Wag! Group Co Annual Report 2010

Plain-text annual report

Contents CHAIRMAN’S STATEMENT REVIEW OF OPERATIONS DIRECTORS’ REPORT STATEMENT OF DIRECTORS’ RESPONSIBILITIES INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PETREL RESOURCES PLC CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME CONSOLIDATED BALANCE SHEET COMPANY BALANCE SHEET CONSOLIDATED AND COMPANY STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT COMPANY CASH FLOW STATEMENT NOTES TO THE FINANCIAL STATEMENTS NOTICE OF ANNUAL GENERAL MEETING 2 5 15 18 19 21 22 23 24 25 26 27 44 FORM OF PROXY enclosed Petrel Resources Annual Report & Accounts 2010 Chairman’s Statement Petrel has been in existence for almost 30 years. This will undoubtedly come as a surprise to many shareholders who know only of our Iraqi activities. It was set up in 1982 to explore for oil offshore Ireland – but that venture failed. Following an abortive and expensive incursion into US oil and gas, the company value was virtually written off. David Horgan, currently the Managing Director, bought the shell in the mid 1990s and ﬁ nanced it, initially for African exploration in Namibia and Uganda. Then an opportunity opened in 1999 to go into Iraq, which was and is the best hydrocarbon province in the world. We exited Africa. In Iraq we worked with the Ministry of Oil under the Saddam regime. Since 2003 operating in Iraq has become more difﬁ cult, complicated and dangerous. In the last eight years Iraqi oil development has languished with production levels only now getting back to pre-war levels. There is no clear set of rules, there is no new Hydrocarbon Law. We had an early success getting access to a 10,000 sq km block in the Western Desert and a very substantial success in 2005 with the award of the Subba and Luhais $197 million (Engineering Procurement and Supervision of Construction) development contract to a Petrel/Makman partnership. But repeated changes in rules and personnel made it difﬁ cult to operate. Nevertheless we obtained two further Technical Cooperation Agreements in Iraq, to produce evaluators of both the Merjan and Dhurﬁ ya ﬁ elds. The world’s supermajors have rushed in and accepted service contracts on sub-economic terms. Work progressed on Subba and Luhais. There was a hiatus while payment was received for work done and acceptable Letters of Credit put in place for future payments. Inﬂ ation, design changes and delays meant that any proﬁ t was likely to be small, so Petrel negotiated with Makman to obtain an exit payment of US$7 million plus a 10 per cent proﬁ t interest while remaining operator of record. The project is now 94% completed and will soon operate as a 200,000 plus barrel a day oil producer. In one of the most unstable and dangerous areas on Earth a state of the art world class project has been delivered. No one was killed, international suppliers have been paid and the Iraqi people will shortly have additional exports of over US$700 million each year. But Iraq was proving an impossible location in which to obtain oil concessions so Petrel sought to leverage its Iraq experience by exploring in Jordan. The Jordanian experience was good, but costly and ultimately unsuccessful. We got licences, we did the necessary work, we identiﬁ ed targets but drilling was going to be expensive and was deemed too risky. We were unable to joint venture the project so we dropped it. We next sought to build on our international contacts. Ghana is the hottest hydrocarbon exploration area on earth. Recent giant offshore discoveries are drawing Ghana to the ﬁ rst rank of oil producers. Petrel, with two associate companies and a local partner, applied for, and obtained, a concession, Tano 2A close to the big Kosmos/Tullow discoveries. Cabinet and parliament approval is taking a long time, understandable when you realise that the legislators have to learn about and understand the effects and impact of oil wealth. The curse of resources is well known. In a return to our roots we have applied for blocks in the current Irish offshore licencing round. Irish offshore exploration has not been successful to date with ﬁ ve small discoveries from over 200 wells 2 Petrel Resources Annual Report & Accounts 2010 Chairman’s Statement (continued) drilled. But technology improves and oil prices are high. Petrel has for many years maintained a signiﬁ cant library of Irish offshore seismic and well log data. This database has been analysed and new data added. Our team have put together applications for a couple of blocks. No awards have been made to date. Why oil and why Iraq? Growing world demand particularly in the large emerging markets is expected to grow to 120 million barrels a day by 2020. Current capacity cannot meet that demand. Finding new supplies is becoming more difﬁ cult and expensive. The vast new discoveries offshore West Africa are in ultra deep waters and will require hundreds of billions to develop. The even bigger discoveries offshore Brazil, at total depths approaching 10 kilometres, will require as yet undeveloped engineering technology and vast sums of capital. Contrast this with Iraq. Over 70 discovered undeveloped oil ﬁ elds with known resources of over 150 billion barrels and potential to go to 300 billion matching the Saudi Arabian reserve ﬁ gures. Capital and operating costs will be the lowest in the world. Cash operating costs could be under $2 a barrel. Technical, management and geological skills are in country. The infrastructure is good when compared to offshore Africa and Brazil. Iraq is simply the world’s best hydrocarbon province. We have been there for twelve years, we have maintained an ofﬁ ce in Baghdad, we have experienced staff. All we need is the opportunity. Petrel has prepared and submitted a detailed proposal to participate in the Fourth Licencing Round. The focus is on oil prone acreage becoming available from January 2012. Iraq The Subba & Luhais project will be completed by end 2011. While we are the operator of record, day to day operations are under the control of Makman who paid Petrel US $7 million to take 100% ownership. We maintain a 10% proﬁ t interest. Despite facing obstacles that would defeat most groups, Petrel/ Makman have delivered the contracted elements of a 200,000 barrel a day oil development. We continue to maintain an interest in the former Block 6. It should be noted that this nomenclature refers to areas included in blocks advertised over a decade ago. It is not the same as the Block 6 offered in recent rounds. Petrel began to work on the 10,000 sq km Western Desert area formerly known as Block 6 in 2000 and reached agreement with the authorities on a work programme in 2002. No ﬁ nal signatures were obtained. Article 40 of the draft hydrocarbon law requires the Ministry of Oil to review 2003 agreements to operate in accordance with the law. We think and hope that this means a revision of ﬁ nancial terms and a new work programme. We are ready to begin ﬁ eld work once agreement is reached. Ghana The Petrel board of directors and management team has extensive experience in resources in Africa. While waiting for a clear path in Iraq, an opportunity arose to apply for a highly prospective onshore/ offshore block in Ghana, Tano 2A, close to the massive discoveries of Tullow and Kosmos. A consortium of four companies applied for, and obtained the 1,532 sq km Tano 2A block. The target is a multibillion barrel discovery in the proliﬁ c Cretaceous geological structure. Terms in Ghana are good. The Petrel Resources Annual Report & Accounts 2010 3 Chairman’s Statement (continued) agreement was signed in 2010 with the Ghana National Petroleum Company (GNPC) and is now working its way through cabinet and parliament. The agreed work programme requires a minimum expenditure of US$25 million in the ﬁ rst three years including a well. While awaiting ratiﬁ cation we have acquired, processed and analysed 769 kilometres of seismic and studied ﬁ ve horizons at different depths. We have identiﬁ ed a number of promising areas. Offshore Ireland Petrel, in a previous guise and time, was an active participant in Irish offshore exploration working on three blocks in the Irish Sea (Kish Basin), Celtic Sea (Block 57/1) and Porcupine (Blocks 35/23 and 35/24). Nothing commercial was discovered. In the past year the Irish government has offered large offshore blocks totalling 500,000 sq km. The ﬁ scal terms are very good, title is not an issue and there is a positive State attitude. They need to be positive as drilling results have been poor and exploration costs will be high. Following a detailed review of newly constructed seismic base maps together with analysing well log data on over 50 holes a number of leads were identiﬁ ed. Petrel has submitted applications for blocks in the Porcupine Basin. Future Petrel with over US$6 million in cash is well ﬁ nanced for all current activities. We are active in Iraq, Ghana and now Ireland. We are very hopeful of participating in the 4th Licencing Round in Iraq. The status of our Western Desert interest awaits the passing of the Hydrocarbon Law. Once parliament approves our Ghana licence we will move quickly. We know what we want to do and have the cash to do it. Many shareholders have been patient for a long time and we appreciate that support. They understand that we have no control over the decisions of sovereign states. Building a successful hydrocarbon company in politically uncertain areas is high risk but, in the areas we are, the potential is great. Chairman 27 June 2011 4 Petrel Resources Annual Report & Accounts 2010 Review of Operations Petrel has long-standing projects in Iraq, has which changes the entire legal framework. So far the recently expanded into Ghana and is an applicant for recent contracts have not approved such approval. blocks offshore Ireland. Iraq Petrel has two interests in Iraq: • The Subba and Luhais EPC Contract • Western Desert Block 6 pre-2003 Agreement Highlights Background Iraq remains a complicated and uncertain place to do business. Security issues remain, but power and authority steadily return to the sovereign central government. Meantime oil production has begun to recover and has already reached circa 2.7 million barrels daily, of which circa 2.1 million barrels is exported daily. We expect that 2 to 3 million barrels daily will be added under existing plans – but the announced expectation of 12.5 million barrels daily will be challenging to deliver under prevailing circumstances and hard to explain to OPEC partners. Most observers believe that about 5 to 6 million barrels will be delivered from the current projects – already a major accomplishment which would triple Iraq’s output. World oil demand is now growing moderately, at a total level of c. 89 million barrels daily – with The March 2010 election went well and peacefully about 87% of the growth in developing countries. but the election did not yield an immediately clear There are nearly 4.4 million barrels daily of surplus result. It took until early 2011 to complete the capacity already available within OPEC, 67% of formation of a new government. This is the sixth which is in Saudi Arabia. government Petrel has dealt with since 1999, but the ﬁ rst whose electoral legitimacy is not seriously disputed. The objective of the Iraqi authorities remains to drive the best bargain for their citizens. This was indeed necessary Realpolitik in terms of the need to gain the There have been contracts awarded and two main grudging acceptance of a skeptical and fragmented bid rounds involving super-majors and National electorate for necessary restructuring and opening- Oil Companies agreeing to marginal rates of up to international investment and technology. For return on service contracts with demanding work historical reasons, as in Iran, there is deep public commitments. The gas round did not excite the same level of interest due to the current lack of major gas export infrastructure. These gas export pipelines will ultimately be resolved by direct market access to Europe, India and China – but this will take time, because of ﬁ nancial, political and logistical challenges. As of June 2011, the macro situation regarding the oil industry remains confused: No one is yet certain how the laws, contracts and general government will turn out. The best legal advice remains that oil contracts require explicit ratiﬁ cation by Parliament to be 100% reliable – unless there is a new General Hydrocarbon Law, suspicion of the super-majors. Hence Iraqi efforts to develop the oil industry via service contracts. There are major disadvantages to this model, as can be seen from the limited and slow progress to date. Few anticipated that output would be at such a modest level 8 years after the toppling of the former régime. Such an attitude is normal in the region, but no country has experienced Iraq’s difﬁ cult recent history. Since the service contract bid rounds for development of giant ﬁ elds, preliminary work has started and intentions are positive but not everything has gone smoothly. The risk appetite of BP and other companies might be impacted if oil price corrects and indeed 2010’s tragic events in the Gulf of Mexico. On the other hand the straightforward geology and low Petrel Resources Annual Report & Accounts 2010 5 Review of Operations (continued) environmental risk of conventional Iraqi projects is to reverse a long production decline and increase even more compelling. Long experience of Iraq’s special conditions convince us that the bid-round contracts will not be implemented as planned to the satisfaction output to c. 2.7mmbod in recent months. While well below pre-2003 levels, this has to be seen in terms of decades of strife, sanctions and under-investment. A national oil company will be re-established. of all parties. This is because bidding for service Security continues to improve. Our recent Baghdad contracts does not align the interests of the players visit (May 2011) for meetings, and to deliver our or guarantee access to the best technology to qualiﬁ cation materials to the Ministry of Oil, was maximise recovery from reservoirs. conducted without special security and went One lesson