f ra m e wo rkexternal audit process and the approach taken to the appointment or reappointment of...

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C O N T E N T S

Highlights 2012 01Outlook 2013 01Annual General Meeting 01Chairman’s Statement 02Summary of Changes to the Code 04Statement of Compliance 05Board of Directors 06Report of the Directors 08Report of the Remuneration Committee 18Report of the Audit Committee 30Other Committee Reports 32Appendix 1 37Appendix 2 UK Corporate Governance Code 38Corporate governance glossary 53Advisers and financial calendar IBC

Heritage Oil Plc is an independent oil and gas exploration and production company with a Premium Listing on the London Stock Exchange (“LSE”) (symbol HOIL). The Company is a member of the FTSE 250 Index and has Exchangeable Shares listed on the Toronto Stock Exchange (“TSX”) (symbol HOC) and the LSE (symbol HOX).

Heritage is a versatile organisation, dedicated to creating and increasing shareholder value with a portfolio of quality assets managed by a highly experienced team with excellent technical, commercial and financial skills. The Company has producing assets in Nigeria and Russia and exploration assets in Tanzania, Papua New Guinea, Malta, Libya and Pakistan.

Corporate GovernanceThe Corporate Governance Report provides detailed information on all aspects of Heritage’s corporate governance.

Corporate Social ResponsibilityThe CSR Report provides detailed information concerning Heritage’s CSR strategy, policies, systems and performance.

Financial StatementsThe Financial Statements Report provides detailed information on Heritage’s financial position.

Annual ReviewThe Annual Review provides an overview of Heritage, its processes and a Business Review.

0 1H E R I T A G E O I L P L CCorporate Governance 2 0 1 2

– Transformational year with the Company acquiring a significant interest in OML 30, Nigeria, through Shoreline Natural Resources Limited (“Shoreline”) and disposal of its interests in the Kurdistan Region of Iraq (“Kurdistan”)

– Various Committees rigorously assessed the entry into Nigeria and the disposal of the Miran asset in Kurdistan

– Enhanced the Board through two appointments, including the first woman Director

– Executive remuneration has developed in line with best practice – Board has reviewed risk management

– Remuneration Committee will review recent UK government proposals in respect of executive remuneration

– Board will consider UK government proposals to amend narrative reporting requirements for Annual Reports

– Board will review amendments to the UK Corporate Governance Code which come into e"ect for financial years beginning on or after 1 October 2012

The 2013 Annual General Meeting (“AGM”) will be held at 22 Grenville Street, St Helier, JE4 8PX, Jersey, Channel Islands on 20 June 2013. Formal notice of the AGM, including details of any special business, will be set out in the Notice of AGM to be dispatched to shareholders at least 20 working days before the meeting. The notice of AGM will also be available on the Company’s website at www.heritageoilplc.com.

All dollars are US dollars unless otherwise stated.

HIGHL IGH TS2 012

O U T LO O K 2 013

A NNUA L GENER A L MEE T ING

0 2Corporate Governance 2 0 12 H E R I T A G E O I L P L C

CH A IR M A N ’S S TAT EM EN T

A R E S P O N S I B L E B U S I N E S S

M I C H A E L J . H I B B E R DC H A I R M A N

Dear Shareholder,This has been an exciting and transformational year for Heritage. In line with our vision and strategy for the Group we acquired a significant interest in the OML 30 licence in Nigeria through Shoreline, our Nigerian joint venture company.

The importance of having well established decision making processes and sound governance procedures was highlighted during this process. Throughout the transaction, from its inception to completion, there was a rigorous assessment of the risks, benefits and opportunities this acquisition would bring. Various Board Committees, including the Audit, Reserves and Anti-Bribery and Corruption Committees were active in reviewing and considering implications for the Group. The Board is now taking steps to ensure that our values, policies, internal controls and best practices are integrated into the new operation.

For us governance is not just about tickbox compliance but is an integral partof doing business.


B OA R D CO M P O S I T I O NThe other important governance development during the year was the strengthening of the Board by the appointment of two new independent Non-Executive Directors, Carmen Rodriguez and Mark Erwin. Our evaluation process had highlighted the need for these appointments and we were also aware of the concerns of some shareholders on the balance of independent Directors on the Board. Carmen Rodriguez is the first woman Director to be appointed to the Board, in line with our policy to increase diversity on the Board. Further information on diversity and gender policies may be found in the Report of the Nomination Committee on pages 32 to 33.

D E V E LO P M E N T S I N 2 012I reported in our 2011 Annual Report that our governance focus in 2012 would be on two main areas in particular. These were executive remuneration and the development of our approach to managing risk. I can report good progress in both these areas. Details of remuneration policy may be found in the Report of the Remuneration Committee on pages 18 to 29 and details of risk management may be found in the Annual Review on pages 32 to 34 and in the Report of the Audit Committee in this report on pages 30 to 32.

We will continue to review our narrative reporting to ensure it meets new developments and best practice.

O U R F O C U S F O R 2 013The UK government has recently introduced proposals in respect of reporting on executive remuneration which will come into force on 1 October 2013. The Remuneration Committee will be considering these requirements with the aim of providing greater transparency to shareholders. As well as developing remuneration reporting, the Board will be considering UK government proposals to amend narrative reporting requirements for company annual reports. These proposals will require companies to produce a Strategic Report which replaces the Business Review. We believe that our reporting in this respect is already well developed, but we will continue to review our narrative reporting to ensure it meets new developments and best practice.

In addition, there have been some amendments to the UK Corporate Governance Code (the “Code”) which come into e"ect for financial years beginning on or after 1 October 2012. These are outlined in the following pages. Wherever possible we will seek to introduce these requirements in advance.

As a Company our priority in 2013 will be to integrate the OML 30 acquisition into the Group. This will include ensuring that Group policies, such as those relating to anti-bribery and corruption, whistle-blowing and health and safety, are integrated into these operations.

We continue to support open and constructive dialogue with all of our shareholders on governance, strategy and executive remuneration and welcome any feedback.

M I C H A EL J . H I B B ER DC H A I R M A N2 9 A PR I L 2 013


SU M M A RY O F CH A N GE S TO T HE CO DE W HICH CO M E IN TO EFFEC T F O R F IN A N CI A L Y E A RS BEGINNIN G O N O R A F T ER 1 O C TO BER 2 012

D I V E R S I T Y A N D G E N D E R The Nomination Committee should include a description of the Board’s policy on diversity, including gender, any measurable objectives that it has set for implementing the policy and progress on achieving the objectives.

Carmen Rodriguez has been appointed as the first woman Director on the Board. The Nomination Committee will continue to develop a broad approach to the recruitment of Directors to ensure a wide variety of sectors, talents and backgrounds are represented.

A N N U A L R E P O R T A N DA C C O U N T S

The Directors should state that they consider the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy.

The Board does, and will continue to, involve the Audit Committee, and where appropriate other committees, to confirm this statement for Annual Reports.

A U D I TO R S FTSE 350 companies should put the external audit contract out to tender at least every ten years.

The Company’s current auditors, KPMG, have been in position since the Company first listed in March 2008. In addition KPMG were the auditors of Heritage Oil Corporation (“HOC”). Information on the assessment of the external auditor is provided in the Report of the Audit Committee on pages 30 to 32. Having assessed the current auditors to be e"ective in their role there is no current intention to put the contract out to tender.

A U D I T C O M M I T T E E R E P O R T I N G Additional requirements for information that should be included in the Report of the Audit Committee. These include reporting on significant issues that the Audit Committee considered in relation to the financial statements, how these were addressed, and an explanation of how the Committee assessed the e"ectiveness of the external audit process and the approach taken to the appointment or reappointment of the external auditor. Information on the length of tenure of the current audit firm and when a tender was last conducted is also required.

This information is included in the Report of the Audit Committee on pages 30 to 32.


S TAT EM EN T O F CO M PL I A N CE

CO M P L I A N C E W I T H T H E CO D EAs a company with a Premium Listing on the LSE, the Company is subject to the Financial Conduct Authority’s (“FCA”) Listing Rules and the requirement to explain how it has applied the Main Principles of the Code. A copy of the Code is available from the FCA’s website, www.fca.org.uk. The Listing Rules also require a company to confirm that it has complied with all the provisions of the Code or explain areas of non-compliance. The Board considers that the Company has complied with all the provisions of the Code, save in respect of only the following item:

– Code Provision C.3.1: The Chairman of the Company is a member of, and chairs, the Audit Committee. The Board believes the Chairman is the most appropriate person to be a member of, and chair, the Audit Committee given his extensive financial experience. The Chairman is also considered by the Board to have maintained his independent status. The Board and Nomination Committee have reviewed the continued chairing of the Audit Committee by the Chairman. Given the size of the Company and of the Board the decision was reached that this is still the most appropriate Audit Committee leadership role to maintain.

