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2020 Report2006 Annual Report & Accounts Petroleum plc The company is UK based and engaged in the exploration of hydrocarbons. The company’s shares are listed on the Alternative Investment Market of the London Stock Exchange (AIM). Contents 01 Highlights 02 Chairman’s Statement 04 Chief Executive’s Review 10 Financial Review 12 Board of Directors 14 Directors’ Report 17 Audit Committee Report 18 Remuneration Committee Report 19 Auditors’ Report 22 Consolidated Profit and Loss Account 23 Consolidated Balance Sheet 24 Company Balance Sheet 25 Consolidated Cash Flow Statement 25 Reconciliation of Net Cash Flow to Movements in Net Debt 26 Notes to the Financial Statements 36 Corporate Directory Front cover: Volunteer Beach, Falkland Islands Borders & Southern Highlights Borders & Southern has completed the processing and interpretation of its Falkland Islands 2D seismic data The Company has commissioned and completed numerous technical studies aimed at technical risk reduction A new fold belt play located to the south of the Falkland Islands has been defined, the heart of which is contained within the Company’s 100% owned licensed area The size of the Company’s lead inventory has increased significantly, and contains numerous structures capable of holding giant oil or gas accumulations The Company is currently assessing the design and cost of a focused 3D seismic acquisition programme aimed at further risk reduction prior to drilling The management team is actively seeking to add new projects to its portfolio that are consistent with its strategy and meet its stringent screening criteria Cash balance as at 31 December 2006 was £9.47 million Borders & Southern Petroleum plc 1 In the last 18 months the Company has made significant progress towards its objective of building a successful exploration and production business. Chairman’s Statement D Islands 2D seismic data and commissioned a uring this period the Company has completed the processing and interpretation of the Falkland number of specialist studies all aimed at reducing the technical exploration risk. The results of the technical work have confirmed our belief that an excellent fold belt play exists to the south of the Falkland Islands. The work also confirmed the scale of the opportunity, with numerous structural leads mapped, seven of which exceed 50 square kilometres in size. These structures are potentially capable of holding very large volumes of hydrocarbons. The evaluation has produced far better results than expected at the outset and the Company has been fortu- nate to find that its acreage (in which we hold a 100% interest) contains the majority of the play fairway. 2 Borders & Southern Petroleum plc Ultimately, of course, we want to drill our Falkland Islands prospects as soon as practical. The objective is to align the drilling programme with other licence holders in the Falkland Islands region so that we can take advantage of the cost benefits of a combined drilling programme. Discussions with these licence holders are ongoing. However, if a joint venture partner is brought into our acreage, the incoming partner is likely to assume opera- torship of our licences and will accordingly seek input into the timing of exploration drilling. In addition to progressing the evaluation of the Falkland Islands licences the management team has been assess- ing opportunities in other regions with the intention of adding new licences to the Company’s portfolio. Applying strict screening criteria, the Company has been and will continue to be very selective when considering new licences. Borders & Southern will ensure that any additions to the exploration portfolio will be consistent with our strategy and at least equal in quality to those assets in our current portfolio. Exploration in frontier regions is always challenging. However the potential rewards are great. Borders & Southern’s current portfolio holds the potential to discover and prove up significant volumes of hydrocarbons. We will continue to progress towards testing this potential. HARRY DOBSON Chairman The management team’s strategy from the outset was to attract large Independent and major oil companies as partners in the projects that we pursue. The challenge is to determine the right time to bring in such partners by way of a farmout. We need to optimise the commercial terms of any agreement whilst reducing the technical risk enough to attract the partner. In order to understand how major oil and gas companies would perceive the current risk profile of Borders & Southern’s licensed acreage, the Company invited a very limited number of companies to review the data, with a view to them potentially becoming a joint venture partner. We did not believe it appropriate to launch a full farmout campaign at this time. The selected small number of companies took up our invi- tation and made multiple visits to our offices to review the data. Discussions with some of these potential partners are ongoing. In the meantime, in order to maintain the pace of explo- ration the Company is currently evaluating the best way to further reduce the technical risk. One option being con- sidered is a focused 3D seismic survey. Therefore the Company is working with consultants on 3D survey design and assessing how much data is required to deliv- er a significant risk reduction and how much it will cost. If we proceed with 3D seismic acquisition then it is likely to occur in the last quarter of 2007 at the start of the Austral summer season. Borders & Southern Petroleum plc 3 In November 2004 Borders & Southern gained licences to explore in nearly 20,000 square kilometres of the territorial waters of the Falkland Islands. This acreage is located in the untested South Falkland Basin. Chief Executive’s Review 4 Borders & Southern Petroleum plc The Falkland Islands developed. In April / May of 2005 we acquired 2862 kilo- metres of new 2D seismic data. Onboard processing allowed us to confirm that the play existed and enabled us to refine the survey during acquisition in order to cover the most interesting structures. This is why there is a higher density of seismic lines in the west of the licensed area. There have been no exploration wells drilled in the basin. Calibration of the seismic data, necessary for interpretation, FALKLAND ISLANDS EVALUATION T he Company’s specific objective was to investi- comes from Deep Sea Drilling Project (DSDP) wells located gate the presence of a fold belt play to the south to the east of the Falklands on the Maurice Ewing Bank and of the Falkland Islands, the offshore continuation from exploration wells located in the Malvinas Basin to the of the Andes Mountain trend. Throughout the South American west. These wells provide critical stratigraphic information continent, from Venezuela in the north through Colombia, and demonstrate the presence of a high quality, organic rich Peru, Bolivia and Argentina, fold belts provide one of the Cretaceous / Jurassic aged marine source rock. most successful hydrocarbon plays. Previous exploration drilling in the contiguous Malvinas Fold belts usually contain numerous, simple geological basin during the early 1980s resulted in several sub- structures suitable for trapping hydrocarbons. Providing commercial discoveries. Oil flow rates in excess of 3000 there are good reservoir rocks and