Team Governance

Wednesday, 01 March 2017

Angela Faherty photo
Angela Faherty

    Building a governing team that focuses on diversity, social responsibility and the discovery of future directors is key to ASX listed and Papua New Guinea-based Oil Search’s strategic success. Angela Faherty reports.

    Oil and gas exploration and development company, Oil Search Limited, has come a long way since it was first incorporated in Papua New Guinea (PNG) in 1929. The company is one of the oldest in PNG and indeed, the oil and gas sector globally.

    The company’s history is a fascinating one; it started out as a small entrepreneurial firm financed by small capital raisings and investors willing to take a punt on discovering oil. It wasn’t until the 1980s that the first major oil and gas discoveries were made with the Hides and Kubutu fields coming on stream in 1991 and 1992 respectively. Oil Search subsequently acquired the local interests of global giants BP and Chevron, and became a proper operating business.

    Today, it is the largest private sector employer in the country, as well as the largest taxpayer, and is often hailed as a leader in corporate PNG. It has dual listing on both the Port Moresby Stock Exchange and the Australian Securities Exchange (ASX) and has a market capitalisation of around $11 billion, not a bad achievement for a company that took 62 years to generate its first cash flow.

    Market conditions

    Operating in the volatile oil and gas sector obviously has its challenges. The imbalance of the supply and demand cycle coupled with a fluctuating oil price remains one of the toughest challenges for the business and requires a relentless focus on costs. Equally challenging is the rugged terrain that makes drilling, production and logistics in PNG daunting tasks, but Oil Search’s knowledge of the country and the partnerships it has forged as a result are both key and testament to its success.

    Despite the challenges of operating in a volatile commodities market, Oil Search continues to generate a profit, attributing its success to its high quality assets, low operating costs and its strong balance sheet. Another factor in the organistation’s success is the excellent performance of both the Oil Search-operated PNG oil and gas fields and the PNG LNG Project, a world-scale liquefied natural gas (LNG) project. PNG LNG is operated by US oil and gas company ExxonMobil Corporation, which owns 33 per cent, while Oil Search owns 29 per cent and the PNG government and local landowners are joint venture partners.

    According to its 2015 Annual Report, Oil Search generated a profit of US$360 million that year – a fall of 33 per cent on the previous year – yet a remarkable feat in a year of market volatility that saw average global oil prices drop 50 per cent.

    For Oil Search investors, the obvious impact of oil price weakness was a fall of 12 per cent in total shareholder returns (TSR) in 2015. This is in the context, however, of the company delivering a TSR of 112 per cent over the last decade, outperforming both the ASX 200 and ASX 200 energy indices.

    In fact, in terms of output, 2015 was actually one of the most successful for Oil Search, with production reaching an all-time high of 29.3 million barrels of oil equivalent (mmboe), an increase of 52 per cent on 2014. Production reached another new high in 2016, increasing to 30.2 mmboe.

    Business optimisation

    While Oil Search made a profit in 2015, the volatility of the oil and gas industry and the slump in global oil prices prompted the company to implement a number of initiatives aimed at recalibrating the business. It established a business optimisation program with the aim of delivering superior returns to its shareholders, in a socially responsible way, in a “lower for longer” oil price environment.

    The program included a number of initiatives that would help to simplify Oil Search’s organisational structure and create a leaner and more efficient business model. Integral to this are the company’s six key strategies:

    1. Sustain and optimise the company’s oil and gas assets.
    2. Commercialise gas in PNG.
    3. Pursue high-value exploration opportunities.
    4. Contribute to a stable operating environment.
    5. Enhance organisational capability.
    6. Optimise capital management.

    The plans for expansion are tracking well: the PNG LNG project continues to bear fruit as large tankers regularly ship LNG to customers in China, Korea, Taiwan and Japan, and recent exploration success has the potential to extend the project’s lifespan significantly.