The Company has reviewed Executive Directors’ employment contracts annually with external advisers, taking into account shareholder feedback, and internally, within the Remuneration Committee, more details of which can be found on page 21. After consultation during the year, the notice periods of the Executive Directors has been reduced from 24 months to 12 months, e"ective 1 January 2013, to bring the Company further in line with best practice.

The following sections of this report describe how the Company has applied the Main Principles of the Code:

– Leadership – E"ectiveness – Accountability – Remuneration – Relations with Shareholders

Appendix 2, at the back of this document, sets out additional disclosure requirements and detailed compliance with provisions of the Code.

The following statements may be found on page 8 of the Financial Statements Report:

i) Statement of the Directors’ Responsibilities for preparing the Annual Report and Accounts 2012;

ii) Responsibility Statement of the Directors that the financial statements and management report (which is incorporated in the Annual Review Report and in the CSR Report) give a fair review of the Company’s business; and

iii) Going Concern Statement.

For and on behalf of the Board

M I C H A EL J . H I B B ER DC H A I R M A N2 9 A PR I L 2 013


BOA R D O F D IREC TO RS

PAU L AT H E R TO NChief Financial O#cer

Joined Heritage March 2000Appointed to the Board February 2008

Mr. Atherton is a qualified accountant, qualifying with Deloitte & Touche, and holds a degree in geology from Imperial College London. He has a corporate finance background with specific experience in the international mining and resource sectors.

None

– Reserves Committee – Corporate Social Responsibility

Committee – Anti-Bribery and Corruption

Committee

M I C H A E L H I B B E R DChairman and Non-Executive Director

Joined Heritage March 2006Appointed to the Board March 2008

Mr. Hibberd has extensive international energy project planning and capital markets experience. Mr. Hibberd has been president and CEO of MJH Services Inc., a corporate finance advisory company, since 1995, prior to which he spent 12 years with ScotiaMcLeod in corporate finance and held the position of director and senior vice-president, corporate finance.

– President and CEO of MJH Services Inc

– Chairman of Canacol Energy Ltd – Chairman of Greenfields

Petroleum Corporation – Co-chairman of Sunshine

Oilsands Ltd – Director of Montana

Exploration Corp – Director of Pan Orient

Energy Corp

– Audit Committee – Nomination Committee – Reserves Committee – Corporate Social Responsibility

Committee – Anti-Bribery and Corruption

Committee

SIR MICHAEL WILKES, KCB CBENon-Executive Director and Senior Independent Director

Appointed to the Board March 2008

Sir Michael Wilkes KCB, CBE, retired from the British Army in 1995 as Adjutant General and Middle East Adviser to the British Government. As Adjutant General, Sir Michael was the most senior administrative o#cer within the Army and a member of the Army Board. During his distinguished career, he has seen active service across the world while also commanding at every level from Platoon to Field Army, including commanding the 22 Special Air Service Regiment and serving as the Director of Special Forces. On leaving the Army in 1995 he was appointed Lieutenant Governor and Commander in Chief of Jersey, where he served until retiring in 2000.

– Non-executive director of Stanley Gibbons Group (AIM listed)

– Non-executive director of Blue Star Capital plc (AIM listed)

– Non-executive positions on a number of private companies including Britam Defence

– Audit Committee – Remuneration Committee – Nomination Committee – Anti-Bribery and Corruption

Committee

A N T H O N Y BU CK I N GH A MChief Executive O#cer

Founder of HeritageAppointed to the Board February 2008

Mr. Buckingham commenced involvement in the oil industry as a North Sea diver and subsequently became a concession negotiator acting for several companies including Ranger and Premier Oil plc. He was previously a security adviser to various governments.

None

– Nomination Committee – Corporate Social Responsibility

Committee

Skills and experienceE

xternal appointments

Com

mittee m

embership


G R EGO RY T U R N BU L L , Q CNon-Executive Director

Joined Heritage 1997Appointed to the Board March 2008

Mr. Turnbull is a Senior Partner of the Calgary o#ce of the law firm of McCarthy Tétrault LLP. Mr. Turnbull has extensive knowledge of corporate governance issues and has acted for many boards of directors and special committees in that regard. Mr. Turnbull started his career with the law firm of MacKimmie Matthews in 1979. From 1987 to 2001, he was a partner with Gowlings LLP (formerly Code Hunter LLP). In 2001 and 2002, he was a partner with the law firm of Donahue LLP. Mr. Turnbull has been a partner with the law firm of McCarthy Tétrault LLP since July 2002 and was appointed Queen’s Counsel in 2010.

– Non-executive director of Crescent Point Energy Corp

– Non-executive director of Hawk Exploration Ltd

– Non-executive director of Hyperion Exploration Corp

– Non-executive director of Porto Energy Corp

– Non-executive director of Sonde Resources Corp

– Non-executive director of Storm Resources Ltd

– Non-executive director of Sunshine Oilsands Ltd

None

J O H N M C L E O DNon-Executive Director


Mr. McLeod is a Professional Engineer with over 40 years of varied resource extraction experience. He has held positions and has served on various boards including Constellation Oil & Gas Ltd., Ranger Energy Ltd. and CanArgo Energy Inc., as president and CEO of Arakis Energy Company, as vp, operations of Pengrowth Gas Company, CEO and director of Rally Energy Corp. and Canoro Resources. He is a member and past president of the Association of Professional Engineers and Geoscientists of Alberta.

– President of United Hydocarbon International Corp

– Director of Paris Energy Inc – Director of Tuscany Energy Ltd – Director of Diaz Resources Ltd – Director of Kallisto Energy Corp – Director of Emperor Oil Ltd

– Audit Committee – Remuneration Committee – Reserves Committee

C A R M E N R O D R I G U E ZNon-Executive Director


Ms. Rodriguez has most recently held the position of Chairperson and CEO (from 2007 to 2012) of Sociedad Estatal Española P4R, S.A., a Spanish government owned consultancy firm specialising in foreign trade, investment and co-operation. She was also, until recently, a trustee of the Spain-China Council Foundation, the Spain-India Council Foundation and Casa Arabe. She has previously held many other senior executive positions including at commodities trading companies. Ms. Rodriguez was awarded the prestigious Órden de Isabel la Católica by King Juan Carlos of Spain in 1990, in recognition of her services to the Spanish people and work with the international community.

– Spanish Committee of the United Nations Relief and Works Agency

– Plan Espana Foundation

– Audit Committee – Remuneration Committee

M A R K E R W I NNon-Executive Director

Appointed to the Board May 2012

Mr. Erwin served in the United States Army for over 25 years, culminating his career as the Chief of Sta" of the United States Army Special Operations Command. He became a specialist in building teams of joint, interagency partners working closely with other nations’ leadership, both military and civilian. In 2011, Mr Erwin started Long Walk Enterprise, LLC, a service-disabled veteran-owned small business providing consulting and operational support services. In April of 2012, Mr. Erwin was named CEO of A&K Global Health, a medical travel services company operating globally.

– Long Walk Enterprise, LLC – CEO A&K Global Health

– Corporate Social Responsibility Committee

– Anti-Bribery and Corruption Committee


FinanceLegal Mining/exploration/engineeringSecurity/defence

Skills and experience of the Board

0–4 years4–5 years

Length of tenure of the Non-Executive Directors

Non-Executive ChairmanExecutive Directors Independent Non-ExecutiveDirectorsNon-Independent Non-Executive Director

Balance of Non-Executive and Executive Directors

REP O R T O F T HE D IREC TO RS

L E A DERSHIP

Directors of the Company who served in 2012 and up to the date of the signing of this report are:

Appointment dates

Michael Hibberd1

Chairman and Non-Executive Director 18 March 2008

Anthony Buckingham2

CEO 25 February 2008

Paul Atherton2

Chief Financial O#cer 6 February 2008

John McLeod1

Non-Executive Director 18 March 2008

Carmen RodriguezNon-Executive Director 22 March 2012

Gregory Turnbull1

Non-Executive Director 18 March 2008

Sir Michael Wilkes1

Non-Executive Director and Senior Independent Director 18 March 2008

Salim Macki3

Non-Executive Director 12 August 2008

Mark ErwinNon-Executive Director 1 May 2012

1 The Director was appointed on 18 March 2008 and this became e"ective on the Company’s listing on the LSE on 28 March 2008.