working source bopd have been reported. Importantly the oil has been systems then fold belts can contain prolific hydrocarbon typed to source rocks in the same stratigraphic interval provinces. Individual structures can contain billion barrel oil fields or multi-tcf gas accumulations. Examples of such giant fields include: El Furrial (Venezuela), Cusiana (Colombia) and the San Martin / Cashiriari structures (Peru). Prior to our exploration programme in the South Falkland Basin there had been only limited evaluation of the fold belt play. Hints that a play could exist were seen on legacy regional seismic data from 1992. However, this data is insufficient to define where the play might best be Typical north-south cross-section through the fold belt Borders & Southern Petroleum plc 5 TertiaryCretaceousJurassic Chief Executive’s Review continued Regional map illustrating the location of Borders & Southern’s licences in the untested basin to the south of the Falkland Islands as the source rocks cored in the DSDP wells. Similar Borders & Southern’s regional work has demonstrated aged organic rich shales are also recorded onshore that Upper Cretaceous / Tertiary sands are likely to have South America, on the Antarctic Peninsula, in the Weddell been derived from the Falklands Massif to the north of the Sea, and off the west coast of South Africa. This gives a Company’s acreage. Mapped canyons and channels high degree of confidence that this is a regional source indicate a north south sediment transport direction. rock which will be present within Borders & Southern’s licensed acreage. The nearest outcrop to the licensed area is Beauchene Island, located almost midway between the northern limit Indirect evidence that source rocks are present and of the acreage and the main Falkland Islands. The geology generating hydrocarbons within the licences come from a of Beauchene Island is comprised of quartzitic sand- clearly defined bottom simulation reflector, interpreted to stones and quartzites, interpreted to be of Devonian age represent gas hydrates. There are also many seismic by analogy to the quartzites of the Port Stephens and Port amplitude and AVO anomalies within geologically sensi- Stanley Formations on the main Falkland Islands. Erosion ble trapping configurations that might be indicative of these sandstones and quartzites would provide of hydrocarbons. excellent reservoirs in the contract area. 6 Borders & Southern Petroleum plc Falkland IslandsATLANTIC OCEANArgentina005050100150KmMiles100Chile FOLD BELT TRENDOil discoveriesGas discoveries Wells drilled in the late 1990s Falkland’s drilling campaign Chief Executive’s Review continued Several prospective play fairways have been identified and mapped, but the main targets are Late Cretaceous / Tertiary sands within large anticlinal closures. Additional stratigraphic plays also occur within this stratigraphic interval. Subsidiary plays include Lower Cretaceous described as similar to the West of Shetlands in the UK, sands within tilted fault blocks. This is similar to the proven challenging but certainly within the capability of industry play of the Malvinas Basin. practice. Due to the water depths of between 1500 and 2D SEISMIC INTERPRETATION tion semi-submersible will be required for an exploration Detailed mapping of our new 2D seismic data has well. Again, we will be using standard oil industry tech- revealed numerous structural leads. These comprise four- nology and the oil industry is already exploring in water 2000 metres it is likely that a drill ship or a high specifica- way dip anticlinal closures, three-way dip thrust fault depths out to 3000 metres. closed structures, and tilted fault blocks. Many of these structures are large. Seven leads have a mapped area of Critically, the minimum field size required for a commer- closure over 50 sq km, with one structure exceeding 130 cial development has been investigated. This was found sq km. Significantly these structures display vertical to be around 100 million barrels, assuming an oil price in closure in excess of 2 km which allows the possibility of excess of $34 per barrel. In the exploration success case, stacked reservoirs, providing multiple targets within the these volumes should be easily achievable given the size same prospect. of mapped structures. During the last 12 months we have undertaken a rigorous A discovery would be developed using standard tech- technical evaluation. This started with a regional play fair- nology involving a Floating Production Storage way analysis taking in the whole of the South and East Offloading system whereby the crude oil is shipped Falkland Basins. Once the new data had been acquired, direct to market without the need for significant onshore we focused on the licensed area, and brought in specialist infrastructure. help for specific projects, using experienced industry consultants and experts from British universities. NEXT STEPS Projects have included geochemical and thermal model- taken to date has reinforced our view that we have an ling, structural modelling and restoration, seismic AVO excellent position in the South Falklands Basin worthy of All the technical and commercial work we have under- analysis, seismic reprocessing, seismic facies analysis, exploration drilling. and lead specific mapping. All of these studies have been brought together to help reduce the exploration risks. In order to progress further we are currently evaluating In addition to the technical studies we have commis- 3D seismic acquisition. New 3D data would allow the sioned independent analysis of the operating environ- Company to have greater confidence in the reservoir dis- ment and economics. The environment conditions are tribution across the large structures and to better site additional work programme options. One such option is Borders & Southern Petroleum plc 7 Chief Executive’s Review continued OUR ACREAGE IN THE SOUTH FALKLAND BASIN exploration wells. It may also provide direct hydrocarbon indicators such as flat spots and amplitude anomalies conforming to the mapped structure thereby significantly reducing the technical risks. STRATEGY The Company’s strategy is to build a portfolio of up to five exploration projects in frontier basins, areas in which a prolific petroleum system has yet to be defined. As frontier exploration has a higher technical risk profile than exploration in mature basins, the scale of opportunity and the potential rewards will need to be very large. One overriding technical constraint to the screening is the focus on basins where there is a high degree of confi- dence of a working source system, through either direct (oil flow in wells) or indirect technical evidence (direct hydrocarbon indicators from seismic or seeps). The Company will seek to minimise the exploration risk through high quality technical work and the application of leading edge technologies. We hope to secure large tracts of our targeted play fair- ways so that if the drilling of the first prospect is success- ful then there would be plenty of remaining potential. The Company will also target those play fairways that contain individual prospects of significant size. In contrast to the relatively high technical risks, the Company intends to focus on countries where political and commercial risks are considered to be relatively low. The Company sees its role in the industry as