    Another project on Oil Search’s drawing board is the Papua LNG project in the Gulf Province, much closer to Port Moresby. ExxonMobil is soon expected to become a partner in the project, once its bid for Canadian company, InterOil, completes. Once in Papua LNG, Exxon will work alongside the operator of the project, French global oil and gas firm Total, and Oil Search, with the aim of integrating PNG LNG and Papua LNG, to get the maximum economies out of effectively combining the resources.

    Social responsibility

    One of the key elements of the Oil Search business optimisation plan was its desire to drive greater social responsibility. The company delivers US$213 million of infrastructure projects on behalf of the PNG Government under various tax credit schemes and continues to improve its safety performance. In 2016, Oil Search’s total recordable injury rate fell to 1.53 per million hours worked, the fourth year-on-year consecutive improvement.

    In 2015, Oil Search’s governing team, under the guidance of chairman Rick Lee AM FAICD, approved the transition of the Oil Search Health Foundation to the Oil Search Foundation and expanded its remit from health to include leadership, education, and women’s protection and empowerment. The transition included initiatives designed to address the critical tuberculosis challenges in PNG, the rollout of literacy programs in hard-to-reach provinces, and better education for communities and the workforce to combat violence against women.

    In late 2016, following the retirement of long-standing board members Bart Philemon and Ziggy Switkowski AO FAICD, the company saw an opportunity to instigate a number of changes to the make-up of its board. The board strengthened its diversity by appointing PNG national Mel Togolo CBE MAICD, a founding member of the Business Council of Papua New Guinea and its president for more than six years, and former Oil Search director, Fiona Harris FAICD who returned to the board after stepping down in December 2015 with a personal health issue. As a consequence of these appointments, there are now two female directors and three PNG nationals serving as directors.

    It was also announced that three new roles would be created at the board committee level. These roles have been filled by three PNG citizens – two women and one man. The appointments of the independent committee members (ICMs) for an initial two-year term signalled the start of a long-term trainee director program that Oil Search hopes will spearhead the next generation of PNG directors. The company is working with the Australian Institute of Company Directors’ (AICD) Advisory unit to deliver a series of workshops as part of its induction and training process.

    Company Director recently spoke to the Oil Search chairman Rick Lee, two of its directors, Dr Eileen Doyle and Fiona Harris, and the three independent committee members, Richard Kuna, Mary Johns and Serena Sasingian Sumanop about building a governing team for the future. Here is an edited version of the interview:

    Company Director (CD): Oil Search is a dominant player in the oil and gas industry and its role as a key PNG player cannot be overstated. What do you feel is the key to its success?

    Rick Lee (RL): Most of our focus, certainly during my time on the board and for many years before that, has been on the continuing efficient operation of Oil Search’s oil fields, the development and commissioning of the big PNG LNG project and the planning and construction of the next big LNG project that is expected to commence in the next two years. It’s a pretty good story, particularly as Oil Search was a minor player with no production 25 years ago and is now a very substantial company with a market capitalisation of $11 billion.

    The share price has grown very strongly and it’s been a very strong performer on the ASX for shareholders seeking long-term growth.

    As a PNG company, we play an important facilitation role in the country because I think we are regarded as the company that knows PNG the best. The fact that major global oil and gas companies such as Exxon and Total are happy to partner with us to get these projects off the ground, is a great credit to the company.

    Eileen Doyle (ED): From my perspective, Oil Search has a number of key competencies in that it is low cost and in the bottom quartile in its field, which in a commodity-based business is very important. In good times you do extremely well, but even in bad times you do a lot better than your competitors. So that’s one great benefit. The other is it has a key competency in exploiting rugged terrain exploration for oil and gas and some of its exploration skills are used by other oil companies who don’t have those skills. It also has meaningful and sustainable community involvement. I was highly impressed with how involved Oil Search is in the communities it operates in. It has an excellent sustainability program and has a reputation for that.

    CD: Working across two jurisdictions must be challenging. How does the board manage these challenges?