2 The Director was appointed as indicated and this became e"ective on the Company’s listing on the LSE on 28 March 2008.

3 The Director resigned from the Board on 22 March 2012 and was replaced by Carmen Rodriguez.

Biographical details of all current Directors can be found on pages 6 to 7 of this report. With the exception of Sir Michael Wilkes, Carmen Rodriguez and Mark Erwin, all the Directors were previously, and continue to be, Directors of HOC.

CO M P O S I T I O N O F T H E B OA R D There are currently eight Directors, six of whom are Non-Executive Directors. The Chairman and three of the Non-Executive Directors are deemed to be independent under the terms of the Code.

The current composition is assessed by the Board to be highly e"ective. There is a balanced mix of skills and experience, a variance in length of tenure of Non-Executive Directors which ensures continuity and new perspectives, and a good balance between Executive and independent Non-Executive Directors. The variety of experience of the Directors, coupled with the recruitment of the Board’s first woman Director, Carmen Rodriguez, brings a balanced diversity of thought to Board deliberations.


A P P O I N T M E N T S TO T H E B OA R DIt is crucial that the appropriate skills and balance of talents are represented on the Board. This is an area of ongoing focus for the Board which has delegated the tasks of reviewing Board composition, searching for appropriate candidates and making recommendations to the Board on appointment of Directors to the Nomination Committee. In March 2012, Heritage announced the appointment of Carmen Rodriguez to the Board and the retirement of Salim Macki. In May 2012, Heritage announced the appointment of Mark Erwin. The appointments process and role of the Nomination Committee is described more fully in the Report of the Nomination Committee on pages 32 to 33.

R E - E L E C T I O NWith regard to retirement and re-election of Directors, the Company is governed by its Articles, the Code and the Jersey Companies Law. Under the Articles, Directors have the power to appoint a Director to the Board during the year but any person so appointed must stand for election at the next AGM. All Directors retire and stand for re-election annually in compliance with the Code. Directors re-elected at the AGM are appointed for a one year term.

I N D E P E N D E N C EThe Board’s assessment of the independence and e"ectiveness of the Non-Executive Directors is made regularly. In addition to the requirements of the Code, this assessment includes the Directors’ total number of commitments, relationships with major suppliers or with charities or other entities receiving material support from the Company.

The Board considers that John McLeod, Carmen Rodriguez, Sir Michael Wilkes, Mark Erwin and Michael Hibberd are independent in character and judgement and free from relationships or circumstances which may a"ect their judgement. These criteria also applied to Salim Macki whilst he served on the Board before his resignation in March 2012. On appointment, the Chairman was considered to be independent and continues to be so.

The Board acknowledges that John McLeod does not meet the strict independence criteria set out in the Code as he has served as a Director of HOC, the prior holding company of the Group, for more than nine years and was previously granted options. However, the Board has satisfied itself that neither of these factors impact John McLeod’s independence in character and judgement. His length of service on the Board enhances his ability to perform his duties e"ectively and helps maintain an appropriate balance between experienced Non-Executive Directors and those more recently appointed to the Board. John McLeod, like all Directors, stood for re-election at the last Annual General Meeting and received overwhelming support from shareholders and was re-elected.

Gregory Turnbull does not meet the independence criteria set out by the Code as he is a partner of McCarthy Tétrault LLP, the Canadian legal advisers to the Company.

CO N F L I C T S O F I N T E R E S T A N D R E L AT E D PA R T Y T R A N S AC T I O N SUnder the Articles of Association of the Company (the “Articles”), a Director may be a party to, or otherwise interested in, any transaction or arrangement with the Company as long as they have disclosed to the Directors the nature and extent of any interests at the first meeting of the Directors at which a transaction is considered or as soon as practical after that meeting by notice in writing to the Secretary. Where disclosure is made to the Secretary, the Secretary must inform the other Directors that it has been made and table the notice at the next meeting of the Directors. Any disclosure at a meeting of the Directors must be recorded in the minutes of the meeting. Any potential or actual conflicts of interest are regularly reviewed by the Board.

The Company’s Code of Business Conduct and Ethics also requires Directors (and employees) to avoid conflicts of interest which may interfere or appear to interfere with the obligation to act in the best interests of the Company.

Related party transactions with Directors are disclosed in note 23 of the notes to the consolidated financial statements in the Financial Statements Report. The current related party transactions relate to provision and personal use of transportation services.

R O L E O F T H E B OA R DThe Board’s principal roles are direction, supervision and stewardship. How the Board fulfilled these responsibilities during the year, for example by directing strategy and objectives and upholding the values and culture of the Group, are shown in the table on page 13 which summarises the Board’s activities for the year. The detailed responsibilities of the Board are set out in a schedule of matters reserved for its attention which is reviewed on a regular basis. The most recent review was carried out early in 2013.

R E S P O N S I B I L I T I E S O F T H E B O A R D

The schedule of matters reserved for the Board sets out its responsibilities. These include:

– approval of strategy and long-term objectives; – establishing and communicating the Company’s values and

standards; – determining the nature and extent of risks that the Board is

willing to take to achieve its objectives; – approval of annual budgets, business plans, annual and half

year reports and dividends; – review of press releases and all financial information to be

released to the market; – reviewing performance in light of strategy, objectives and

business plans and ensuring corrective action is put in place if necessary;

– approving changes to Board composition; – approval of material acquisitions, disposals and contracts; – considering items of major litigation; – ensuring the e"ectiveness of the Company’s system of internal

controls including managing risks; and – approval of Group policies including the Code of Ethics, Anti-

Bribery and Corruption, Code of Conduct, health, safety and environmental policies.


REP O R T O F T HE D IREC TO RS CO N T IN U ED

D I V I S I O N O F R E S P O N S I B I L I T I E S There is a clear division of responsibility between the roles of the Chairman, Michael Hibberd, and the Chief Executive O#cer (“CEO”), Anthony Buckingham, to ensure an appropriate balance of responsibility and accountability. The Senior Independent Director (“SID”) is Sir Michael Wilkes. The responsibilities of the Chairman, CEO and SID, which have been formalised in writing, were reviewed by the Board during the year. The key responsibilities are summarised below.

C H A I R M A N ’ S R O L E

C E O ’ S R O L E S E N I O R I N D E P E N D E N T D I R E C TO R ’ S R O L E

G O V E R N A N C E

Upholding the highest standards of integrity, probity and corporate governance throughout the Group, particularly at Board level.

B U S I N E S S S T R AT E G Y A N D M A N A G E M E N T

Development and implementation of Board approved objectives and strategy. Oversight and management of all operations, business activities and performance.

G E N E R A L

To act as a sounding board for the Chairman and serve as an intermediary for the other Directors when necessary.

R U N N I N G O F T H E B O A R D

Leading the Board and setting its agenda, ensuring adequate time is given to matters under consideration and ensuring Directors receive accurate, timely and clear information in order to carry out their responsibilities. Managing the Board to allow enough time for discussion of complex or contentious items and, in particular, strategic issues.

I N V E S T M E N T A N D F I N A N C I N G

Recommending annual budgets and business plans to the Board and identifying new business opportunities in line with strategic plans.

S H A R E H O L D E R S

To be available to shareholders if they have concerns which contact through the normal channels of Chairman, CEO or Chief Financial O#cer (“CFO”) has failed to resolve.

To attend su#cient meetings with major shareholders and analysts to obtain a balanced understanding of the issues and concerns of such shareholders.

D I R E C TO R S ’ I N D U C T I O N , D E V E L O P M E N T A N D E VA L U AT I O N

Facilitating constructive relationships between Directors and induction, training and development needs of Directors. Ensuring that the performance of the Board, its committees and individual Directors is evaluated annually and acting on the results of such evaluation.

R I S K M A N A G E M E N T A N D C O N T R O L S

Ensuring appropriate risk management and internal control systems are in place.

C H A I R M A N

To meet with the other Non-Executive Directors at least once a year to appraise the Chairman’s performance and on such other occasions as deemed appropriate.

R E L AT I O N S W I T H S H A R E H O L D E R S

Ensuring communication and dialogue is entered into with shareholders and the e"ective use of the AGM and Extraordinary General Meetings.

E X E C U T I V E T E A M A N D M A N A G E M E N T

Leading the management team, ensuring Group policies and procedures are followed and the development of a succession plan for senior management.


The Board delegates management of business and day-to-day operational decisions to executives and is responsible for monitoring performance. The Executive Directors have close involvement with the operations of the business through their operational roles and the Board is supported by a strong and experienced senior management team.