one where it generates ideas, secures the acreage, funds the early stage of exploration with the acquisition of 2D and/or 3D seismic data and thereby takes out significant exploration 8 Borders & Southern Petroleum plc PL 018Quad 61Blocks 16 to 30PL 019Quad 62 Blocks 16 to 30PL 020Quad 63Blocks 16 to 30PL 021Quad 64Blocks 1 to 30PL 022Quad 73Block 1 to53,668 sq km3,668 sq km3,668 sq km7,381 sq km1,213 sq km100%Operator100%Operator100%Operator100%Operator100%OperatorLICENCEAREAINTERESTJune 2005 Seismic Acquisition ProgrammeFold belt trendContractor:Geophysical Services IncorporatedVessel:GSI AdmiralAmount: 2862 kmA higher density of lines has help define the“sweet spot” of well imaged, simple folds within Falkland Islands territorial waters 50 km50km6162636473 Chief Executive’s Review continued risk from the opportunity prior to attracting the larger com- panies to help fund the drilling campaigns. Despite the sustained high price of oil and increased pressure of reserve replacement, the industry majors are still relatively risk averse and are not pursuing frontier opportunities. This provides an excellent opportunity for technically proficient small companies like Borders & Southern for early entry and risk-reduction exploration work prior to farming out. NEW OPPORTUNITIES With the price of oil still relatively high, the competition for Bruce Farrer, Business Development Manager acreage is fierce, particularly in proven and emerging petroleum basins. As the Company screens opportunities it needs to ensure the quality is as good as its existing decade was characterised by prices around the $30 per project and also that it focuses on projects that would barrel level. Whilst some weakening of the price might appeal to the larger companies. During the last 18 months occur many commentators believe that it is unlikely that oil we have screened a number of opportunities, but as yet prices will return to these levels in the short to medium term. have not secured a second project. The Company will continue to take time in order to bring the right projects The impact of high oil prices on our business is two fold. into the portfolio. Firstly, there is increased competition for acreage, partic- ularly in the proven hydrocarbon basins. Secondly, due to During the last year we were pleased to welcome Bruce the increased exploration, appraisal, and development Farrer into the Company. Bruce trained as a geologist and activity there is a higher demand for services, such as joins us from BHP Billiton where he has worked for the last seismic and drilling contractors, which flows through to 15 years in various technical and project management both costs and availability. roles. He brings significant operational and evaluation expertise to the Company based on his experience of exploration and development projects in Europe, North and West Africa and the Caribbean. INDUSTRY OUTLOOK During the last 18 months the price of oil increased to over $75 per barrel (July/August 2006) before falling back to levels around $60 per barrel. This is still very high when looking at a five-year trend as the early part of the HOWARD OBEE Chief Executive Officer Borders & Southern Petroleum plc 9 Financial Review 10 Borders & Southern Petroleum plc D uring the period under review, the Company did not incur any significant capital expenditures, with interest from the cash deposits offsetting the majority of the Company’s costs. BORDERS & SOUTHERN SHARE PRICE (p) The cash balances at the beginning and end of the FTSE AIM ALL SHARE INDEX - OIL & GAS period were as follows: Cash at 1 July 2005 Less: £ million £10.42 Overheads and working capital (net of interest) £0.95 Cash at 31 December 2006 £9.47 The cash at 31 December 2006 was held in pounds sterling and US dollars in either current accounts or short- term cash deposits. It is the Company’s intention to continue to hold this cash on current or short-term deposits until required and to potentially convert further pounds sterling into US dollars at times when the exchange rate is favourable. The Company has sufficient funds to finance current exploration expenditure commitments and to cover general overheads for the next financial year. BRENT CRUDE OIL $/BARREL PETER FLEMING Finance Director Borders & Southern Petroleum plc 11 7570656055506,5006.0005,5005,0004,5004,000Rebased closing price50454035302520 Mar 2007Dec 2006 Sep 2006Jun 2006 Mar 2006Dec 2005Sept 2005 Mar 2007Dec 2006 Sep 2006Jun 2006Historical data for the FTSE AIM Oil & Gas index starts from May 2006Source: London Stock ExchangeSource: London Stock Exchange Mar 2007Dec 2006 Sep 2006Jun 2006 Mar 2006Dec 2005Sept 20057570656055506,5006.0005,5005,0004,5004,000Rebased closing price50454035302520 Mar 2007Dec 2006 Sep 2006Jun 2006 Mar 2006Dec 2005Sept 2005 Mar 2007Dec 2006 Sep 2006Jun 2006Historical data for the FTSE AIM Oil & Gas index starts from May 2006Source: London Stock ExchangeSource: London Stock Exchange Mar 2007Dec 2006 Sep 2006Jun 2006 Mar 2006Dec 2005Sept 20057570656055506,5006.0005,5005,0004,5004,000Rebased closing price50454035302520 Mar 2007Dec 2006 Sep 2006Jun 2006 Mar 2006Dec 2005Sept 2005 Mar 2007Dec 2006 Sep 2006Jun 2006Historical data for the FTSE AIM Oil & Gas index starts from May 2006Source: London Stock ExchangeSource: London Stock Exchange Mar 2007Dec 2006 Sep 2006Jun 2006 Mar 2006Dec 2005Sept 2005 Board of Directors NUMBER OF BOARD MEETINGS Attendance: Harry Dobson Howard Obee Peter Fleming Steven Posford Nigel Hurst-Brown 5 4 5 5 5 5 12 Borders & Southern Petroleum plc DAVID HARRY WILLIAMSON DOBSON (Non-executive Chairman) age 59. Harry Dobson is a former investment banker and senior partner of Yorkton Securities. PETER WILLIAM FLEMING (Finance Director) age 45. Peter Fleming has over 12 years of upstream oil and gas experience, the majority of which was He currently engages in various merchant banking and ven- gained at BHP Billiton both in London and Melbourne. Whilst at ture capital activities in North America and Europe, and has BHP Billiton, Peter held senior positions in exploration and acted as Chairman of a number of resource companies business development, investment evaluation, acquisitions and (including American Pacific Mining Company Inc. and Lytton disposals and strategic planning. Prior to joining BHP Billiton, he Minerals Limited). He is currently the Chairman of Kirkland worked for Bridge Oil and Banque Indosuez. He holds Masters Lake Gold Inc. (a Toronto Stock Exchange and AIM quoted degrees in Business Administration and Finance. Company) and Rambler Metals and Mining plc (an AIM quoted Company). He is experienced in the organisation and funding of resource projects, including those located in inaccessible locations. HOWARD KEVIN OBEE (Chief Executive) age 47. Howard Obee was appointed Chief Executive when the Company was incorporated in June 2004. He has a PhD in structural geology from Imperial College, STEPHEN JAMES DOUGLAS POSFORD (Non-executive Director) age 60. Stephen Posford was a part- ner of stockbrokers W.Greenwell and Co. In 1986, he became Managing Director of Greenwell Montagu Gilt Edged, and in 1989 moved to Salomon Brothers to head up their proprietary trading department in London. He then became Salomon Brothers European CEO before retiring in 1996. and has spent 20 years in the oil industry, initially with BP (1985-1992), and subsequently with BHP Billiton (1992- 