elements of the project. The offshore installation element of the first phase of the development is expected to be undertaken in the 2011/2012 construction weather-window, with the second stage development drilling expected to be undertaken the following year. A significant amount of engineering work has been and will be undertaken to remove uncertainties associated with the second stage development drilling by optimising the drilling plan and assessing opportunities for long term operating cost reduction. It is also planned to assess production optimisation opportunities within the existing facilities which will include the production benefits from the MLE.
AWE reported on the size of the potential shale gas resource in the Perth Basin which is being pursued through the Shale Gas initiative. Initial hydraulic fracture stimulation of shale gas wells is planned to be undertaken during 2011. This exciting project has the capacity to substantially change AWE in the future.
Recent transactions for shale gas assets in the USA have highlighted the increased potential value of AWE’s Sugarloaf asset, where Marathon Oil has acquired the interests of Hilcorp Resources in the Sugarloaf area and will take over operatorship of AWE’s acreage. Importantly, AWE expects to see further acceleration in development drilling in
Sugarloaf under Marathon’s operatorship.
The final changes to the AWE Board were completed with the commencement of Bruce Clement as Managing Director in February 2011. The extensive board renewal has been designed to provide an added emphasis on financial discipline and risk management as AWE emerges as an Energy Company rather than just a conventional exploration and production entity.
Under the renewed Board and Management, a company-wide review of assets, including independent reviews of reserves, was implemented during the year. The work confirmed the previously reported 2P reserves for Cliff Head, Casino, BassGas and Sugarloaf. However, preliminary work undertaken by AWE on Tui indicates a reduction in
AWE’s net remaining developed 2P reserves to 4.1 million BOE at 30 June 2011. Further work will be undertaken during the 2012 financial year to complete the evaluation work, including assessment of additional potential recovery from infill drilling and the independent review of AWE’s work. The Company’s 2P reserves at 30 June 2011 of 66.1 million
BOE, and diverse asset base provide a strong foundation for sustained cash flow generation.
At year end, AWE held a net cash position of $117 million and 2P Reserves of 66.1 million BOE in a portfolio of production assets. During the year, the Company generated sales revenue of $305 million and cash flow from operating activities of $140 million. The Board believes AWE is in a strong financial position and is well positioned to take advantage of opportunities to add to its asset base and to further exploit those assets within the Company’s existing portfolio.
The board and management looks towards the future with considerable optimism.

SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS
Other than as set out below, in the opinion of the directors there were no significant changes in the state of affairs of the consolidated entity during the financial year under review.
During the previous financial year, AWE’s wholly-owned subsidiary ARC Energy Limited made an on-market takeover offer to acquire all of the outstanding ordinary shares in
Adelphi Energy Limited that it did not already own. On 25 June 2010, AWE acquired a controlling interest in Adelphi Energy Limited (“Adelphi”). On 1 September 2010, AWE advised that ARC had completed the compulsory acquisition of all the remaining shares in Adelphi, taking its shareholding to 100%.

DIVIDENDS
No dividends were paid or declared by the Company since the end of the previous financial year.

EVENTS SUBSEQUENT TO BALANCE DATE
AWE’s wholly-owned subsidiary ARC Energy Limited sold all of its ordinary shares held in Buru Energy Limited on 29 July 2011. Net proceeds from the sale of the shares amounted to $16.93 million. The shares in Buru Energy Limited are classified as a current available-for-sale financial asset as at 30 June 2011, refer also to Note 14.
In July 2011, a proposed carbon pricing mechanism was announced by the Australian Federal Government. Uncertainties exist with regards to the impact of any carbon pricing mechanism on the consolidated entity as key parts of the legislative scheme have yet to be drafted, and the draft legislation already released must be voted on and passed by both houses of Parliament.

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29

Y EAR ENDED 30 JUNE 2011

DIRECTORS’ REPORT
LIKELY DEVELOPMENTS

OPTIONS

As noted above, the Australian Federal Government released the draft Clean Energy
Bill 2011 which will have an impact on the Australian economy, and also on the AWE
Group. The Bill, which is not substantially enacted, is expected to be finalised in
November 2011 with a commencement date on 1st of July 2012. Management is currently reviewing its operations, expected financial impacts and opportunities, based on the information released, however this may change as the Bill is finalised.

Under the Company’s Share Option Plan, options to subscribe for ordinary shares in the Company were issued at the discretion of the directors and the exercise price and exercise period were determined on the basis of rewarding employees if the
Company’s share price achieves significant long-term growth. Options are unlisted and are granted with exercise prices not less than the average market price of the
Company’s shares for the five days prior to grant.