of the ﬁ rst bid process was the demonstrated belief that leading oil industry players, who have studied Iraqi ﬁ elds, are convinced that production can be dramatically increased – to the smoothly, without incident. While challenges remain, there are regular air services and travelling within Iraq can normally be conducted at acceptable risk – for the ﬁ rst time since 2007. point that they were prepared to lock remuneration Petrel continues to work only with the Iraqi Central into achieved targets that until recently would have Government Authorities and has no inappropriate been considered very demanding. This conﬁ rms business relationships with any of the Regional that the potential economic value of Iraqi is world Authorities. All of Petrel’s contracts are with the class. However, the Iraqi industry will not be able ofﬁ cial Ministry of Oil of the sovereign government of to maximise this value for some years without the Republic of Iraq. In our belief, this is the correct international technology and capital. The challenge is and secure way to proceed. Local relationships are persuading the authorities that circa 80% of a much important, but not to the point where they undermine bigger cake is better than 100% of a smaller cake. legitimate authority. The ultimate solution may be risk-sharing • The ﬁ nal payment due of $2.5 million was arrangements which align the interests of the received, on schedule in April 2011, in relation parties. Iraq will receive over 80% of the economic to the Engineering, Procurement and supervision value but agile, hard-working partners will be fairly of Services (EPC) contract on the Subba and remunerated. Much of the political passion against Luhais development contract in Iraq. international operators is now dissipating with the • Petrel has now received a total of $7 million in departure of international forces and restoration of cash over the past year from Subba and Luhais. Iraqi sovereignty. All existing or potential liabilities have been The legal situation is further complicated by attempts of regional government to extend its inﬂ uence into areas properly belonging to the central authorities exacerbate nationalism and complicate matters. Attempting to bypass the legitimate sovereign authorities is not a sensible or ethical way to invest. ironed out. • Petrel maintains a 10% proﬁ t share in the project but has no further liability or exposure. The unavoidable delays and cost escalation of key items, including steel and long-lead items, mean that the ultimate project proﬁ t is unlikely to be signiﬁ cant. We expect these issues to steadily clarify when the policy of the current government steadily clariﬁ es • The Subba and Luhais project is nearing completion, with all Letters of Credit opened and over the coming months. 94% of procurement complete. Ministry of Oil producing companies have done well • This track record of steady progress clears the way for expansion in Iraq. 6 Petrel Resources Annual Report & Accounts 2010 Review of Operations (continued) • An application has being made to participate group, Makman. At ﬁ rst the project went smoothly, in the Fourth Iraqi Hydrocarbon Licensing with basic design work conducted to the highest Round. Initial studies of the Blocks offered are international standards and key orders for the critical underway. After a long effort and overcoming many obstacles, work is now almost complete on the Engineering, Procurement and supervision of Services (EPC) contract on the Subba and Luhais additional ﬁ eld development contract in Iraq. Petrel has now received the ﬁ nal $2.5m payment due in relation to this project, in accordance with agreements in place. Petrel retains a 10 per cent proﬁ t interest in the project, based on audited accounts of the project Joint Venture company. Completion meetings with the Iraqi authorities were conducted during May 2011. Given the prevailing circumstances, the escalation of steel and component prices from 2004 through 2008, and the many obstacles which we had to overcome or work a way around, completion represents a huge achievement for your company. Your company has shown that one can operate in southern Iraq, without injury to personnel or equipment. We maintained high international Health & Safety standards throughout. Petrel maintains a 10% proﬁ t interest in the EPC project, but the prevailing circumstances in Iraq, packages of long-lead items placed. The prevailing circumstances did however pose challenges, with the unfortunate loss of key individuals at the Ministry. The world ﬁ nancial crisis after Lehman Brothers complicated the acquisition and necessary extension of Letters of Credit on acceptable commercial terms. This led to unavoidable project delays, which were eventually resolved with goodwill and ﬂ exibility on all sides. The many problems were resolved one by one and this important project is now nearing successful completion. Successful delivery of all equipment and services to site, without injury, loss of life or equipment is a major achievement for everyone involved with this important project. This unique and valuable experience proves that with goodwill, enthusiasm and unremitting effort, large-scale work can be satisfactorily delivered notwithstanding the prevailing circumstances. Petrel is now preparing a detailed proposal to participate in the recently announced Fourth Licensing Round in Iraq. Speciﬁ c blocks have been identiﬁ ed, with a focus on the oil-prone acreage becoming available from January 2012. Petrel met the original closure date for pre-qualiﬁ cation documents of 19th May 2011, though it was later especially delays and materials’ inﬂ ation, means that extended till June. net proﬁ ts are unlikely to be signiﬁ cant. We have however learnt a great deal from the experience of operating in an unusual environment. We have established a network of important contacts that hopefully will be a foundation for future success in development contracts. We ﬁ rst studied the Subba and Luhais project in 2000, but development was then constrained by the UN sanctions then in place. We were pre-qualiﬁ ed to bid and asked to bid on the EPC contracts in 2004. The 10,000km2 area formerly known as ‘Iraqi Western Desert Block 6’ is not one of the blocks on offer in the current round. The new, additional ‘Block 6’ advertised by the Iraqi authorities is not in any way connected with the ‘Iraqi Western Desert Block 6’ that Petrel was invited to study by the Oil Exploration Company of the Iraqi Ministry of Oil in 2000. The long term, continued interest of Petrel in this area is known to the relevant authorities in Iraq. Petrel bid and was awarded this contract in 2005, We have identiﬁ ed speciﬁ c targets in the blocks after which we formed a 50:50 Joint Venture with a included in the Fourth Hydrocarbon Licensing leading Iraqi construction and engineering Round. Petrel is now completing a detailed study Petrel Resources Annual Report & Accounts 2010 7 Review of Operations (continued) of the blocks of interest. The blocks on offer are Reﬂ ecting the difﬁ cult circumstances through which interesting for gas and oil but do not include the the Iraqi oil industry has battled in recent years and 10,000km2 area known as ‘Iraqi Western Desert decades, there was considerable turnover in key Block 6’. A successful election in March 2010 led to many months delay in the formation of a new government, which in turn hampered the planned rapid development of Iraqi oil. A new Administration has taken charge, and remaining issues are being resolved. We expect renewed progress in the coming individuals and sometimes policy-making delays. We are pleased therefore to have ﬁ nally overcome these difﬁ culties and helped reﬁ ne attitudes on all sides to be more commercial and pragmatic, so as to expedite the development of the oil industry and of Iraq generally in the interests of all legitimate stakeholders. months to drive forward the development of Iraq and After several false dawns and lengthy negotiations, particularly its hydrocarbons industry, to the beneﬁ t all outstanding issues on the Subba and Luhais of all stakeholders. Subba and Luhais Technical Work The Subba and Luhais oil ﬁ eld development services project is one of the largest EPC (Engineering, Procurement and Supervision of Construction) contracts awarded to date by the Ministry of Oil. oilﬁ eld development in Southern Iraq were satisfactorily resolved in February 2010, and all ministerial approvals received in April 2010. Petrel handed over primary responsibility for the ﬁ nal phases of the work, in accordance with the original Joint Venture Agreement of December 2005, but maintained a role. Mobilisation for the project, which was effectively suspended for 20 months, began The development of the Subba and Luhais oilﬁ elds promptly. will provide a minimum capacity of 200,000 barrels Project Description: of oil daily and 120 million cubic feet of associated gas for export from the ﬁ eld area. Much of this gas is designated for use to support power generation for the Iraqi National Grid. • Development of a grass roots Gas Oil Separation Plant (at Subba central) with a 100,000 bbl/d capacity and relevant satellite ﬂ ow-station, Petrel Resources was awarded the $197 million Subba & Luhais oil ﬁ eld EPC contract in 2005. Work started immediately. There were no serious security problems. Technical work proceeded well but • Revamping of an existing 50,000 bbl/d capacity Gas Oil Separation Plant (at Luhais central) and relevant satellite ﬂ ow-station to increase production up to 150,000 bbl/day, payments were initially slow and there were disputes • Installation of ﬂ ow-lines, treated oil and gas over control of project bank accounts and related bank guarantees. The resulting uncertainty led to project delays from 2008 and de-mobilising most of our project team in late 2009. The project was further complicated by the escalation of oil industry component costs between 2004 and 2008. We were therefore pleased to be eventually able to organise Letters of Credit, source components and bulk supplies at reasonable cost and deliver same to site without loss or incident. export pipelines, fresh water supply lines for both ﬁ elds (Net Diameter from 4” to 28”) for a total length of about 500km). • Together with our JV partner and engineering partner, Enereco, the team carried out all basic and detail design activities, procurement assistance, Vendor follow-up and expediting. Project completion is now close (at June 2011). Immediately following resolution of the Subba & Luhais outstanding issues, on the ground work 8 Petrel Resources Annual Report & Accounts 2010 Review of Operations (continued) re-started in Iraq in May 2010. Our Project Joint No pioneer can guarantee quick success. We Venture Company extended the Performance Bond guarantee is that we will not spend shareholders’ and Advance Payment Guarantee for an initial money on overhead. We put it into projects. When it 6 months based on the agreed extension of the works shareholders do very well. If not, there is no Contract period and the Ministry of Oil’s Project disgrace in honest failure. Letter of Credit for an initial 6 months, extendible. The initial adjusted schedule was 14 months, but this is being extended by agreement to cover minor exceptional unforeseen delays. Petrel has raised a total of $15 million or £10 million from 1994 to date. Petrel still has $6 million in cash and a market capitalisation of $22 million. It has operated continually in Iraq since 1999 and has run a Completing the project in this way avoided any Baghdad ofﬁ ce through sanctions, invasion, civil war legal complications or lengthy delays resulting and 5 governments. A super-major told us that their from re-bidding. The current Contractor’s team was minimum security budget would have been $2 million acknowledged by all to be now experienced and yearly since 2003 – or equal to all of the funds that expert, and therefore best positioned to complete Petrel has raised. this work quickly given its experience to date and familiarity with the project. Petrel also gains from the contacts of its management elsewhere: this brought a 30% stake in By May 2011 the procurement phase was 94% the fashionable Ghanaian Tano 2A Block. There are complete. While there were some limited additional more such opportunities. delays and issues because of the prevailing circumstances, steady progress was made across all main disciplines. This work has been conducted without any casualties or signiﬁ cant injury, and without any material being destroyed or damaged. Our generally smooth operating experience shows that we can operate in Iraq, provided commercial aspects are robust. The steady advance of the work, and overcoming of obstacles, allows Petrel to move forward with other projects. Accordingly, and despite the many challenges, we regard this project as a success in that it has ﬁ rmly established our ability to deliver. Petrel’s philosophy remains to seek big potential projects – typically in places with good geology but challenging politics. Our logic is that politicians change but rocks do not. We deliver quality work but, like larger groups, are still exposed to bureaucracy and politics. Sometimes players seek to impose conditions or unattractive limits on rates of return that are not fully commercial. We are not a charity, so must always seek adequate upside. But there is always a solution. Exploration and Development Projects Petrel was a pioneer in Iraqi oil and the only western company to have worked continuously in Iraq since 1999. We have never lost an employee or suffered serious sabotage or loss of equipment. This operating expertise is valuable and we have had discussions with larger groups interested in using our services. Our preference is to maintain our independence, and develop Petrel into an Iraq-based oil and gas producer as soon as this is commercially and legally practical. Petrel has trained Ministry staff, undertaken technology transfer work on the Merjan and Dhufriya ﬁ elds, and has studied, at the request of the Ministry, Block 6 in the Western Desert. Our work on Merjan has been reviewed and