GROWTH Overview of Heritage, Its Processes F RAM E WORK Provides Detailed Information on ANNUAL REVIEW COR PORATE GO VERNANC E 20I 2 2012 and a Business Review

G R OWT H

ANNUAL REVIEW 2012 HERITAGE OIL PLC Annual Review 2012

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

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

C O NTENTS THE HERITAGE OIL PLC A NNUAL R E POR T A N D ACCOUNTS 2012 CON S I S T S OF FOUR DOCU M ENTS A S DETAILED B ELOW.

O VERVIEW Annual Review Corporate Governance Highlights 2012 01 The Annual Review provides an The Corporate Governance Report Outlook 2013 01 GROWTH overview of Heritage, its processes F RAM E WORK provides detailed information on ANNUAL REVIEW COR PORATE GO VERNANC E 20I 2 2012 and a Business Review. all aspects of Heritage’s corporate A SSETS governance. Asset overview 02 The Heritage business model 04

S TRATEGY Vision and strategic overview 06

F RAM E WORK Corporate Social Financial Statements Corporate governance 08 Responsibility The Financial Statements Report RESPECT DIVERSIFIED provides detailed information on CORPORATE SOCIAL RESPONSIBILITY The CSR Report provides detailed FINANCIAL STATEMENTS 20I 2 20I 2 RESPE C T information concerning Heritage’s Heritage’s ﬁnancial position. Corporate Social Responsibility 10 CSR strategy, policies, systems and performance. CHIEF E X E C UTIVE’S REVIEW 12

OPERATIO NAL REVIEW

Nigeria 16 Russia 18 Tanzania 19 Papua New Guinea 20 Malta 21 Libya 22 Pakistan 23 Other developments 24

DIVERS I F IED Financial review 26 Risks 32 Annual review glossary 35 Advisers and ﬁnancial calendar IBC Annual Review 2012 HERITAGE OIL PLC 01

HIGHLIGH TS OPERATIONAL – Acquired an interest in OML 30, Nigeria, through Shoreline Natural 2012 Resources Limited (“Shoreline”), whose ownership interests are held by Heritage Oil SNR (Nigeria B.V.), a wholly owned subsidiary of Heritage and a local Nigerian partner, Shoreline Power Company (“Shoreline Power”) – Acquisition provided a material change in proved and probable reserves for Heritage, which RPS Energy Consultants Ltd (“RPS”) independently estimate at 412 MMbbls, for interests in Nigeria and Russia, as at 31 March 2012 – Disposed of interests in the Miran asset, in the Kurdistan Region of Iraq (“Kurdistan”), for $450 million – Extended acreage in Tanzania, adding to acreage Heritage believes could be geologically analogous to the Lake Albert Basin, providing the Company with a key advantage in assessing the blocks – Commenced the work programme in Tanzania through the acquisition of 2D seismic on Rukwa and the acquisition of a very high resolution gravity survey on Kyela – Farmed in to two licences in Papua New Guinea (“PNG”); Petroleum Prospecting Licence 319 (“PPL 319”) and Petroleum Retention Licence 13 (“PRL 13”), which are believed to be in an attractive geological fairway

FINANCIAL – Since the acquisition of an interest in OML 30, revenues net to Heritage of $234.5 million have been generated – Shoreline made a cash payment of $52.5 million, in April 2013, to reduce the bridge loan to $497.5 million – Heritage had cash at 31 December 2012 of c.$90 million, excluding amounts relating to the tax dispute of c.$405 million and amounts used as part security in respect of OML 30 of $101 million – Average gross production from OML 30 has been 20,350 bopd since the acquisition – Production from the interest in OML 30, Nigeria, net to Heritage of 12,350 bopd for November and December 2012 and net production from Russia of 607 bopd for the year

O UTLOOK – Further increases in production from OML 30, with key items of equipment having been identiﬁed and ordered 2013 – Exploration activity to continue in Tanzania, following initial promising results and ﬁrst drilling slated for 2014 – Extension of 2D seismic programme in PNG with the intention of progressing the Tuyuwopi structure to a drillable prospect in 2014 – Continue to look for further opportunities to create value

All dollars are US dollars unless otherwise stated. HERITAGE OIL PLC Annual Review 2012 02

EXPLORATION PRODUCTION ASSET OVERVIEW

M ALTA

Area 2; 100% working interest & operator Heritage typically focuses on regions Area 7; 100% working interest & operator which may have been overlooked Areas 2 and 7 lie in the south-eastern offshore and where it can participate as an region of Malta and show geologic similarities to areas offshore Libya and Tunisia which contain a early entrant. number of producing fields. Well planning continues which will enable the drilling of an identified prospect in Area 7 once Maltese government approval is granted.

The Heritage asset portfolio provides a geographical and operational diversification. Material corporate transactions undertaken in 2012 have provided a balance to the portfolio with assets that include significant production and reserves. The joint venture company Shoreline Natural Resources Limited (“Shoreline”), created in partnership with Nigerian company Shoreline Power, has established an indigenous company which will provide a platform for further growth within the country. Through Shoreline, Heritage has acquired an interest in OML 30, a world class asset, which secures Heritage a step change in production and reserves. Entry into Nigeria was partially funded through the disposal of interests in Kurdistan, for which an attractive valuation was achieved. OML 30 lies onshore the Niger Delta in one of the most prolific oil provinces in the world and includes eight producing fields with oil and gas contained in numerous stacked reservoirs. Improving the gas lift is a key target in 2013 and could increase production by up to 20%. Average production from OML 30, net to Heritage for November and December 2012, was 12,350 bopd.

Heritage has held an interest in Russia since 2005 and has acquired 2D seismic, constructed pilot production facilities, commenced ﬁeld production, drilled four wells and re-entered an existing well. A revised ﬁeld development plan was submitted and this has been approved by the regulatory authorities at the end of December 2012.

In August 2011, Heritage acquired a controlling 51% interest in Sahara Oil Services Holdings Limited (“Sahara Oil”) which owns the entire share capital of Sahara Oil Services Limited (“Sahara”) in Libya. Through this acquisition Heritage believes it is well placed to play a signiﬁcant role in the future development of the oil and gas industry in Libya. NIGERIA Activity on the exploration portfolio will increase as work programmes continue in Tanzania, Malta and Papua New OML 30; 45% equity interest through Shoreline Guinea, which was added to the portfolio in April 2013. In Rukwa, In November 2012, Heritage acquired a seismic processing is continuing and inﬁll 2D seismic may be significant interest in OML 30 through Shoreline. acquired in conjunction with Kyela seismic acquisition scheduled OML 30 covers 1,097 square kilometres and for later this year. includes eight producing fields.

2D seismic acquisition within licences PPL 319 and PRL 13 will be RPS, in an independent evaluation, estimated expanded and is targeting advancement of the Tuyuwopi structure that OML 30 contains proved and probable and the Mudoli/Middletown lead. Further assessment will continue reserves of 347 MMbbls of oil net to the Group as at 31 March 2012. of the upside potential identiﬁed at the Iehi and Orie anticlines, in addition to the untested hanging wall of the Kuru ﬁeld in PRL13. These prospects and leads are located in a known hydrocarbon province which includes the multi-TCF Triceratops and Elk/Antelope discoveries with infrastructure close by. Annual Review 2012 HERITAGE OIL PLC 03

LIBYA RUSSIA

51% equity interest in Sahara Oil Zapadno Chumpasskoye; 95% equity interest

Heritage is exploring ways to assist the newly The licence covers an area of about 200 appointed interim government, under the square kilometres and contains the Zapando General National Congress elected in July Chumpasskoye Field, discovered in 1997. 2012, the national oil company and the state oil companies rehabilitate and re-shape Libya’s RPS, in an independent evaluation, estimated hydrocarbons sector. that Zapadno Chumpasskoye contains proved and probable reserves of 65 MMbbls of oil net to the Group as at 31 March 2012.

TANZ ANIA PAPUA NEW GUINEA PAKISTAN

Rukwa North; 100% working interest & operator PPL 319; 80% working interest and operator Sanjawi; 54% working interest & operator Rukwa South; 100% working interest & operator PRL 13; 80% working interest and operator Zamzama North; 48% working interest & operator Kyela; 100% working interest & operator Latham; 29.9% working interest & operator Heritage entered this new region in April 2013 The Sanjawi onshore exploration licence covers through the farm-in to, what management a gross area of 2,258 square kilometres. The In 2011/2012 Heritage was awarded the Rukwa estimate to be, highly prospective acreage. Zamzama North licence covers an area of and Kyela licences and the work programmes 2D seismic has recently been acquired and this 1,229 square kilometres. The current seismic have begun. In Rukwa, seismic processing is programme will be extended later this year. database used to map the Zamzama North continuing and infill 2D seismic may be acquired licence comprises some 1,000 kilometres of in conjunction with Kyela seismic acquisition good quality 2D seismic. scheduled for later this year. HERITAGE OIL PLC Annual Review 2012 04

T HE HERITAGE BUSINESS M ODEL The Company possesses certain key attributes, discussed overleaf, that provide it with a competitive advantage. Key Performance Indicators (“KPIs”) are used by the Company as one measure of performance and relate to both the underlying business model and the delivery of strategy. In addition, the Heritage’s vision is to be a leading Company actively monitors certain risks attached to the exploration and production company. business model and strategy which are detailed on pages The business model creates the 32 to 34. foundation upon which the Company Heritage’s business model balances the exploration and can achieve this through its strategy. appraisal process with cash generating production assets which is supported through high standards of governance, regional knowledge and contacts and an e"ective Corporate Social Responsibility (“CSR”) policy framework.

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O E C P G I T A R O N D L E E D L R U P M E C T O W S I O E L O P N + E V O D N K N L S I A B I N L I T I O Y R E G Annual Review 2012 HERITAGE OIL PLC 05

CORE BUSINESS MODEL

Exploration and appraisal Production and development Capital discipline Our technical team is responsible for Once the area has been proven, An appropriate capital structure assessing new areas for exploration appraised and confirmed balancing the exploration and campaigns and ensuring that we have commercially viable, the operational demands of the portfolio the ability to continually replenish development team is responsible for with financing requirements is our exploration portfolio. The team providing information to enable the required to ensure appropriate will identify core plays and prioritise Company to best achieve revenue funding for long-term sustainable exploration options across the generation and cash flow by moving growth. This can include the portfolio. After reviewing the initial the hydrocarbons into production. monetisation of assets or accessing exploration programme, the team A strong regard for the environment capital markets and is an ongoing will propose an appraisal campaign and respect for local communities process to ensure e#cient allocation to prove up the size of the discovery is important. of capital. and whether it is deemed commercial. Further information can be found in Further information on the current the Financial Statements Report. asset portfolio can be found in this report on pages 16 to 23.