In the opinion of the directors, the provision of further information regarding likely developments in the operations of the consolidated entity in future financial years and the expected results of those operations would be likely to result in unreasonable prejudice to the consolidated entity and, accordingly, has not been included in this report.

The Plan was approved by shareholders at the time of the float of the Company.
The sum of the number of shares issued on the exercise of options in the previous five years and the number of unexercised options cannot exceed 5% of the total number of shares on issue at any time.

DIRECTORS’ INTERESTS
The relevant interest of each director in the share capital of the Company, as notified by the directors to the Australian Securities Exchange (“ASX”) in accordance with section 205G(1) of the Corporations Act 2001, at the date of this report is as follows:

No options were granted during the financial year and up to the date of this report, and no options will be granted to employees in the future as the Share Option Plan has been replaced by the share rights plan.
At the date of this report the details of options on issue under the Company’s Share
Option Plan are as follows:
NUMBER

B. J. Phillips
B. F. W. Clement
D. I. McEvoy
A. J. Hogendijk
K. G. Williams
N. N. Jukes
V. Braach-Maksvytis

2,900,000
–
30,000
10,000
–
–
–

No directors’ interests are subject to margin loans.
Details of employee share options are set out under “Options”.

SHARE RIGHTS
The Employee Cash Share Plan (“the Share Rights Plan”) was approved by shareholders at the Annual General Meeting held on 19 November 2009. It is designed to generate performance-based cash awards that may be converted, at the
Board’s discretion, into cash, AWE shares or other employee benefits.
The key elements of the plan include:

EXERCISE PRICE

65,000
150,000
555,000
2,165,000
45,000
250,000
300,000
125,000
275,000
300,000
1,466,000
75,000
437,500
6,208,500

FULLY PAID
ORDINARY
SHARES

$3.10
$2.86
$2.68
$3.56
$3.56
$2.77
$3.18
$3.65
$4.10
$4.08
$3.28
$2.60
$2.75

EXPIRY DATE

9 November 2011
14 January 2012
11 March 2012
14 July 2012
8 October 2012
10 April 2012
30 August 2012
6 April 2013
12 May 2013
11 June 2013
14 August 2013
15 January 2014
15 June 2014

The Company has not issued ordinary shares as a result of the exercise of options during or since the end of the financial year.

INDEMNIFICATION AND INSURANCE OF OFFICERS

Rights will be granted automatically each year;
The number of rights granted will be determined by the employee’s level in the
Company, their fixed remuneration and the value of the right, which is related to the 30-day Volume Weighted Average Price (“VWAP”) of the AWE share price in the June of the year of grant;
There will be three tranches of rights with separate vesting criteria:
− Retention
− Absolute Total Shareholder Returns (“TSR”)
− Relative TSR;
The vesting period will be three years and there will be no retesting.
At the date of this report the details of rights on issue under the Company’s share rights plan are as follows:
NUMBER

EXPIRY DATE

1,824,882
3,176,325
5,001,207

30 June 2012
30 June 2013

No ordinary shares were issued during or since the end of the financial year as a result of the vesting of the share rights.

AWE ANNUAL REPO RT

Under the Company’s Constitution, and to the extent permitted by law, every person who is, or has been, a director or secretary is indemnified against:
1. a liability incurred by that person, in his or her capacity as a director or secretary, to another person (other than the Company or a related body corporate of the
Company) provided that the liability does not arise out of conduct involving a lack of good faith; and
2. a liability for costs and expenses incurred by that person:
(i) in defending any proceedings in which judgement is given in that person’s favour, or in which that person is acquitted, or
(ii) in connection with an application in relation to any proceedings in which the
Court grants relief to that person under the Corporations Act.
During the financial year, the Company paid premiums based on normal commercial terms and conditions to insure all directors, officers and employees of the Company against the costs and expenses in defending claims brought against the individual while performing services for the consolidated entity. The premium paid has not been disclosed as it is subject to the confidentiality provisions of the insurance policy.
The Company has entered into Indemnity Deeds to indemnify directors and certain executives of the Company against all liabilities incurred in the course of or arising out of their employment with the Company and its controlled entities, except where the liability results wholly or in part from serious and wilful misconduct by the executive or director.