2004). He trained as an exploration geologist, but has been CHRISTOPHER NIGEL HURST-BROWN (Non-executive Director) age 55. Since qualifying as a Chartered Accountant, Nigel Hurst-Brown has pursued a appointed to various technical and commercial roles, incor- career in fund management. From 1986-1990 he was porating exploration, new ventures, strategic planning, and Chairman of Lloyd’s Investment Managers. In 1990 he moved business development. His most recent roles for BHP Billiton to Mercury Asset Management as a main board Director and were West Africa Asset Team Leader, and Exploration following Mercury’s acquisition by Merrill Lynch in 1997 Manager, London. He has experience of executing seismic became a Managing Director of Merrill Lynch Investment and drilling programmes in frontier basins, including those in Managers. Currently he is Chief Executive of Hotchkis and deep water. From left to right: Peter William Fleming Howard Kevin Obee David Harry Williamson Dobson Stephen James Douglas Posford Christopher Nigel Hurst-Brown Wiley (UK) Limited and a member of the Executive Committee of its US parent Hotchkis and Wiley Capital Management LLC. Borders & Southern Petroleum plc 13 Directors’ Report The Directors present their report and the audited consolidated financial statements for the 18 month period ended 31 December 2006. PRINCIPAL ACTIVITY The principal activity of the Group is the exploration for oil and gas. The comparative figures cover the period from the date of the Company’s incorporation, 8 June 2004 to 30 June 2005. RESULTS AND DIVIDENDS The Group profit and loss account is set out on page 22 and shows the result for the period. The Directors do not recommend the payment of a dividend. REVIEW OF BUSINESS AND FUTURE DEVELOPMENTS On 18th October 2005 the Company’s sole subsidiary, Borders & Southern Falklands Islands Limited, was incorporated. It is owned 100% by Borders & Southern Petroleum Plc. Whilst the Company made a loss during the period, the Directors are comfortable with the Company’s financial position at period end. Further details and a review on the operations of the Group are contained in the Chairman’s Statement, Chief Executive’s Review and Financial Review on pages 2 to 11. POST BALANCE SHEET EVENTS No events have occurred since the period end which require reporting or disclosing in the financial statements. CHARITABLE AND POLITICAL DONATIONS There were no political or charitable contributions made by the Company or the Group during the period. HEALTH, SAFETY AND ENVIRONMENT The Group has an overriding commitment to health, safety and environmental responsibility. The Group works closely with host governments and communities in the countries in which it operates, together with its contractors and partners, to ensure internationally recognised standards are implemented and maintained along with compliance to local legislation. The Group’s exploration activities are subject to the relevant environmental protection acts. The Group closely monitors its activities to ensure to the best of its knowledge there is no potential for the breach of such regulations. There have been no convictions in relation to breaches of these Acts recorded against the group during the reporting period. CREDITOR PAYMENT POLICY It is the Group’s policy to settle the terms of payment with suppliers when agreeing the terms of the transaction, to ensure that suppliers are aware of these terms and to abide by them. The amounts owed to the Company and Group's trade creditors at the year end represented 23 days (2005: 66 days) as a proportion of the total amounts invoiced by suppliers during the year. 14 Borders & Southern Petroleum plc FINANCIAL INSTRUMENTS Details of the use of financial instruments by the Company and its subsidiary undertaking are contained in note 25 of the financial statements. DIRECTORS AND THEIR INTERESTS The beneficial and other interests of the Directors and their families in the share capital at the beginning of the period or the date of their appointment to the board, whichever is earlier, and at 31 December 2006, were as follows: David Harry Williamson Dobson Stephen James Douglas Posford Howard Kevin Obee Peter William Fleming Christopher Nigel Hurst-Brown At 31 December 2006 25,000,000 25,000,000 10,000,000 2,200,000 1,000,000 At 1 July 2005 25,000,000 25,000,000 10,000,000 2,200,000 1,000,000 The ordinary shares in which Mr D H W Dobson is interested in are held by the Zila Corporation, a company owned by the Whitmill Trust Company Limited, as trustee of The Lotus Trust of which he is a beneficiary. DIRECTORS SHARE OPTIONS Howard Kevin Obee Peter William Fleming SUBSTANTIAL SHAREHOLDERS Number of options granted during the period (and held at end of period) Fair value of options 50,000 50,000 21p 21p Exercise price 48p 48p Vesting period 3 years 3 years At 13 April 2007 the following had notified the Company of disclosable interests in 3% or more of the nominal value of the Company's shares carrying voting rights: Stephen James Douglas Posford Zila Corporation Limited Lansdowne Partners Limited Partnership Howard Kevin Obee Morgan Stanley Securities Limited Artemis UK Smaller Companies Merrill Lynch & Co Inc F & C Inv Funds ICVCII UK Dynamic Fund Number of ordinary shares 25,000,000 25,000,000 11,125,000 10,000,000 6,756,250 6,260,000 4,200,000 4,200,000 % of share capital 19.58 19.58 8.71 7.83 5.29 4.9 3.29 3.29 Borders & Southern Petroleum plc 15 Directors’ Report continued DIRECTORS' RESPONSIBILITIES Directors are required by company law to prepare financial statements which give a true and fair view of the state of affairs of the Company and the Group at the end of the financial period and of the profit or loss of the Company and the Group for the period ending on that date. In preparing those financial statements, Directors are required to: select suitable accounting policies and apply them consistently; make judgements and estimates that are reasonable and prudent; state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company and the Group will continue in business. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure the financial statements comply with the Companies Act 1985. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and the Group and to prevent and detect fraud and other irregularities. Financial statements are published on the Group’s website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdic- tions. The maintenance and integrity of the Group’s website is the responsibility of the Directors. The Directors’ responsibility also extends to the ongoing integrity of the financial statements therein. All of the current directors have taken all the steps that they ought to have taken to make themselves aware of any infor- mation needed by the Company's auditors for the purposes of their audit and to establish that the auditors are aware of that information. The Directors are not aware of any relevant audit information of which the auditors are unaware. AUDITORS BDO Stoy Hayward LLP have expressed their willingness to continue in office and a resolution to reappoint them will be proposed at the Annual General Meeting. By order of the board WILLIAM JOHN WALTON SLACK Company Secretary 16 April 2007 16 Borders & Southern Petroleum plc Audit Committee Report The Board has established an Audit Committee comprising Mr Hurst-Brown (Chairman), Mr