SUPPORTED T HROUGH

Governance Regional knowledge and contacts Corporate Social Responsibility Heritage seeks to achieve and Relationships with national and An e"ective CSR policy framework is maintain the highest standards and regional governments are a key a key element of long-term success. best practice reporting in all areas focus within the business. These Managing relationships with of governance. relationships provide the Company stakeholders is viewed as important with the ability to assess risk and in developing and maintaining a Further information can be found in provide a competitive edge versus reputation as a preferred partner. the Corporate Governance Report. its peers. Further information can be found in the CSR Report.

KEY PERF ORM ANCE INDICATORS

Heritage uses a number of ﬁnancial Lost Time Injury Frequency Rate Reserves and contingent resources and operating KPIs that are closely (“LTIFR”) – Operationally a top additions – The core business model aligned with the underlying business priority is to keep people safe. This involves replenishing the exploration model and its strategy for delivering includes employees, contractors and portfolio, ensuring the continued long-term sustainable growth. These local communities where we operate. growth of the Company and the are some of the indicators by which potential production proﬁle. the Company monitors performance. Sta" turnover – Retaining quality Several of these are linked to the sta" is important to ensure the Average realised price – In Russia, primary business risks of the delivery of the strategy. the realised price improves, in part, Company which are detailed on as production increases due to better pages 32 to 34. Production from continuing price negotiation and there being a operations – Production is key to wider base of customers. Prices have revenue and cash generation and not been hedged during the year. Heritage aims to achieve levels in line with annual budgeting and market guidance.

2012 2011 2010 2009 LTIFR1 0 0 0 0 Sta" turnover2 3% 2% 3% 3% Production3 +1,825% +24% +65% –13% Reserves and contingent resources additions4 +564% +0% +42% +103% Average realised price5 +8% +45% +26% –35%

1 Lost Time Injury Frequency Rate per 10,000 hours worked. 2 Excludes sta" members in Uganda who transferred with the sale of the Ugandan Assets in 2010. 3 For 2012, pro forma production includes Heritage’s net share of average daily production from the Zapadno Chumpasskoye Field in Russia for the full year, together with its net share of average daily production for OML 30 included for November and December 2012 only, following completion of the acquisition of an interest in OML 30 through Shoreline e"ective 1 November 2012. Heritage’s total net share of production in 2012 was 975,511 barrels. 4 Management estimates. 5 Realised price is a measure of the price achieved for output sold. HERITAGE OIL PLC Annual Review 2012 06

VISION & STRATEGIC OVERVIEW

STRATEGY

Heritage’s vision is to be a leading exploration and production company and the Company aims to generate long-term shareholder value.

Heritage sets out to achieve its aim of sustainable long-term KEY ATTRIBUTES OF HERITAGE shareholder value through a strategy that focuses on: Heritage has a unique background with which it can deliver – high-impact international plays with the potential to on its strategy because of the following key attributes: discover significant hydrocarbon reserves; – demonstrated success of first mover advantage in – generating cash flow through production; and territories such as Uganda and Kurdistan; – managing the portfolio e"ectively, which can include the – proven track record of monetising assets with the current acquisition of value creating opportunities. management team having raised c.$2 billion; – an appreciation of risk, both political and security; This is done against the background of: – management expertise with a team containing – ensuring operations are safe and minimising Lost Time experience of corporate finance, legal and industry Injuries (“LTIs”) for sta" and contractors; specific skills; – engagement with local communities who may be a"ected – technical expertise with senior members of the team by our work; each with in excess of 30 years’ industry experience; – building successful long-term relationships with local – a highly e"ective network of industry, political and governments, communities and stakeholders in the areas institutional relationships; of operation; and – balanced portfolio of assets; and – high standards of corporate governance. – strategic positioning of assets.

Heritage ensures this is done through: – a diversiﬁed Board, which avoids “group think”; and – employing and retaining a strong team across all departments of the Group. Annual Review 2012 HERITAGE OIL PLC 07

K EY ATTRIBUTES OF HERITAGE

ACQUIRE AND INVEST S TRATEGIC POSITIONING

S TRONG RELATIONSH IPS BALANCED PORTF OLIO

VALUE CREATION

MANAGEM ENT EXPERTISE FIRST M OVER ADVANTAGE

T ECH NICAL EXPERTISE A PPRECIATION OF RISK HERITAGE OIL PLC Annual Review 2012 08

CORPORATE GOVERNANCE

F RAM EWORK

The Company aims to achieve best practice reporting on corporate governance.

With a Premium Listing on the LSE, the Company is L OOK I N G A H EAD subject to the Financial Conduct Authority’s Listing Rules Recent proposals in respect of reporting on executive and the requirement to explain how it has applied the main remuneration will become e"ective for ﬁnancial principles of the UK Corporate Governance Code (the reporting which comes into force on 1 October 2013. “Code”). The Remuneration Committee will be considering these requirements with the aim of providing greater H O W T H E BOARD O P ERATES transparency to shareholders. The Board will also be The Board delegates certain responsibilities to committees considering government proposals to amend narrative in line with recommendations of the Code and to facilitate reporting requirements for company annual reports which the achievement of business objectives of the Company. will entail replacing the Business Review with a Strategic The Board as a whole is collectively responsible for the Report. We consider our reporting to be well developed success of the Company and each Director must take already, however, we will continue to review our reporting decisions objectively in the interests of the Company. The to ensure it meets the new developments and best practice. Board’s principal role is to set strategy and the parameters within which the Group operates to further its objectives. Furthermore there are amendments to the Code which come into e"ect for ﬁnancial years beginning on or after D E V E L O PME N TS I N 2012 October 2012 and we will seek to introduce these Executive remuneration and the development of our requirements in advance where possible. approach to managing risk were key priorities for our governance focus in 2012 and we made great progress. In We continue to support open and constructive dialogue terms of our remuneration policy the Board has approved with all of our shareholders on governance, strategy and amendments to the bonus plan which we believe will executive remuneration and welcome any feedback. further align our remuneration with the delivery of our business strategy. Following feedback from shareholders For further information on corporate governance please see and further internal review the Board has also approved the Corporate Governance Report. changes to the contracts of the Executive Directors, reducing the notice periods and adopting more modest termination provisions in the event of a change of control of the Company in line with UK best practice. Annual Review 2012 HERITAGE OIL PLC 09

C ORP ORATE STRUC TURE

BOARD The Board is supported by the work of its committees and delegates day-to-day management of the Group to senior management

SUP ERV ISION STEW ARD S H I P Review of performance against strategy Approval of strategy Review of ﬁnancial information Values and standards Review of e"ectiveness of internal controls and risk management Approval of Group policies

BOARD CO MMITTEES

AUD IT REM U N ERATION N O M I N ATION RESERV ES A N TI- C SR CO MMITTEE C O MMITTEE C O MMITTEE C O MMITTEE C O MMITTEE BRIBERY A N D C ORRUP TION C O MMITTEE

Monitors integrity of Sets remuneration policy Makes recommendations Oversight responsibilities Oversees anti-bribery Sets CSR Policy ﬁnancial statements on Board composition with respect to the programme and ethical Framework Reviews and approves Company’s oil and gas policies and practices Reviews accounting remuneration of Reviews succession reserves evaluation Reviews internal CSR policies Executive Directors planning process programme

Manages relationship Reviews Board Considers independence with external auditor performance of the technical evaluator Oversees external audit process

Considers auditor independence

SEN IOR MA N AGEM E N T/LEAD ERSH I P TEAM HERITAGE OIL PLC Annual Review 2012 10

CORPORATE SOCIAL RESPONSIBILITY

RESPECT

The business approach of Heritage is underpinned by CSR from the ﬁrst stages of planning and being awarded a licence, through to exploration and production.

OUR CSR VISION C SR I N A C TION – to be a responsible and transparent business in all the Our approach to CSR supports our business model and sets areas in which the Company operates, believing this is out essential core values that we believe make Heritage a important to the operational aim of generating long-term good corporate citizen. The Company sets itself a high growth for the Company; standard against which to measure itself and recognises – to create lasting legacies for local communities; the importance of being a partner of choice. – to operate to the highest international social, environmental and safety standards; and Heritage aims to make a positive contribution in all areas – to maintain high standards of corporate governance. where it operates.

CSR encompasses the Company’s management of D E V E L O PME N TS I N 2012 relationships with stakeholders; shareholders, employees, – approximately $971,000 spent on CSR-related initiatives, contractors, partners and the local communities in which c.39% higher than 2011; we work. In addition, it includes the impact the Company – zero environmental incidents, ﬁnes or sanctions across has on society and the environment. all operations; – zero fatalities and LTIs across all operations; OUR CSR STRATEGY – zero breaches in business conduct policies; – employment of local people remains high across all SET POLICIES operations; and – commenced adoption of Heritage’s CSR policies and systems in the Shoreline joint venture. DEVISE AND MAINTAIN SYSTEMS For further information on CSR please see the CSR Report. MEASURE AND M O N I TO R PERFORM ANCE

COMMUNIC AT E A N D R E P O R T TO STAKEHOLDERS

APPLY STA KEHOLDER FEEDBACK Annual Review 2012 HERITAGE OIL PLC 11

OUR AREAS OF I MPA C T A ND O PPORTUN ITY

Heritage recognises speciﬁc Environment and Aim to make a positive contribution to global responsibilities in each of six core sustainability sustainability and to protect the environment areas of potential impact and opportunity, speciﬁc to the CSR aspects of our activities. Adherence to these CSR values are viewed as a key Health and safety A core element of all activities and a natural factor in securing the long-term priority operational success of the Company.