N O N - E X E C U T I V E D I R E C TO R S The importance of the role of a Non-Executive Director is recognised by the Board. The responsibilities of the Non-Executive Director to constructively challenge and help develop strategy are set out in the individual letters of appointment of each Non-Executive Director. Non-Executive Directors are also specifically tasked with responsibilities in the areas of strategy, performance, risk and people to ensure the e"ective operation of the Board. Non-Executive Directors are aware of their responsibilities and feel able to raise any concerns at Board meetings, which are minuted accurately in the Board meeting minutes.

CO M M I T T E E SThe Board has delegated certain responsibilities to Committees in line with recommendations of the Code and to facilitate progressing the business of the Company. These are the Audit, Remuneration, Nomination, Reserves, Anti-Bribery and Corruption and CSR Committees. The duties of these Committees are set out in formal Terms of Reference approved by the Board and are available on the Company’s website www.heritageoilplc.com. Attendance of non-Committee member Directors is encouraged at all Committee meetings unless where matters associated with their own interests are being discussed.

S U P E R V I S I O NReview of performance against strategyReview of financial informationReview of e"ectiveness of internal controls and risk management

A U D I T C O M M I T T E E

R E M U N E R AT I O N C O M M I T T E E

N O M I N AT I O N C O M M I T T E E

R E S E R V E S C O M M I T T E E

A N T I -B R I B E R Y A N D C O R R U P T I O N C O M M I T T E E

C S R C O M M I T T E E

Monitors integrity of financial statements

Reviews accounting policies

Manages relationship with external auditor

Oversees external audit process

Considers auditor independence

Sets remuneration policy

Reviews and approves remuneration of Executive Directors

Makes recommendations on Board composition

Reviews succession planning

Reviews Board performance

Oversight responsibilities with respect to the Company’s oil and gas reserves evaluation process

Considers independence of the technical evaluator

Oversees anti-bribery programme and ethical policies and practices

Sets CSR Policy Framework

Reviews internal CSR programme

S T E WA R D S H I PApproval of strategyValues and standardsApproval of Group policies

G O V E R N A N C E S T R U C T U R E

B OA R DThe Board is supported by the work of its committees and delegates day-to-day

management of the Group to senior management

B OA R D CO M M I T T E E S

S E N I O R M A N AG E M E N T/ L E A D E R S H I P T E A M



A report on the Committee activities can be found later in this report on pages 18 to 36.

The Board met in formal meetings ten times during the year and is scheduled to meet at least four times a year. In addition, due to the extensive nature of business over the course of the year it was deemed necessary to conduct four meetings of a committee of the Board. It also engaged informally in numerous ad hoc information calls which were not convened as formal meetings. The Board believes that one of its strengths is in having open communication channels that enable its Directors to engage informally on a variety of topics.

EFFEC T I V ENE SS

H O W T H E B OA R D O P E R AT E ST H E B O A R D C H A R T E ROur Board Charter details the basic operation and processes relating to the operation of the Board. It sets out the Directors’ responsibilities and conduct of Directors. It also covers Board meeting procedures concerning agenda, papers, minutes, conflict of interest procedures and other governance matters, such as the procedure for Directors to take independent advice if required.

B OA R D M E E T I N G SBoard and Committee meeting attendance in 2012.

Board

(10 meetings)

Audit Committee

(5 meetings)

Remuneration Committee

(3 meetings)

Nomination Committee

(4 meetings)

Reserves Committee

(4 meetings)

Anti-Bribery Committee

(2 meetings)

CSR Committee

(2 meetings)

Michael Hibberd 10 5 – 4 4 2 2

Anthony Buckingham 9 – – 4 – – 2

Paul Atherton 10 – – – 4 2 2

Mark Erwin1 5 – – – – 1 1

John McLeod 10 5 3 – 4 – –

Salim Macki2 1 – – – – – –

Carmen Roderiguez3 7 5 3 – – – –

Gregory Turnbull 10 – – – – – –

Sir Michael Wilkes 10 5 3 4 – 2 –

1 Mark Erwin was appointed to the Board on 1 May 2012.2 Salim Macki resigned from the Board on 22 March 2012.3 Carmen Rodriguez was appointed to the Board on 22 March 2012.

The attendance record of each Director at formal Board meetings is shown in the table above. In addition to the Board meetings detailed in the table, four written resolutions of the whole Board were passed. As well as formal meetings, the Chairman, CEO and CFO maintained frequent contact with other Directors to discuss any issues they may have had relating to the Group or as regards their areas of responsibility and to keep them fully briefed on the Group’s operations and initiatives. Additionally, the Chairman and Non-Executive Directors met and spoke regularly during the year, and on an ad hoc basis, without the Executive Directors being present.


W H AT T H E B OA R D D I D D U R I N G T H E Y E A RHow the Board fulfilled its responsibilities of direction, supervision and stewardship is highlighted in the summary of the key items reviewed and discussed at Board meetings during the year.

S T R AT E G Y – consideration of possible acquisition of an interest in OML 30, Nigeria (the “Acquisition”), through Shoreline. Included comprehensive review of assets, history, licences, geology, legal due diligence, anti-bribery and corruption issues as well as negotiation of various corporate and financing documents;

– discussions, updates and review of documentation and approvals for the Acquisition;

– consideration of Miran asset disposal in Kurdistan; – review of various press releases and announcements in connection with the

Acquisition and the disposal of the interests in the Miran asset; and – review and approval of prospectus and circular in connection with the

Acquisition and Miran asset disposal in Kurdistan.

P E R F O R M A N C E / R I S K – consideration of risks and opportunities in connection with the Acquisition; – review of possible environmental, security and other compliance risks in

connection with the Acquisition; – report on due diligence carried out in respect of the Acquisition; – receipt of operational reports; – review of Report of the Reserves Committee and approval of Competent

Persons Reports (“CPR”); and – consideration of risks and opportunities in connection with the Miran asset

disposal in Kurdistan and relinquishment of licences in Mali.

G O V E R N A N C E / C S R – review of Board Evaluation results; – review of reports from the Remuneration, Audit, Nomination, Anti-Bribery

and Corruption, CSR and Reserves Committees; – receipt of reports from the SID; – review of related party transactions and conflicts of interest; – review and approval of amended Board Charter; – review and approval of whistle-blower policy; – review and approval of the written responsibilities for the Chairman, CEO

and SID; and – approval for setting up a Board Committee to consider, review and approve

necessary steps and documentation in connection with the Acquisition, Miran asset disposal in Kurdistan and financing arrangements.

F I N A N C E – reviews of financing options relating to the Acquisition and Miran asset disposal in Kurdistan;

– consideration and approval of various financing arrangements; – review of the Financial Statements, Annual Report and CSR Reports and

approval of the same; – review and approval of the year end and interim results; – update on Ugandan tax dispute; – consideration of possible rights issue in connection with the Acquisition;

and – reviews of working capital reports.

S U C C E S S I O N P L A N N I N G – review of Nomination Committee Report. Consideration of candidates to be appointed as a Non-Executive Director. Agreement to pursue appointment and to carry out the requisite due diligence and meetings with the highlighted candidates;

– resignation of Salim Macki and approval of Carmen Rodriguez as a Director on recommendation of the Nomination Committee;

– approval of appointment of Mark Erwin as a Director on recommendation of the Nomination Committee; and

– confirmation of succession plan.



CO M M I T M E N T, D E V E LO P M E N T, I N F O R M AT I O N A N D S U P P O R TIt is in the whole Board’s interest to ensure that all Directors have su#cient time to commit to their duties and that they receive the training and information they require in order to perform e"ectively. Further information on how the Company addresses these issues may be found in Appendix 2 on pages 44 to 45.

The Non-Executive Directors’ letters of appointment set out the duties of the Director and commitment expected. A summary of the terms of appointment for Carmen Rodriguez and Mark Erwin is set out below.

S U M M A R Y O F N O N - E X E C U T I V E D I R E C TO R S ’ L E T T E R O F A P P O I N T M E N T

Area Comment

T E R M Appointed for initial three year term with typical tenure expected of two three year terms, subject to annual re-election by shareholders.

T I M E C O M M I T M E N T At least 20 days per annum.

E X P E C T E D D U T I E S Attendance at Board meetings, AGM, meetings of the Non-Executive Directors, meetings with shareholders, training if needed, meetings as part of the Board evaluation process.