endorsed by the Technical Committee of the Ministry. A subsequent thorough Ministry technical and Petroleum Licensing & Contracts Directorate (PLCD) review also endorsed our technical work. Petrel works, where possible, with Iraqi staff; they Petrel Resources Annual Report & Accounts 2010 9 Review of Operations (continued) act as contractors to maximise ﬂ exibility and protect experience. Petrel was an oil & gas explorer in their security. Petrel has maintained a continuous Uganda & Namibia – before focusing on Iraq in Baghdad presence since 2000. We maintained 1999. a core Iraqi team through the difﬁ cult times and continue with training activities. There are now more than 330 Billion barrels of oil equivalent of reserves discovered in Africa, of which The work included a broadening of previous regional about half is in Sub-Saharan Africa. analysis of the western desert, including Block 6. Its output included detailed analysis of seismic data and well logs made available to our team. We conﬁ rmed that the oil-bearing structure extended well beyond the previously mapped structure. There are many hydrocarbon-rich basins in Africa, which remains under-explored. New ideas are constantly emerging. Discoveries since 2000 in Angola and Ghana alone exceed the entire Africa Yet-to-Find calculations of Peak Oil theorists in 1999. Petrel maintains its interest in this project and In exploration, technology moves forward by ﬁ ts and hopes to reﬁ ne reserve estimates when additional starts but it is rightly said that ‘exploration begins information becomes available. again every 15 years’. The $100 price for locally We are interested in further exploring and developing this ﬁ eld if and when it is legally possible. The ﬁ eld produced Bonny Light Sweet crude has dramatically improved the economics of West African projects. has the possibility to become a 100,000 barrel a day There is a generally welcoming business producer. Other than regional work associated with the Merjan oil ﬁ eld, no geological or geophysical work was conducted on Western Desert Block 6 during 2010. The Iraqi authorities are working their way through the pre-2003 contracts and agreements on Western Desert Exploration Blocks and have had discussions environment for junior E&P companies in these countries of focus. The big up-front costs of the established provinces are a deterrent, as are the poor ﬁ scal terms available in established producers such Algeria and Angola. Many other countries like Libya or DRC suffer political issues. We aim at areas of geological potential, reasonable legal and physical security with attractive ﬁ scal terms and limited up- with ONGC on Block 8. front costs: The security situation had been challenging in this area, but dramatically improved after 2007. Our geophysics contractor GSC has conﬁ rmed the availability of a ﬁ eld crew to shoot a state-off-the-art 2D, or if necessary 3D, seismic survey. Ghana emphatically now meets those objectives: over the past year Ghana has solidiﬁ ed its status as the oil industry’s new hotspot, following recent success by Tullow / Kosmos in new (especially Cretaceous) plays generating an estimated 2 billion 4th Iraqi Bid Round, 2011/2012: barrels of recoverable oil. Petrel has submitted Pre-Qualiﬁ cation materials to participate in the 4th Bid Round in Baghdad. Key strengths are Petrel’s 12 years of experience in Iraq and unique familiarity among international companies with operational challenges. Ghana Our group has 25 years continuous Africa Almost overnight Ghana moved from small production of circa 700 barrels daily to about 60,000 and ultimately over 200,000 barrels daily. Anchor infrastructure is now being planned that will lower the costs and accelerate development time for additional projects. In a world that generally suffers from resource nationalism, Ghana offers competitive conditions and large exploration potential. Despite 1 0 Petrel Resources Annual Report & Accounts 2010 Review of Operations (continued) Ghana’s rich history and culture, English is the should be roughly half the total value created. This working language and there is established legal title compares favourably with ﬁ scal terms in comparable based on English Law. Accordingly. Ghana became our priority outside of Iraq, and Petrel participated in a proposal to explore and develop the circa 1,532km2 Tano Block 2A. Our group of related companies (as the Ghanaian company ‘Pan Andean Resources Limited’) signed a Memorandum of Understanding with Ghanaian state areas (typically 60 to 70%) and for established producers (80% +). There are risks in West Africa but contractors are well-remunerated if they discover and develop oil. The work programme has agreed been agreed with GNPC, is reasonably ﬂ exible and is not speciﬁ cally bonded: petroleum company, GNPC, on the Tano 2A Block in Minimum Expenditure in the Initial Exploration Period November 2008, and a Petroleum Agreement with GNPC on Tano 2A Block in December 2008. The Block is held via a Ghanaian private company (called ‘Pan Andean Resources Limited’), owned 30% by Petrel, 60% by Clontarf Energy plc and 10% by Ghanaian interests. Block size: c. 1,532 km2 (153,200 hectares) Basin: Tano Geological Target: Cretaceous Potential: multi-billion barrel recoverable Fiscal terms are competitive: There is a royalty off the top (12.5% for oil and 10% for gas), a 10% carried state interest (held by the national oil company, the GNPC) and a standard 35% income tax on proﬁ ts. In addition the GNPC can elect to pay their way for a further 15%. There is also a super-proﬁ ts tax or ‘Additional Oil Entitlement (AOE)’ which is payable according to the overall Rate of Return. This extra ‘bonanza tax’ does not apply for a rate of return under 12.5%. The Additional Oil Entitlement rises in a step function with returns to a maximum of 30% for project Rates of Return over 27.5%. There are also the normal, relatively modest land rentals plus Training Allowance plus an additional ‘Technology Support’ one-time payment. These terms compare favourably with best practice elsewhere and are broadly similar in economic effect to the terms available in Colombia and Peru. For likely discovery economics the total state take If the 1st well is Onshore US$ 25 million If the 1st well is Offshore US$ 35 million (no sum was contractually speciﬁ ed for the offshore area and upon conferring with the Exploration Department they gave US$35m as a reasonable ﬁ gure). Our team has collected, during 2010, all data available from GNPC and have now consolidated and integrated the GNPC geological and seismic data with our regional database so as to expedite and focus the exploration work programme. In 2008 our negotiating team had conceded the GNPC’s desire for 3D seismic in the surf-zone and mangrove swamp areas of the block notwithstanding their oft-mentioned technical concerns that 3D seismic in such circumstances was not appropriate or possible. Further technical work during 2009 conﬁ rmed these concerns and we proposed appropriate adjustments. Simultaneously with these technical clariﬁ cations, the GNPC negotiators asked us to amend the Petroleum Agreement to grant greater entitlements pre-emption rights and the need for more comprehensive approvals of future corporate transactions involving the block. Our technical and senior management team has made several presentations to GNPC, the Ministry of Energy, Ghana Internal Revenue Service, as well as other branches of the Ghanaian authorities. Petrel Resources Annual Report & Accounts 2010 1 1 Review of Operations (continued) All Ghanaian Petroleum Agreements are subject to outlined, but we succeeded in identifying areas of Cabinet approval and ratiﬁ cation by Parliament. We greater promise within the Tano 2A Block. understand that this process was well advanced by June 2011. Reprocessing of the existing seismic lines using the original tapes is a critical early step in a methodical Ratiﬁ cation is a notoriously slow process in West exploration programme. This solid base, together Africa, so we have used the time to push ahead with with later acquisition of new seismic data will our technical work: We reviewed the four seismic survey databases, undoubtedly deﬁ ne additional areas of interest, particularly in the offshore section of the Block. shot and originally processed by different companies. Offshore Ireland Our group purchased all the available data from the GNPC. A total of 769 line kilometres of seismic data were loaded onto our corporate database. Interpretation of the seismic data was conducted by Geophysical Center (GSC) a top contractor we have worked with in the Middle East for many years. Data quality was generally poor to fair, so much work was required to maximize the value of the database. This reﬂ ects the data’s vintage, together with some apparent defects in the processing parameters. However, it also reﬂ ects the challenges in acquiring quality seismic data in the shallow water and surf zone conditions immediately offshore, and the frequently swampy nature of the coastal plain. Future reprocessing of diverse original data would provide a more uniform database, and improve the seismic data in terms of statics, velocities, frequency content and multiple elimination. In turn, this will help to minimize the ‘mis-tie’ problems between the different surveys that bedevil such exploration. Petrel technical staff has long experience of the Irish offshore, dating back to 1982. When Petrel was known as Kish Developments Ltd in the 1980s, it was an active participant in Irish offshore exploration. We were involved in three petroleum licences or options: • Licence 82/8 covering Blocks 33/17 & 33/23 in the (Irish Sea) Kish Basin. We assembled the group for this licence and initially operated the block. Operatorship was later assumed by Charterhouse plc (subsequently acquired by Total). The group carried out a seismic survey and then drilled the 33/17-1 well. We held a 34% working interest in the licence. • We held a 10% interest in the group holding a Celtic Sea licence, covering Block 57/1 and operated by Premier Consolidated Oilﬁ elds plc. • We operated a group with an option over Blocks 35/23 and 35/24 in the Porcupine Basin. This group carried out a seabed geochemical survey We studied ﬁ ve horizons of different depths, and and undertook the ﬁ rst gravity coring of the, then produced ‘time structure maps’ of acceptable largely unknown, cold-water coral mounds that reliability for two horizons. While these maps show are a feature of the Porcupine Basin. The the overall form of the basin, they are insufﬁ ciently company funded research on the cores that was detailed to allow prospect deﬁ nition. Therefore later published. a second analysis was conducted to scrutinize all seismic lines individually. This work aimed to deﬁ ne areas of structural or stratigraphic potential, and develop play or prospect leads. This project was completed in May 2011. Data quality and grid spacing did not allow drillable prospects to be Subsequently Petrel re-focused elsewhere, but has maintaining a watching brief on this intriguing though complicated petroleum province. Irish ﬁ scal terms available are some of the most attractive world-wide, and politicians of all parties have been adept in deﬂ ecting naïve resource 1 2 Petrel Resources Annual Report & Accounts 2010 Review of Operations (continued) nationalism, and encouraging exploration. Drilling 2. Ballycotton gas ﬁ eld of 0.1 trillion cubic feet has been limited in recent years but we feel that this (which was economic because it was effectively will now change: a satellite of Kinsale), The local gas market is growing and prices high. According to the IEA, Ireland is 58% dependent on gas for electricity generation, and 95% dependent on gas imports. Part of the reasoning behind the opening-up of large tracts of offshore acreage is the need to diversify away from imports. There are security of supply 3. Corrib gas ﬁ eld of 0.8 to 1 trillion cubic feet +, which is marginally economic and encountered vigorous local minority opposition because of poor community relations by Enterprise and Shell. There have been several uneconomic discoveries, chieﬂ y: concerns due to the fact that Ireland is at the end Helvick (at circa 1 million barrels of oil (mmbo) of a long supply pipeline ultimately emanating from recoverable), western Siberia and North Africa – though there is Seven Heads (an uneconomic gas/condensate ﬁ eld also European production, especially in the North in the Celtic Sea - though effectively a satellite of Sea and likely in the future from unconventional Kinsale), and sources. A ﬂ attening on the long German decline BP Connemara (Porcupine Basin: high initial oil ﬂ ow in hydrocarbons consumption since 2007, together rates which declined). with the recently announced de-commissioning of the German nuclear industry has exacerbated supply worries in Western Europe. Germany already sources 24% of its energy from gas and 39% from oil, with coal accounting for 25% and nuclear currently 11%. The modest presence and prospects for renewables in the short-term suggest that gas will make up the difference together with any growth. This initiative and the legal prohibition on generation of electricity from nuclear plants shows the importance of political and emotional factors in the European energy debate. In fact, a good proportion of the circa 150 true exploration ‘wildcats’ offshore Ireland did intersect hydrocarbons – though at sub-commercial levels. On the Irish Atlantic Margin in recent years some 42 exploration ‘wildcats’ have been drilled, with maybe 5 gas/condensate or possibly oil discoveries that will ultimately be developed. While this is a low hit-rate of 1 in 8, after taking into account the attractive ﬁ scal terms (basically a 25% tax, with ‘bonanza taxes’ unlikely to kick-in because of the ‘R’ formula linking revenue and total costs). Most wells were drilled during a previous era of high oil prices in the As a result, about 500,000km2 of sedimentary 1970s and 1980s, when analysts wrongly saw this acreage, including much of the available Atlantic Irish offshore province as comparable to the quite acreage, was opened up by the Irish Department of different North Sea. Energy in the May 2011 bid-round. The high proportion of shows (c. 50% in the Celtic The fact that no commercially producing oil ﬁ eld Sea, for instance) show that there is a working has been discovered offshore Ireland despite 214 petroleum system in the main Irish offshore basins. exploration and development wells drilled since 1968 is a negative. Despite about €3 billion of exploration or risky appraisal/development investment since then, there have been only 3 commercial ﬁ nds: 1. Kinsale gas ﬁ eld of 1.4 trillion cubic feet, The big volume potential is in the deep water, but the best immediate risk vs. reward trade-off is, we think, in the Porcupine Basin. There will be discoveries in the Irish offshore. Petrel Resources Annual Report & Accounts 2010 3 1 Review of Operations (continued) In preparing an application for the current round Petrel and our contractor GSC professionals worked closely in order to obtain the most useful interpretation results from the existing seismic database, and to deﬁ ne target horizons and features. The work project was carried out on newly- constructed seismic base maps. Petrel already held a considerable seismic database and purchased an additional 2,740 line km of seismic data to assist in the study. Petrel also holds well information for most of the wells drilled along the Atlantic seaboard and petrophysical studies were carried out on the critical wells. Careful quality control management of this material was carried out to validate all data being used in the project. Well information data was used for the calibration of seismic data, and contour maps are produced in time and depth for each of the selected seismic markers. The study identiﬁ ed a number of leads in the region. 