PR

OPERATIONAL RISK

MITIGATION

Inherent risks in conducting exploration, drilling, and construction operations in the upstream industry. The level of risk is potentially impacted by harsh geographical conditions and associated resource availability and costs.

SOCO seeks to mitigate its operational risks through the application of industry best practice procedures. Mitigation may also be achieved by transferring risk, for example, by entering into partnerships or farm-outs and by maintaining, at a minimum, standard industry best practice insurance. The Board of Directors does not believe that it is practical or prudent to obtain third-party insurance to cover all adverse circumstances it may encounter as a result of its oil and gas activities. However, the Board believes that SOCO's comprehensive property, control of well, casualty, liability and other policy cover conforms to industry best practice. As such, it provides substantial protection against typical industry operational risks. The Board believes it has struck an appropriate balance between exposure and coverage.

PR

EMPOWERMENT RISK

MITIGATION

The Group's international portfolio comprises oil and gas ventures in widespread, often remote locations with government and industry partners. Conduct of operations requires the delegation of a degree of decision making to partners, contractors and locally based personnel.

As operator in a project, SOCO can directly influence operations and decision making. Where SOCO is a co-venturer it seeks to maximise its influence through active participation with management, including direct secondments and application of internal control best practice under a procedural framework.

PR

RESERVES RISK

MITIGATION

As discussed in Note 4 to the financial statements, the Group uses standard recognised evaluation techniques to estimate its proven and probable oil and gas reserves. Such techniques have inherent uncertainties in their application. SOCO has projects with booked reserves in the early stages of production, development or non-conventional fracture basement reservoirs, upward or downward revisions to reserve estimates will be made when new and relevant information becomes available. Such revisions may impact the Group's financial position and results, in particular, in relation to DD&A costs and impairment provisions.

Reserve estimates are reviewed regularly by independent consultants. Future development costs are estimated taking into account the level of development required to produce the reserves by reference to operators, where applicable, and internal engineers.

Portfolio management through exploration, appraisal or acquisition may fail to yield reserves in commercial quantities sufficient to replace production.

The Group continues to evaluate projects in existing and potentially new areas of interest and will add exploration licences when the appropriate opportunities arise.

PR

HEALTH, SAFETY, ENVIRONMENT AND SOCIAL RISKS

MITIGATION

The Group operates in an industry sector with inherent high risks associated with HSES. Additionally, it operates in regions where there is a greater risk of economic or social instability and where local attitudes to risk differ compared with nations with more established or developed economies. Accordingly, the Group may be exposed to specific risks in relation to social and environmental factors as well as health and safety matters, including security.

SOCO aims to mitigate such risks by actively engaging with local communities and governments, using specialist consultants and by maintaining its HSES Management Systems, which provides the framework for managing HSES issues and to bring its policies into line with the World Bank IFC Performance Standards on Environment and Social Sustainability published in 2012. Further details of how SOCO addresses these risks can be found in the CSR Report on pages 24 to 33.

POLITICAL AND REGIONAL RISK

MITIGATION

Many of the Group's projects are in developing countries or countries with emerging free market systems where the regulatory environment may not be as mature as in more developed countries. There may be a high level of risk in relation to compliance with and interpretation of emerging hydrocarbon law, taxation and other regulations. Some of the Group's interests are in regions identified as potentially more susceptible to business interruptions due to the consequences of possible unrest.

SOCO seeks to minimise such risks by using in-country professional advisors and by engaging directly with the relevant authorities where appropriate. The Group assesses the risks of operating in these areas before beginning operations and has deemed these risks commercially acceptable. SOCO does not currently carry political risk insurance or associated business interruption insurance coverage to mitigate such risks. However, it periodically assesses the cost and benefit of both and future circumstances may lead the Group to acquire such insurance cover.

BUSINESS CONDUCT AND BRIBERY RISK

MITIGATION

SOCO operates both in an industry sector and in certain countries where the promotion of transparent procurement and investment policies is perceived as having a low priority and where customary practice may fall short of the standards expected by the UK Bribery Act.

The Group seeks to mitigate these risks by ensuring that it has appropriate procedures (including vendor due diligence) in place to eliminate bribery and that all employees, agents and other associated persons are made fully aware of the Group's policies and procedures with regard to ethical behaviour, business conduct and transparency. Annual training and compliance certifications by all associated persons refreshes and reinforces SOCO's Code of Business Conduct and Ethics.

Running in parallel with the Group's general risk management process, the Audit and Risk Committee has established a detailed bribery risk assessment and mitigation reporting procedure. Bribery risks are monitored throughout the year along with implementation of procedures to mitigate any new risks identified. The Company has arrangements for 'whistleblowing', whereby staff may, in confidence, raise concerns regarding improprieties, which would be addressed with appropriate follow-up action. To facilitate such reporting the Company maintains an Ethics Hotline Service using an independent, confidential telephone service that can be used by staff members and other stakeholders to report a suspected breach of SOCO's Code of Business Conduct and Ethics.