Dobson and Mr Posford, all Non-executive Directors. The Audit Committee meets at least biannually and is responsible for: The integrity of the financial statements and related disclosures, based on adequate books, records and internal controls and selection and consistent application of appropriate accounting policies; The appropriateness of the internal financial controls; The independent auditors’ qualifications, independence, and performance; and The compliance with legal and regulatory requirements. Borders & Southern Petroleum plc 17 Remuneration Committee Report The Board has established a Remuneration Committee comprising Mr Dobson (Chairman), Mr Hurst-Brown and Mr Posford, all Non-executive Directors. The Remuneration Committee meets at least annually and is responsible for: Reviewing the performance of the CEO and other Executive Directors and senior management of the Company and determines their remuneration and the basis of their service agreements with due regard to the interests of shareholders; The payment of any bonuses to the CEO, other Executive Directors and senior management; and Making recommendations to the Board with respect to equity-based incentive plans and to act as a preparatory body for the Board of Directors in the management of any company award and option plans DIRECTORS’ REMUNERATION AND SERVICE CONTRACTS On 18 May 2005, all of the Company’s Directors entered into a service agreement with the Company. The remuneration of the Directors for the 18 month period from 1 July 2005 to 31 December 2006 was as follows: David Harry Williamson Dobson Stephen James Douglas Posford Howard Kevin Obee Christopher Nigel Hurst-Brown Peter William Fleming Basic Salary £ – – 106,665 – 31,670 PENSIONS The Group does not operate a pension scheme for its Directors or employees. Whilst the Company is not required to present a Directors’ Remuneration Report as it is not subject to the Listing Rules of the Financial Services Authority nor the requirements of the Directors’ Remuneration Report Regulations 2002; it has disclosed here certain information about the Directors’ policies and emoluments. 18 Borders & Southern Petroleum plc Auditor’s Report INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF BORDERS & SOUTHERN PETROLEUM PLC We have audited the Group and parent company financial statements (the “financial statements”) of Borders & Southern Petroleum Plc for the period ended 31 December 2006, which comprise the Group profit and loss account, the Group and parent balance sheets, the Group cash flow statement and the related notes. These financial statements have been prepared in accordance with the accounting policies set out therein. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS The Directors’ responsibilities for preparing the Annual Report and the financial statements in accordance with applica- ble law United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the Statement of Directors’ Responsibilities. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view and have been properly prepared in accordance with the Companies Act 1985 and whether the information given in the Directors’ Report is consistent with those financial statements. We also report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if informa- tion specified by law regarding directors’ remuneration and other transactions is not disclosed. We read other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. The other information comprises only the Highlights Report, the Chairman’s Statement, the Chief Executive’s Review, the Financial Review, Board of Directors’ Report, Audit Committee’s Report, Remuneration Report and the Corporate Directory. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information. Our report has been prepared pursuant to the requirements of the Companies Act 1985 and for no other purpose. No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of the Companies Act 1985 or has been expressly authorised to do so by our prior written consent. Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability. BASIS OF OPINION We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s and Company’s circumstances, consistently applied and adequately disclosed. Borders & Southern Petroleum plc 19 Auditors’ Report continued We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. OPINION In our opinion: the Group financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the Group’s affairs as at 31 December 2006 and of its loss for the period then ended; and the parent company financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the parent company’s affairs as at 31 December 2006 the financial statements have been properly prepared in accordance with the Companies Act 1985; and the information given in the Directors’ Report is consistent with the financial statements. BDO STOY HAYWARD LLP Chartered Accountants & Registered Auditors 16 April 2007 20 Borders & Southern Petroleum plc Main Heading continued Financial Statements for the Period from 1 July 2005 to 31 December 2006 Borders & Southern Petroleum plc Borders & Southern Petroleum plc 21 for the period ended 31 December 2006 Consolidated Profit & Loss Account Turnover Administrative expenses Operating loss Other interest receivable and similar income Loss on ordinary activities before and after taxation Loss for the financial period Note 18 months ended 31 December 2006 £ – (1,176,389) 2 (1,176,389) 649,365 (527,024) (527,024) 8 June 2004 to 30 June 2005 £ – (204,785) (204,785) 63,539 (141,246) (141,246) Loss per share – basic and diluted (see note 3) (0.39p) (0.26p) All amounts for both periods relate to continuing activities. The Group has no recognised gains or losses for the period other than the results above. The notes on pages 26 to 35 form an integral part of these financial statements. 22 Borders & Southern Petroleum plc as at 31 December 2006 Consolidated Balance Sheet Fixed assets Intangible assets Tangible assets Current assets Debtors Cash at bank and in hand Creditors: Amounts falling due within one year Net current assets Total assets less current liabilities Provisions for liabilities Net assets Capital and reserves Called up share capital Share premium reserve Other reserves Profit and loss reserve Equity shareholders’ funds Note 31 December 2006 £ £ 30 June 2005 £ £ 9 10 12 13 14 15 18 18 18 17 1,637,066 10,144 1,647,210 1,497,668 14,965 1,512,633 135,731 9,468,174 9,603,905 (65,804) 142,790 10,416,100 10,558,890 (331,546) 9,538,101 11,185,311 – 11,185,311 1,276,875 10,561,393 15,313 (668,270) 11,185,311 10,227,344 11,739,977 (42,955) 11,697,022 1,276,875 10,561,393 – (141,246) 11,697,022 The financial statements were approved by the Board of Directors and authorised for issue on 16 April 2007. HOWARD KEVIN OBEE Director PETER WILLIAM FLEMING Director The notes on pages 26 to 35 form an integral part of these financial statements. Borders & Southern Petroleum plc 23 as at 31 December 2006 Company Balance Sheet Note 31 December 2006 £ £ 30 June 2005 £ £ Fixed assets Intangible assets Tangible assets Investments Current assets Debtors Cash at bank and in hand Creditors: Amounts falling due within one year Net current assets Total assets less current liabilities Provisions for liabilities Net assets Capital and reserves Called up share capital Share premium reserve Other reserves Profit and loss reserve Equity shareholders’ funds 9 10 11 12 13 14 15 18 18 18 17 1,637,066 10,144 1 1,647,211 156,758 9,468,174 9,624,932 (60,804) 142,790 10,416,100 10,558,890 (331,546) 9,564,128 11,211,339 – 11,211,339 1,276,875 10,561,393 15,313 (642,242) 11,211,339 1,497,668 14,965 – 1,512,633 10,227,344 11,739,977 (42,955) 11,697,022 1,276,875 10,561,393 – (141,246) 11,697,022 The financial statements were approved by the Board of Directors and authorised for issue on 16 April 2007. HOWARD KEVIN OBEE Director PETER WILLIAM FLEMING Director The notes on pages 26 to 35 form an integral part of these financial statements. 