We aim to apply targets, across our Employees Our ability to create shareholder value is identiﬁed areas of impact and linked with our ability to recruit and retain opportunity, to focus employees and high calibre sta" enable the Company and stakeholders to monitor performance. Community and Active and enduring relationships are an essential and fundamental element of our human rights business

Business conduct We maintain robust policies with respect to all matters concerning our business conduct

Corporate governance As a Company with a Premium Listing, Heritage maintains high corporate governance standards HERITAGE OIL PLC Annual Review 2012 12

CHIEF EXECUTIVE’S REVIEW

A TRANSFO R MATIONAL YE A R

ANTHONY BUCKIN GHAM CHIEF EXECUTIVE O FFICER

Our transformation during 2012 and into 2013 resulted from 2012 has been a momentous year in decisions to exit Kurdistan and Mali, and enter new regions of the evolution of Heritage. We have Nigeria and Papua New Guinea whilst extending our acreage in Tanzania. Our portfolio now includes significant producing assets enhanced our portfolio through and an enlarged exploration portfolio. This combination provides corporate activity, securing a step more balance with both geographic and operational diversification. change in production, reserves and Since the acquisition of an interest in OML 30, total revenues, net to Heritage of $234.5 million have been generated and cash received in cash flow. 2013 from Nigeria at an average realised price of $116.87/bbl. The crude is marketed by a subsidiary of Royal Dutch Shell plc and given the quality of the crude attracts a premium to Brent. This revenue generated excess cash flow which resulted in Shoreline making a payment of $52.5 million in April 2013 to reduce the bridge loan from $550 million to $497.5 million. We are currently in the process of refinancing this to a long-term five year loan.

Heritage has an exceptional multi-year record of creating value and monetising assets and has generated c.$2 billion in asset sales with the current executive management team. We have consistently identiﬁed assets which are underdeveloped or overlooked and we have utilised the expertise of the Board and our technical team to create a strategic asset position.

Against the ongoing backdrop of economic uncertainty, oil prices have remained high and the Company has secured assets with signiﬁcant production potential which will generate high netback returns. Annual Review 2012 HERITAGE OIL PLC 13

TSR versus peers since TSX listing, % Heritage Oil Plc Tullow Oil plc

10000 Premier Oil plc 9000 SOCO International plc 8000 Afren Plc 7000 6000 Salamander Energy plc 5000 4000 3000 2000 1000 0 Jan 99 Jan 01 Jan 03 Jan 05 Jan 07 Jan 09 Jan 11 Jan 13

Source: Factset and Datastream as of 25 January 2013.

NEW AREAS OML 30 is located onshore and comprises eight producing fields NIGERIA with associated infrastructure which includes a 45% interest in the In November 2012, Heritage, through Shoreline, completed the 850,000 bpd capacity Trans Forcados pipeline running from the acquisition of an interest in OML 30. Shoreline is a special purpose Eriemu Field, within the licence, to the Forcados River manifold. Nigerian company formed between a subsidiary of Heritage and a OML 30 is one of the largest onshore licences, by reserves, in Nigerian partner, Shoreline Power, which acquired 45% of OML 30. Nigeria with gross proved and probable reserves of 1.1 billion barrels This transaction established Heritage’s first significant participation of oil, as estimated independently by RPS as at 31 March 2012. in the Nigerian oil industry and creates a platform for future growth Consequently, this one licence alone contains more oil reserves than in the region. are held within many entire African countries.

Average production, net to Heritage, from OML 30 for November and The licence benefits from having all infrastructure already in place. December was 12,350 bopd. Since the acquisition on 1 November There are nine flow stations with the capacity to handle 395,000 bpd, 2012, gross production for the licence has averaged c.20,350 bopd thereby handling several years of projected production growth. The but has been as high as 42,825 bopd. This is in part due to a manifold facilities have been robustly designed and constructed, benefiting in a gas lift compressions system failing and also to a strike by local from following a standard design enabling equipment to be easily workers. These two issues are being addressed and the manifold is replaced if necessary. The licence includes an ownership interest in expected to be repaired by the end of May. The majority of the fields the Trans Forcados Pipeline which transports production from OML are operating again after a series of successful meetings the operator 30 and several other licences to an export terminal on the coast. The held with local workers. The remaining fields are expected to be back pipeline generates revenues which provides the licence owners with a in production shortly. Good progress has been made to increase profit from the tari" charged. Gross revenue from the Trans Forcados production in the second half of the year, primarily through Pipeline is expected to total approximately $50 million in 2013. improved gas lift with new compressors being ordered. There has been no evidence of bunkering on the pipeline since the acquisition. With OML 30, and through Shoreline, we saw the opportunity to acquire a world class asset at low valuation multiples. The acquisition We identified the potential to both stabilise and increase production cost of $1.70 per barrel of proved and probable reserves (“2P”) versus in the near term through the refurbishment of infrastructure and the the average for precedent transactions in the Niger Delta of $5.90 per re-starting of non-producing existing wells. In addition, existing barrel of 2P reserves represents a significant discount. It is the largest wells will be worked over to improve completions and gas lift can be upstream onshore asset transaction in sub-Saharan Africa on a 2P installed in a number of existing wells which do not have artificial basis and positions Shoreline as one of the largest indigenous oil lift. Longer term, there is the potential to increase gross production companies in Nigeria. for the field to c.300,000 bopd through the drilling of new wells which is expected to begin in the second half of 2014. Since 1961, over 200 wells have been drilled on the licence and the strong aquifer support has enabled the majority to become producers. To date, work on the licence has commenced with ordering four Eight fields have been developed and there is a railway line to an new gas lift compressors, the first of which will be delivered in export terminal on the coast. However, the licence has previously June, installing diesel generators and installing new instrument air been ill maintained and underdeveloped with a sporadic drilling compressors. Over the course of this year further work will continue history, especially since 1980. aimed at optimising existing facilities. Gas lift is the single method of artificial lift within OML 30 and six of the eight fields have gas lift installed, with installation at the two remaining fields planned in HERITAGE OIL PLC Annual Review 2012 14

CHIEF EXECUTIVE’S REVIEW CONTIN UED

2014–2015. Improving the gas lift system is the key target in 2013 c.600 kilometres of 2D seismic across the north eastern margin of the and we believe could increase production by up to 20%. basin which is currently being processed. We continue to be excited with the potential in the Rukwa Rift Basin and Kyela which we Shoreline has opened its technical and administrative head o#ce in believe to share certain geological similarities with the Albert Basin Lagos, employing a team of 17 members of sta". A very good working of Uganda, where we were the pioneering oil company to undertake relationship has been established with the Nigerian Petroleum active exploration for the first time in nearly 60 years. Following a Development Company (“NPDC”), the operators of OML 30, on joint technical review in 2012, all expenditures relating to Latham were technical and operational reviews of all the fields and facilities and the written-o". budget for 2013 has been approved. NPDC took over operatorship of OML 30 at the beginning of February 2013 after a three month OTHER ASSETS transition period. R USSIA Production averaged 607 bopd over the year, a decrease of 10% over Shoreline has also commenced a series of programmes in OML 30 the year due to natural well decline and a temporary mechanical issue after meeting with local communities to ensure that the Company on well 363 which has been resolved. Based on positive results from can implement the most e"ective social programmes for these the horizontal well drilled in August 2011, a revised field development communities, with a focus on education, training and healthcare. plan was submitted for Zapadno Chumpasskoye, replacing vertical producers with horizontal wells. The change in well type should result Heritage’s partner, Shoreline Power, is a pan-African energy and in a significant reduction in the number of production wells required infrastructure business with an existing network of strong and to develop the field and a corresponding reduction in drilling respected relationships within Nigeria. Coupled with the experience expenditure. Our revised development proposal was accepted by of Heritage’s technical team the two companies create, in Shoreline, regulatory authorities at the end of December 2012. a company that is well positioned as a platform for further growth within the country. Nigeria, with estimated proved reserves of 37.2 LIBYA AND M ALTA billion barrels, is the largest African producer with 2.5 MMbbls A new Libyan government was established in the second half of 2012 per day, according to the BP Statistical Review 2012, and has and as this and other government institutions become established, well-established infrastructure from over 50 years of oil production. we are confident that a constructive dialogue with Malta will develop The country is predicted to be one of the largest growing emerging regarding the associated maritime boundary issues and hydrocarbon economies with growth expected in the energy sector. rights. Heritage is actively assisting o#cials in both countries to move forward with these discussions, ultimately to enable the PAPUA NEW GUIN E A exploration and development of Area 7 where a prospect has been In April 2013 we announced the expansion of our exploration identified and preparations continue to drill a well, subject to Maltese portfolio with entry into. Heritage has agreed to acquire an 80% government approval. working interest in PPL 319 and PRL 13 from LNG Energy. In return for earning the working interests and operatorship, Heritage will C O R P O R AT E fund the costs of the seismic acquisition and the cost of drilling an BOAR D CHANGES exploration well. We look forward to developing and accelerating the I am pleased to announce that we have strengthened our Board this work programme as this acreage provides the opportunity to discover year with two appointments; Carmen Rodriguez and Mark Erwin. large gas reserves at a time when regional gas demand is growing Carmen, the first woman Director appointed to our Board, joined in rapidly. The licences are onshore and close to multiple producing March 2012, replacing Salim Macki who retired. Mark joined the fields and discoveries, including the multi-TCF Triceratops and Elk/ Board in May 2012. We view both appointments as outstanding Antelope discoveries. There is also a close proximity to current and additions to our Board with considerable experience. under-construction infrastructure with the Kutubu oil export pipeline and the PNG Liquefied Natural Gas pipeline crossing CASH the acreage. As at 31 December 2012, Heritage had a cash position of approximately $90 million, excluding amounts related to the tax TANZANI A dispute of approximately $405 million, which is more than su#cient In January 2012 Heritage was awarded the Kyela PSA which had to cover planned work programmes into 2014. never previously been targeted for hydrocarbon exploration. Our work programme commenced with the acquisition of a c.1,500 P ETROFR ONTIER CORP. square kilometre very high resolution gravity survey indicating the Heritage continued to acquire common shares (“Shares”) of presence of structural highs adjacent to a main depocentre. In PetroFrontier Corp. (“PetroFrontier”) for investment purposes and January 2013 we completed a 100 kilometre reconnaissance seismic currently holds 19.98% of the outstanding Shares of PetroFrontier. survey across the Kyela Block which has confirmed the structures PetroFrontier is listed on the TSX Venture Exchange and is focused previously indicated by the gravity data. The processing of this on a high-impact drilling programme in Australia targeting billions data will enable the positioning of targeted infill 2D seismic of barrels of resources. which is scheduled to be acquired later this year. During 2012 we reprocessed the legacy 2D seismic in Rukwa and acquired a further Annual Review 2012 HERITAGE OIL PLC 15