PR

STAKEHOLDER AND REPUTATIONAL RISK

MITIGATION

The Group operates in locations where social and environmental matters may be highly sensitive both on the ground and as perceived globally. This can potentially lead to a reputational risk which may influence various Group stakeholders. Actions of international bodies may harm the objectives of the Company and its regional partners.

SOCO works closely with all of its stakeholders including local communities, governments and non-governmental organisations to ensure that, during operations, any disturbance is minimised and that on completion of the Group's activities the local population and environment will be left in, at least, as good a state as when SOCO first arrived. Additionally the Group provides opportunities for direct interfaces with shareholders and analysts at least three times a year and maintains a website to disseminate information widely and in a timely fashion.

PR

COMMODITY PRICE RISK

MITIGATION

Exposure to fluctuations in crude oil prices may lead to reduced cash flows, impairment of assets or locked in losses in longer term contracts. The sustained decline in the oil price has significantly impacted the industry as a whole, including SOCO. The Group does not currently maintain any fixed price, long term marketing contracts. Production is sold on 'spot' or near term contracts, with prices fixed at the time of a transfer of custody or on the basis of an average market price.

The Board may give consideration in certain circumstances to the appropriateness of entering into fixed price, long term marketing contracts. Although oil prices may fluctuate widely, it is the Group's policy not to hedge crude oil sales unless hedging is required to mitigate financial risks associated with debt financing of its assets or to meet its commitments. The budget and various sensitivity cases are regularly tested for downside scenarios and provide comfort that SOCO are able to meet its commitments. No price hedging mechanisms were in place during the year. Over time, during periods when the Group sees an opportunity to lock in attractive oil prices, it may engage in limited price hedging.

FOREIGN CURRENCY RISK

MITIGATION

Generally, it is the Company's policy to conduct and manage its business in US dollars. Cash balances in Group subsidiaries are primarily held in US dollars, but smaller amounts may be held in GB pounds or local currencies to meet immediate operating or administrative expenses, or to comply with local currency regulations. From time to time the Company may take short term hedging positions to protect the value of any cash balances it holds in non-US dollar currencies.

The Group seeks to minimise the impact that debt financing has on its balance sheet by negotiating borrowings in matching currencies. The impact of a 10% movement in foreign exchange rates on the Group's foreign currency denominated net assets as at 31 December 2015 would not have been material (2014: not material) and would not have been material with respect to the Group's profit in 2015 (2014: not material).

PR

LIQUIDITY AND CREDIT RISK

MITIGATION

The Group carried significant cash balances throughout the year thereby decreasing its exposure to liquidity risk and increasing its exposure to credit risk. Additionally the Group's financial asset which is subject to credit risk is in respect of the Group's disposal of its Mongolia interest (see Note 17 to the financial statements) and a non-current receivable in respect of two accumulating abandonment funds in Vietnam.

To mitigate these risks and to protect the Group's financial position, cash balances are generally invested in short term, non-equity instruments or liquidity funds, not generally exceeding three months forward. Investments are generally confined to money market or fixed term deposits in major financial institutions. The Group seeks to minimise credit risk by only maintaining balances with creditworthy third parties including major multinational oil companies subject to contractual terms in respect of trade receivables. The credit risk on liquid funds is limited as the Company only selects institutions with high credit ratings assigned by international credit rating agencies and endeavours to spread cash balances and liquid investments to multiple institutions. The level of deposits held by different institutions is regularly reviewed.

CONTRACTUAL RISK

MITIGATION

The Group enters into various contractual arrangements in the ordinary course of its business. Such contracts may rely on provisional information that is subject to further negotiation at a later date. This may give rise to uncertainty regarding such information.

The Group manages its commitments via the annual budget and regular forecasts, reporting against actuals on a monthly basis. Board delegated authority minimises the exposure to unauthorised commitments.

PR

CAPITAL RISK MANAGEMENT

MITIGATION

The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximising the return to stakeholders through the optimisation of the debt and equity balance

The Group seeks to maintain a significant free cash balance to fund its operations and shareholder distribution policy. There is regular reporting to the Board. Farm out opportunities are considered where deemed appropriate to reduce exposure. There is daily reporting on cash balances and forecasts regularly prepared to monitor cash requirements. Discretionary expenditures are reviewed for potential deferral and cost reduction programmes are in place. Sensitivity cases are monitored on an ongoing basis as funds are spent and forecasts are updated to determine the amount and timing of any additional financing required. The Group maintains relationships and active dialogue with various financial institutions and may consider raising debt or equity finance at the appropriate time.

2015
$ million

2014
$ million

Short term employee benefits

3.5

3.6

Post-employment benefits

0.3

0.3

Share-based payments

1.9

1.6

5.7

5.5