    RL: I guess most of what we do is keep a very close eye on making sure that all of Oil Search’s activities have significant components that are compatible with national development priorities. PNG’s national petroleum and oil legislation requires that, so the PNG government has a right to invest in the project, which they did in PNG LNG and they will do in due course in Papua LNG, which is the new project that’s on the drawing board. The PNG government gets royalties and taxes and is a significant player in its own right because the oil and gas revenues are PNG’s largest source of income. These projects are potentially country makers.

    These projects also give the government the capacity to fund national development. The government has priorities around health and education and the challenge in PNG is that it is geographically very difficult to get around. The oil and gas is located in very isolated regions and there are 800-odd different languages spoken throughout the country, giving some idea of the rich cultural heritage in PNG. It’s enormously complex. It’s a really interesting, fascinating country.

    CD: The Oil Search board is extremely diverse, in terms of skills, culture and gender makeup. What advantages does this bring to the company and how has the board evolved?

    RL: Our key workforce is in PNG and we have always had PNG nationals on the board. There is no formal requirement for that but I think it’s both a necessity in terms of understanding what’s going on in PNG and also presenting the right kind of face to the country and government. We want to work with our partners for the benefit of our shareholders and for the development of PNG as a whole.

    With our ICMs, we are trying to identify young talented PNG nationals and help them in their own development, which, in due course, will hopefully help the country’s economic development. In terms of education, literacy and health needs, you’ve got to help PNG nationals to deliver those services themselves. That’s where we see ourselves playing a part in the process.

    In terms of diversity, when I joined, the company had no women on the board. We now have two. We’re focusing on that and we certainly see the importance of gender diversity as an asset around the board table. Ultimately it would be ideal if we are able to appoint PNG national women to the board in the years ahead. PNG has a male-dominated society. It is a society that has significant issues around women’s empowerment and violence towards women. There are some serious challenges there and we’re doing what we can to ensure that we set an example for others to follow, give female PNG nationals a “leg-up” in their aspirations – hopefully our female Australian nationals on the board set an example of how talented women can contribute to the board and good governance of a company like Oil Search.

    Fiona Harris (FH): Under Rick’s leadership we’ve really made significant advances in diversity in terms of getting our independent committee members on board and contributing. We’ve really started to add to board diversity and enhance succession – and it’s a great thing. Retiring director, Bart Philemon was a champion of this approach and was heavily involved with Rick in the selection of our new committee members.

    Some companies in the ASX200 have a very significant number of women on the board and Oil Search is at two out of nine at the moment. But the cultural issue on those boards is possibly not as significant an issue as it is for us in PNG. When you look at diversity within the organisation, if you are operating in other countries, you’re probably less focused on gender diversity and more focused on diversity at a national level and citizen level.

    I think we’re good for where we are at the moment and I think that the work that we’re doing with the ICMs is probably ground breaking; it’s not something that I’ve heard about other boards doing. To actually do that in a country like PNG is a little bit different and hopefully gives other companies something to think about.

    ED: Oil Search has fantastic diversity in terms of national experience, and there’s great diversity in terms of the mix of skills of people as well. There are people with really deep industry backgrounds; there are people with strong finance skills and other competencies as well. There are people with a whole range of different industry backgrounds that contribute because it’s important. You don’t want everyone from the oil and gas industry there because you need to have different ways of thinking and looking at things.

    If you look at the Oil Search board at the moment, there are seven males on the board and two females, so that’s 22 per cent in terms of female representation. The ideal in any of these areas is that you continue to move closer to the representation that they might have in the population that you’re operating in. Eventually we should be at 50 per cent, but sometimes it takes time to get there and you have to do it in a measured way in terms of ensuring that the people you have are doing the best for long-term shareholder value.

    CD: What was the reasoning behind the appointment of the ICMs and the trainee directorship program?

    FH: Most of the ICMs have been brought in to bring a particular technical skill in certain areas, for example, on the audit committee. Presumably that’s also been done by other committees on a technical basis, but I’m not sure I’ve seen it done through the appointment of the citizens of the country in which you’re operating and as part of the professional development of those people.