R E S P O N S I B I L I T I E S O F A L L D I R E C TO R S

The Board provides entrepreneurial leadership within a framework of e"ective controls, sets the Company’s strategic aims, ensures necessary financial and human resources are in place, reviews management performance, sets the Company’s values and standards and ensures obligations to its shareholders and others are understood and met.

R O L E O F T H E N O N - E X E C U T I V E D I R E C TO R

Key elements of the Non-Executive Director’s role are: – Strategy – Constructively challenge and develop proposals; – Performance – Scrutinise the performance of management in meeting agreed goals

and objectives and monitor reporting of performance; – Risk – Non-Executive Directors should satisfy themselves on the integrity of

financial information and that financial controls and systems of risk management are robust;

– People – Determine appropriate levels of remuneration of Executive Directors and prime role in appointing Executive Directors and succession planning.

O U T S I D E I N T E R E S T S /C O N F L I C T S O F I N T E R E S T

Disclose significant commitments to the Board and notify any changes to these in advance, disclose any potential or actual conflicts of interest.

P R I C E S E N S I T I V E I N F O R M AT I O N A N D S H A R E D E A L I N G

Compliance with Model Code, Company’s Share Dealing Code and Disclosure and Transparency Rules on insider dealing required.

E VA L U AT I O N / T R A I N I N G Individual Directors, the Board and its Committees are subject to annual review. Arrangements for training on an ongoing basis are made available if required.

C O N F I D E N T I A L I T Y Duties set out in respect of confidential information of the Company.

I N D U C T I O NThe two new Non-Executive Directors who joined the Board during the year underwent an induction process which covered the following areas:

Area Facilitated by

B O A R D P R O C E D U R E S , D U T I E S O F A D I R E C TO R , C O R P O R AT E G O V E R N A N C E

Chairman

S T R AT E G Y A N D B U S I N E S S D E V E L O P M E N T S CEO

F I N A N C I A L P E R F O R M A N C E , F I N A N C I A L R E P O R T I N G , B U D G E T S , R I S K

Chief Financial O#cer

I N V E S TO R R E L AT I O N S Head of Investor Relations

C O M PA N Y A N D I N D U S T R Y S P E C I F I C Visits to Head O#ce in Jersey and meetings with the Company’s technical team to provide overview of operations


E VA L UAT I O NThe Board undertakes regular evaluations of its own performance as well as that of the various Board Committees and the Chairman and ensures that an external review is carried out at least once every three years. An external review is currently being conducted by Hay Group which also facilitated reviews in 2009 and 2010. In 2011, the review was conducted internally by means of a detailed questionnaire. An internal review was conducted by the Chairman in 2012.

Overall, evaluations have identified that the Board, its Committees and individual Directors perform well and provide strong and e"ective leadership. Suggestions raised during the year are reviewed to ensure that progress is made.

ACCO U N TA BIL I T Y

It is the responsibility of the Board to ensure that there is in place a system of checks and balances to manage risk across the Group. It has well established internal control procedures which are described below. The Audit Committee is responsible for reviewing and reporting on the e"ectiveness of the Group’s control systems.

F I N A N C I A L A N D B U S I N E S S R E P O R T I N GIt is essential that shareholders are provided with a clear assessment of the Group’s position and prospects. The Annual Report and Accounts, half yearly report and other periodic financial or trading statements provide this information to shareholders and the market. Financial reporting is controlled principally through the policies set out in the Financial Reporting Procedures Memorandum (the “Board Memorandum”). This was first established as part of the process to become listed on the Main Market of the LSE and is reviewed and updated on an annual basis. The Board Memorandum was specifically updated in 2012 to ensure that established procedures allow the Directors to continue to make proper and informed judgements on the financial position and prospects of the Group following the Acquisition. The Directors recognise the need to maintain financial reporting procedures, to review them on an ongoing basis and to adapt them to changing circumstances and will use the Board Memorandum as a basis for further developing control processes.

In fulfilling its responsibility to monitor the integrity of financial reports to shareholders, the Audit Committee reviews accounting principles, policies and practices adopted in the preparation of public financial information and examines documentation in relation to the Annual Report and Accounts and annual financial report announcements. The ultimate responsibility for reviewing and approving the half year and annual financial statements remains with the Board.

The Company’s internal controls and reporting procedures and systems are being implemented by Shoreline, the joint venture company incorporated in Nigeria that owns an interest in OML 30.

R I S K M A N AG E M E N T A N D I N T E R N A L C O N T R O LIt is the Board’s responsibility to determine the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. It also has overall responsibility for the Group’s system of internal control and risk management and has established processes for identifying, evaluating and managing the significant risks that the Group faces. This includes significant risks that may arise from environmental, social and governance matters. The Group’s system of internal control is designed to manage, rather than eliminate, the risk

of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. The risk assessment and internal control procedures were in place from the start of 2012 to the date of approval of this report and have been reviewed by the Board in accordance with the Financial Reporting Council’s guidance on internal control (the “Turnbull Guidance”).

The Audit Committee reviews regularly, on behalf of the Board, the e"ectiveness of the Group’s system of internal control. The review covers all controls, including financial, operational and risk management processes. Appropriate actions are put into place to remedy any weaknesses identified by the review. One weakness identified in its financial procedures reporting concerns accounting for complex financial transactions and so the Company ensures that it seeks third party advice to mitigate this weakness.

I N T E R N A L CO N T R O L F R A M E W O R KThe Board Memorandum sets out the internal control systems of the Group including governance, high level financial controls, budgeting and forecasting procedures, controls of resources, accounting and information systems and treasury management. The Board Memorandum of also specifically includes OML 30 acquisition risks and controls and integration plans. In addition to high level controls, controls are in place at an operational level. These systems are based on established management structures with defined lines of responsibility and clear delegation of authority.

High level controls include:

– review of management accounts with comparison of actual performance against prior periods and budget;

– approval of orders, authorisation of invoices and two signatories required to make a transfer from the principal bank accounts;

– quarterly reconciliation of all control accounts; – prior approval by the Board for major investments; and – segregation of duties between relevant functions and departments.

Entity-level controls set the tone and establish the expectations of the Group’s control environment and are used to monitor the extent to which that tone and expectations are being fulfilled. These include controls within each of the following elements:

– control environment; – risk assessment; – information and communication; and – monitoring.

R I S K A S S E S S M E N TFormal risk assessments are conducted periodically during the year which cover all material controls, including financial and operational, and risk management systems. A risk matrix has been developed which aids identification of the primary risks the Group faces and likelihood of their occurrence. The primary risks are collated from this assessment with recommended controls to mitigate these risks and presented to the Audit Committee for review. The Board receives reports of the Audit Committee’s review of the internal control system, risk assessment process and any reports made under its whistle-blowing policy.

Details of principal risks and uncertainties, which are those reviewed by the Audit Committee during the year, are discussed on pages 32 to 34 of the Annual Review.


W H I S T L E - B LO W I N G P O L I C YAn important part of the Company’s control processes is having a reporting system that can be used by employees to report possible fraud or wrongdoing. The whistle-blowing policy and procedures in place were reviewed during the year. Information is available to all employees advising them that they can raise concerns in confidence about possible wrongdoing by contacting the Chairman of the Audit Committee. In addition, the Board and Audit Committee receive reports of any information reported under the whistle-blowing procedures and appropriate action is taken as a result.

REL AT IO NS W I T H SH A REH O L DERS

The Chairman, with input from the SID and Executive Directors, is responsible for ensuring e"ective communication of shareholders’ views to the Board as a whole and will update the rest of the Board accordingly. Board members are expected to use their best endeavours to attend meetings with a broad range of shareholders or otherwise keep in touch with shareholder opinion and discuss strategy and governance issues with them as time progresses. In addition, the Company employs an investor relations specialist and an investor relations programme is in place for the Company to meet major shareholders and analysts.

Sir Michael Wilkes, as SID, has the chief responsibility of maintaining su#cient contact with major shareholders to help develop a balanced understanding of their issues and concerns. In this role Sir Michael Wilkes is available to shareholders who have concerns that have not been, or cannot be, resolved through discussion with the Chairman, CEO or CFO or where such contact is inappropriate.

Throughout 2012, Executive Directors and senior management met with institutional investors in London and across the UK as well as other European, North American and Middle East cities. These roadshows, combined with the attendance of various Directors and/or senior management at several conferences, provided for comprehensive and engaging dialogue with shareholders. In addition, the Company and its advisers entered into discussions with major shareholders in respect of the resolutions put to its 2012 AGM, particularly in respect of the resolution concerning the Rule 9 waiver. This enabled shareholders to fully understand the reasons for this resolution.