30

Y EAR ENDED 30 JUNE 2011

DIRECTORS’ REPORT
NON-AUDIT SERVICES
Details of the amounts paid to the auditor of the Company, Ernst & Young, and its related practices for audit and non-audit services provided during the year are set out below.
In addition, amounts paid to other auditors for the statutory audit have been disclosed:

2011
$

2010
$

226,600
–
–
226,600
8,955
235,555

–
321,677
17,711
339,388
2,007
341,395

140,659

–

3,283

–

–
–

838,923
1,160

–
–
143,942

376,261
19,403
1,235,747

Statutory audit:
Auditor of the Company:
Ernst and Young Australia – audit and review of financial reports
KPMG Australia – audit and review of financial reports
Overseas KPMG – audit and review of financial reports
Other auditors – audit and review of financial reports
Services other than statutory audit:
Ernst & Young Australia
– Taxation compliance services
Overseas Ernst & Young firms
– Taxation compliance services
KPMG Australia
– Taxation compliance services
– Taxation services (ARC Energy Limited Scheme of Arrangement)
Overseas KPMG firms
– Taxation compliance services
– Other assurance services

AWE’s auditor changed from KPMG to Ernst & Young for the financial year ending 30 June 2011. This change in auditor was approved by shareholders at the 2010 Annual General
Meeting of the Company. KPMG is AWE’s current tax advisor.

AUDITOR’S INDEPENDENCE DECLARATION UNDER SECTION 307C OF THE CORPORATIONS ACT 2001
The auditor’s independence declaration is set out on page 32 and forms part of the Directors’ Report for the year ended 30 June 2011.

ROUNDING OFF
The Company is of a kind referred to in Australian Securities and Investments Commission (“ASIC”) Class Order 98/100 dated 10 July 1998 and in accordance with that Class
Order amounts in the financial report and the Directors’ Report have been rounded off to the nearest one thousand dollars unless otherwise stated.
Signed in accordance with a resolution of the directors:

B. J. PHILLIPS
Chairman

B. F. W. CLEMENT
Managing Director

Dated at Sydney this twenty ninth day of August 2011

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31

Y EAR ENDED 30 JUNE 2011

AUDITOR’S INDEPENDENCE DECLARATION
TO THE DIRECTORS OF AWE LIMITED

In relation to our review of the financial report of AWE Limited for the year ended 30 June 2011, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct.

Ernst & Young

Trent van Veen
Partner

Dated at Sydney this 29th day of August 2011

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32

Y EAR ENDED 30 JUNE 2011

REMUNERATION REPORT
INTRODUCTION

2.

This report is prepared in accordance with section 300A of the Corporations Act 2001
(the Act) and has been audited as required by section 308 (3C) of the Act. Where appropriate, information which is included in other parts of the Annual Financial
Report is included in this report by reference.

For the purposes of this report, the senior executives who represent Key
Management Personnel of the consolidated entity at any time during the June 2011 financial year were:
Senior Executive

Position

This report sets out remuneration information pertaining to directors and senior executives who are the ‘Key Management Personnel’ of the consolidated entity.
Key Management Personnel are defined as those persons having authority and responsibility for planning, directing and controlling the activities of the consolidated entity, directly or indirectly.

Bruce F. W. Clement

Managing Director (appointed on 1 February 2011)

Bruce J. W. Wood

Managing Director (retired as a director on 31 January 2011, ceased employment 30 July 2011)

Dennis Washer

Chief Operating Officer/General Manager, New Zealand

1.

Executive summary

Neville F. Kelly

Chief Financial Officer/Company Secretary

Objectives

Ian D. Palmer

General Manager, Development

Brod W. Wray

General Manager, Business Development

Dave Gaudoin

General Manager, Exploration and Geoscience
(from 7 February 2011)

1.1

The key objectives of AWE’s remuneration practices are to:
Align the interests of senior executives and shareholders;
Attract and retain suitably qualified senior executives; and
Motivate senior executives to achieve superior performance

1.2

Key management personnel

General Manager, Europe (to 6 February 2011)
Leigh J. Brooks

Mix of remuneration

To achieve these objectives remuneration packages consist of:

The five highest paid executives of the consolidated entity are included above.

Fixed remuneration (refer section 4);
Short-term performance benefits (refer section 5); and
Long-term performance benefits (refer section 6).

3.

The remuneration structures take into account: the performance of the consolidated entity including:
− the growth in total returns to shareholders;
− the consolidated entity’s financial results;
− delivery of base business (that is, “business as usual”);
− the results of exploration, development and production activities;
− adherence to health, safety and environment policies; and
− compliance with regulatory regimes; the capability and experience of senior executives; the ability of senior executives to control the performance of their relevant area of responsibility; and current economic and industry circumstances.