B U Y B A CK PRO GRAMME CORPORATE SOCIAL RESPONSIBILITY Heritage commenced a share buy back programme in April 2011. To We continue to mature our approach to CSR and engagement date 34,602,442 Ordinary Shares have been bought back and are held with stakeholders towards achieving a shared future, which is a key in treasury. Shares were bought back in the year under the authority element supporting our core business model. We have developed, and given at the 2011 Annual General Meeting (“AGM”). No such continue to review, a policy framework disclosing our essential core authority was sought at the 2012 AGM. Consequently, Heritage has values. I am delighted to report that we continue to maintain a strong 255,595,978 Ordinary Shares in issue (excluding treasury shares) as track record for health and safety which is fundamental in being well as 2,361,018 exchangeable shares of no par value of Heritage Oil viewed as a preferred partner. Corporation, each carrying one voting right in Heritage. Community relations are a key factor for success in our new Nigerian DISPO S AL operations where there are over 90 communities living on the licence. The disposal of our interests in the Miran asset in Kurdistan was We are applying our core values, through Shoreline, in working with announced in August 2012. Shareholder approval was received in the communities within the OML 30 licence and are striving to December 2012 and the transaction completed shortly thereafter. improve their lives in the areas of health, education and environment. The sale for $450 million secured an attractive valuation for this asset A comprehensive series of CSR programmes have already commenced which has a signiﬁcant further capital expenditure requirement and in Nigeria. these proceeds were used to partially fund our entry into Nigeria. During 2012, we spent a total of approximately $971,000 on U G ANDA CSR-related activities with community programmes focused on areas In January 2010, Heritage announced the sale of Blocks 1 and 3A in where we were operationally more active. We are looking forward to Uganda by its wholly owned subsidiary, Heritage Oil & Gas Limited having a positive contribution to our new areas of activity. (“HOGL”), to Tullow Uganda Limited (“Tullow”) for $1.45 billion. OUTLOOK Subsequently, the Uganda Revenue Authority (“URA”) assessed Nigeria is the core focus for us in 2013 as we strive to increase that income tax was due on the capital gain arising on this disposal. production and work with the operator on forward programmes. We Heritage’s position, based on comprehensive legal and tax advice, expect to continue to be very active across the exploration portfolio is that no tax is payable. In order to appeal the URA assessment, with activity increasing in Tanzania and seismic programmes being Heritage was required to deposit 30% of the disputed tax assessment undertaken in PNG. This activity will continue into 2014 and is with the URA. The remainder is retained in escrow in London. expected to set the basis for future growth for our Company.

HOGL continues to challenge both the URA in the Ugandan courts As always, I am very grateful to our management team, employees and, in accordance with the PSAs, the Ugandan government through and supportive Board for their dedication and contribution to the international arbitration proceedings in London, which commenced progress made by Heritage this past year. Finally, to our shareholders, in May 2011. The arbitration tribunal ruled in April 2013 that the thank you for your continued support and interest in Heritage. determination of tax was outside its jurisdiction, but that there were two areas of HOGL’s claims which it will consider, in respect of ANTHONY BUCKIN GHAM contractual income tax stabilisation clause protection and breach CHIEF EXECUTIVE O FFICER of other contractual obligations. 29 APRIL 2013 The determination by the arbitral tribunal marks the end to the preliminary phase. The proceedings will now continue to deal with the merits phase of Heritage’s contractual claims against the Ugandan government and the underlying substantive Ugandan tax matters remain under appeal in the Ugandan courts.

In April 2011, Tullow made a payment to the URA and subsequently ﬁled a claim in the High Court in England seeking compensation for alleged breach of contract as a result of HOGL’s and Heritage’s refusal to reimburse Tullow. In March 2013, an 11 day hearing took place in the Commercial Court in London. A ﬁrst instance judgment is expected during the course of 2013. HERITAGE OIL PLC Annual Review 2012 16

O PERATIONAL REVIEW NIGERIA

OML 30 Oil pipeline Forcados pipeline Oil field

NIGERIA

OML 30

Kokori Escraros Aﬁesre Eriemu Warri Oweh Osioka Olmoro-Oleh Forcados Evwreni Oroni Uzere West

In November 2012, Heritage successfully completed the acquisition of a major interest in OML 30, Nigeria, through Shoreline.

On 9 November 2012, Heritage announced that OML 30 lies onshore within the Niger Delta in one of Shoreline, a special purpose private Nigerian company the most prolific oil and gas provinces in the world. The formed between a subsidiary of Heritage and a local licence covers 1,097 square kilometres and includes eight Nigerian partner, Shoreline Power, successfully producing fields with oil and gas contained in numerous completed the acquisition of a 45% interest in OML 30, stacked reservoirs. The fields are deltaic shallow marine together with a 45% interest in other assets under the shelf sands at intermediate depth level in growth fault joint operating agreement for OML 30, for a total cash structural setting. The fields each contain up to 40 consideration of $850 million, net of costs. OML 30 is a stacked reservoirs and the reservoirs are underlain by world class asset with gross oil reserves of over 1.1 billion substantial aquifers that provide nearly infinite pressure barrels and has all the infrastructure in place to produce support. The oil is good quality 30° API and typically up to 395,000 bpd. sells at a 3% premium to Brent.

Shoreline Power had an option to acquire 30% of Since 1961 over 200 wells have been drilled on the licence Heritage’s interest in Shoreline which was exercised, in line and the strong aquifer support has enabled the majority with expectations, at the end of December 2012. Heritage of these to become producers. There is the potential to will shortly receive the exercise price from Shoreline Power both stabilise and increase production in the near term of over $100 million which, in accordance with the bridge through refurbishing infrastructure and restarting facility from Standard Bank, will be used in part as non-producing existing wells. Additionally, existing wells security against the existing facility to Shoreline and also will be worked over to further increase production. In the for general corporate purposes. Following completion of longer term, drilling which is slated to commence in the the option exercise and continuation of the existing proﬁt second half of 2014 will target additional reservoir share agreement, Heritage’s equity and economic interests intervals that will provide a further increase in in Shoreline will be 31.5% and 68.25%, respectively. production levels.

To date, work on the licence has commenced with the ordering of four new gas lift compressors, the first of which will be delivered in June, installation of diesel generators and new instrument air compressors. Over the course of this year further work will continue aimed at optimisation of existing facilities. Gas lift is the single method of artificial lift within OML 30 and six of the eight fields have gas lift installed, with the two remaining fields planned to have gas lift installed in 2014–2015. Annual Review 2012 HERITAGE OIL PLC 17

Improving the gas lift system is the key target in 2013 and In November and December 2012, average production could increase production by 20%. net to Heritage was 12,350 bopd. Since the acquisition of an interest in OML 30, total revenues net to Heritage The licence benefits from infrastructure being in place of $234.5 million have been received from Nigeria at an with nine flow stations that have the capacity to handle average realised price of $116.87/bbl. Gross production 395,000 bpd thereby handling several years of projected for the licence has been as high as 42,825 bopd during production growth. The facilities have been robustly this period. designed and constructed, and benefit from a standard design so equipment can easily be replaced if required. The acquisition and partnership with Shoreline Power enhances Heritage’s profile in Nigeria and creates a The acquisition included a 45% interest in the segment platform for further growth in this prolific hydrocarbon of the Trans Forcados pipeline between the Eriemu region. Shoreline has become one of the leading Manifold and the Forcados River Manifold, which is indigenous companies producing in Nigeria, combining largely buried. The pipeline is used by several other Shoreline Power’s energy and infrastructure operating operators and provides additional revenue for the expertise and respected network of relationships within pipeline owners through the tari" charged. Nigeria with Heritage’s strong technical team.

OML 30 – SUMMARY O F RESERV ES1,2 Heritage Group Net Gross Remaining Reserves Entitlement Reserves Gross of Net of Gross of Net of Royalty Royalty Royalty Royalty (mmstb) (mmstb) (mmstb) (mmstb) Proved Reserves (1P) 538 430 168 134 Proved & Probable Reserves (2P) 1,114 891 347 277 Proved & Probable & Possible Reserves (3P) 1,733 1,387 539 431

1 Post exercise of Shoreline Power option. 2 As per RPS, as at 31 March 2012.

OML 30 – POST TAX E VALUATION NET TO HERITAG E Alternative Base Income Income Tax Tax Scenario1 Scenario2 ($ million) ($ million) Post-tax NPV Post-tax NPV (10%) (10%) Proved Reserves (1P) 1,189 1,410 Proved & Probable Reserves (2P) 2,162 2,652 Proved & Probable & Possible Reserves (3P) 3,129 3,820

1 Assumes the income tax applicable under current Nigerian law. 2 Assumes the income tax under changes to Nigerian law which Heritage believes might occur. HERITAGE OIL PLC Annual Review 2012 18

O PERATIONAL REVIEW CONTIN UED RUSSIA

Heritage licence Z A PA D N O Oil pipeline C H U M PA S S KOY E Gas pipeline L I C E N C E W E S T E R N Oil producer Oil well S I B E R I A

Since 2005, the Group has held a 95% equity interest in ChumpassNefteDobycha Limited, a Russian company whose sole asset is a 100% interest in the Zapadno Chumpasskoye licence.

The Zapadno Chumpasskoye licence is in the installed on well 226 to arrest the natural well production hydrocarbon-rich West Siberian province of Khanty- decline and a water shut-o" operation was completed on Mansiysk, approximately 100 kilometres from the city well P4. Based on positive results from the horizontal well of Nizhnevartovsk and in the area of the region’s prolific drilled in August 2011, a revised field development plan Samotlor oilfield, which makes it accessible to existing was submited for Zapadno Chumpasskoye replacing infrastructure. The licence contains the Zapadno vertical producers with horizontal wells. The change in Chumpasskoye Field, discovered in 1997. A total of 13 well type should result in a 50% reduction in the number wells have been drilled on the licence including four by of production wells required to develop the field and a the Group. The Chumpasskoye crude is light, sweet corresponding reduction in drilling expenditure of (42º API) oil, with moderate gas-to-oil ratios. approximately $200 million. The development proposal was approved by regulatory authorities at the end of Since 2006, the Group has acquired 2D seismic data December 2012. covering an area of 200 kilometres, constructed pilot production facilities, commenced field production, drilled Production averaged 607 bopd for the year, a decrease four wells and re-entered existing well 226. Production of 10% year-on-year due to natural well decline and facilities were commissioned and production commenced a temporary mechanical issue which has since in May 2007. In 2009, an electric submersible pump was been resolved.