The Company engages with and considers the views of investor voting advisory services such as that provided by the Institutional Voting Information Service and RREV Proxy Advisory Services.

The Board is aware of its reporting responsibilities and, where necessary, takes advice to ensure that material information is released on a timely basis. The Board has recently reviewed its Disclosure Policy to ensure Directors and management remain aware of their responsibilities in relation to the release of price sensitive information. It is the Company’s policy not to comment on market rumours or press speculation.

The Group issues its results and other news releases promptly and publishes them on the Company’s website at www.heritageoilplc.com. Other corporate information, including the Annual Report, any prospectus and, circulars issued during the year and other financial presentations are also available on the website. Shareholders and other interested parties can subscribe to receive news updates by email by registering online on the website.

A R T I C L E S O F A S S O C I AT I O NThe Articles govern, amongst other things, the rights and obligations relating to the Company’s shares, powers of the Directors, proceedings at general meetings, and the appointment and resignation of the Directors. The Articles may only be amended by a special resolution of the Company’s shareholders.

S H A R E C A P I TA LThe Company has two classes of shares, namely the Ordinary Shares and the special voting share of HOC (the “Special Voting Share”). HOC, the Company’s indirect subsidiary, has Exchangeable Shares outstanding that are convertible into Ordinary Shares of the Company.

The Ordinary Shares and the Special Voting Share carry no right to fixed income. The Ordinary Shares have a right to one vote for every share at general meetings. The holders of Exchangeable Shares have rights through the Special Voting Share held by the trustee of the Voting and Exchange Trust to one vote at general meetings for every Exchangeable Share on the same basis as if they had exchanged them for Ordinary Shares. For clarity, the Voting and Exchange Trust is a Canadian Trust that holds the Special Voting Share for the benefit of the registered holders of the Exchangeable Shares pursuant to the terms of a Voting and Exchange Trust Agreement dated 27 February 2008, as amended on 24 April 2008.

Subject to applicable statutes, shares in the Company may be issued with such rights or restrictions as the Company may by Special Resolution determine. Unissued shares are at the disposal of the Board.

The issued share capital of the Company and total voting rights of the Company as at 29 April 2013 are as follows:

– 255,595,978 Ordinary Shares of the Company are issued and outstanding, which constitutes 99.1% of the total voting rights of the Company; and

– 2,361,018 Exchangeable Shares of HOC, each carrying one voting right in the Company, are issued and outstanding, which constitutes 0.9% of the total voting rights of the Company.

P U R C H A S E O F O W N S H A R E SAt the AGM held on 20 June 2011, a Special Resolution was passed by shareholders authorising the Company to make market purchases of its own shares up to the date of the next AGM. Any shares which have been so purchased may be held as treasury shares or cancelled immediately upon completion of the purchase. No such resolution was proposed at the AGM held on 21 June 2012.

Details of the Ordinary Shares purchased in 2012, under the 2011 authority, are provided below:

Number of shares

Percentage of issued share

capital1

Aggregate consideration

paid$’000

Shares purchased and held in treasury 1,373,708 0.5% 3,323

1 Percentage of issued share capital as at 1 January 2012.

As at 31 December 2012, the Company held a total of 34,602,442 Ordinary Shares in treasury equal to 13.3% of the issued share capital as at 1 January 2012. As at 29 April 2013, 34,602,442 Ordinary Shares were held in treasury.



ManagementOther RetailValue

December 2011

MultipleHedge Fund

GrowthIndex

34.1%12.3%11.4%11.2%

7.8%9.3%

8.3%4.4%

Quantitative 1.1%

Source: J.P. Morgan Securities Ltd. Other consists of trading positions, custody and unclassified.

ManagementRetail MultipleOther

December 2012

Hedge FundValue

GrowthIndex

34.1%12.2%

9.9%11.6%

9.2%9.7%

7.5%4.0%

Quantitative 1.8%

Source: J.P. Morgan Securities Ltd. Other consists of trading positions, custody and unclassified.

S H A R E H O L D E R A N A LY S I SAnalysis of the Company’s shareholder base, shown on the following two graphs, indicates that there has been a small change in the profile of those holding shares in Heritage in 2012. There has been an increase in the retail shareholding and a decrease in investors classified as growth and value investors.

M A J O R S H A R E H O L D E R SAs at 29 April 2013, the Company had been notified in accordance with the Disclosure and Transparency Rules, of the following interests in voting rights in its issued share capital:

NameOrdinary

Shares held % held1

Albion2 85,040,340 32.97Lansdowne Partners Limited 28,498,394 11.05Capital Research and Management

Company 20,991,874 8.14London and Capital Asset Management

Ltd 7,825,024 3.03

1 Includes voting rights attaching to the Special Voting Share as well as the Ordinary Shares.

2 Number of Ordinary Shares held by Anthony Buckingham either directly or indirectly through Albion.

V OT I N GUnder the Articles, every member and every duly appointed proxy present at a general meeting has, upon a show of hands, one vote. If voting at a general meeting is carried out by poll, every member present in person or by proxy has a vote for each share held.

T R A N S F E R SSubject to the Articles, any member may transfer certificated shares by an instrument of transfer in writing in any usual form or in any other form acceptable to the Directors. Directors may refuse to register any transfer of certificated shares which are not fully paid or where the register of transfer is not in the acceptable form.

P O W E R S O F T H E D I R E C TO R SSubject to the Articles, relevant statutory law and any direction that may be given by shareholders in general meetings, the business of the Company is managed by the Directors who may exercise all powers of the Company.

R E S U LT S A N D D I V I D E N D SThe Group’s financial results for the year ended 31 December 2012 are set out in the Financial Statements Report of the Company’s 2012 Annual Report and Accounts. The Company has not declared or paid any dividends since incorporation other than a special dividend paid in 2010 to return part of the sale proceeds from the disposal of Heritage Oil & Gas Limited’s 50% interest in Blocks 1 and 3A in Uganda (the “Ugandan Assets”). Future payments of dividends are expected to depend on the earnings and financial condition of the Company and such other factors as the Board of Directors of the Company consider appropriate.

R E G I S T R A RThe Company’s share registrar is Computershare Investor Services (Jersey) Limited of Queensway House, Hilgrove Street, St Helier, JE1 1ES, Jersey, Channel Islands.

A N N UA L G E N E R A L M E E T I N GThe 2013 AGM will be held at 22 Grenville Street, St Helier, JE4 8PX, Jersey, Channel Islands on 20 June 2013. Formal notice of the AGM, including details of special business, is set out in the Notice of AGM and dispatched to shareholders at least 20 working days before the meeting. The Notice of AGM will also be available on the Company’s website at www.heritageoilplc.com.

The AGM gives shareholders an opportunity to hear about business developments and ask questions of the Directors. Shareholders are encouraged to send questions, prior to the meeting, to the Company’s registered o#ce in Jersey. For those shareholders not able to attend the meeting, any presentation given at the meeting together with results of voting will be available on the Company’s website. All of the Directors are expected to attend the AGM and be available to answer questions. Voting at the AGM will be by poll, which the Directors believe is the most representative way of conducting voting, giving shareholders one vote for each share held and enabling those shareholders not able to attend the meeting in person an opportunity to vote by lodging a proxy vote. Details of how to vote and deadlines for exercising voting rights are set out in the Notice of AGM.


Over the past 12 months, Heritage has continued to strengthen and develop its corporate strategy and portfolio of interests through the entry into Nigeria and the exit from Kurdistan. The acquisition of an interest in OML 30, Nigeria, through Shoreline, has provided the Company with a material increase in cash generation, production and reserves. It provides exposure to the largest African oil-producing country and a platform for further growth. Divesting of the Miran asset in Kurdistan secured an attractive valuation for an asset with a significant future capital expenditure requirement. These corporate transactions have strengthened the Company and positioned it to provide substantial growth going forward.

Executive remuneration has continued to remain at the forefront of shareholder, regulatory and media attention during 2012. Over the course of the year we have seen amended investor guidelines and proposed regulatory reporting requirements as a consequence of this sustained interest with the aim of ensuring that executive pay practices are transparent, linked to Company performance and aligned to corporate strategy. In particular, UK government amendments to remuneration reporting regulations will, once finalised and adopted, alter the content and layout of the Directors’ Remuneration Report.

REP O R T O F T HE REM U NER AT IO N CO M M I T T EE

A R O B U S T B U S I N E S S

J O H N M C L E O DC H A I R M A N O F T H E R E M U N E R AT I O N C O M M I T T E E

Dear Shareholder, On behalf of the Board and the Remuneration Committee, I am delighted to present this year’s Remuneration Report for Heritage.