1 4 Petrel Resources Annual Report & Accounts 2010 Director’s Report The directors present their annual report and the audited ﬁ nancial statements for the year ended 31 December 2010. PRINCIPAL ACTIVITIES AND FUTURE DEVELOPMENTS The main activity of Petrel Resources plc and its subsidiaries (the Group) is oil and gas exploration. The company commenced development of an oil ﬁ eld in Iraq in 2007. The company is also involved in exploration in Ghana. On the 26 April 2010, the company announced the settlement of all outstanding operational issues on the Subba and Luhais Oilﬁ eld Development in Southern Iraq which will result in the company having a signiﬁ cantly reduced role in the Project going forward. See Note 3 for further details. Further information concerning the activities of the Group during the year and its future prospects is contained in the Chairman’s Statement and Review of Operations. RESULTS FOR THE YEAR The consolidated loss after taxation for the year, transferred to reserves, amounted to €836,052 (2009: loss of €6,526,075). The directors do not recommend that a dividend be declared for the year ended 31 December 2010 (2009: €Nil). PERFORMANCE REVIEW The performance review is set out in the Chairman’s Statement and Review of Operations. RISKS AND UNCERTAINTIES The Group is subject to a number of signiﬁ cant potential risks including: • Foreign exchange risks; • Uncertainties over development and operational costs; • Political and legal risks, including arrangements for licenses, proﬁ t sharing and taxation; • Foreign investment risks including increases in taxes, royalties and renegotiation of contracts; • Liquidity risks; • Operations and environmental risks and; • Going Concern risks. In addition to the above there can be no assurance that current exploration programmes will result in proﬁ table operations. The recoverability of the carrying value of exploration and evaluation assets is dependent upon the successful discovery of economically recoverable reserves, the achievement of proﬁ table operations, and the ability of the Group to raise additional ﬁ nancing, if necessary, or alternatively upon the Group’s and company’s ability to dispose of its interests on an advantageous basis. Changes in future conditions could require material write down of the carrying values of the Group’s assets. KEY PERFORMANCE INDICATORS The Group reviews expenditure incurred on exploration projects and successes thereon, and ongoing operating costs. In addition the Group reviewed the stages of completion in respect of the Subba & Luhais development services contract up to the date of the primary responsibility of the project being transferred to Makman, as outlined in the ﬁ nancial statements. DIRECTORS The current directors are listed on the inside of back cover. There were no changes to the Board during the year. Petrel Resources Annual Report & Accounts 2010 5 1 Director’s Report (continued) DIRECTORS’ AND SECRETARY’S INTERESTS IN SHARES The directors and secretary held the following beneﬁ cial interests in the shares of the company: 31/12/2010 Ordinary Shares of €0.0125 Number 3,615,000 2,715,384 190,000 1,015,384 155,000 31/12/2010 Options - Ordinary Shares of €0.0125 Number 1,900,000 1,650,000 - 870,000 450,000 31/12/2009 Ordinary Shares of €0.0125 Number 3,615,000 2,715,384 190,000 1,015,384 155,000 31/12/2009 Options - Ordinary Shares of €0.0125 Number 1,900,000 1,650,000 - 870,000 450,000 J. Teeling D. Horgan G. Delbes J. Finn (Secretary) S. Borghi SUBSTANTIAL SHAREHOLDINGS The share register records that, in addition to the directors, the following shareholders held 3% or more of the issued share capital as at 31 December 2010 and at 31 May 2011: 31 May 2011 Number of Ordinary Shares 31 December 2010 Number of Ordinary Shares % % Citibank Nominees (Ireland) Limited (CLRLUX) L. R. Nominees Limited TD Waterhouse Nominee (Europe) Limited HSBC Global Custody Nominee Lynchwood Nominees Limited 10,960,803 5,335,883 4,327,307 2,940,000 2,464,234 14.3 6.96 5.64 3.83 3.21 10,769,283 14.05 6.93 5.41 3.83 3.30 5,316,303 4,147,928 2,940,000 2,530,134 FINANCIAL RISK MANAGEMENT Details of the Group’s ﬁ nancial risk management policies are set out in Note 19 to the ﬁ nancial statements. GOING CONCERN Information in relation to going concern is outlined in Note 3. CORPORATE GOVERNANCE The Board is committed to maintaining high standards of corporate governance and to managing the company in an honest and ethical manner. The Board approves the Group’s strategy, investment plans and regularly reviews operational and ﬁ nancial performance, risk management, and Health, Safety, Environment and Community (HSEC) matters. The Chairman is responsible for the leadership of the Board, whilst the Executive Directors are responsible for formulating strategy and delivery once agreed by the Board. 1 6 Petrel Resources Annual Report & Accounts 2010 Director’s Report (continued) SUBSIDIARIES Details of the company’s signiﬁ cant subsidiaries are set out in Note 13 to the ﬁ nancial statements. CHARITABLE AND POLITICAL DONATIONS The company made no political or charitable contributions during the year. BOOKS OF ACCOUNT To ensure that proper books and accounting records are kept in accordance with Section 202 of the Companies Act, 1990, the directors have involved appropriately qualiﬁ ed accounting personnel and have maintained appropriate computerised accounting systems. The books of account are located at the company’s ofﬁ ce at 162 Clontarf Road, Dublin 3. SUBSEQUENT EVENTS Details of signiﬁ cant subsequent events are outlined in Note 25. AUDITORS Deloitte & Touche, Chartered Accountants, will continue in ofﬁ ce as auditors in accordance with Section 160(2) of the Companies Act 1963. Signed on behalf of the Board: John Teeling Director 27 June 2011 David Horgan Director Petrel Resources Annual Report & Accounts 2010 7 1 Statement of Directors’ Responsibilities Irish company law requires the directors to prepare ﬁ nancial statements for each ﬁ nancial year which give a true and fair view of the state of affairs of the company and the Group and of the proﬁ t or loss of the Group for that period. In preparing those ﬁ nancial statements, the directors are required to: • select suitable accounting policies for the Group and the Parent Company Financial Statements and then apply them consistently; • make judgments and estimates that are reasonable and prudent; and • prepare the ﬁ nancial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The directors are responsible for keeping proper books of account which disclose with reasonable accuracy at any time the ﬁ nancial position of the company and to enable them to ensure that the ﬁ nancial statements are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and comply with Irish statute comprising the Companies Acts, 1963 to 2009. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and ﬁ nancial information included on the company’s website. Legislation in the Republic of Ireland governing the preparation and dissemination of ﬁ nancial statements may differ from legislation in other jurisdictions. 1 8 Petrel Resources Annual Report & Accounts 2010 Independent Auditor’s Report to the Members of Petrel Resources Plc We have audited the ﬁ nancial statements of Petrel Resources Plc for the year ended 31 December 2010 which comprise the Group Financial Statements: the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the Group Statement of Changes in Equity and the Consolidated Cash Flow Statement and the Company Financial Statements: the Company Balance Sheet, the Company Statements of Changes in Equity, the Company Cash Flow Statement and the related notes 1 to 26. These ﬁ nancial statements have been prepared under the accounting policies set out therein. This report is made solely to the company’s members, as a body, in accordance with Section 193 of the Companies Act, 1990. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors The directors are responsible, as set out in the Statement of Directors’ Responsibilities, for preparing the Annual Report, including the preparation of the Group Financial Statements and the Company Financial Statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. Our responsibility, as independent auditors, is to audit the ﬁ nancial 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 Group Financial Statements and the Company Financial Statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, and are properly prepared in accordance with Irish statute comprising of the Companies Acts, 1963 to 2009. We also report to you whether in our opinion: proper books of account have been kept by the company; whether, at the balance sheet date, there exists a ﬁ nancial situation requiring the convening of an extraordinary general meeting of the company; and whether the information given in the Directors’ Report is consistent with the ﬁ nancial statements. In addition, we state whether we have obtained all the information and explanations necessary for the purpose of our audit and whether the company’s balance sheet is in agreement with the books of account. We also report to you if, in our opinion, other information speciﬁ ed by law regarding directors’ remuneration and directors’ transactions is not disclosed and, where practicable, include such information in our report. We read the other information contained in the Annual Report and consider the implications for our report if we become aware of any apparent misstatement or material inconsistencies with the ﬁ nancial statements. The other information comprises only the Chairman’s Statement, the Review of Operations and the Directors’ Report. Our responsibilities do not extend to any other information. BASIS OF AUDIT 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 ﬁ nancial statements. It also includes an assessment of the signiﬁ cant estimates and judgments made by the directors in the preparation of the ﬁ nancial statements and of whether the accounting policies are appropriate to the company’s and the Group’s circumstances, consistently applied and adequately disclosed. 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 sufﬁ cient evidence to give reasonable assurance that the ﬁ nancial Petrel Resources Annual Report & Accounts 2010 9 1 Independent Auditor’s Report to the Members of Petrel Resources Plc statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we evaluated the overall adequacy of the presentation of information in the ﬁ nancial statements. OPINION In our opinion: • the Group Financial Statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the affairs of the Group as at 31 December 2010 and of its loss for the year then ended; the Group Financial Statements have been properly prepared in accordance with the Companies Acts, • 1963 to 2009; • adopted by the European Union as applied in accordance with the provisions of the Companies Acts, 1963 the Parent Company’s Financial Statements give a true and fair view, in accordance with IFRSs as to 2009 of the state of the parent company’s affairs as at 31 December 2010; and the Parent Company’s Financial Statements have been properly prepared in accordance with the • Companies Acts, 1963 to 2009. Emphasis of matter – Realisation of intangible assets Without qualifying our opinion we draw your attention to Note 12 to the ﬁ nancial statements concerning the valuation of intangible assets. The realisation of intangible assets of €2,149,670 (2009: €1,644,482) included in the consolidated balance sheet and intangible assets of €2,138,433 (2009: €1,633,245) included in the company balance sheet is dependent on the successful discovery and development of economic reserves including the ability of the Group to raise sufﬁ cient ﬁ nance to develop these projects. The ultimate outcome of these uncertainties cannot, at present, be determined. We have obtained all the information and explanations we consider necessary for the purpose of our audit. In our opinion proper books of account have been kept by the company. The company’s balance sheet is in agreement with the books of account. In our opinion the information given in the Directors’ Report is consistent with the ﬁ nancial statements. The net assets of the company, as stated in the company balance sheet are more than half the amount of its called-up share capital and, in our opinion, on that basis