    I think the ICMs will be able to bring expertise in a cultural and political sense, plus more. For example, if we’re looking to tap a particular pool of expertise or talent, a local would be able to give us a really good view about how deep that pool of talent is likely to be within PNG or how best we might develop and train for particular aspects of skills or behaviour and where we might help support the development of those skills. I think that’s the kind of thing that’s going to be a real benefit to us going forward.

    ED: We have three very experienced PNG citizens who are on the board who deserve to be there in their own right through their qualifications and experience as professionals and directors, and we have three people that have great potential on the committees. The opportunity of being a full member of the committee and contributing to that committee will help them to grow their knowledge of the company, what it is to be an ASX listed company director and to educate them on corporations law and governance practices.

    In addition, the three ICMs will undertake the AICD’s training program as part of their development, which will further build upon their skills. What that means is we get the contribution of those people and their perspective in the committees and we’re growing them as well so that they have potential to possibly become an Oil Search director or become a director of another company, a larger listed company. I think we get a benefit and they benefit from it too.

    RL: We saw an opportunity to go into the market to try and identify some younger talent that we do not necessarily have a place for on the board today, but they can come and get involved and be part of the board committee process. They will get quite a lot of exposure to the detailed workings of the company. Part of the approach is to make sure that while the ICMs are with us, we give them the benefit of training, which is where the AICD program plays an important part.

    In these training sessions, we are adding a group of Oil Search executives to the ICMs. I’ve always felt a part of executives’ training as they come through organisations is to understand the business through the lens of a director. The board committee members will have the opportunity to meet and interact with some of the management of the company, particularly those that are regarded as highly talented and are part of our executive development programs. That experience will be valuable for both parties.

    CD: How do you view your role in the development of the ICMs and the evolution of the board as a whole?

    RL: I certainly have a responsibility to make sure that these individuals are given the training necessary for them to make the contribution they’re capable of making. We will be giving them exposure to an industry that none of them have had much exposure to before and we will be taking them up to the fields and giving them the opportunity to understand what goes on up there.

    From a board perspective, I will be overseeing, guiding and leading that process. I have no concerns that it will work and whether these individuals end up on the Oil Search board or other boards or both, I don’t see any particular outcome being more meritorious than the other. I just see this as a step on the journey for the development of business in PNG. If one of them moves on to something else, we will be looking to replace them on our board subcommittee. Hopefully one or two of them will end up being board ready for Oil Search and be a natural future appointment to the board.

    CD: Integrating the local community is an excellent way of giving something back to the country. Tell me about the Oil Search Foundation and its long-term objectives.

    RL: Given we’re operating in the provinces of PNG that are a long way from the capital, Port Moresby, as an employer you effectively take on the responsibilities for your workforce in terms of workplace health and safety. When those employees go home at the end of their shifts, they go into the villages and the issues in those villages come back into the workplace whether you like it or not.

    When I became Oil Search chairman, I had a strong base on which to build further engagement with local communities. I felt that it was important to extend the excellent work being done in health and create a structure called the Oil Search Foundation. It is a development from an entity called the Oil Search Health Foundation that had been created a few years before. We broadened its remit to cover health, education and leadership, women’s empowerment and other issues.

    The Oil Search Foundation has now, I think, a reputation in PNG as being a very potent force in deploying money on the ground and making a real difference. My hope is that the Oil Search Foundation will be around for longer than the oil and gas reserves in the country and hopefully will be able to be self-sustaining at that point and continue to do the community development work that it has now embraced.

    CD: What is it that makes Oil Search stand out from other organisations?

    RL: I certainly feel that PNG is deep in Oil Search’s DNA. We have a very strong commitment to the country, to our shareholders and to the business. We feel that if a company like Oil Search doesn’t lead the way in terms of diversity and ethical and sustainable business practices, who is going to do it? It’s not as if we’re the only ones doing it, but I think we are regarded from a PNG perspective as both longstanding and successful in our activities. We are, I think, well regarded as a corporate citizen in PNG across the board.