To ensure that we will be well positioned to adhere to the changes, we have continued to improve the quality of our dialogue with shareholders and the transparency of our reporting. We continue to monitor these proposals with interest and intend to be fully compliant once they have been implemented. As such, I believe we are well positioned to adhere to the changes when they come into e"ect.

We are committed to providing a clear explanation of the underlying principles of our reward policy and ensuring our Executive Directors’ remuneration arrangements support the delivery of our business strategy and reward for exceptional Company performance. Last year we stated that executive remuneration would be a focus for the Board and in line with this we initiated a thorough review of our pay arrangements during the year. This included benchmarking independent market data against global oil companies, thoroughly reviewing our remuneration policy and, as described last year, commissioning an independent remuneration risk review.

We are mindful that the market for experienced and talented oil executives remains highly competitive and believe that retaining the current Executive Directors protects the best interests of the Company and our shareholders. As a result of these reviews, we have made amendments to our remuneration policy which we believe will help to ensure the delivery of our long-term strategy and your interests.

We have continued to improve the quality of our dialogue with shareholders and the transparency of our reporting.

We have recommended, and the Board has approved, amendments to the bonus plan which we believe will further align our remuneration arrangements with the delivery of our business strategy. We have introduced bonus deferral in our annual bonus scheme, which will apply to this year’s and future years’ bonus awards. Any bonus payments awarded in excess of half of the maximum will now be deferred for one year.

Furthermore, any unvested deferred awards will be subject to formal clawback measures. Further details of these changes are set out on pages 23 to 24 of this report. We believe that these amendments will not only provide a greater alignment between Directors’ and your interests, but reinforces our commitment to ensure our remuneration practices align in so far as practicable with recommended UK best practice.

At the same time, following feedback from shareholders and further internal review, we have also approved changes to the contracts of the Executive Directors, reducing the notice periods and adopting more modest termination provisions in the event of a change of control of the Company, in line with best practice.

Together with the rest of the Board I look forward to hearing your views on these matters as well as any other questions you may have concerning the Group’s executive remuneration policy.

J O H N M C L EO DC H A I R M A N O F T H E R EM U N ER AT I O N CO M M I T T EE2 9 A PR I L 2 013


M E M B E R S O F T H E R E M U N E R AT I O N C O M M I T T E E A N D AT T E N D A N C E AT M E E T I N G S

Attendance at meetings (3 meetings held)

John McLeod, ChairmanCarmen Rodriguez1

Sir Michael Wilkes

333

1 Carmen Rodriguez replaced Salim Macki in March 2012.

The Remuneration Committee has clearly defined Terms of Reference, summarised below, which conform to the requirements of the Code and are available on the Company’s website www.heritageoilplc.com.

R E S P O N S I B I L I T I E S O F T H E R E M U N E R AT I O N C O M M I T T E E

The Terms of Reference set out the responsibilities of the Remuneration Committee. These include:

– to set the remuneration policy for the Chairman, Executive Directors and senior executives;

– to assess and determine total compensation packages available to the Executive Directors;

– to monitor the remuneration of senior management other than the Executive Directors;

– to determine policy and scope for pension rights and any compensation payments;

– in determining remuneration to give due regard to the Code, UK Listing Rules and associated guidance; and

– to make recommendations to the Board for its approval, and that of shareholders, on the design of LTIPs and making recommendations for the grant of awards to executives under such plans.

This report has been prepared with reference to the UK Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (the “Regulations”) and meets the relevant requirements of the Financial Conduct Authority’s Listing Rules.In preparing this report, consideration has also been given to the Code and the Association of British Insurers “Principles of Remuneration” guidelines.

The report has been divided into di"erent parts for unaudited and audited information. The first part, which is not required to be audited, details the role of the Remuneration Committee and our executive reward policy, with particular reference to the link between our reward policy and the business strategy. The second part, which has been audited in accordance with the Regulations, contains details of the Executive Directors’ emoluments, performance share awards, options and pension arrangements.

A resolution to approve the report will be put to shareholders at the AGM on 20 June 2013.

W H AT D I D T H E R E M U N E R AT I O N C O M M I T T E E D O D U R I N G T H E Y E A R ?

R E M U N E R AT I O N

Commission and review of report from Hay Group on the remuneration of Executive Directors and senior management.Approved base salary increase of 3% to the Executive Directors. The Remuneration Committee considers wider pay increases to employees as well as general market conditions before approving any pay increases to Executives.

B O N U S E S

Review of annual bonus arrangements for Executive Directors; recommendation and implementation of bonus deferral and formal clawback measures.

L O N G T E R M I N C E N T I V E P L A N ( “ LT I P ” )

Review of 2011 LTIP and review of 2012 peer group companies to be used for performance conditions. Approval of awards made in 2012 to Executive Directors and senior management. Interim review of current performance against the first awards made under the 2011 LTIP.

R E P O R T I N G A N D G O V E R N A N C E

Approval of Remuneration Report disclosures.

R I S K R E V I E W

Commission and review of independent reward risk review considering how Heritage’s reward policies help to mitigate against, or may potentially exacerbate, risk including those identified by Heritage on pages 36 to 38 of the Annual Review.

S E R V I C E A G R E E M E N T S

Recommendation and implementation of amendments to the Executive Directors’ service contracts to reduce notice periods.

REP O R T O F T HE REM U NER AT IO N CO M M I T T EE CO N T IN U ED


U N AU D I T E D I N F O R M AT I O NR E M U N E R AT I O N C O M M I T T E EThe Committee met three times during 2012 and the attendance record of individual Committee members is shown on page 20 of this Corporate Governance Report.

All members of the Remuneration Committee, including John McLeod, the Committee Chairman, are considered by the Board to be independent, as explained in this Corporate Governance Report on page 9.

In setting the remuneration policy and total compensation package levels for Executive Directors and other senior executives, the Remuneration Committee gives consideration to the economic environment, the financial and operational performance of the Group and the remuneration policy and levels for the wider employee population. In particular, the Remuneration Committee considers how pay levels in the wider employee population compare against the market and is mindful of the pay di"erentials between top executives and roles at di"erent levels in the structure. In line with our Terms of Reference, no individual is involved in setting their own pay.

A D V I C E TO T H E R E M U N E R AT I O N CO M M I T T E EThe Chairman of the Board, CEO and CFO provide internal support to the Remuneration Committee and attend meetings at the Committee’s invitation except where matters associated with their own remuneration are being discussed.

The Remuneration Committee has access to external advice as required. During the year, the Committee continued to receive independent advice from external executive reward consultants, Hay Group, on matters under consideration by the Committee. In addition, Hay Group provided updates on market practice. No other services were provided to the Company by Hay Group during the year.

Hay Group is a founding member of the Remuneration Consultant’s Group and a signatory of its code of conduct.

E X E C U T I V E R E WA R D P O L I C YDuring the year, the Remuneration Committee has continued to monitor the executive reward policy and principles to ensure that they remain appropriate and continue to support the business strategy. These broad principles, which the Remuneration Committee believes remain appropriate in the current climate, are designed to ensure that the Company:

– has an executive reward framework to help drive future value growth;

– retains and, when necessary, recruits management talent of the required ability and experience;

– provides overall levels of reward that are appropriate for the Company given its Premium Listing in London, international operations and the global nature of the oil and gas industry;

– follows UK best practice in so far that such standards support and enhance the Company’s ability to generate value for shareholders; and

– maintains a balance between fixed (base package and benefits) and variable reward (short and long-term incentives) that is appropriate and motivates the right behaviours (see chart on page 23).

Following a review of the annual bonus arrangements, the Remuneration Committee has recommended, and the Board has approved, the introduction of a deferred bonus plan, and the introduction of clawback provisions on all bonuses awarded to Executive Directors. Further details of these proposals are set out in the bonus section of this report. As ever, we are committed to ensuring our policy is appropriate for Heritage in the context of changing best practice and investor guidelines, discussing with third party advisers and then making recommendations for change where necessary and will continue to do so.

During 2012 the Remuneration Committee also reviewed the LTIP peer group for awards made in 2012, to ensure that performance against this group continues to be appropriate and stretching for Heritage. After consideration of Heritage’s corporate transactions during the year, the Board recommended some minor amendments to the constituents of this group; the full list of comparator organisations can be seen on page 24.

Following consultations with external advisers and after taking into account feedback from shareholders, the notice periods of the Executive Directors have been reduced from 24 months to 12 months, e"ective 1 January 2013, to bring the Company further in line with best practice.