there did not exist at 31 December 2010 a ﬁ nancial situation which, under Section 40(1) of the Companies (Amendment) Act, 1983, would require the convening of an extraordinary general meeting of the company. Deloitte & Touche Chartered Accountants and Statutory Auditors Earlsfort Terrace Dublin 2, Ireland 27 June 2011 2 0 Petrel Resources Annual Report & Accounts 2010 Consolidated Statement of Comprehensive Income for the year ended 31 December 2010 CONTINUING OPERATIONS Administrative expenses Loss on foreign exchange Impairment of exploration and evaluation expenditure Impairment of construction costs OPERATING LOSS Investment revenue LOSS BEFORE TAXATION Income tax expense LOSS FOR THE YEAR: all attributable to equity holders of the parent Notes 2010 € 2009 € 5 (462,646) (545,835) (387,180) - 12 14 4 5 10 - - (3,923,885) (2,085,100) (849,826) (6,554,820) 13,774 28,745 (836,052) (6,526,075) - - (836,052) (6,526,075) Exchange differences on translation of foreign operations 128,486 (2,936) TOTAL COMPREHENSIVE INCOME FOR THE YEAR (707,566) (6,529,011) Loss per share – basic and diluted 11 (1.09c) (8.73c) The ﬁ nancial statements were approved by the Board of Directors on 27 June 2011 and signed on its behalf by: John Teeling Director David Horgan Director Petrel Resources Annual Report & Accounts 2010 1 2 Consolidated Balance Sheet as at 31 December 2010 ASSETS: NON CURRENT ASSETS Intangible assets CURRENT ASSETS Construction contracts Trade and other receivables Cash and cash equivalents TOTAL ASSETS CURRENT LIABILITIES Trade and other payables NET CURRENT ASSETS NET ASSETS EQUITY Called-up share capital Capital conversion reserve fund Share premium Share based payment reserve Retained deﬁ cit TOTAL EQUITY Notes 2010 € 2009 € 12 2,149,670 1,644,482 14 15 16 - 2,139,269 2,748,831 5,361,939 37,407,723 923,429 4,888,100 43,693,091 7,037,770 45,337,573 17 (85,213) (37,677,450) 4,802,887 6,015,641 6,952,557 7,660,123 20 958,308 7,694 17,784,268 205,971 (12,003,684) 958,308 7,694 17,784,268 205,971 (11,296,118) 6,952,557 7,660,123 The ﬁ nancial statements were approved by the Board of Directors on 27 June 2011 and signed on its behalf by: John Teeling Director David Horgan Director 2 2 Petrel Resources Annual Report & Accounts 2010 Company Balance Sheet as at 31 December 2010 ASSETS: NON CURRENT ASSETS Intangible assets Investment in subsidiaries CURRENT ASSETS Trade and other receivables Cash and cash equivalents TOTAL ASSETS CURRENT LIABILITIES Trade and other payables NET CURRENT ASSETS NET ASSETS EQUITY Called-up share capital Capital conversion reserve fund Share premium Share based payment reserve Retained deﬁ cit TOTAL EQUITY Notes 2010 € 2009 € 12 13 15 16 2,138,433 11,237 1,633,245 11,237 2,149,670 1,644,482 2,139,269 2,748,831 5,865,154 864,644 4,888,100 6,729,798 7,037,770 8,374,280 17 (85,213) (714,157) 4,802,887 6,015,641 6,952,557 7,660,123 20 958,308 7,694 17,784,268 205,971 (12,003,684) 958,308 7,694 17,784,268 205,971 (11,296,118) 6,952,557 7,660,123 The ﬁ nancial statements were approved by the Board of Directors on 27 June 2011 and signed on its behalf by: John Teeling Director David Horgan Director Petrel Resources Annual Report & Accounts 2010 3 2 Statement of Changes in Equity for the year ended 31 December 2010 GROUP AND COMPANY Share Capital € Share Capital Conversion Premium Reserve fund € € Share Based Payment Reserve € Retained Deﬁ cit € Total € At 1 January 2009 Shares issued Share issue expenses Total comprehensive income for the year 902,873 55,435 - 15,693,098 2,137,544 (46,374) 7,694 - - 205,971 (4,767,107) 12,042,529 - 2,192,979 (46,374) - - - - - - - (6,529,011) (6,529,011) At 31 December 2009 958,308 17,784,268 7,694 205,971 (11,296,118) 7,660,123 Total comprehensive income for the year - - - - (707,566) (707,566) At 31 December 2010 958,308 17,784,268 7,694 205,971 (12,003,684) 6,952,557 Share premium The share premium comprises of the excess of monies received in respect of the issue of share capital over the nominal value of shares issued. Capital conversion reserve fund The ordinary shares of the company were renominalised from €0.0126774 each to €0.0125 each in 2001 and the amount by which the issued share capital of the company was reduced was transferred to the capital conversion reserve fund. Share based payment reserve The share based payment reserve represents share based payments granted which are not yet exercised and issued as shares. Retained deﬁ cit Retained deﬁ cit comprises accumulated losses in the current year and prior years. 2 4 Petrel Resources Annual Report & Accounts 2010 Consolidated Cash Flow Statement for the year ended 31 December 2010 CASH FLOW FROM OPERATING ACTIVITIES Loss for the year Investment revenue recognised in loss Exchange movements Shares issued in lieu of fees Impairment of exploration and evaluation expenditure Impairment of construction costs OPERATING CASHFLOW BEFORE MOVEMENTS IN WORKING CAPITAL Movements in working capital: Decrease/(increase) in construction contracts Decrease in trade and other payables Decrease in trade and other receivables Notes 2010 € 2009 € (836,052) (13,774) 7,644 - - - (6,526,075) (28,745) (5,659) 107,434 3,923,885 2,085,100 (842,182) (444,060) 5,361,939 (37,592,237) 35,268,454 (154,765) (869,557) 1,277,070 CASH GENERATED BY/(USED IN) OPERATIONS 2,195,974 (191,312) Investment revenue NET CASH FROM/(USED IN) OPERATING ACTIVITIES INVESTING ACTIVITIES 13,774 28,745 2,209,748 (162,567) Payments for intangible ﬁ xed assets (376,702) (789,347) NET CASH USED IN INVESTING ACTIVITIES (376,702) (789,347) FINANCING ACTIVITIES Proceeds from issue of equity shares Share issue costs NET CASH GENERATED BY FINANCING ACTIVITIES - - - 2,085,544 (46,374) 2,039,170 NET INCREASE IN CASH AND CASH EQUIVALENTS 1,833,046 1,087,256 Cash and cash equivalents at beginning of ﬁ nancial year 923,429 559,599 Effect of exchange rate changes on cash held in foreign currencies (7,644) (723,426) Cash and cash equivalents at end of ﬁ nancial year 16 2,748,831 923,429 Petrel Resources Annual Report & Accounts 2010 5 2 Company Cash Flow Statement for the year ended 31 December 2010 CASH FLOW FROM OPERATING ACTIVITIES Loss for the year Investment revenue recognised in loss Exchange movement Shares issued in lieu of fees Impairment of exploration and evaluation expenditure Impairment of construction costs OPERATING CASHFLOW BEFORE MOVEMENTS IN WORKING CAPITAL Movements in working capital: Decrease in trade and other payables Decrease/(increase) in trade and other receivables Notes 2010 € 2009 € (836,052) (13,774) 7,644 - - - (6,526,075) (28,745) (5,659) 107,434 3,923,885 2,085,100 (842,182) (444,060) (628,944) 3,725,885 (374,279) (99,756) CASH GENERATED BY/(USED IN) OPERATIONS 2,259,759 (918,095) Investment revenue 13,774 28,745 NET CASH GENERATED BY/(USED IN) OPERATING ACTIVITIES INVESTING ACTIVITIES 2,268,533 (889,350) Payments for intangible ﬁ xed assets (376,702) (789,347) NET CASH USED IN INVESTING ACTIVITIES (376,702) (789,347) FINANCING ACTIVITIES Proceeds from issue of equity shares Share issue costs NET CASH GENERATED BY FINANCING ACTIVITIES - - - 2,085,544 (46,374) 2,039,170 NET INCREASE IN CASH AND CASH EQUIVALENTS 1,891,831 360,473 Cash and cash equivalents at beginning of ﬁ nancial year Effect of exchange rate changes on cash held in foreign currencies Cash and cash equivalents at end of ﬁ nancial year 864,644 498,512 (7,644) 5,659 16 2,748,831 864,644 2 6 Petrel Resources Annual Report & Accounts 2010 Notes to the Financial Statements for the year ended 31 December 2010 1. PRINCIPAL ACCOUNTING POLICIES The signiﬁ cant accounting policies adopted by the group and company are as follows: (i) Basis of preparation The ﬁ nancial statements are prepared under the historical cost convention as modiﬁ ed by the revaluation of certain ﬁ nancial instruments which are held at fair value. The consolidated ﬁ nancial statements are presented in Euro. (ii) Statement of compliance The ﬁ nancial statements of Petrel Resources plc and all its subsidiaries (“the Group”) have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. The ﬁ nancial statements have also been prepared in accordance with International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB) and International Financial Reporting Interpretations Committee (IFRIC) as adopted by the European Union. The ﬁ nancial statements are prepared under the Companies Acts, 1963 to 2009. (iii) Basis of consolidation The consolidated ﬁ nancial statements incorporate the ﬁ nancial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 December each year. Control is achieved where the Company has the power to govern the ﬁ nancial and operating policies of an investee entity so as to obtain beneﬁ ts from its activities. Where necessary, adjustments have been made to the ﬁ nancial statements of the subsidiaries to bring the accounting policies used into line with those used by the Group. All intra-Group transactions, balances, income and expenses are eliminated on consolidation. (iv) Investment in subsidiaries Investment in subsidiaries is stated at cost less any provision for impairment. (v) Intangible assets Exploration and evaluation assets Exploration expenditure relates to the initial search for mineral deposits with economic potential in Iraq and Ghana. Evaluation expenditure arises from a detailed assessment of deposits that have been identiﬁ ed as having economic potential. The costs of exploration properties and leases, which include the cost of acquiring prospective properties and exploration rights and costs incurred in exploration and evaluation activities, are capitalised as intangible assets as part of exploration and evaluation assets. Exploration costs are capitalised as an intangible asset until technical feasibility and commercial viability of extraction of reserves are demonstrable, when the capitalised exploration costs are re-classed to property, plant and equipment. Exploration costs include an allocation of administration and salary costs (including share based payments) as determined by management, where they relate to speciﬁ c projects. Prior to reclassiﬁ cation to property, plant and equipment exploration and evaluation assets are assessed for impairment and any impairment loss is recognised immediately in the statement of comprehensive income. Impairment of intangible assets Exploration and evaluation assets are assessed for impairment when facts and circumstances suggest that the carrying amount may exceed its recoverable amount. The Company reviews and tests for impairment on an ongoing basis and speciﬁ cally if the following occurs: a) the period for which the Group and Company has a right to explore in the speciﬁ c area has expired or is expected to expire; b) the exploration and evaluation has not led to the discovery of economic reserves; c) the development of the reserves is not economically or commercially viable; d) the exploration is located in an area that has become politically unstable; e) the board resolves to exit a particular project or region. Petrel Resources Annual Report & Accounts 2010 7 2 Notes to the Financial Statements for the year ended 31 December 2010 1. PRINCIPAL ACCOUNTING POLICIES (continued) (vi) Construction contracts Work in progress related to costs incurred on the Subba & Luhais oilﬁ eld development and was stated at the lower of cost and net realisable value. Amounts previously capitalised in exploration and evaluation expenditure relating to this project were transferred to work in progress after being tested for impairment. Where the outcome of the construction contract could have been estimated reliably, revenue and costs were recognised by reference to the stage of completion of the contract at the balance sheet date, measured based on the proportion of contract costs incurred for work performed to date relative to the estimated total contract costs, except where this would not have been representative of the stage of completion. Variations are included in contract revenue when it is probable that the customer will approve the variation and the amount of revenue arising from the variation and the amount of revenue can be reliably measured. Where the outcome of the construction contract could not be estimated reliably, contract revenue was recognised to the extent of contract costs incurred that it was probable would be recoverable. Contract costs were recognised as expenses in the period in which they were incurred. When it was probable that total contract costs would exceed total contract revenue, the expected loss was recognised as an expense immediately. During 2010, the company announced the settlement of all outstanding operational issues on the Subba & Luhais contract which will result in the company having a signiﬁ cantly reduced role in the project going forward. (vii) Foreign currencies The individual ﬁ nancial statements of each Group company are maintained in the currency of the primary economic environment in which it operates (its functional currency). The functional currency of the company is US Dollars. However, for the purpose of the consolidated ﬁ nancial statements, the results and ﬁ nancial position of the Group are expressed in Euro (the presentation currency). This is for the beneﬁ t of the Group’s shareholders, the majority of whom reside in the Eurozone. In preparing the ﬁ nancial statements of the individual companies, transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was re- determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in the statement of comprehensive income for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in the statement of comprehensive income for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in equity. For the purpose of presenting consolidated ﬁ nancial statements, the assets and liabilities of the Group’s foreign operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period, unless exchange rates ﬂ uctuate signiﬁ cantly during that period, in which case the exchange rates at the date of transactions are used. (viii) Taxation The tax expense represents the sum of the tax currently payable and deferred tax. Current tax is based on taxable proﬁ t for the year. Taxable proﬁ t differs from net proﬁ t as reported in the statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. 