    FH: There are certainly a lot of challenges in PNG in terms of making sure that the benefits that are being received in the country from operations like Oil Search are being shared appropriately among the right people. That’s where Oil Search has adopted a strategy that’s probably quite different from other companies who have operated in similar situations; it is trying to partner with the government to make sure that those benefits are felt at the appropriate locations. The health strategy has been a significant part of that, as have been the tax credit schemes, which Oil Search has participated in to help the government build significant infrastructure that is required for various purposes and events.

    ED: I think Oil Search is an innovative company in terms of how it continues to run, in some instances on a world scale, operations at a relatively low cost. Oil Search is also innovative in terms of how it deals with its partners that are much bigger than the company, such as Exxon and Total. I think it’s also particularly innovative in technology and “know-how” applied in a local setting and in a way that maximises the chance of finding and minimising the costs of accessing potential oil and gas reserves.

    CD: What does the future hold for Oil Search?

    ED: There’s a range of very sound plans for continuing to grow long-term shareholder value. If you look at Oil Search as a business you could call it a portfolio venture. It has a range of different assets and leases, and I think because of that portfolio approach, there is always potential to grow. If one project is going slower or has less potential than another, the company can concentrate on another bit. There are options, which is a positive thing.

    FH: To uphold our strategic planning goal, we need to maintain a top quartile performance in terms of return to our shareholders. At the end of the day, it’s a listed company and it has got to be focused on things that are of benefit to the shareholders and making sure that they get an adequate return for the risk they’re taking. Everything else that we’re doing is really enabling that to happen.

    RL: Our aspirations to succeed and the policies we follow are not much different from other major companies on the ASX. We have a diversity policy, we have talent programs, we have all kinds of initiatives to measure and report on. Women on the board and women in senior management ranks is a key focus, but the resources sector has always been challenged in this area simply because the industry has typically not attracted a lot of women at a professional level.

    But I think companies in the industry generally are now doing a lot in that area. There are some quite innovative things being done to try and encourage better quality careers, better quality decision-making, training and development from graduate recruitment and trade recruitment. All of those things continue right through to the board table and senior management ranks. We hope that in 10 years we are further down that road. We certainly plan to be further down that road than we are today, but we don’t underestimate the challenges.

    The Oil Search Foundation

    In 2015, the Oil Search Health Foundation transitioned to the Oil Search Foundation and expanded its remit from health to also include leadership, education, and women’s protection and empowerment. These were identified as significant areas where the foundation could best contribute to PNG’s most important sustainable development goals.

    As the founder and principal donor to the foundation, Oil Search contributed US$28 million between 2011 and 2015 and made a further commitment to continue to support the foundation’s work over the period 2016 to 2020 by donating a further US$56 million. The foundation also receives grants from a range of donors and has been selected to manage, on behalf of the PNG Government, the US$14.2 million Global Fund HIV grant.

    As a development partner, the Oil Search Foundation delivers targeted programs that are dedicated to improving the lives of Papua New Guineans, with health, education and gender equality identified by the PNG Government as key development priorities. Partnerships are at the core of the work the Oil Search Foundation carries out and it has established long-lasting relationships with communities and government.

    During 2015, the foundation continued to improve maternal and child health by supporting the vaccination of more than 5,000 children, equipping delivery rooms with electricity and running water, and training nurses and midwives to deliver babies safely in remote locations. It has also helped to ensure continued low malaria rates in local communities and has improved access for HIV patients to lifesaving treatment programs.

    Education and literacy are also top priorities and through various partnerships, the foundation has introduced communities with low literacy rates to libraries with early childhood literary programs. An additional initiative, the Women’s Protection and Empowerment program, aims to enrich the lives of women so they are free to live productive lives, free of violence.

    Directors of the future

    In September 2016, the Oil Search board announced the creation of three new independent committee member (ICM) roles aimed at developing the directors of the future.

    The rationale behind the appointments was to draw on the experiences and capabilities of highly talented PNG citizens, while providing them with the opportunity to experience and participate in the governance processes of PNG’s largest and most successful listed company.