It remains the Remuneration Committee’s opinion that, in light of the geographic areas in which the Company operates, the relatively small number of executives at the Company and the roles conducted by the Executive Directors, an upper quartile level of total reward is appropriate. However, whilst the policy allows for upper quartile levels of reward, these will only be realised for truly exceptional levels of performance.

The Remuneration Committee considers that Heritage’s remuneration policy should be su#ciently flexible to reward outstanding performance, in line with the performance-driven culture of the Group.

The table below summarises the main elements of the Executive Directors’ remuneration packages and its alignment to Heritage’s business strategy.


S U M M A R Y O F C U R R E N T R E M U N E R AT I O N CO M P O N E N T S

CO M P O N E N T O F E X E C U T I V E R E WA R D

P O L I C Y F O R E X E C U T I V E D I R E C TO R S

A L I G N M E N T TO CO R P O R AT E S T R AT E G Y

Base package – typically reviewed annually; – benchmarked against UK and

international oil and gas peer group companies; and

– increases of 3% awarded for 2013.

– market competitive pay levels enable us to recruit and retain the best available talent for Heritage; and

– consideration of wider employee pay increases as well as general market conditions.

Annual bonus – maximum opportunity of 300% of base package;

– based on exceptional financial, operational and non-financial achievements;

– any award in excess of 150% of salary will be deferred for 12 months;

– 50% of deferred bonus will be payable in share price-indexed cash, the remainder will be payable in cash; and

– unvested awards are subject to clawback in the event of material misstatement of financial results or misconduct.

– promotes a high-performance culture; – maximum levels of bonuses are only

available for exceptional performance; – encourages further alignment between

Executive Directors and shareholders; – strengthens the long-term strategic focus

of the Board; and – complies with UK best practice.

2011 LTIP – annual awards of performance shares; – maximum award of 300% of base

package; – relative Total Shareholder Return

(“TSR”) performance targets measured against a bespoke group of companies over three years; and

– awards begin to vest for median performance (at which point 25% vests); full vesting for upper quartile performance.

– alignment with long-term corporate performance and shareholder value; and

– in line with the stage of Heritage’s development since its London listing, and in direct response to shareholders’ views, the vesting schedule of awards made under the 2011 LTIP is in line with typical market practice.

Pension – allowance of 10% of base package. – below market lower quartile and in line with our high-performance culture.

REP O R T O F T HE REM U NER AT IO N CO M M I T T EE CO N T IN U ED


100

80

60

40

20

0

Components of Executive Directors’ Reward

CFOCEO

Fixed rewardVariable reward

Variable reward includes total 2012 bonus award and the fair value of long-term incentive awards notionally made on 19 June 2012.

78%

22%

80%

20%

B A L A N C E B E T W E E N F I X E D A N D P E R F O R M A N C E -R E L AT E D R E WA R DThe Remuneration Committee firmly believes in “pay for performance” as demonstrated by the charts below which illustrate the balance between fixed (base package and benefits, including pension) and variable (bonus and long-term incentives) elements of reward for each of the Executive Directors for exceptional performance.

B A S E PAC K AG EAs a general policy, base packages reflect the Remuneration Committee’s assessment of the appropriate market rates for executive positions in peer organisations, as well as the individual’s level of responsibility, experience, criticality and value to the business. Salaries are therefore set at a level to enable the Company to recruit and retain high-calibre individuals in a highly competitive market where there is a shortage of experienced executives. The Remuneration Committee believes that by ensuring Heritage’s market competitiveness in keeping and attracting some of the very best talent in the global oil sector, it is both protecting and generating shareholder value and ensuring the long-term success of the Company.

Salaries are reviewed annually with any increases becoming e"ective in the first quarter of the relevant financial year. To ensure informed decision-making, the Remuneration Committee is provided with independent benchmark data. As part of the Remuneration Committee’s review last year, the Company was compared against three pre-determined peer groups of comparable companies, namely:

– a comparator group comprising both UK and international oil and gas companies of a similar size and scale to Heritage;

– a peer group comprising those oil and gas companies that are often used by equity analysts to evaluate Heritage’s performance; and

– the constituents of the FTSE 350 Oil and Gas index.

The Committee recognises that benchmark data forms only one part of any pay-setting exercise and should be viewed in context. When making any decisions regarding proposed salary increases, the Remuneration Committee also has due regard to the salaries of, and the increases awarded to, all Group employees, the views of institutional shareholders and the desire to emphasise the importance of the performance-related elements of the package. For 2013, the Committee has recommended an increase of 3% of salary.

The table below details the 2013 and 2012 base packages of the Executive Directors.

Name2013 base

package 2012 base

package Increase

Anthony Buckingham £766,514 £744,188 3%

Paul Atherton £567,788 £551,250 3%

A N N UA L B O N U SFollowing dialogue with shareholders and in line with Heritage’s continued dedication to aligning with UK corporate governance and market best practice, an extensive review of the annual bonus plan was undertaken during 2012. As a result of this review, the Committee has introduced bonus deferral to the scheme in addition to a formal clawback mechanism for unvested deferred awards.

The total maximum bonus award remains at 300% of salary. In line with our performance-driven culture, target bonus opportunity is one third of the maximum. This is lower than is typical in the market. For awards made in 2013 in respect of 2012 performance, and all future awards, any bonus payment made in excess of 150% of salary will now be deferred for a period of one year. These deferred awards will vest at the end of the one-year deferral period. Half of any deferred award will be delivered in share price-indexed cash which will increase, or reduce, in line with Heritage’s share price over the deferral period; the remainder of the deferred award will be payable in cash.

The Remuneration Committee believes that the introduction of this bonus deferral provides further alignment between Executive Directors and shareholders, as well as strengthening long-term strategic focus.

B O N U S E S PAYA B L E F O R 2 0 12 P E R F O R M A N C EThe Remuneration Committee recommends the level of annual bonuses paid to the Executive Directors and in doing so considers a wide range of financial and non-financial performance indicators over the year. These include, but are not limited to, environmental, health and safety issues, the time dedicated by Directors in developing and expanding Heritage’s portfolio as well as the financial performance of the Company.

In particular, the Committee recognises that during the year the Directors have successfully negotiated and e"ected key strategic deals which will provide the foundation for continued growth, ensuring the future success of Heritage. The delivery of a cash-generating asset to Heritage’s portfolio will help to fund the activities of the Company going forward. As such, the Committee has recommended bonus awards of 300% of base package in respect of outstanding performance in 2012. These awards will be subject to deferral, with half deferred for one year in keeping with the new arrangements outlined above.


C L AW B AC K P R O V I S I O N SReflecting our proactive approach to risk management, and our continued commitment to aligning Heritage’s remuneration policy with best practice, the Remuneration Committee has introduced a formal clawback mechanism for unvested deferred bonus awards. These provisions will apply to bonus awards made in 2013, in respect of 2012 performance, and any future awards.

Unvested deferred bonus awards may be reduced, either in part or in whole, at the discretion of the Remuneration Committee in the event that, in the opinion of the Committee, any of the following issues arise:

– if there is later found to be a material misstatement of the financial results;

– if there is later found to be an error in assessing the extent to which bonus payments were made; or

– if the Director ceases to be an employee of the Company as a result of serious misconduct.

LO N G -T E R M I N C E N T I V E S 2 0 11 LT I PIn order to align the executives’ interests with those of the long-term success of the Company and value delivered to shareholders, the Company makes awards of long-term equity-based incentives to those employees with the ability to influence shareholder value. Following a comprehensive review of the Company’s remuneration arrangements, the Committee oversaw the introduction of the 2011 LTIP. This plan marked the move to annual LTIP awards which the Committee believes, for a UK-listed global company of Heritage’s size, is appropriate given the current stage of the business’ development. Further, an annual awarding and vesting schedule avoids a gap in remuneration arrangements and assists the Committee in keeping, retaining and incentivising the very best talent in a highly competitive sector. This plan replaced the 2008 LTIP and all future long-term incentive awards will be made under this plan apart from those in relation to Anthony Buckingham. Anthony Buckingham continues to hold his LTIP award under the 2008 LTIP on amended performance conditions, revised to reflect substantially the same terms and conditions as those under the rules of the 2011 LTIP.

In line with the Company’s high-performance culture, the plan allows for upper quartile levels of reward to be delivered, but only for upper quartile performance.

The rules of the 2011 LTIP allow for annual awards of performance shares of up to 300% of base package to be made to Executive Directors (which may be exceeded in exceptional circumstances). However, it is the Committee’s intention that the Executive Directors will not annually receive the maximum level of award und

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