2 8 Petrel Resources Annual Report & Accounts 2010 Notes to the Financial Statements for the year ended 31 December 2010 1. PRINCIPAL ACCOUNTING POLICIES (continued) Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the ﬁ nancial statements and the corresponding tax bases used in the computation of taxable proﬁ t, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax assets and unused tax losses to the extent that it is probable that taxable proﬁ ts will be available against which deductible temporary differences and the carry forward of unused tax credits and unused tax losses can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable proﬁ t nor the accounting proﬁ t. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are recognised for deductible temporary differences arising on investments in subsidiaries and associates, only to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable proﬁ t will be available against which the temporary difference can be utilised. Unrecognised deferred tax assets are reassessed at each balance sheet date and are recognised to the extent that it has become probable that future taxable proﬁ ts will allow the deferred tax asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Deferred tax is charged or credited in the statement of comprehensive income, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. (ix) Share-based payments The Group and Company have applied the requirements of IFRS 2 “Share-Based Payments”. In accordance with the transitional provisions, IFRS 2 has been applied to all equity instruments vesting after 1 January 2006. The Group and Company issue equity-settled share based payments to directors and certain consultants. Equity settled share-based payments are measured at fair value at the date of grant. The fair value excludes the effect of non-market based vesting conditions. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period based on the Group and Company’s estimate of shares that will eventually vest. At the balance sheet date the Group reviews its estimate of the nature of equity instruments expected to vest as a result of the effect of non-market based vesting conditions. Where the value of the goods or services received in exchange for the share-based payment cannot be reliably estimated the fair value is measured by use of a Black-Scholes model. (x) Operating loss Operating loss comprises general administrative costs incurred by the Company, which are not speciﬁ c to evaluation and exploration projects. Operating loss is stated before ﬁ nance income, ﬁ nance costs and other gains and losses. (xi) Financial instruments Financial assets and ﬁ nancial liabilities are recognised in the Group and Company balance sheet when the Group and Company becomes a party to the contractual provisions of the instrument. Trade receivables Trade receivables are measured at initial recognition at invoice value, which approximates to fair value. Appropriate allowances for estimated irrecoverable amounts are recognised in the consolidated statement of comprehensive income when there is objective evidence that the carrying value of the asset exceeds the recoverable amount. Subsequently, trade receivables are classiﬁ ed as loans and receivables which are measured at amortised cost, using the effective interest method. Petrel Resources Annual Report & Accounts 2010 9 2 Notes to the Financial Statements for the year ended 31 December 2010 1. PRINCIPAL ACCOUNTING POLICIES (continued) Cash and cash equivalents Cash and cash equivalents comprise cash held by the Group and Company and short-term bank deposits with a maturity of three months or less from the date of acquisition. Financial liabilities Financial liabilities are classiﬁ ed according to the substance of the contractual arrangements entered into. Trade payables Trade payables are classiﬁ ed as ﬁ nancial liabilities, are initially measured at fair value, and are subsequently measured at amortised cost using the effective interest rate method. Equity instruments Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. (xii) Comparative Amounts Comparative amounts have been reclassiﬁ ed, where necessary, on the same basis as the current year. (xiii) Critical accounting judgments and key sources of estimation uncertainty Critical judgments in applying the Group and Company accounting policies In the process of applying the Group and Company accounting policies above, management has identiﬁ ed the judgmental areas as those that have the most signiﬁ cant effect on the amounts recognised in the ﬁ nancial statements (apart from those involving estimations, which are dealt with below): Exploration and evaluation The assessment of whether general administration costs and salary costs are capitalised or expensed involves judgement. Management considers the nature of each cost incurred and whether it is deemed appropriate to capitalise it within intangible assets. Costs which can be demonstrated as project related are included within exploration and evaluation assets. Exploration and evaluation assets relate to exploration and related expenditure in Iraq and Ghana. The Group and Company’s exploration activities are subject to a number of signiﬁ cant and potential risks including: • Foreign exchange risks; • Uncertainties over development and operational costs; • Political and legal risks, including arrangements for licenses, proﬁ t sharing and taxation; • Foreign investment risks including increases in taxes, royalties and renegotiation of contracts; • Liquidity risks; • Operation and environmental risks; • Going Concern. The recoverability of these exploration and evaluation assets is dependent on the discovery and successful development of economic reserves, including the ability to raise ﬁ nance to develop future projects. Should this prove unsuccessful, the value included in the balance sheet would be written off as an impairment to the statement of comprehensive income. Impairment of intangible assets The assessment of intangible assets for any indications of impairment involves judgement. If an indication of impairment exists, a formal estimate of recoverable amount is performed and an impairment loss recognised to the extent that the carrying amount exceeds the recoverable amount. Recoverable amount is determined as the higher of fair value less costs to sell and value in use. The assessment requires judgements as to the likely future commerciality of the assets and when such commerciality should be determined, future revenue and operating costs and the discount rate to be applied to such revenues and costs. Deferred tax assets The assessment of availability of future taxable proﬁ ts involves judgement. A deferred tax asset is recognised to the extent that it is probable that taxable proﬁ ts will be available against which deductible temporary differences and the carry forward of unused tax credits and unused tax losses can be utilised. 3 0 Petrel Resources Annual Report & Accounts 2010 Notes to the Financial Statements for the year ended 31 December 2010 1. PRINCIPAL ACCOUNTING POLICIES (continued) Going Concern The preparation of ﬁ nancial statements requires an assessment on the validity of the going concern assumption. The validity of the going concern assumption is dependent on ﬁ nance being available for the continuing working capital requirements of the Group and Company and ﬁ nance for the development of the Group’s projects. Under the terms of the agreement reached between Petrel and Makman FZC (Makman), Petrel received a ﬁ nal payment of $2.5 million on 3 May 2011. Key sources of estimation uncertainty The preparation of ﬁ nancial statements requires management to make estimates and assumptions that affect the amounts reported for assets and liabilities at the balance sheet date and the amounts reported in the statement of comprehensive income for the year. The nature of estimation means that actual outcomes could differ from those estimates. The key sources of estimation uncertainty that have a signiﬁ cant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next ﬁ nancial year are discussed below. Share-based payments The estimation of share-based payment costs requires the selection of an appropriate valuation model and consideration as to the inputs necessary for the valuation model chosen. The Group and Company have made estimates as to the volatility of its own shares, the probable life of options granted and the time of exercise of those options. The model used by the Group and Company is the Black-Scholes valuation model. 2. INTERNATIONAL FINANCIAL REPORTING STANDARDS The Group did not adopt any new International Financial Reporting Standards (IFRS) or Interpretations in the year that had a material impact on the Group’s Financial Statements. The following IFRS became effective since the last Annual Report but had no material impact on the Financial Statements: IFRS 1 (Revised) First-time Adoption of International Financial Reporting Standards (effective for accounting periods beginning on or after 1 July 2009); IFRS 2 (Amendment) Share Based Payments (effective for accounting periods beginning on or after 1 July 2009 and 1 IFRS 3 IFRS 5 IFRS 8 IAS 1 IAS 7 IAS 17 IAS 27 IAS 28 IAS 31 IAS 36 IAS 38 IAS 39 January 2010); (Revised) Business Combinations (effective for accounting periods beginning on or after 1 January 2010); (Amendment) Non-Current Assets Held for Sale and Discontinued Operations (effective for accounting period beginning on or after 1 July 2009 and 1 January 2010); (Amendment) Operating Segments (effective for accounting periods beginning on or after 1 January 2010) (Amendment) Presentation of Financial Statements (effective for accounting periods beginning on or after 1 January 2010) (Amendment) Statement of Cash Flows (effective for accounting periods beginning on or after 1 January 2010); (Amendment) Leases (effective for accounting periods beginning on or after 1 January 2010); (Amendment( Consolidated and Separate Financial Statements (effective for accounting periods beginning on or after 1 July 2009) (Amendment) Investments in Associates (effective for accounting periods beginning on or after 1 July 2009); (Amendment) Interests in Joint Ventures (effective for accounting periods beginning on or after 1 July 2009); (Amendment) Impairment of Assets (effective for accounting periods beginning on or after 1 January 2010); (Amendment) Intangible Assets (effective for accounting periods beginning on or after 1 July 2009); (Amendment) Financial Instruments: Recognition and Measurement (effective for accounting period beginning on or after 1 July 2009 and 1 January 2010); IFRIC 9 (Amendment) Reassessment of Embedded Derivatives (effective for accounting periods beginning on or after 1 July 2009); IFRIC 16 (Amendment) Hedges of a Net Investment in a Foreign Operation (effective for accounting periods beginning on or after 1 July 2009); IFRIC 17 Distributions of Non-cash Assets to Owners (effective for accounting periods beginning on or after 1 July 2009); and IFRIC 18 Transfers of Assets from Customers (effective for accounting periods beginning on or after 1 July 2009). At the date of authorisation of these ﬁ nancial statements, the following Standards and Interpretations which have not been applied in these ﬁ nancial statements were in issue but not yet effective: IFRS 1 IFRS 1 IFRS 3 IFRS 7 (Revised) First-time Adoption of International Financial Reporting Standards (effective for accounting periods beginning on or after 1 July 2010); (Amendment) First-time Adoption of International Financial Reporting Standards (effective for accounting periods beginning on or after 1 July 2010); (Amendment) Business Combinations (effective for accounting periods beginning on or after 1 July 2010); (Amendment) Financial Instruments: Disclosures (effective for accounting periods beginning on or after 1 July 2011); Petrel Resources Annual Report & Accounts 2010 1 3 Notes to the Financial Statements for the year ended 31 December 2010 2. INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued) IFRS 9 Financial Instruments (effective for accounting periods beginning on or after 1 January 2013); IAS 1 (Amendment) Presentation of Financial Statements (effective for accounting periods beginning on or after 1 January 2011) (Amendment) Deferred Tax: Recovery of Underlying Assets (effective for accounting periods beginning on or after 1 January 2012); (Revised) Related Party Disclosures (effective for accounting periods beginning on or after 1 January 2011); (Amendment) Consolidated and Separate Financial Statements (effective for accounting periods beginning on or after 1 July 2010); (Amendment) Financial Instruments: Presentation (effective for accounting periods beginning on or after 1 February 2010); (Amendment) Interim Financial Reporting (effective for accounting periods beginning on or after 1 January 2011) IAS 12 IAS 24 IAS 27 IAS 32 IAS 34 IFRIC 14 (Amendment) Prepayments of a Minimum Funding Requirement (effective for accounting periods beginning on or after 1 January 2011); and IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments (effective for accounting periods beginning on or after 1 July 2010). The Directors are currently assessing the impact in relation to the adoption of these Standards and Interpretations for future periods of the Group, however, at this point they do not believe they will have a signiﬁ cant impact on the ﬁ nancial statements of the Group in the period of initial application. 