1.3

Market comparatives

Fixed remuneration levels and remuneration structures are benchmarked against independently provided data on Australian upstream oil and gas companies to ensure that salary packages are reasonable and competitive but not excessive.
To ensure that long-term incentive structures are appropriately aligned to the longterm interests of shareholders, the vesting of share rights (“rights”) are conditional on performance conditions which are tied to the three year total shareholder return of the Company and to the three year return of the ASX 200 Energy Index.

1.4

Planned changes to remuneration structures

Following the recent significant changes at both the board and management level and as part of the continual review of remuneration structures, the Company has reviewed the remuneration structures and is implementing a number of refinements to apply from the June 2012 financial year
Changes will be made in respect of the Share Rights Plan as described in section 6.1 to:
Introduce a mechanism to cap the total number of rights that can be issued each year;
Tighten the eligibility requirement for employees to qualify for rights; and
Change the relative comparator group of companies for the calculation of relative share price performance to those companies comprising the ASX 300 Energy Index.

AWE ANNUAL REPO RT

General Manager, Exploration (to 6 February 2011, ceased employment on 19 August 2011)

33

People committee
(formerly the remuneration committee)

The People Committee is responsible for making recommendations to the Board on remuneration policies and employment practices applicable to directors, senior executives and other employees.
The role and responsibilities of the People Committee are documented in a charter approved by the Board and are reviewed at least annually. A copy of this charter is available on the Company’s website.
The People Committee is to be comprised of not less than two non-executive directors, the majority of whom shall be independent. No executive can be a member of the Committee. The People Committee currently comprises Ken Williams
(Chairman), Bruce Phillips, Andy Hogendijk and Vijoleta Braach-Maksvytis, all of whom are non-executive directors of AWE and are considered to be independent.
Mr Bruce McKay retired as a member of the People Committee on 18 November 2010.

3.1

Role

The role of the People Committee as defined in the charter is to ensure that the remuneration policies and employment practices of AWE: are consistent with the Company’s goals and objectives; deliver outcomes in line with strategic business goals; recognise the scale and complexity of the Company’s business activities; encourage directors and senior executives to deliver short-term objectives and to pursue the long-term growth and success of the Company within an appropriate control framework; deliver a level and composition of remuneration that is appropriate and fair to a broad range of stakeholders; define the relationship of remuneration to corporate and individual performance; and attract and retain talented and effective directors and staff so as to encourage enhanced performance of the Company.
The People Committee also evaluates the appropriateness of remuneration packages given trends in comparable companies, the need to drive a performance-based culture and the objectives of the Company’s remuneration strategy.

Y EAR ENDED 30 JUNE 2011

REMUNERATION REPORT
3.2

Responsibilities

The structure of these short-term performance benefits as a percentage of fixed remuneration are as follows:

The responsibilities of the People Committee as defined in the charter are to review and make recommendations to the Board on:

MANAGING
SENIOR
DIRECTOR (a) EXECUTIVES (b)

policies for employment and remuneration of all AWE staff; recruitment, retention and termination policies and procedures for senior executives; the remuneration package of the Managing Director; the remuneration packages of senior executives in consultation with the
Managing Director; performance schemes including short-term and long-term incentives; superannuation arrangements; the remuneration framework for non-executive directors, within the limit approved by shareholders; management succession planning; the annual Statutory Remuneration Report; other matters as requested by the Board; and the appointment of external remuneration consultants and evaluation of advice from remuneration consultants in accordance with the Act.

4.

Target – meets performance objectives
Stretch – exceeds performance objectives
Total potential short-term performance benefit

20%
20%
40%

(a) 100% of Managing Director KPIs are based on achieving corporate performance measures. (b) 50% of senior executive KPIs are subject to corporate performance and 50% are subject to individual and departmental KPIs over which the individual senior executive has responsibility.
In the special circumstance of outstanding individual performance, the Board may award up to 100% of that individual’s short-term performance benefit even though some KPIs have not been achieved. This special circumstance is designed to reward and retain outstanding employees in times where some KPI targets have not been achieved due to circumstances beyond the control of the individual senior executive.

Fixed remuneration

Fixed remuneration consists of base salary calculated on a total cost basis, including fringe benefits tax and employer contributions to superannuation (if applicable).
Remuneration levels are reviewed at least annually by the People Committee through a process that considers independent externally provided remuneration data and also taking into account the overall performance of the consolidated entity to ensure that remuneration is appropriate and competitive in the market place.
For details of fixed remuneration paid to directors and senior executives please refer to section 10.