INDEPENDENTLY ESTIMATED RESERV ES AT THE ZAPADNO CHUMPASSKOYE F IELD1

Net present Net working and value entitlement ($ million reserves in money MMbbls of the day) 1 A summary of RPS’s Proved 23 52 net working interest reserves and their Probable Additional 42 284 Net Present Value, based on forecast Total Proved + Probable 65 336 prices and costs, Total Proved + Probable + Possible 163 976 discounted at 10%, as of 31 March 2012. Annual Review 2012 HERITAGE OIL PLC 19

TANZANI A

Heritage licence Exploration well K E N Y A Mombasa Oil and gas shows U N I T E D Gas field Railway R E P U B L I C O F T A N Z A N I A

Dodoma

R U K W A NOR T H Dar es Salaam Tancan-1

L A T H A M

Ivuna-1 R U K W A S O U T H Galula-1

K Y E L A

Z A M B I A

Heritage has four Blocks in Tanzania, three of which are considered to be geologically analogous to the Lake Albert Basin in Uganda.

RUKWA indicated the presence of probable structural highs In November 2011, Heritage announced the award of a adjacent to a main depocentre, modeled as a potential PSA that covers virtually the entire Rukwa Rift Basin, hydrocarbon kitchen. A 100 kilometre reconnaissance split into two separate areas, Rukwa North and Rukwa seismic survey completed in January 2013 confirms the South. Heritage is the operator with a 100% interest. A structures indicated by the gravity data. Seismic limited amount of exploration activity was undertaken processing has been completed and interpretation is in the region in the mid-1980s which resulted in the ongoing to enable the positioning of targeted infill 2D acquisition of c.2,300 kilometres of 2D seismic data and seismic, scheduled to be acquired later this year. the drilling of two wells. Reprocessing of legacy 2D seismic data in Rukwa was completed in 2012 and the Satellite radar surveys indicate areas of wave-calming in acquisition of c.600 kilometres of 2D seismic data Lake Rukwa and in Lake Nyasa that may be associated completed in March 2013. Seismic processing is ongoing with oil seeps. In the event of an oil discovery, at either and it is planned to acquire infill 2D seismic, if needed, in Rukwa or Kyela, economic scoping shows the commercial conjunction with Kyela seismic acquisition. viability of either rail export to Dar es Salaam or export by pipeline depending on exploration success. Heritage KYELA recognises that the Rukwa and Kyela licences share In January 2012, Heritage was awarded the Kyela PSA certain geological similarities with the prolific Albert covering the entire northern onshore area of the Lake Basin of Uganda where Heritage had previous experience Nyasa (Livingstone) Basin that lies within Tanzanian and significant success. territory. The Block has never previously been targeted for hydrocarbon exploration. Gravity data over the area L AT H A M suggests the presence of a sedimentary section of su#cient After a technical review during 2012, all expenditures thickness to allow for the generation of oil. The work with respect to Latham have been written-o". programme commenced with the acquisition of a c.1,500 square kilometre very high resolution gravity survey. This

Area Date Heritage Blocks (sq km) awarded equity Partners Operator Rukwa North 10,175 November 2011 100% – Heritage Rukwa South 8,745 November 2011 100% – Heritage Kyela 1,934 January 2012 100% – Heritage Latham 5,056 September 2006 29.9% Petrodel Heritage HERITAGE OIL PLC Annual Review 2012 20

O PERATIONAL REVIEW CONTIN UED PA PUA NEW GUINE A

Heritage licence Oil field Gas field Oil pipeline proposed Gas pipeline proposed PAPUA Oil pipeline NEW GUINEA Gas pipeline Lae

PRL 13 PPL 319

Kerema Kumul Marine Terminal

Popondetta

In 2013 Heritage expanded its portfolio into onshore PNG through the farm-in to two licences as operator with an 80% working interest.

PPL 319/PRL 13 The licences benefit from being close to current and In April 2013, Heritage announced the farm-in to under-construction infrastructure with the Kutubu oil exploration licence PPL 319 and retention licence PRL 13 export pipeline and the PNG Liquefied Natural Gas to be appointed as operator with the right to obtain an pipeline crossing the acreage. The licences also benefit 80% working interest. The contiguous licences are from the Kikori River which provides a link to the open located onshore and have respective gross areas of sea, thereby increasing transport options. approximately 2,025 and 160 square kilometres. The transaction completed in April 2013 following receipt Assessment of the legacy dataset, which includes c.250 of consent from the Papua New Guinea government and kilometres of 2D seismic data and high resolution Heritage has been appointed operator. In return for magnetic and gravity surveys, has identified a potential earning the working interests and operatorship, Heritage local source kitchen with more than seven kilometres of will fund the costs of seismic acquisition and the cost of section. This potential is being further evaluated through drilling an exploration well. In addition, Heritage has the recent acquisition of seismic data across the Tuyuwopi made a $4 million contribution to LNG Energy Ltd’s structure in PPL 319 which completed 31 March 2013. back costs on the licences. Heritage intends to enlarge this seismic programme by funding a minimum of 100 kilometres of 2D seismic data The licences are located at the junction of the Papuan fold with the intention of progressing the Tuyuwopi structure belt and the Miocene carbonate platform where there are to a drillable prospect in 2014 and to assess additional multiple producing fields and discoveries including the upside of the licences. multi-TCF Triceratops and Elk/Antelope discoveries.

Approximate Date Heritage Block area (sq km) farm-in equity Partners Operator PPL 319 2,025 March 2013 80% LNG Energy Heritage PRL 13 160 March 2013 80% LNG Energy Heritage Annual Review 2012 HERITAGE OIL PLC 21

MALTA

Heritage licence Siracusa Exploration well Tunis Oil and gas shows Oil field Gas field

MALTA A R E A 2

Medina Bank-1

T U N I S I A Sfax A R E A 7

L I B Y A Tripoli

In December 2007, the Group entered into a PSC with the Maltese government for a 100% interest in Areas 2 and 7 in the south-eastern o"shore region of Malta.

The Maltese licences cover almost 18,000 square In addition, the Company has recognised the presence of kilometres and are situated approximately 80 kilometres a north-south trending shelf margin on the eastern part (Area 2) and 140 kilometres (Area 7) o"shore, in water of the blocks where a number of attractive reef prospects depths of up to approximately 300 metres. The two Areas have been mapped. are close to, and geologically similar to, a number of producing ﬁelds o"shore Libya and Tunisia. A drillable prospect has been identiﬁed and preparations are underway to drill a well in Area 7 subject to Maltese With only one well previously drilled in Area 2, the government approval. Medina Bank-1 well in 1980 which did not reach its target, both licences are considered to be underexplored. Although drilled to a depth of 1,225 metres, the well failed to reach the objective horizons, estimated to be between 1,500 and 4,500 metres.

The interpretation of seismic data in Heritage’s extensive dataset of approximately 5,000 kilometres of 2D seismic, has conﬁrmed the mapping of a highly attractive Lower Eocene carbonate reef play within a prospect in Area 7 and also allowed for the mapping, with greater certainty, of a deeper carbonate reef play within the Cretaceous section of the prospect. These primary targets are recognised as major hydrocarbon producing zones in the central part of the Mediterranean.

Area Date Heritage Blocks (sq km) awarded equity Area 2 9,190 December 2007 100% Area 7 8,778 December 2007 100% HERITAGE OIL PLC Annual Review 2012 22

O PERATIONAL REVIEW CONTIN UED L IBYA

Oil field Gas field Oil pipeline Tripoli Gas pipeline Benghazi

Sirte

L IBYA A L G E R I A E G Y P T

N I G E R C H A D

In August 2011, Heritage acquired a controlling 51% interest in Sahara Oil which holds the necessary long-term permits and licences to provide oil ﬁeld services in Libya.

Heritage has pursued its strategy of “ﬁrst mover Heritage established a base in Benghazi in the ﬁrst half advantage” through pursuing participation in the of 2011, having been in discussions with senior members restoration of the Libyan oil production sector which of the National Transitional Council, the legitimate and presents a dynamic and evolving environment. recognised government of Libya at the time, as well as with its Executive Committee, the NOC and certain Libya is considered to be a highly attractive oil province subsidiaries. The dialogue with these parties continues, due to the low cost of oil recovery, high quality oil which with Heritage now also active in Tripoli and exploring is generally sweet with API gravity ranging between ways to assist the newly appointed interim government, 32–44º, proximity to European markets and well under the General National Congress elected in July 2012, developed infrastructure. the NOC and the state oil companies, rehabilitate and re-shape Libya’s hydrocarbons sector, placing it on a A wholly owned subsidiary of Heritage acquired a 51% sustainable path that will meet the future needs of equity interest and control of Sahara Oil which owns the country. the entire share capital of Sahara, a Libyan registered company providing services to the oil industry, for cash consideration of $19.5 million.

Sahara Oil was established in April 2009 and has been granted long-term licences to provide full oil ﬁeld services in Libya, including the ability to drill onshore and o"shore and hold both oil and gas licences. Our e"orts have the aim of playing a key role in the substantial rehabilitation work needed to resume, maintain and increase Libya’s hydrocarbon production in line with National Oil Company (“NOC”) and Oil Ministry targets. Annual Review 2012 HERITAGE OIL PLC 23

PA KISTAN

Heritage licence Islamabad Oil field Peshawar Gas field Oil pipeline Gas pipeline

Lahore

A F G H A N I S T A N S A N J A W I Quetta

PAKISTAN IR A N I N D I A

Z A M Z A M A N O R T H

Heritage is operator of two Blocks in Pakistan.

SANJAWI There is considerable infrastructure in the area as one Heritage has a 54% interest and is operator of the Sanjawi of the main pipelines runs through the licence and any licence (number 3068-2) in Zone II (Baluchistan), which discovered hydrocarbons could be readily connected. was awarded in November 2007, and which covers a The Zamzama Gas Field, a major gas ﬁeld in production, gross area of 2,258 square kilometres. The Block is lies immediately to the south of, and adjacent to, considered prospective due to an oil discovery to the Zamzama North. west, a number of gas ﬁelds to the south-east and the presence of oil seeps in the licence. The licence area is Using the current seismic database Heritage has mapped dominated by a series of broad east-west trending surface a number of structural prospects and leads and a drilling features including the large Dabbar and Warkan Shah programme is under consideration. The database anticlines, the former being some 300 square kilometres comprises some 1,000 kilometres of good quality 2D in area. seismic data.

ZAMZAMA NORTH In December 2008, Heritage obtained a 48% interest in the Zamzama North licence (number 2667-8) and was appointed operator. The Zamzama North licence covers an area of 1,229 square kilometres and is located in the south of Pakistan, in the western part of the Sindh Province, approximately 200 kilometres north west of Hyderabad.