3. GOING CONCERN The Group and Company incurred a loss for the year of €836,052 (2009: loss of €6,526,075) and had a retained earnings deﬁ cit of €12,003,684 (2009: deﬁ cit of €11,296,118), at the balance sheet date leading to doubt about the Group and Company’s ability to continue as a going concern. The Group had a cash balance of €2,748,831 at the balance sheet date together with a bank loan of € Nil (2009: €23,501,833) representing the amount drawn down on a letter of credit which was in place in respect of the Subba & Luhais development contract. Under the terms of the agreement reached between Petrel and Makman FZC (Makman), Petrel received the ﬁ nal payment of $2.5 million, subsequent to the year end on 3 May 2011. Accordingly the directors are satisﬁ ed that it is appropriate to continue to prepare the ﬁ nancial statements of the Group and Company on the going concern basis, as the additional cash resources of $2.5 million realised can be used on other projects along with the day to day running of the Group. The ﬁ nancial statements do not include any adjustment to the carrying amount, or classiﬁ cation of assets and liabilities, if the Group or Company was unable to continue as a going concern. 4. INVESTMENT REVENUE Interest on bank deposits 5. LOSS BEFORE TAXATION The loss before taxation is stated after charging/(crediting) the following items: Administrative expenses: Professional fees Staff costs - salaries - payroll taxes Net foreign exchange losses/(gains) Other administration expenses Impairment of exploration and evaluation expenditure Impairment of construction costs Details of directors’ remuneration are set out in Note 7. 2010 € 13,774 2010 € 206,851 182,535 21,390 394,825 44,225 849,826 - - 2009 € 28,745 2009 € 203,249 229,671 43,000 (5,659) 75,574 545,835 3,923,885 2,085,100 3 2 Petrel Resources Annual Report & Accounts 2010 Notes to the Financial Statements for the year ended 31 December 2010 6. AUDITOR’S REMUNERATION Auditor’s remuneration for work carried out for the Group and Company in respect of the ﬁ nancial year is as follows: Group Audit of Group accounts Other assurance services Tax advisory services Other non-audit services Total Company Audit of company accounts Other assurance services Tax advisory services Other non-audit services Total 7. RELATED PARTY AND OTHER TRANSACTIONS Group and Company • Directors’ Remuneration The remuneration of the directors is as follows: 2010 Fees – services as directors € 2010 Fees-other services 2010 Total € € 2010 € 18,000 1,000 3,300 - 22,300 9,000 9,000 3,300 - 21,300 2009 € 24,000 1,000 5,000 - 30,000 16,000 8,000 5,000 - 29,000 2009 Total 2009 2009 Fees- Fees-other services services as directors € € € John Teeling David Horgan Guy Delbes Total 5,000 5,000 5,000 99,783 156,825 9,095 104,783 161,825 14,095 5,000 5,000 5,000 107,900 172,200 9,303 112,900 177,200 14,303 15,000 265,703 280,703 15,000 289,403 304,403 Directors’ remuneration of €100,000 (2009: €82,500) was capitalised as exploration and evaluation expenditure as set out in Note 12. Key management compensation Key management personnel are deemed to be John Teeling (Chairman), David Horgan (Managing Director), Guy Delbes (Director) and James Finn (Chief Financial Ofﬁ cer). The total compensation expense comprising solely of short-term beneﬁ ts in respect of key management personnel was as follows: Short-term employee beneﬁ ts 2010 € 2009 € 385,686 407,200 Petrel Resources Annual Report & Accounts 2010 3 3 Notes to the Financial Statements for the year ended 31 December 2010 7. RELATED PARTY AND OTHER TRANSACTIONS (continued) Other Petrel Resources plc shares ofﬁ ces and overheads with a number of companies also based at 162 Clontarf Road. These companies have some common directors. Transactions with these companies during the year are set out below: African Botswana Clontarf Connemara Swala Mining Distillery Resources Exploration Diamonds Resources Cooley Pan Andean Hydrocarbon Stellar Plc € Balance at 1 January 2009 (9,284) Diamonds Diamonds Plc € - Energy Plc € 11,396 Plc € - Plc € (9,525) Plc € 27,214 Plc € - Plc € 20,539 Plc Total € 217 40,557 € Ofﬁ ce and overhead costs recharged Repayments Balance at 31 December 2009 10,191 10.929 11,836 Ofﬁ ce and overhead costs recharged (22,926) Exploration and evaluation expenditure recharged by Petrel Exploration and evaluation expenditure recharged to Petrel - - - - - - - Transfer on demerger 11,090 (11,090) Repayments - - 7,757 1,343 (27,658) 19,330 - - 23,108 (11,160) 19,153 1,343 (14,075) 35,384 - - - 14,706 - 25,669 (22,067) (217) 593 13,178 - 66,819 16,555 569 (35,300) - 44,464 - - - - - - - - - - 49,375 - - - 23,107 - (67,560) (35,384) 35,384 - - - - - (17,995) - 44,464 - (67,560) - - - - 97,739 (13,178) - 133,936 88,670 - - 159,664 Balance at 31 December 2010 - (11,090) 80,172 1,912 - On 4 April 2010 certain assets of Pan Andean Resources plc were demerged to Hydrocarbon Exploration plc. The assets demerged included amounts due by Pan Andean Resources plc to Petrel Resources plc. On 20 December 2010 certain assets of African Diamonds plc were demerged to Botswana Diamonds plc. The assets demerged included amounts due to African Diamonds plc by Petrel Resources plc. Petrel Resources plc owns 30% of Pan Andean Resources Limited, an early stage exploration vehicle registered in Ghana. Clontarf Energy plc, Hydrocarbon Exploration plc and Abbey Oil & Gas own the remaining 70%. During 2010 exploration and evaluation expenditure was paid by Petrel Resources plc in relation to the Ghanian operations. This expenditure was recharged to Clontarf Energy plc during the year. Exploration and evaluation expenditure was also paid by Hydrocarbon Exploration plc and recharged to Petrel Resources plc during the year. Cash held in Escrow Accounts €1,197,425 and €580,890 of cash and cash equivalents were held on behalf of Botswana Diamonds Plc and Connemara Mining Company Plc, respectively at the balance sheet date under Security Escrow Agreements dated 29 November 2010. Both Botswana Diamonds Plc and Connemara Mining Company Plc share ofﬁ ces with the company at 162 Clontarf Road and have some common directors. Company At 31 December the following amount was due to the Company by its subsidiaries: Amounts due from the Petrel/ Makman Service Contract Joint Venture 3 4 Petrel Resources Annual Report & Accounts 2010 2010 € 2009 € - 5,758,994 Notes to the Financial Statements for the year ended 31 December 2010 8. STAFF NUMBERS There were no employees of the Group other than the directors and the secretary during the current or prior year. 9. SEGMENTAL ANALYSIS The Group has adopted IFRS 8 Operating Segments with effect from 1 January 2009. IFRS 8 requires operating segments to be identiﬁ ed on the basis of internal reports about the Group that are regularly reviewed by the chief operating decision maker. The Board is deemed the chief operating decision maker within the Group. For management purposes, the Group has two classes of business: mining exploration and development and construction of an oil ﬁ eld. These are analysed on a project by project basis. Exploration and evaluation Construction of an oil ﬁ eld 2010 € 2009 € 2010 € 2009 € 2010 € Total 2009 € 9A. Segment Results Continuing Operations Subba & Luhais Oil Field Development Merjan and Dhufriya Oil Field Agreement Western Dessert Block 6 Ghana East Safawi Block, Jordan (387,180) - - - - (4,420,290) (36,925) - - (1,551,769) Total for continuing operations Unallocated head ofﬁ ce (387,180) (448,872) (6,008,984) (517,091) (836,052) (6,526,075) There was no revenue earned during the year. - - - - - - - - - - - - - - - (387,180) (4,420,290) (36,925) - - - - - - (1,551,769) (387,180) (6,008,984) (448,872) (517,091) - (836,052) (6,526,075) 9B. Segment Assets Group & Company Subba & Luhais Oil Field Development Merjan and Dhufriya Oil Field Agreement Western Dessert Block 6 Ghana East Safawi Block, Jordan - - - 1,900,663 249,007 - - 402,749 1,241,733 - - - 42,722,287 - 42,722,287 - - 402,749 - - 1,900,662 1,241,733 - - - - - - - 249,007 - Total for continuing operations Unallocated head ofﬁ ce 2,149,670 4,888,100 1,644,482 970,804 - 42,722,287 2,149,669 44,366,769 970,804 - 4,888,100 - 7,037,770 2,615,286 - 42,722,287 7,037,769 45,337,573 Petrel Resources Annual Report & Accounts 2010 5 3 Notes to the Financial Statements for the year ended 31 December 2010 9. SEGMENTAL ANALYSIS (continued) Exploration and evaluation Construction of an oil ﬁ eld 2010 € 2009 € 2010 € 2009 € 2010 € Total 2009 € 9C. Segment Liabilities Group Subba & Luhais Oil Field Development Merjan and Dhufriya Oil Field Agreement Western Dessert Block 6 Ghana East Safawi Block, Jordan - - - - - - - - - (411,357) Total for continuing operations Unallocated head ofﬁ ce - (85,213) (411,357) (302,800) - - - - - - - (36,963,293) - - - - - (36,963,293) - - - - - - (411,357) - (36,963,293) - - (37,374,650) (302,800) (85,213) (85,213) (714,157) - (36,963,293) (85,213) (37,677,450) Company Subba & Luhais Oil Field Development Merjan and Dhufriya Oil Field Agreement Western Dessert Block 6 Ghana East Safawi Block, Jordan - - - - - - - - - (411,357) Total for continuing operations Unallocated head ofﬁ ce - (85,213) (411,357) (302,800) (85,213) (714,157) Additions to non-current assets (Group and Company) Subba & Luhais Oil Field Development Merjan and Dhufriya Oil Field Agreement Western Dessert Block 6 Ghana East Safawi Block, Jordan - - 127,695 249,007 - 210,679 - - - 578,668 Total for continuing operations Unallocated head ofﬁ ce 376,702 - 789,347 - 376,702 789,347 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (411,357) - (85,213) (411,357) (302,800) - (85,213) (714,157) - - - - - 127,695 - 249,007 - - 210,679 - - - 578,668 - 376,702 - - 789,347 - - 376,702 789,347 3 6 Petrel Resources Annual Report & Accounts 2010 Notes to the Financial Statements for the year ended 31 December 2010 10. INCOME TAX EXPENSE Factors affecting the tax expense: Loss on ordinary activities before tax Income tax calculated @ 12.5% Effects of: Expenses not allowable Tax losses carried forward Income taxed at higher rate Tax charge 2010 € 2009 € (836,052) (6,526,075) (104,506) (815,759) 54,402 49,580 524 - 748,261 62,708 4,790 - No corporation tax charge arises in the current year or the prior year due to losses brought forward. At the balance sheet date, the Group had unused tax losses of €3,960,185 (2009: €3,559,354) which equates to a deferred tax asset of €495,023 (2009: €444,919). No deferred tax asset has been recognised due to the unpredictability of the future proﬁ t streams. Losses may be carried forward indeﬁ nitely. 11. LOSS PER SHARE Loss per share - Basic and diluted Basic loss per share 2010 € (1.09c) 2009 € (8.73c) The earnings and weighted average number of ordinary shares used in the calculation of basic loss per share are as follows: 2010 € 2009 € Loss for the year attributable to equity holders (836,052) (6,526,075) Weighted average number of ordinary shares for the purpose of basic earnings per share 2010 Number 2009 Number 76,664,624 74,727,222 Basic and diluted loss per share is the same as the effect of the outstanding share options is anti-dilutive. 12. INTANGIBLE ASSETS Exploration and evaluation assets: Cost: Opening balance Additions Impairment Exchange translation adjustment Group 2010 € Group 2009 € Company 2010 € Company 2009 € 1,644,482 376,702 - 128,486 4,781,953 789,347 (3,923,885) (2,933) 1,633,245 376,702 - 128,486 4,770,716 789,347 (3,923,885) (2,933) Closing balance 2,149,670 1,644,482 2,138,433 1,633,245 Petrel Resources Annual Report & Accounts 2010 7 3 Notes to the Financial Statements for the year ended 31 December 2010 12. INTANGIBLE ASSETS (continued) Exploration and evaluation assets at 31 December 2010 represent exploration and related expenditure in respect of projects in Iraq and Ghana. The directors are aware that by its nature there is an inherent uncertainty in relation to the recoverability of amounts capitalised on the exploration projects. In addition, the current economic and political situation in Iraq is uncertain. Having reviewed the exploration and evaluation expenditure and as a result of the settlement of all outstanding operational issues on the Subba and Luhais Oilﬁ eld development in Southern Iraq, the directors decided to write off €2,372,116 of the exploration and evaluation costs capitalised in relation to the projects in Iraq in the prior year. In addition, in 2009 the directors had impaired all exploration and evaluation costs, amounting to €1,551,769, relating to the project in Jordan due to an anticipated loss of the license on the block as a result of the Group being unable to identify a partner to progress and fund development of the project The Group’s activities are subject to a number of signiﬁ cant potential risks including: Political and legal risks, including arrangements for licenses, proﬁ t sharing and taxation; Foreign investment risks including increases in taxes, royalties and renegotiation of contracts; • Foreign exchange risks; • Uncertainties over development and operational costs; • • • Liquidity risks; • Operations and environmental risks and; • Going Concern risks. The realisation of these intangible assets is dependent on the successful development of economic reserves, including the ability to raise ﬁ nance to develop the projects. Should this prove unsuccessful the value included in the balance sheet would be written off to the statement of comprehensive income. Directors’ remuneration of €100,000 (2009: €82,500) was capitalised as exploration and evaluation expenditure during the year. Segmental Analysis Western Dessert Block 6 Ghana 13. INVESTMENT IN SUBSIDIARIES Company Shares at cost - unlisted: Opening and closing balance Group 2010 € Group 2009 € 1,900,663 249,007 1,644,482 - 2,149,670 1,644,482 2010 € 2009 € 11,237 11,237 The directors are satisﬁ ed that the carrying value of the investment is not impaired. The Group consisted of the parent company and the following wholly owned subsidiaries as at 31 December 2010: Name Petrel Industries Limited Petrel Resources of the Middle East Offshore S.A.L. Registered Ofﬁ ce Group Share Nature of Business 162 Clontarf Road, Dublin 3, Ireland Damascus Street Beirut, Lebanon 100% Dormant 100% Dormant The company also holds a 30% interest in Pan Andean Resources Limited, an early stage exploration company incorporated in Ghana. 