24 Borders & Southern Petroleum plc for the period ended 31 December 2006 Consolidated Cash Flow Statement Net cash flow from operating activities Returns on investment and servicing of finance Capital expenditure and financial investment Purchase of intangible fixed assets Purchase of tangible fixed assets Cash outflow before management of liquid resources and financing Financing Note 19 31 December 2006 £ £ 30 June 2005 £ £ (1,456,917) 654,221 (140,147) 63,539 (139,398) (5,832) (1,326,875) (18,685) (145,230) (947,926) (1,345,560) (1,422,168) Issue of shares (net of issue costs of £804,232) Change in cash on deposit – 928,867 11,838,268 (10,000,000) Net cash flow 928,867 (19,059) 1,838,268 416,100 Reconciliation of Net Cash Flow to Movement in Net Debt (Decrease)/increase in cash in the period Change in short term deposits Change in net debt resulting from cash flows Net funds at the start of the period Net funds at the end of the period 31 December 2006 £ 30 June 2005 £ (19,059) (928,867) 416,100 10,000,000 (947,926) 10,416,100 10,416,100 – 9,468,174 10,416,100 The notes on pages 26 to 35 form an integral part of these financial statements. Borders & Southern Petroleum plc 25 25 for the period ended 31 December 2006 Notes to the Financial Statements 1. ACCOUNTING POLICIES Basis of preparation The financial statements have been prepared in accordance with the historical cost convention and in accordance with the applicable accounting standards and the Statement of Recommended Practice “Accounting for Oil and Gas Exploration, Development, Production and Decommissioning Activities”. In preparing these financial statements, the Group has adopted FRS20 ‘share-based payment’ for the first time. The impact for the current period is to increase the loss by £15,335. There is no change in net assets. There is no impact on the prior period as there were no share-based payments in existence. Further details are given in note 16. The consolidated financial statements include the financial statements of the Company and its subsidiary undertaking made up to 31 December 2006. The acquisitions method of accounting has been adopted. Under this method, the result of the subsidiary undertaking acquired in the period is included in the consolidated profit and loss account from the date of acquisition. Under section 230(4) of the Companies Act 1985 the Company is exempt from the requirement to present its own profit and loss account. Its loss for the financial period was £500,996 (2005 – £141,246). Turnover At the end of the period the Group had not commenced commercial production from its exploration sites and therefore has no turnover in the period. Depreciation Depreciation is provided on tangible fixed assets so as to write off the cost or valuation, less any estimated residual value, over their expected useful economic life as follows: Office equipment 331⁄3% Assets are depreciated from the date of acquisition, and on a straight line basis. Exploration and evaluation expenditure The Group has adopted the full cost accounting policy for expenditure on oil and gas projects. All costs associated with oil exploration are capitalised on a project-by-project basis, pending determination of feasibility of the project. Costs incurred include appropriate technical and administrative expenses but not general overheads. If an exploration project is successful, the related expenditures will be transferred to tangible fixed assets and amortised over the estimated life of the commercial reserves. Where a licence is relinquished, a project is abandoned, or is considered to be of no further value to the Group the related costs are written off. All capitalised costs are reviewed annually against the underlying value of oil and gas reserves, unless the expenditure relates to an area where it is too early to make a decision about the value of the assets. Impairment tests When there is an indication that the value of an asset may be impaired, the net amount at which the asset is recorded is assessed for recoverability against the discounted future estimated net cash flows expected to be generated from the estimated remaining commercial reserves. The assessment is made on the basis of future oil prices, exchange rate and cost levels as forecast at the balance sheet date. A provision is made by way of an additional depreciation charge, where the carrying value of the asset exceeds the discounted future net cash flows to be derived from its estimated remaining commercial reserves. 26 Borders & Southern Petroleum plc Notes to the Financial Statements continued Foreign currencies Profit and loss account transactions in foreign currencies are translated into sterling at the exchange rate ruling at the date of the transaction. Assets and liabilities denominated in foreign currencies are translated into sterling at the closing rates at the balance sheet date and the exchange differences are included in the profit and loss account. Operating leases Rentals payable under operating leases are charged in the profit and loss account on a straight line basis over the lease term. Share based incentives In accordance with Financial Reporting Standard 20 the fair value of equity-settled share-based payments to Directors and employees is determined at the date of grant and is expensed over the vesting period. Fair value is measured by a Black-Scholes-Merton pricing model. Financial instruments In relation to the disclosures made in Note 25: Other than the information about the Group’s exposure to foreign exchange risk, short-term debtors and creditors have been excluded from the financial instrument disclosures in note 25. The Group does not hold or issue derivative financial instruments for trading purposes; and Forward exchange contracts are used to fix the exchange rate of committed and anticipated foreign currency transactions. Gains and losses arising on such hedges are not recognised until until the transaction occurs. The Group has not made use of any derivative financial instruments in the period. Deferred taxation Deferred tax is provided in full on timing differences which represent a liability at the balance sheet date, at rates expected to apply when they crystallise based on current tax rates and law. Timing differences arise from the inclusion of items of income or expenditure in tax computations in periods different from those in which they are included in the financial statements. Deferred tax balances are not discounted. Liquid resources For the purpose of the cash flow statement, liquid resources are defined as current asset investments and short- term deposits, held on a rolling monthly basis. Borders & Southern Petroleum plc 27 Notes to the Financial Statements continued 2. OPERATING LOSS Operating loss is stated after charging: Exploration and evaluation expenditure Auditors’ remuneration – audit services Company Group Auditors’ remuneration – non audit services Company – taxation Group – taxation Exchange differences Depreciation of owned tangible fixed assets Hire of other assets – operating leases Equity settled share-based payment 18 months ended 31 December 2006 £ 144,422 15,000 17,500 3,000 3,000 392,486 10,653 102,284 15,335 8 June 2004 to 30 June 2005 £ 16,667 12,500 12,500 5,500 5,500 – 3,720 21,150 – 3. EARNINGS/(LOSS) PER SHARE The calculation of the basic loss per share is based on the loss attributable to ordinary shareholders divided by the weighted average number of shares in issue during the period. The loss for the financial period for the Group was £527,024 (2005 – £141,246) and the average number of shares in issue for the year was 127,687,500 (2005 – 55,413,437). The effect of the share options in issue is anti-dilutive (see note 16 for details of share options). 