5.

25%
25%
50%

Following announcement of the retirement of the former Managing Director,
Bruce Wood, in July 2010, the Board set a number of interim short-term KPI’s for the interim period from July 2010 up to the time of handover to the new Managing
Director. These KPIs addressed specific transition issues as well as a number of corporate performance objectives and were capped at a maximum of 25% of fixed remuneration on a pro rata basis (rather than 50% as per the table above).
For details of short-term performance benefits paid in the June 2011 financial year, refer to section 11.

6.

Long-term performance benefits

Long-term “at risk” performance benefits are awarded in the form of rights with vesting conditions tied to absolute Total Shareholder Returns (“TSR”), relative TSR and retention criteria.

Short-term performance benefits

Short-term performance benefits are awarded in the form of cash bonuses. These benefits are “at risk” and are paid for performance during the financial year and are designed to reward senior executives for meeting or exceeding their respective Key
Performance Indicators (“KPIs”).

The rationale for the choice of this criteria include: to align employees with commonly shared goals related to producing high returns for shareholders over the medium to long term; to encourage and assist employees to become shareholders of AWE themselves; to provide a long-term component of remuneration to enable AWE to compete effectively for the calibre of talent required for the Company to be successful; and to help retain talented personnel, minimise employee turnover and stabilise the workforce.

Each year, the Board sets KPIs for the Managing Director which is based on overall corporate performance targets.
At the time of the appointment of Bruce Clement as Managing Director on 1
February 2011 the board set a number of interim KPI’s for the period to 30 June
2011 to address both immediate transition issues as well as a number of corporate performance and transaction completion objectives.

The Company no longer issues employee share options as a method of rewarding long-term performance and no employee share options have been issued since June
2009. There are however residual unexercised employee share options on issue.

For the June 2012 financial year the Managing Director KPIs will be based on a balanced scorecard approach and include corporate performance measures as follows:
Delivery of base budget (30%) – includes delivery of production, operating expenditure and capital expenditure budgets.

6.1

Share rights plan

Optimisation of the business (30%) – includes implementation of cost control measures, achievement of oil and gas reserves replacement targets, maintaining and improving HSE performance and community and regulatory relationships and overall team performance goals.

As detailed in last year’s Remuneration Report, the Company introduced in the June
2010 financial year a Share Rights Plan for the award of long-term performance benefits.

Business growth (30%) – includes specific targets aimed at expanding the business and positioning the Company for long-term growth.

The key elements of the plan include:

The Share Rights Plan is designed to generate performance-based awards that may be converted, at the Board’s discretion, into AWE shares, cash or other employee benefits.
Rights are granted each year and the number of rights granted will be determined by the employee’s level in the Company and fixed remuneration at the time of grant;
There are three tranches of rights with separate vesting criteria:
− Retention;
− Absolute TSR; and
− Relative TSR
The vesting period is for three years, the rights will lapse after 3 years and there will be no retesting.

In addition, a 10% allowance is determined at the discretion of the board to cover potential changed circumstances during the financial year.
The board believes that the attainment of these measures will result in meaningful shareholder returns both in the short-term and long-term.
For the 30 June 2011 financial year corporate KPIs for senior executives were based on total shareholder returns, base business delivery, growth and sustainability. In addition, the Managing Director sets individual KPIs for the senior executives. These KPI’s take into account individual and departmental performance over which the senior executive has responsibility. The board believes that the attainment of these individual and departmental KPIs is essential in delivering the overall corporate objectives.

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Early vesting of share rights is not permitted other than at the time of change in control of the Company where the extent of any vesting is to be determined at the discretion of the Board. On termination of employment share rights are forfeited

34

Y EAR ENDED 30 JUNE 2011

REMUNERATION REPORT unless and to the extent determined by the Board. The Board has discretion whether or not to make a determination and reserves the right to exercise that discretion having regard to the circumstances that might arise from time to time.
The conditions for the award of rights and the criteria for vesting are:
Retention grants
Calculated using the 30-day VWAP of the AWE share price in June of grant year.
Vest after three years if participant remains employed by AWE.
(Note that in response to market feedback it has been determined that the Managing
Director will no longer receive Retention Grants so as to align long-term benefits to long-term Company performance)
Absolute TSR grants
Calculated using the 30-day VWAP of the AWE price in June of grant year.
Vest after three years according to the Company’s Absolute TSR for that three year period.
AWE TSR

% OF RIGHTS TO VEST

< 6% pa compound
6% pa compound
>6% and 50% and 6% and 50% and