Area Date Heritage Blocks (sq km) awarded equity Partners Operator Sanjawi 2,258 November 54% Hycarbex Heritage 2007 American Energy Sprint Energy Trakker Energy Zamzama North 1,229 December 48% Hycarbex Heritage 2008 American Energy Sprint Energy Trakker Energy HERITAGE OIL PLC Annual Review 2012 24

O PERATIONAL REVIEW CONTIN UED OTHER D EVELOPM EN TS

K U R D I S TA N The Ugandan Revenue Authority (“URA”) contends Heritage was one of the initial companies to be awarded a that income tax is due on the capital gain arising on the Production Sharing Contract in Kurdistan in October 2007. disposal and it raised assessments of $404,925,000 prior Heritage has again demonstrated the ability to successfully to completion of the disposal. Heritage’s position, based explore, discover and monetise its acreage with the full on comprehensive advice from leading legal and tax divestment of the Miran asset for $450 million. Heritage experts in Uganda, the United Kingdom and North decided to sell its Kurdistan interests as the valuation was America, is that no tax should be payable in Uganda on considered attractive and the multi-billion dollar capital the disposal of the Ugandan Assets and that even if tax expenditure requirements associated with developing the were payable, under the terms of the production sharing Block given the lack of local infrastructure or local gas agreements with the Ugandan government relating to market would no longer be required and would not be the Ugandan Assets (the “PSAs”) HOGL should be a drain on the Group. The sale also meant that the indemnified by the Ugandan government (under the planned rights issue to partially fund the acquisition contract stabilisation clause). of OML 30 was no longer required. On closing, Heritage deposited $121,477,500 with the Furthermore, the elimination of funding obligations URA, representing 30% of the disputed tax assessment and significant appraisal and development capital of $404,925,000. $121,477,500 has been classified as a requirements in respect of the Miran Block, together with deposit in the balance sheet at 31 December 2012. A the proceeds of the divestment, allow the Company to further $283,447,000 has been retained in escrow with continue to acquire and invest in, and subsequently Standard Chartered Bank in London, pursuant to an explore and develop, oil and gas opportunities agreement between HOGL, Tullow and Standard throughout the world. Chartered Bank pending resolution between the Ugandan government and HOGL of the tax dispute. MALI Heritage announced in March 2008 that the Government In August 2010, the URA issued a further income tax of Mali had approved Heritage’s farm-in on two assessment of $30 million representing 30% of the exploration licences in the Gao Graben. additional contractual settlement amount of $100 million. HOGL has challenged the Ugandan tax Heritage was the operator of Blocks 7 and 11 and acquired assessments on the disposal of HOGL’s entire interest 1,077 kilometres of 2D seismic in 2011. The interpretation in the Ugandan Assets. of all data within the acreage was completed. In November 2011 and December 2011, the Tax Due to the security situation in the region, and following Appeals Tribunal in Uganda dismissed HOGL’s discussions with the government, Heritage has applications in relation to the two assessments relinquished the assets in 2012 and has no further amounting to $434,925,000. The rulings from the obligations in this respect. Tax Appeals Tribunal in Uganda are part of a domestic process and are not final and determinative. HOGL has U G ANDA appealed the rulings, which it believes are fatally flawed On 18 December 2009, Heritage announced that it and in many respects, through the Ugandan court system its wholly owned subsidiary Heritage Oil & Gas Limited commencing with the High Court and subsequently the (“HOGL”) had entered into a SPA with Eni for the sale of Court of Appeal and Supreme Court if necessary. its interests in Uganda (the “Ugandan Assets”). On 17 January 2010, Tullow exercised its rights of pre-emption. The transaction was overwhelmingly approved by Heritage shareholders at the General Meeting on 25 January 2010.

On 27 July 2010, Heritage announced that HOGL had completed the disposal of the Ugandan Assets. Tullow paid cash of $1.45 billion, including $100 million from a contractual settlement, of which Heritage received and retained $1.045 billion. Annual Review 2012 HERITAGE OIL PLC 25

In May 2011, HOGL commenced international arbitration On 15 April 2011, Heritage and its wholly owned proceedings in London against the Ugandan government subsidiary HOGL received Particulars of Claim filed in in accordance with the provisions of the PSAs. HOGL is the High Court of Justice in England by Tullow seeking seeking a decision requiring, among other things, the $313,447,500 for alleged breach of contract as a result of return or release of approximately $405 million, plus HOGL’s and Heritage’s refusal to reimburse Tullow in interest, in aggregate currently on deposit with the URA relation to a payment made by Tullow of $313,447,500 on or in escrow with Standard Chartered Bank in London. 7 April 2011 to the URA. Heritage and HOGL have filed HOGL made a number of claims in the arbitration their Defence and Counterclaim against Tullow seeking proceedings that tax had been improperly imposed on it instead the release to HOGL of the $283,447,000 plus which the arbitration tribunal ruled on 3 April 2013 to be interest currently being held in escrow with Standard outside its jurisdiction. The tribunal ruled at the same time Chartered Bank in London. The case commenced to be that there were two areas of HOGL’s claims which it will heard in the High Court in March 2013 and a first consider, in respect of contractual stabilisation clause instance decision is expected to be received later this protection and breach of other contractual obligations. year. Heritage and HOGL believe that the claim has no Accordingly, the arbitration proceedings now concern merit and are in the process of vigorously and robustly HOGL’s claims that the Ugandan government wrongfully defending it. or unreasonably delayed consent to the sale by HOGL of the rights under the PSAs and that the Ugandan Although disputes of this nature are inherently government should indemnify HOGL with respect to uncertain, the Directors believe that the monies on any tax liability which arose due to changes in law that deposit and held in escrow will ultimately be recovered materially reduced the economic benefits to be derived by by Heritage. HOGL from the PSAs.

The determination by the arbitral tribunal marks the end to the preliminary phase. The proceedings will now continue on to deal with the merits phase of Heritage’s contractual claims against the Ugandan government and the underlying substantive Ugandan tax matters remain under appeal in the Ugandan courts. HERITAGE OIL PLC Annual Review 2012 26

FINANCIAL REVIEW

D IVERS IFIED

PAUL ATHERTON CHIEF FINANCIAL OFFICER

S ELECTED OPERATIONAL AND FINANCIAL DATA

2012 2011 Change P RO FORM A PROD UCTION1 bopd 12,957 673 1,825% SALES VOLUM E 2 bopd 607 671 (10%) AVERAG E REALIS E D PRICE $/bbl 39.7 36.9 8%

P ETROLEUM REVENUE $ million 8.8 9.0 (2%) LO SS FROM CONTINUING OPERATIONS AFTER TAX $ million (182.3) (63.0) (189%) GAIN/(LOSS) FROM DI S CONTINUED OPERATIONS $ million 210.9 (3.9) n/a N ET PROFIT/(LOSS) $ million 28.6 (66.9) n/a

TOTAL CAS H INVES TING AND CAPITAL E X PEND ITURES $ million 910.0 134.9 Y EAR END CAS H BALANCE $ million 89.6 310.9

1 Pro forma production includes Heritage’s net share of average daily production from the Zapadno Chumpasskoye Field in Russia for the full year, together with its net share of average daily production for OML 30 included for November and December 2012 only, following completion of the acquisition of an interest in OML 30 through Shoreline e"ective 1 November 2012. Heritage’s total net share of production in 2012 was 975,511 barrels. OML 30 production was sold in January 2013 and included in inventory at 31 December 2012. 2 Sales volumes from the sale of crude from the Zapadno Chumpasskoye Field, Russia. Annual Review 2012 HERITAGE OIL PLC 27

CORPORATE PERFORMANCE are included in capital expenditure and other income statement PROD UCTION AND S ALES VOLUM E S accounts. General and administrative expenses are comprised of Petroleum revenue was generated in 2012 from the Zapadno salaries of management, finance and administrative sta", consulting, Chumpasskoye Field in Russia. Production from the Zapadno legal and professional fees, transportation costs and other costs. Chumpasskoye Field decreased from an average daily production of 673 bopd in 2011 to 607 bopd in 2012, primarily due to natural If share-based compensation expenses are excluded, net general and decline and a mechanical problem occurring on well 363 which has administrative expenses increased from $17.4 million in 2011 to been repaired. $18.5 million in 2012. In 2012, the Group capitalised $5.5 million (2011 – $5.5 million) of general and administrative costs relating to In November 2012, Heritage, through Shoreline Natural Resources exploration and development activities, including share-based Limited (“Shoreline”), completed the acquisition of a 45% interest in compensation of $1.1 million (2011 – $1.1 million). a producing oil mining licence in Nigeria (“OML 30”) together with a 45% interest in other assets owned under a joint operating agreement Depletion, depreciation and amortisation expenses increased by for OML 30 (the “Acquisition Assets”). Shoreline is a special purpose 144% to $6.4 million in 2012, primarily as a result of the inclusion Nigerian company formed between a subsidiary of Heritage and a of depletion for Heritage’s net interest in OML 30. Depletion for the Nigerian partner, Shoreline Power Company Limited (“Shoreline Zapadno Chumpasskoye Field decreased in line with the lower Power”), which acquired the 45% of OML 30. Production from OML production volumes. 30 is incorporated within the Group results with e"ect from 1 November 2012. Average daily production, net to Heritage’s Exploration expenditures expensed in the year, and not capitalised, economic interest, of 12,350 bopd was generated from OML 30 decreased from $12.3 million in 2011 to $4.7 million in 2012. in Nigeria for November and December 2012. Exploration expenditures in 2012 related principally to activities in Africa as the Company looked to expand its portfolio in one of its The di"erence between the production volumes and sales volumes is core areas. due to the change in the oil inventory balance during the year. Expenses of acquisition in 2012 of $72.4 million (2011 – nil) related REVENUE principally to costs incurred and accrued for legal and professional Petroleum revenue from the Zapadno Chumpasskoye Field in fees and include stamp duty of $10.5 million and transfer tax of Russia decreased by $0.2 million (2%) to $8.8 million in 2012. $10.4 million arising from the purchase of the Acquisition Assets. This decrease comprised: In 2012, the Group recognised an impairment of intangible – $(0.8) million from a decrease in sales volumes from 671 bopd exploration and evaluation assets of $34.3 million (2011 – $10.8 in 2011 to 607 bopd in 2012; and million). The impairment recognised in 2012 comprised two elements. – $0.6 million from an 8% increase in average commodity prices Firstly, after a technical review and consideration of the security from $36.86/bbl in 2011 to $39.74/bbl in 2012. situation, management decided to relinquish the licences in Mali and fully write-o" all expenditure of $18.4 million. Secondly, after a There was no petroleum revenue recognised from OML 30 in Nigeria technical review, management decided to write-o" expenditure of for 2012, as the first lifting was in January 2013. All 2012 production $15.9 million incurred with respect to the Latham licence area in from OML 30 is therefore reflected as inventory at year end. The Tanzania. The impairment recognised in 2011 of $10.8 million related average commodity price achieved from sales of OML 30 crude in the to the Kimbiji licence in Tanzania. first quarter of 2013 was $116.87/bbl. In 2012, the Group recognised an impairment write-down of OPERATING RES ULTS property, plant and equipment of $2.1 million (2011 – nil) relating to Expenses a reduction in the fair value of an aircraft due to unfavourable Petroleum operating costs for the Zapadno Chumpasskoye Field in economic conditions. Russia increased by 3% to $3.0 million in 2012. Average operating cost per produced barrel of oil increased from $11.82/bbl in 2011 to Finance income/costs $13.37/bbl in 2012, due primarily to higher well workover costs In 2012, interest income was $3.2 million (2011 – $5.7 million). Cash to repair a mechanical problem on well 363, together with higher and cash equivalents are typically held in interest bearing treasury fuel costs. accounts. This decrease in interest income is primarily due to a decrease in average cash and cash equivalents balances. Net operating costs for OML 30 were $1.0 million. Petroleum operating costs for OML 30 in Nigeria for November and December Other finance costs increased from $3.7 million in 2011 to $39.8 2012 were $10.0 million, but as 2012 production was held in inventory million in 2012, due primarily to financing fees and interest charges as at 31 December 2012, there is a transfer of operating expenses of incurred for the bridge facilities and guarantee relating to the $9.0 million to inventory. At 31 December 2012, Heritage’s net Acquisition Assets, interest charges incurred on the $294 million economic share of barrels held in inventory from OML 30 exchangeable loan provided by Genel (see the Kurdistan disposal production was 753,380 barrels. section of the Financial Review and interest charges incurred on the loan provided in August 2012 of $30 million to refinance the Production tax in Russia decreased from $4.9 million in 2011 to acquisition of an aircraft. The impact of the new financing $4.7 million in 2012 as a result of lower production volumes, the arrangements was partially o"set by lower convertible bond accretion impact of which was partially o"set by increased average commodity expense following repayment of the convertible bond at term in prices in 2012, as both production volumes and price are used in the February 2012. calculation of the tax. In 2012, the Group had foreign exchange losses of $0.1 million General and administrative expenses decreased from $19.9 million in compared to $0.2 million in 2011. The loss arose from net foreign 2011 to $18.7 million in 2012. This was due, principally, to a higher exchange gains and losses on revaluation of balances denominated in percentage of sta" being seconded directly to projects and those costs currencies di"erent from the functional currency. HERITAGE OIL PLC Annual Review 2012 28