    Although not members of the board, the ICMs are expected to contribute fully to the effective functioning and execution of duties and responsibilities of the relevant board committees. As part of their training, they will also complete a series of workshops delivered by the AICD as part of the induction and engagement process.

    “I’m pleasantly surprised to be appointed as a committee member for Oil Search’s people and nominations committee,” says Mary Johns, company secretary at Bank South Pacific (BSP) and a former member of the 2015 Pacific Games Organising Committee and the Port Moresby Chamber of Commerce.

    Johns is currently chair of Leadership PNG, a not-for-profit organisation that provides structured and focused learning programs with the aim of developing PNG’s future leaders.

    “I think my PNG experience and the fact that the organisation I work with provides banking services across PNG and the Pacific, brings an understanding of the various jurisdictions and the challenges of the geography we operate in here in PNG.”

    A lawyer by profession, Johns has practised in PNG for 21 years, 15 of which have been spent as company secretary at BSP. She says Oil Search has had an enormous impact on the country at a social and an economic level.

    “The establishment of the Oil Search Foundation and the activities it undertakes in the territories and provinces to positively impact the communities is very important, especially as it provides access to things that are often taken for granted in more developed economies. It also provides opportunities for PNG citizens in terms of knowledge and training, which I think is important,” she says.

    Fellow ICM, Richard Kuna, is an independent member of the audit and financial committee. Previously a partner in audit and advisory at KPMG, Kuna sits on the boards of the Bank of Papua New Guinea and the PNG Government’s Central Supply and Tenders Board.

    Kuna studied at the University of Technology Sydney. “Oil Search started as a very small company in 1929 and now it’s probably the biggest public company in PNG. All of its core assets and its operations are in PNG, so it’s a significant entity and to be part of that is great,” he says.

    “The benefits it provides to the economy, the government and the community in terms of providing social infrastructure such as schools, bridges and roads is fantastic. Most companies would rely on the government to provide those community benefits, but Oil Search extends beyond that.”

    Kuna says the opportunity to learn about Australian jurisdiction and the significance of being on a listed board will be an eye opener. “In PNG, the government body which is charged with the oversight of the Companies Act here is not active and to my knowledge no director has ever been charged for non-compliance.

    “But in terms of the duties and liabilities that it takes to be a director on the Oil Search board – we’ve got to get things right. That is huge. I think this aspect of training will clearly signify what it means to be a director in an ASX listed environment, which is completely different to PNG. The director training is important for us.”

    Serena Sasingian Sumanop is the third and youngest independent committee member. She works as a lawyer with the Department of Justice and Attorney General in PNG and has a Masters of Business from Queensland University of Technology. She is very active in the NFP sector where she sits on the boards of Femili PNG, a case management centre that assists survivors of family and sexual violence access the essential services they need, and The Voice Inc, a leading youth development and leadership organisation in PNG.

    Sumanop believes her skills in the NFP and legal sector in PNG will help her contribute effectively to Oil Search’s health, safety and sustainability committee. “For me, the Oil Search Foundation is doing important work in providing sustainable solutions to key development challenges in the country. Its work with the Hela Provincial Hospital is an example of this as the foundation not only supports the hospital with capital works and medical supplies but also provides governance and management support to the board of the hospital.

    Projects like this strengthen the government’s ability to effectively deliver essential services to rural communities and can become examples of best practice for other provinces.

    “In PNG, our land is our identity and has sustained us for thousands of years, so Oil Search’s commitment to having a social licence to operate is something I admire about the company. As a younger person, I hope to bring the voices of the next generation of Papua New Guinea to the table and also enhance my leadership skills through exposure to world class corporate governance training,” she says.

    Oil Search’s operating environment is unique and sets it apart from other large listed entities. The AICD’s Board Advisory team worked closely with Oil Search to build a consulting-led program specific to the needs of Oil Search’s ICMs and senior executives. “Governing in the Grey” focused on the dualities of governing across jurisdictions with their respective legal, social and cultural contexts. The first in a series of programs was delivered in mid-February 2017.

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