3 8 Petrel Resources Annual Report & Accounts 2010 Notes to the Financial Statements for the year ended 31 December 2010 14. CONSTRUCTION CONTRACTS Work in progress: Opening balance Expenditure incurred in period Impairment Transfer to trade and other receivables Group 2010 € 5,361,939 - - (5,361,939) Group 2009 € 5,315,599 2,131,440 (2,085,100) - - 5,361,939 The above expenditure relates to costs incurred and not billed in respect of the Subba and Luhais development services contract. The Subba and Luhais development services contract represents a contract with the Iraqi Ministry of Oil, and SCOP (State Company of Oil Projects) to assist design, supply materials and services for the development of an oil ﬁ eld. On 26 April 2010, the Company announced the settlement of all outstanding operational issues on the Subba and Luhais oilﬁ eld development in Southern Iraq. Under the terms of the agreement Petrel were to receive a minimum consideration of $7 million, $4.5m of which had been received as at 31 December 2010. The remaining $2.5m was received on 3 May 2011. The directors had assessed the carrying value of the amounts recoverable under construction contracts at the end of 2009. As a result an impairment of €2,085,100 was recognised to bring the values recoverable under the contract to the actual amount receivable under the terms of the settlement. 15. TRADE AND OTHER RECEIVABLES Current assets: Trade receivables VAT refund due Other receivables Non-current assets: Amounts due from Group undertakings Group 2010 € Group 2009 € 1,870,977 11,969 256,323 37,301,562 19,953 86,208 Company 2010 € 1,870,977 11,969 256,323 Company 2009 € - 19,953 86,207 - - - 5,758,994 2,139,269 37,407,723 2,139,269 5,865,154 Trade receivables relate to amounts billed in respect of the Subba and Luhais development services contract up to 31 December 2010 with a carrying amount of €Nil (2009: €37,301,562). As disclosed in Note 12, the risks and the substantial rewards relating to the Subba and Luhais Development Contract were transferred to Makman. In respect to the amounts due from Makman, a total of $4.5 million was received during the year and the ﬁ nal payment of $2.5 million was received subsequent to year end on 3 May 2011. Accordingly, in the opinion of the directors the amounts above are considered to be fully recoverable. Ageing of past due but not impaired Group 2010 € Group 2009 € Company 2010 € Company 2009 € 90 – 120 days > 120 days Total - 1,870,977 - 37,301,562 - 1,870,977 1,870,977 37,301,562 1,870,977 - - - Petrel Resources Annual Report & Accounts 2010 9 3 Notes to the Financial Statements for the year ended 31 December 2010 16. CASH AND CASH EQUIVALENTS Group 2010 € Group 2009 € Company 2010 € Company 2009 € Cash and cash equivalents 2,748,831 923,429 2,748,831 864,644 Cash at bank earns interest at ﬂ oating rates on daily bank rates. The fair value for cash and cash equivalents is €2,748,831 (2009: €923,429) for Group and €2,748,831 (2009: €864,644) for Company. The Group and Company only deposits cash surpluses with major banks. Cash held in Escrow Account €1,197,425 and €580,890 of cash and cash equivalent balances were held on behalf of Botswana Diamonds Plc and Connemara Mining Company Plc, respectively at the balance sheet date under Security Escrow Agreements dated 29 November 2010. Both Botswana Diamonds Plc and Connemara Mining Company Plc share ofﬁ ces with the company at 162 Clontarf Road and have some common directors. 17. TRADE AND OTHER PAYABLES Bank loan Accruals Amount due to Group undertaking Other creditors Customer deposits Group 2010 € - 25,000 - 60,213 - Group 2009 € Company 2010 € 23,501,833 119,074 - 595,083 13,461,460 - 25,000 - 60,213 - Company 2009 € - 119,074 3 595,080 - 85,213 37,677,450 85,213 714,157 The bank loan represents the amounts drawn down on a letter of credit which was in place at the end of 2009 in respect of the Subba & Luhais development contract. The letter of credit has been guaranteed by Makman. The customer deposits relate to payments on account received in respect of the Subba & Luhais development services contract – further details are set out in Notes 14 and 15. The Petrel/Makman Joint Venture Agreement which includes both the bank loan and the customer deposits was transferred to Makman on 26 April 2010. It is the Group’s normal practice to agree terms of transactions, including payment terms, with suppliers and provided suppliers perform in accordance with the agreed terms, and it is the Group’s policy that payments are made between 30 - 45 days. The Group has ﬁ nancial risk management policies in place to ensure that all payables are paid within the credit timeframe. 18. FINANCIAL INSTRUMENTS The Group and Company undertakes certain transactions denominated in foreign currencies. Hence, exposures to exchange rate ﬂ uctuations arise. The Group and Company holds cash as a liquid resource to fund the obligations of the Group. The Group’s cash balances are held in Euro, Sterling and in US dollar. The Group’s strategy for managing cash is to maximise interest income whilst ensuring its availability to match the proﬁ le of the Group’s expenditure. This is achieved by regular monitoring of interest rates and monthly review of expenditure. The Group and Company has a policy of not hedging due to no signiﬁ cant dealings in currencies other than the euro denominated transactions and therefore takes market rates in respect of foreign exchange risk; however, it does review its currency exposures on an adhoc basis. At 31 December 2009, the Group had a letter of credit in place with the Trade Bank of Iraq for €Nil (2009: €23,501,833). The amount drawn down and outstanding at year end in respect of this was US$Nil. The Group and Company has relied upon equity funding to ﬁ nance operations. The Directors are conﬁ dent that adequate cash resources exist to ﬁ nance operations for future exploration but controls over expenditure are carefully managed. 4 0 Petrel Resources Annual Report & Accounts 2010 Notes to the Financial Statements for the year ended 31 December 2010 18. FINANCIAL INSTRUMENTS (continued) The carrying amounts of the Group and Company’s foreign currency denominated monetary assets and monetary liabilities at the reporting dates are as follows: GROUP Sterling US Dollar COMPANY Sterling US Dollar 19. RISK MANAGEMENT Assets 2010 € Assets 2009 € Liabilities 2010 € Liabilities 2009 € 77,630 4,538,635 434,885 37,736,396 18,408 18,710 5,334 37,388,463 Assets 2010 € Assets 2009 € 77,630 4,538,635 434,883 6,135,042 Liabilities 2010 € 18,408 18,710 Liabilities 2009 € 5,334 425,170 The Group’s ﬁ nancial instruments comprise cash balances and various items such as trade receivables and trade payables which arise directly from trading operations. The main purpose of these ﬁ nancial instruments is to provide working capital to ﬁ nance Group operations. The Group and Company do not enter into any derivative transactions, and it is the Group’s policy that no trading in ﬁ nancial instruments shall be undertaken. The main ﬁ nancial risk arising from the Group’s ﬁ nancial instruments is currency risk. The board reviews and agrees policies for managing this risk and they are summarised below. Interest rate risk proﬁ le of ﬁ nancial assets and ﬁ nancial liabilities The Group ﬁ nances its operations through the issue of equity shares, and had no exposure to interest rate agreements at the year end date. Liquidity Risk As regards liquidity, the Group’s policy is to ensure continuity of funding primarily through fresh issues of shares. Short- term funding is achieved through utilizing and optimising the management of working capital. The directors are conﬁ dent that adequate cash resources exist to ﬁ nance operations in the short term, including exploration and development. Foreign Currency Risk Although the Group is based in the Republic of Ireland, amounts held as deferred development expenditure were originally expended in currencies other than Euro aligned currencies. However, this expenditure is not considered to be a monetary asset, and has been translated to the reporting currency at the rates of exchange ruling at the dates of the original transactions. At 31 December 2010, the Group held €2,745,288 in Sterling and U.S. dollar denominated bank accounts (2009: €869,731). The Group had a bank loan of US$Nil (2009: €33,856,741). The Group also has transactional currency exposures. Such exposures arise from expenses incurred by the Group in currencies other than the functional currency. The Group seeks to minimise its exposure to currency risk by closely monitoring exchange rates, and restricting the buying and selling of currencies to predetermined exchange rates within speciﬁ ed bands. Credit risk The ﬁ nancial assets of the Group which comprise cash and cash equivalents and trade receivables, the Group’s exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments. Further information is outlined in Note 15 and 16. Capital Management The primary objective of the Group’s capital management is to ensure that it maintains an adequate capital ratio in order to support its business and maximise shareholder value. The capital structure of the Group consists of equity (comprising issued share capital and reserves). The Group manages its capital structure and makes adjustments to it, in light of changes in economic conditions. No changes were made in the objectives, policies or processes during the years ended 31 December 2010 and 31 December 2009. Petrel Resources Annual Report & Accounts 2010 1 4 Notes to the Financial Statements for the year ended 31 December 2010 20. SHARE CAPITAL Group and Company Authorised: 200,000,000 ordinary shares of €0.0125 Allotted, Called-Up and Fully Paid: Opening 76,664,624 (2009: 72,229,796) ordinary shares of €0.0125 each Issued: Nil (2009:4,434,828) ordinary shares of €0.0125 each Closing 76,664,624 (2009: 76,664,624) ordinary shares of €0.0125 each 2010 € 2009 € 2,500,000 2,500,000 958,308 902,873 - 55,435 958,308 958,308 Movements in issued share capital On 4 February 2009, 344,828 shares were issued at a price of 29p per share to consultants in lieu of consulting fees that were due to them. On 14 May 2009, 4,090,000 shares were issued at a price of 45p per share to provide additional working capital and fund development costs. 21. SHARE BASED PAYMENTS The Group issues equity-settled share-based payments to certain directors and individuals who have performed services for the Group. Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is capitalised as part of exploration and evaluation assets as the transaction relates to the payment of goods and services which qualify to be recognised as an asset. Fair value is measured by the use of a Black-Scholes model. OPTIONS The Group plan provides for a grant price equal to the average quoted market price of the ordinary shares on the date of grant. The options vest immediately. Year ended 31/12/2010` Options Year ended 31/12/2010 Weighted average exercise price in cent Year ended 31/12/2009 Options 200,000 - 200,000 200,000 178 - 178 178 200,000 - 200,000 200,000 Year ended 31/12/2009 Weighted average exercise price in cent 178 - 178 178 Outstanding at beginning of year Granted during the year Outstanding and exercisable at the end of year Exercisable at the end of year At 31 December 2010, there were 4,670,000 options in existence which are not accounted for under IFRS2 as the grant date was prior to 1 January 2006. The options outstanding at 31 December 2010 had a weighted average exercise price of 178c, and a weighted average remaining contractual life of 5.75 years. The options are exercisable at prices ranging between €0.0339 and €1.78 in accordance with the option agreement. No options were granted in 2010 or 2009. 4 2 Petrel Resources Annual Report & Accounts 2010 Notes to the Financial Statements for the year ended 31 December 2010 22. PROFIT ATTRIBUTABLE TO PETREL RESOURCES PLC In accordance with Section 148 (8) of the Companies Act, 1963 and Section 7 (1A) of the Companies (Amendment) Act, 1986, the company is availing of the exemption from presenting its individual proﬁ t and loss account to the Annual General Meeting and from ﬁ ling it with the Registrar of Companies. The loss for the year in the parent company was €836,052 (2009: €6,526,075). 23. NON-CASH TRANSACTIONS During 2009 a total impairment charge of €6,008,985 was expensed to the Statement of Comprehensive Income due to an announcement by the company, on 26 April 2010, of the settlement of all outstanding operational issues on the Subba and Luhais oilﬁ eld development in Southern Iraq. For more details see Note 3. There were no signiﬁ cant non- cash transactions during 2010 except as reﬂ ected in Note 20. 24. CAPITAL COMMITMENTS There were no capital commitments at the balance sheet date. 25. POST BALANCE SHEET EVENTS There were no material post balance sheet events. 26. CONTINGENT LIABILITIES There are no contingent liabilities (2009:€Nil). Petrel Resources Annual Report & Accounts 2010 3 4 Notice of Annual General Meeting Notice is hereby given that an Annual General Meeting of Petrel Resources plc will be held on 28 July 2011 in Westbury Hotel, Grafton Street, Dublin 2 at 12 noon for the following purposes: 1. To receive and consider the Directors Report, Audited Accounts and Auditors Report for the year ended December 31, 2010. 2. To re-elect Director: Guy Delbes retires in accordance with Article 95 and seeks re-election. 3. To authorise the directors to ﬁ x the remuneration of the auditors. 4. To transact any other ordinary business of an annual general meeting. By order of the Board: James Finn Secretary 27 June 2011 Registered Ofﬁ ce: 162 Clontarf Road, Dublin 3. Note: 1. A member of the Board who is unable to attend and vote at the above Annual General Meeting is entitled to appoint a proxy to attend, speak and vote in his stead. A proxy need not be a member of the Company. 2. To be effective, the Form of Proxy duly signed, together with the power of attorney (if any) under which it is signed, must be depositied at the Company’s Registrars, Computershare Investor Services (Ireland) Ltd., Heron House, Corrig Road, Sandyford Industrial Estate, Dublin 18, not less than forty eight hours before the time appointed for the Meeting or any adjournment thereof at which the person named in the Form of Proxy is to vote. 4 4 Petrel Resources Annual Report & Accounts 2010

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