FINANCIAL REVIEW CONTINUED

Heritage recognised an unrealised loss on investments of $7.7 million in Under the terms of the call option agreement between Heritage and 2012 (2011 – $20.3 million), which comprised of a decrease in market Shoreline, as amended by an addendum 25 June 2012, (“Shoreline value of investments in shares of PetroFrontier Corp. (“PetroFrontier”). Option Agreement”), Shoreline Power had an option to increase its As at 31 December 2012, the Company had acquired 15,860,467 shares economic interest in Shoreline by purchasing 30% of the shares from of PetroFrontier representing 19.98% of listed shares of the company. Heritage. Shoreline Power exercised the option in December 2012 The investment in share capital of PetroFrontier is classified as and payment is anticipated to be received in the second quarter of available-for-sale and valued at fair value which is determined using 2013. On completion Heritage’s economic share in Shoreline will market price at the end of the period. At 31 December 2012, the market reduce from 97.5% to 68.25%. price of PetroFrontier shares was Cdn$0.35 per share. The Acquisition Assets meet the criteria of a business as set out Heritage held 1,500,000 warrants in Afren plc (“Afren”) with an in IFRS 3 Business Combinations (“IFRS 3”), as they represent an exercise price of £0.60 per warrant, which were received as partial integrated set of activities and assets capable of being conducted and consideration from the sale of Heritage Congo Limited in 2006. managed for purpose of providing a return, therefore the Acquisition On 4 November 2011, the Afren warrants were exercised and the has been accounted for in accordance with IFRS 3. Company acquired 1,500,000 of the listed shares in Afren. The investment in Afren shares is classified as available-for-sale and valued The fair value allocation of the Acquisition Assets is based upon at fair value which is determined using market price at the end of the an independent review. The Company used the data from the period. The valuation at market price as at 31 December 2012 resulted independent review to calculate the fair value of the assets taking in a gain of $1.1 million (2011 – $0.1 million) which was recognised proved and probable reserves. In accordance with IAS 12, a deferred in equity. tax liability has been recognised for the di"erence between the fair value allocated to property, plant and equipment and the value of the ACQUISITION OF AN INTEREST IN OML 30 consideration that can be claimed as a capital allowance to o"set the On 29 June 2012, Shoreline entered into an agreement (the future tax liability, calculated on a tax rate of 65.75% for the first five “Acquisition Agreement”) with The Shell Petroleum Development years and rising to 85% after five years. As only a portion of the Company of Nigeria Limited (“Shell”), Total E&P Nigeria Limited purchase consideration is available to be claimed as a capital (“Total”) and Nigerian Agip Oil Company Limited (“Agip”) (the allowance and the tax rates are high, this has resulted in the “Vendors”) to acquire the Acquisition Assets for cash consideration recognition of a significant deferred tax liability. As a result of the of $850 million, net of costs (the “Acquisition”). impact of the deferred tax liability recognised, the purchase consideration is higher than the aggregate of the fair value of the Shoreline is a private limited Nigerian company whose ownership identifiable assets and liabilities and therefore goodwill has been interests are held by Heritage Oil SNR (Nigeria) B.V., a wholly owned recognised. The fair value of the identifiable assets and liabilities is subsidiary of Heritage, and a local Nigerian partner, Shoreline Power. provisional and if new information is obtained within one year of the acquisition date the acquisition accounting may be revised. At an extraordinary general meeting (“EGM”) on 30 August 2012, the shareholders of the Company approved the Acquisition, and on The following table provides additional information with respect to 9 November 2012 Heritage announced the completion of the the identifiable assets acquired and liabilities assumed at Heritage’s Acquisition, e"ective 1 November 2012. current e"ective 97.5% share of net assets of Shoreline:

1 November The Acquisition Assets were acquired for cash consideration of 2012 $850,000,000, net of costs, of which: (i) a deposit of $85,000,000 $’000 was paid by Shoreline upon the signing of the Acquisition Agreement Property, plant and equipment 2,483,317 (with $5,000,000, being the portion of such deposit not exceeding Intangible assets – goodwill 351,370 1% of the market capitalisation of the Company as at 29 June 2012, Deferred tax liabilities (1,983,189) paid to the Vendors, and the remaining $80,000,000, paid into a Site restoration provision (22,748) dedicated escrow account); and (ii) the balance of the consideration, Net assets 828,750 being $765,000,000 which was paid on completion.

The Acquisition was partially ﬁnanced by a $550,000,000 secured The loss on acquisition at Heritage’s current e"ective 97.5% share of results of Shoreline has been derived as follows: bridge facility provided by The Standard Bank of South Africa Year ended (“Standard Bank Plc”) to Shoreline. The Company has placed 31 December 2012 $50,000,000 in an escrow account with Standard Bank Plc as $’000 security for the bridge facility. Standard Bank Plc also provided a Consideration paid (828,750) $50,000,000 letter of credit (the “Letter of Credit”) to the Nigerian Petroleum Development Company (“NPDC”), to cover Shoreline’s Fair value of net assets acquired 828,750 working capital requirements under the joint operating agreement Less: for OML 30. Heritage provided cash collateral of $51,000,000 to Other expenses (72,351) Standard Bank Plc to guarantee this Letter of Credit which also Expenses of acquisition (72,351) covers any interest which may be due under the Letter of Credit. Both the amount held in escrow and the guarantee for the Letter of Credit Other expenses incurred on the Acquisition include costs of are classiﬁed as restricted cash in the balance sheet at 31 December professional fees ($24.1 million), taxes arising on the Acquisition 2012 (see note 2a). ($20.8 million), success fee ($10.6 million – see note 23) and other costs ($16.9 million). Annual Review 2012 HERITAGE OIL PLC 29