4. SEGMENTAL ANALYSIS For the purpose of segmental information the operations of the Group consist of one class of business, the exploration for hydrocarbons. During the period the Group’s exploration and evaluation activities took place outside the UK, substantially in the Falkland Islands. These costs are capitalised, where appropriate, in accordance with the accounting policies as set out in note 1 above. The operating loss of the Group is analysed as follows: United Kingdom Falkland Islands Worldwide (excluding UK and Falkland Islands) 18 months ended 31 December 2006 £ 1,031,967 21,028 123,394 8 June 2004 to 30 June 2005 £ 204,785 – – 1,176,389 204,785 28 Borders & Southern Petroleum plc Notes to the Financial Statements continued 4. SEGMENTAL ANALYSIS continued Net assets are analysed as follows: United Kingdom Falkland Islands Group Company 31 December 2006 £ 9,527,511 1,657,800 30 June 2005 £ 10,363,420 1,333,582 31 December 2006 £ 9,553,539 1,657,800 30 June 2005 £ 10,363,420 1,333,582 11,185,311 11,697,002 11,211,339 11,697,002 5. EMPLOYEES (INCLUDING DIRECTORS) The aggregate payroll costs of the Group and Company’s employees and Directors were as follows: Wages and salaries Social security Share-based payment 18 months ended 31 December 2006 £ 233,302 27,884 15,313 276,499 8 June 2004 to 30 June 2005 £ 36,744 3,216 – 39,960 The average number of employees (including Directors) employed during the period by the Company was 6 (2005 – 4) and for the Group was 6 (2005 – 4). The Group granted to Directors and staff of Borders and Southern Petroleum Plc, for nil consideration, share options with a total fair value of £105,457 (2005 – £nil), of which £15,313 (2005 – £nil) has been expensed during the year. 6. DIRECTORS’ EMOLUMENTS The Directors’ emoluments for the period are as follows: Directors’ remuneration 18 months ended 31 December 2006 £ 138,335 8 June 2004 to 30 June 2005 £ 35,000 The Group granted to two Directors of Borders and Southern Petroleum Plc, for nil consideration, 50,000 share options each, with a total fair value of £21,091. Of this amount £3,063 has been expensed during the year. 7. INTEREST RECEIVABLE Bank interest 18 months ended 31 December 2006 £ 649,365 8 June 2004 to 30 June 2005 £ 63,539 Borders & Southern Petroleum plc 29 Notes to the Financial Statements continued 8. TAXATION ON LOSS ON ORDINARY ACTIVITIES Analysis of current period tax charge Taxation on loss on ordinary activities 18 months ended 31 December 2006 £ – 8 June 2004 to 30 June 2005 £ – Factors affecting current period tax charge The tax assessed on the loss on ordinary activities for the period is higher than the standard rate of corporation tax in the UK of 30.00% (8 June 2004 to 30 June 2005 – 30.00%). The differences are reconciled below: Loss on ordinary activities before and after taxation Standard rate corporation tax charge Expenses not deductible for tax purposes Depreciation in excess of capital allownces Unutilised tax losses carried forward Total current tax for the period 18 months ended 31 December 2006 £ (527,024) (158,107) 6,227 1,320 150,560 8 June 2004 to 30 June 2005 £ (141,246) (42,374) 830 (1,682) 43,226 – – Factors that may affect future tax charges The Group has a deferred tax asset of £193,786 (2005 – £43,226) in respect of unrelieved tax losses of £645,953 at 31 December 2006 (2005 – £144,085), and a deferred tax liability of £371 in respect of accelerated capital allowances (2005- £1,682). The net deferred tax asset has not been recognised in the financial statements as the transfer of economic benefit is uncertain. INTANGIBLE FIXED ASSETS 9. Group and Company Cost As at 1 July 2005 Additions As at 31 December 2006 Net book value As at 31 December 2006 As at 30 June 2005 Exploration and evaluation costs £ 1,497,668 139,398 1,637,066 1,637,066 1,497,668 30 Borders & Southern Petroleum plc Notes to the Financial Statements continued 10. TANGIBLE FIXED ASSETS Group and Company Cost As at 1 July 2005 Additions As at 31 December 2006 Depreciation As at 1 July 2005 Charge for the period As at 31 December 2006 Net book value As at 31 December 2006 As at 30 June 2005 11. INVESTMENTS HELD AS FIXED ASSETS Company Group shares Cost Additions Net book value As at 31 December 2006 Office equipment £ 18,685 5,832 24,517 3,720 10,653 14,373 10,144 14,965 31 December 2006 £ 30 June 2005 £ 1 1 – – The Company owns the one ordinary £1 subscriber share, being 100% of the issued share capital, in Borders and Southern Falkland Islands Limited. The Company was incorporated in England on 18 October 2005 and its principal activity is oil and gas exploration. 12. DEBTORS Amounts owed by group undertakings Other debtors Prepayments and accrued income Group Company 31 December 2006 £ – 32,939 102,792 135,731 30 June 2005 £ – 62,166 80,624 142,790 31 December 2006 £ 21,027 32,939 102,792 156,758 30 June 2005 £ – 62,166 80,624 142,790 All amounts shown under debtors fall due for payment within one year. Borders & Southern Petroleum plc 31 Notes to the Financial Statements continued 13. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR Group Company Trade creditors Social security and other taxes Other creditors Accruals and deferred income 14. PROVISION FOR LIABILITIES Group and Company Demobilisation costs: Provision brought forward (Released)/provided for in the period Provision carried forward 31 December 2006 £ 28,436 – 1,367 36,001 65,804 30 June 2005 £ 167,735 10,198 29,831 123,782 331,546 31 December 2006 £ 28,436 – 1,367 31,001 60,804 31 December 2006 £ 42,955 (42,955) – 30 June 2005 £ 167,735 10,198 29,831 123,782 331,546 30 June 2005 £ – 42,955 42,955 The Company was obliged to pay for seismic demobilisation costs to a pre-agreed sum and this was paid during the period. 15. SHARE CAPITAL Authorised 750,000,000 Ordinary shares of 1 pence each Allotted, called up and fully paid 127,687,500 Ordinary shares of 1 pence each 31 December 2006 £ 30 June 2005 £ 7,500,000 7,500,000 1,276,875 1,276,875 16. SHARE-BASED PAYMENT On 25th July 2006, the Group granted 500,000 share options to two of its Directors and one other employee of Borders and Southern Petroleum Plc, for nil consideration. The options will be cancelled if the Director/employee leaves the Company. There were no other options at the start of the period and those options granted in the period were outstanding at the balance sheet date. The vesting period is three years. The fair value of each option granted during the year was 21p. The following information is relevant in the determination of the fair value of the options granted during the period, and outstanding at the end of the period, under the equity- settled share based remuneration scheme operated by the Company. 32 Borders & Southern Petroleum plc Notes to the Financial Statements continued 16. SHARE-BASED PAYMENT continued Equity-settled scheme Option pricing model used Weighted average share price at grant date Exercise price Weighted average contractual life (days) Expected volatility Expected dividend growth rate Risk-free interest rate 31 December 2006 Black-Scholes 48p 48p 1,460 50% 0% 4.72% Share-based remuneration expense for the period in respect of the equity-settled scheme (note 5) £15,313 The volatility assumption measured at the standard deviation of expected share price returns is based on a statistical analysis of daily share prices over the last 21 months. 17. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS’ FUNDS Loss for the period Share-based payment for the period New share capital subscribed Group Company 31 December 2006 £ 30 June 2005 £ 31 December 2006 £ 30 June 2005 £ (527,024) 15,313 (141,246) – (500,996) 15,313 (141,246) – – 11,838,268 – 11,838,268 Net (reduction)/addition to shareholders’ funds (511,711) 11,697,022 (485,683) 11,697,022 Opening equity shareholders’ funds 11,697,022 – 11,697,022 – Closing equity shareholders’ funds 11,185,311 11,697,022 11,211,339 11,697,022 18. RESERVES Group Balance at 1 July 2005 Share-based payment Loss for the period Share premium reserve £ Other reserves £ Profit and loss reserve £ Total £ 10,561,393 – (141,246) 10,420,147 – – 15,313 – 15,313 – (527,024) (527,024) Balance at 31 December 2006 10,561,393 15,313 (668,270) 9,908,436 Company Balance at 1 July 2005 Share-based payment Loss for the period Share premium reserve £ Other reserves £ Profit and loss reserve £ Total £ 10,561,393 – (141,246) 10,420,147 – – 15,313 – 15,313 – (500,996) (500,996) Balance at 31 December 2006 10,561,393 15,313 (642,242) 9,934,464 Borders & Southern Petroleum plc 33 Notes to the Financial Statements continued 19. RECONCILIATION OF OPERATING LOSS TO OPERATING CASH FLOWS Operating loss Depreciation of tangible fixed assets Decrease/(increase) in debtors (Decrease)/increase in creditors (Decrease)/increase in provisions Issue of share options Net cash outflow from operating activities 20. ANALYSIS OF CHANGES IN NET FUNDS Cash at bank Short term deposit Total 31 December 2006 £ (1,176,389) 10,653 2,203 (265,742) (42,955) 15,313 30 June 2005 £ (204,785) 3,720 (142,790) 160,753 42,955 – (1,456,917) (140,147) At start of period £ Cash flow £ At end of period £ 416,100 (19,059) 397,041 10,000,000 (928,867) 9,071,133 10,416,100 (947,926) 9,468,174 21. CONTROLLING ENTITY So far as the Directors are aware there are not any persons who, directly or indirectly could exercise control over the Group. 22. RELATED PARTY TRANSACTIONS During the year Borders & Southern Petroleum Plc paid expenses of £21,028 on behalf of Borders & Southern Falkland Islands Limited. This amount was due from the subsidiary at the balance sheet date, and has been set against the £1 unpaid share capital due from Borders & Southern Petroleum Plc to the subsidiary. 23. OPERATING LEASE COMMITMENTS As at 31 December 2006 the Group and Company had annual commitments under non-cancellable operating leases as follows: Within one year Land and Buildings 31 December 2006 £ 57,300 30 June 2005 £ 21,810 24. CONTINGENT LIABILITIES The Group and Company had no contingent liabilities at 31 December 2006. 34 Borders & Southern Petroleum plc Notes to the Financial Statements continued 25. FINANCIAL INSTRUMENTS This note provides the narrative and numerical disclosures required by Financial Reporting Standard 13 “Derivatives and Other Financial Instruments: Disclosures”. As permitted by FRS 13, short term debtors and creditors have been excluded from the disclosures, other than where they relate to currency disclosures. The main risks arising from the Group’s operations are interest rate risk and foreign currency translation risk. The Group monitors risk on a regular basis and takes appropriate measures to ensure risks are managed in a controlled manner. a) Interest rate risk The Group’s financial assets and liabilities accrue interest at prevailing floating rates in the United Kingdom or at pre- arranged fixed rates, as described further below. The Group does not currently use derivative instruments to manage its interest rate risk. b) Foreign currency translation risk The operational currency of the oil and gas exploration and evaluation activities of the Group is USD dollars, services and treasury functions is pound sterling. Balances are held in £ sterling and USD dollars are purchased when required and used to meet exploration and evaluation needs. Interest rate risk profile of financial assets of the Group: Held in pounds sterling Pound sterling equivalent of amounts held in US dollars £ 6,197,041 3,271,133 At 31 December 2006 the Company held cash at bank and in deposits under its control of £9,468,174 (2005 – £10,416,100), which forms the majority of the Group’s working capital. Of this £397,041 (2005 – £416,100) relates to deposits placed with banking institutions that are available on demand which carry interest at prevailing United Kingdom deposit floating rates. The balance represents restricted deposits of £9,071,133 (2005 – £10,000,000) with weighted average fixed interest rate of 4.613% for three months. Fair values The fair values of the Group’s financial assets and liabilities at 31 December 2006 are materially equivalent to their carrying value as disclosed in the balance sheet and related notes. Borders & Southern Petroleum plc 35 Corporate Directory DIRECTORS David Harry Williamson Dobson Stephen James Douglas Posford Howard Kevin Obee Christopher Nigel Hurst-Brown Peter William Fleming SECRETARY William John Walton Slack REGISTERED OFFICE 3 Copthall Avenue London EC2R 7BH BUSINESS ADDRESS 33 St James's Square London SW1Y 4JS NOMINATED ADVISOR Insinger de Beaufort 131 Finsbury Pavement London EC2A 1NT SOLICITORS TO THE COMPANY AS TO ENGLISH LAW Denton Wilde Spate 1 Fleet Place London EC4M 7WS STOCKBROKER Ocean Equitites Limited 3 Copthall Avenue London EC2R 7BH REGISTRARS Capita Registrars Northern House Woodsome Park Fenay Bridge Huddersfield HD8 0LA BANKERS Lloyds TSB Bank plc 19-21 The Quadrant Richmond Surrey PW9 1BP INDEPENDENT AUDITORS BDO Stoy Hayward LLP Chartered Accountants & Registered Auditors 8 Baker Street London W1U 3LL 36 Borders & Southern Petroleum plc Printed in England by Beacon Press using their environmental print technology. The print production of this report is Carbon Neutral. Beacon Press is registered to environment management system ISO 14001 (certifi- cate number E9586) and EMAS, the Eco Management and Audit Scheme (registration number UK-S-00011) Beacon Press is a Carbon Neutral com- pany. On average 84% of any waste associated with this product is recycled. Designed and Produced by Punching Above Your Own Weight Limited Telephone: +44(0)1444 415134 33 St James’s Square London SW1Y 4JS United Kingdom Telephone: +44 (0)20 7661 9348 Fax: +44 (0)20 7661 8055 info@bordersandsouthern.com www.bordersandsouthern.com Petroleum plc
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