RES ULTS FROM CONTINUING OPERATIONS The profit on disposal of discontinued operations has been derived Heritage’s loss after tax from continuing operations in 2012 was as follows: Year ended $182.3 million, compared to $63.0 million in 2011. The adjusted loss 31 December from continuing operations in 2012 was $65.5 million compared to 2012 $’000 $29.4 million in 2011 if certain non-cash items (share-based compensation expense, impairment of intangible exploration and Consideration received evaluation assets, property, plant and equipment impairment Sales proceeds 462,366 588 write-down, foreign exchange gains, unrealised gains/losses on Working capital adjustments revaluation of Afren warrants, unrealised loss on investment in Total disposal consideration 462,954 PetroFrontier shares and one-o" acquisition costs) are excluded. Less: Carrying amount of net assets sold (224,006) D I S POS ALS Other expenses (22,620) Kurdistan Gain on disposal of discontinued operations 216,328 During 2012 the Group disposed of its entire business in the Kurdistan Region of Iraq (“Kurdistan”) which has therefore been classified as a discontinued operation. The disposal was completed The expenses incurred on disposition include costs of bank fees ($4.0 in two distinct transactions. On 21 August 2012, the Group disposed million), professional fees ($5.0 million) and sta" costs recharged and of a 26% interest in the production sharing contract relating to the other costs ($13.6 million). Miran Block (the “Miran PSC”) in Kurdistan and corresponding interest in the related joint operating agreement (the “Miran JOA”) to Uganda Genel Energy plc (“Genel”) in exchange for cash of $156 million (the On 18 December 2009, Heritage announced that it and its wholly “Sale”). On the same date, Genel provided a loan of $294 million to owned subsidiary Heritage Oil & Gas Limited (“HOGL”), had the Group (the “Loan”). entered into a Sale and Purchase Agreement (“SPA”), with ENI International B.V. (“Eni”) for the sale of HOGL’s 50% interests in The Loan bore interest of 8% and had a fixed term ending on the date Blocks 1 and 3A in Uganda (the “Ugandan Assets”). On 17 January which is the earlier of: (i) 15 months after the date of the completion 2010, Tullow Uganda Limited (“Tullow”) exercised its rights of of the Acquisition; and (ii) 6 February 2014. The Loan had an option, pre-emption. The transaction was overwhelmingly approved by following the election of either the Company or Genel and subsequent Heritage shareholders at the General Meeting on 25 January 2010. approval from the shareholders of the Company, to be repaid through the transfer to Genel of Heritage’s remaining 49% interest in the Miran On 27 July 2010, Heritage announced that HOGL had completed the PSC in Kurdistan and the corresponding interest in the Miran JOA. disposal of the Ugandan Assets. Tullow paid cash of $1.45 billion, The Loan terms also provided for the interim funding by Genel of including $100 million from a contractual settlement, of which Heritage’s expenditure on its 49% interest in the Miran PSC by way Heritage received and retained $1.045 billion. of increases in the Loan with e"ect from 1 July 2012. The Ugandan Revenue Authority (“URA”) contends that income In December 2012, following Heritage’s election to repay the Loan tax is due on the capital gain arising on the disposal and it raised in exchange for the transfer of a 49% interest in the Miran PSC to assessments of $404,925,000 prior to completion of the disposal. Genel, Heritage’s shareholders approved the repayment and the Heritage’s position, based on comprehensive advice from leading exchange became unconditional. Shareholder approval was received legal and tax experts in Uganda, the United Kingdom and North in December and the transaction completed shortly thereafter. America, is that no tax should be payable in Uganda on the disposal of the Ugandan Assets and that – even if tax were payable – under the Year ended 31 December terms of the production sharing agreements with the Ugandan 2012 2011 $’000 $’000 government relating to the Ugandan Assets (the “PSAs”), HOGL should be indemnified by the Ugandan government (under the Gain on disposal of discontinued contract stabilisation clause). operations 216,328 – 216,328 – On closing, Heritage deposited $121,477,500 with the URA, representing 30% of the disputed tax assessment of $404,925,000. The following table provides additional information with respect to $121,477,500 has been classified as a deposit in the balance sheet at the Sale amounts included in the balance sheet at 12 December 2012. 31 December 2012. A further $283,447,000 has been retained in escrow with Standard Chartered Bank in London, pursuant to an 12 December 2012 agreement between HOGL, Tullow and Standard Chartered Bank $’000 pending resolution between the Ugandan government and HOGL Assets of the tax dispute. Including accrued interest, an amount of Non-current assets $286,915,000 (2011 – $284,479,000) is classified as restricted cash Intangible exploration and evaluation assets 225,101 in the balance sheet at 31 December 2012. Total assets 225,101 In August 2010, the URA issued a further income tax assessment Liabilities of $30 million representing 30% of the additional contractual Non-current liabilities settlement amount of $100 million. HOGL has challenged the Provisions 1,095 Ugandan tax assessments on the disposal of HOGL’s entire interest in the Ugandan Assets. Total liabilities 1,095 Net assets 224,006 HERITAGE OIL PLC Annual Review 2012 30

FINANCIAL REVIEW CONTINUED

In November 2011 and December 2011, the Tax Appeals Tribunal PROFIT PER S HARE in Uganda dismissed HOGL’s applications in relation to the two Heritage’s net profit in 2012 was $28.6 million, compared to a net assessments amounting to $434,925,000. The rulings from the Tax loss of $66.9 million in 2011. Appeals Tribunal in Uganda are part of a domestic process and are not final and determinative. HOGL has appealed the rulings, which In 2012, the basic earnings and diluted earnings per share was $0.11, it believes are fatally flawed in many respects, through the Ugandan compared to the basic and diluted loss per share of $0.25 in 2011. court system commencing with the High Court and subsequently the Court of Appeal and Supreme Court if necessary. In 2012, the basic and diluted loss per share from continuing operations was $0.71 compared to $0.23 in 2011. In May 2011, HOGL commenced international arbitration proceedings in London against the Ugandan government in accordance with CASH FLOW AND CAPITAL EXPENDITURES provisions of the PSAs. HOGL is seeking a decision requiring, among Cash used in continuing operating activities was $181.1 million other things, the return or release of approximately $405 million, plus in 2012 compared to $34.6 million in 2011. Total cash capital interest, in aggregate currently on deposit with the URA or in escrow expenditures in 2012 were $910.0 million, $775.1 million higher than with Standard Chartered Bank in London. HOGL made a number of in 2011. The following major work programmes and an acquisition claims in the arbitration proceedings that tax had been improperly were undertaken in 2012: imposed on it which the arbitration tribunal ruled on 3 April 2013 to be outside its jurisdiction. The tribunal ruled at the same time that – acquired Acquisition Assets in Nigeria for $828.8 million; there were two areas of HOGL’s claims which it will consider, in – drilling and testing of the Miran West-3 well completed in respect of contractual stabilisation clause protection and breach of May 2012; other contractual obligations. Accordingly, the arbitration proceedings – initial work-over operations to prepare the Miran West-1 well, now concern HOGL’s claims that the Ugandan government wrongfully Kurdistan, for completion took place during September 2012; or unreasonably delayed consent to the sale by HOGL of the rights – planning and development studies on the Miran Field and Front under the PSAs and that the Ugandan government should indemnify End Engineering Design studies on a gas export pipeline took HOGL with respect to any tax liability which arose due to changes in place in 2012; and law that materially reduced the economic benefits to be derived by – in Tanzania the work programme commenced in the recently HOGL from the PSAs. awarded Kyela and Rukwa licences with reprocessing of legacy 2D seismic data and acquisition of a high resolution gravity survey. The determination by the arbitral tribunal marks the end of the preliminary phase. The proceedings will now continue to deal BUY BACK PROG RAMME with the merits phase of Heritage’s contractual claims against the At the Annual General Meeting (“AGM”) held on 20 June 2011, Ugandan government and the underlying substantive Ugandan tax a special resolution was passed by shareholders authorising the matters remain under appeal in the Ugandan courts. Company to make market purchases of its own shares up to the date of the next AGM. Any shares which have been so purchased may be On 15 April 2011, Heritage and its wholly owned subsidiary HOGL, held as treasury shares or cancelled immediately upon completion of received Particulars of Claim filed in the High Court of Justice in the purchase. No such resolution was proposed at the AGM held on England by Tullow seeking $313,447,500 for alleged breach of contract 21 June 2012. Purchased Ordinary Shares are held in treasury. as a result of HOGL’s and Heritage’s refusal to reimburse Tullow in relation to a payment made by Tullow of $313,447,500 on 7 April 2011 In July 2011, the Company announced that the share purchases to the URA. Heritage and HOGL have filed their Defence and would be made via a trading plan to allow the buy back programme Counterclaim against Tullow seeking instead the release to HOGL to continue independently through close periods. The trading plan of the $283,447,000 plus interest currently being held in escrow with agreement was terminated by the Company in May 2012. Standard Chartered Bank in London. The case commenced to be heard in the High Court in March 2013 and a first instance decision is As at 31 December 2012, the Company held a total of 34,602,442 expected to be received later this year. Heritage and HOGL believe that Ordinary Shares in treasury equal to 12% of the issued share capital the claim has no merit and are in the process of vigorously and robustly as at 1 January 2013. The total acquisition cost of these shares was defending it. $126.9 million.

Although disputes of this nature are inherently uncertain, the As at 31 December 2012, Heritage had 255,585,078 Ordinary Shares Directors believe that the monies on deposit and held in escrow will in issue (excluding treasury shares) as well as 2,371,918 exchangeable ultimately be recovered by Heritage. shares of no par value of Heritage Oil Corporation (“HOC”, the “Corporation”), each carrying one voting right in Heritage. The total The results of the Ugandan operations have been classiﬁed as number of voting rights in Heritage, excluding treasury shares as discontinued operations. The loss on disposal of discontinued operations at 29 April 2013 was 257,956,996. (comprising legal fees and costs relating to the litigation described above) for the years ended 31 December 2012 and 2011 is as follows: R EPAYM ENT OF CONVERTIB LE BONDS In February 2012, Heritage repaid $127.1 million to holders of the Year ended 31 December $165,000,000 8% convertible bonds (the “Bonds”), on maturity of 2012 2011 $’000 $’000 the Bonds. Loss on disposal of discontinued P ETROF RONTIER SHARES operations (5,407) (3,933) As at 31 December 2012, the Company had acquired 15,860,467 (5,407) (3,933) of the listed shares of PetroFrontier, representing 19.98% of the company. Total share acquisition costs amounted to $32.2 million. Annual Review 2012 HERITAGE OIL PLC 31

FINANCIAL POSITION – Oil and gas sales volumes and prices – whilst not under the direct LIQUID ITY control of the Company, a material movement in commodity There was a net decrease in cash and cash equivalents in 2012 of prices could impact on the Group. The Group did not hedge oil $221.2 million. At 31 December 2012, Heritage had a working prices in 2012. capital deficit of $17.7 million, including cash and cash equivalents – Loss of key employees – remuneration packages are regularly of $89.6 million. The deficit is a result of the current short term reviewed to ensure key executives and senior management are borrowing facility used in the acquisition of the Acquisition properly remunerated. Long term incentive programmes have Assets, which will be replaced in 2013 by a long term facility (see been established. Employees are encouraged to develop their note 2a). Like most oil and gas exploration companies, Heritage potential and, where appropriate, to further their careers within raises financing for its activities from time to time using a variety of the Group. This is one of the Group’s Key Performance Indicators sources. Sources of funding for future exploration and development and sta" turnover continues to remain at low levels. programmes will be derived from inter alia disposal proceeds from – Foreign exchange exposure – generally, it is the Group’s policy to the sale of assets, such as the sale of the Company’s interest in the conduct and manage its business in US dollars, which is its Miran PSC in 2012 and Company’s Ugandan Assets in 2010 (see reporting currency. Cash balances in Group subsidiaries are disposals section of the Financial Review), using its existing treasury primarily held in US dollars but small amounts may be held in resources, new credit facilities, reinvesting its funds from operations, other currencies in order to meet immediate operating or farm-outs and, when considered appropriate, issuing debt and administrative expenses or to comply with local currency additional equity. Accordingly, the Group has a number of di"erent regulations. sources of finance available to it potentially. – Future funding – Shoreline’s purchase of the Acquisition Assets was in part funded by a $550 million bridge facility arranged by CAPITAL S TRUCTURE Standard Bank Plc which expires no later than 29 December 2013. Heritage’s financial strategy has been to fund its capital expenditure At the time of the acquisition Standard Bank Plc agreed, subject to programmes and any potential acquisitions by selling non-core a number of substantive conditions, to refinance this into a long assets, reinvesting funds from operations, using existing treasury term loan. Discussions have progressed well with Standard Bank resources, finding new credit facilities and, when considered Plc and the other banks in the lending syndicate and terms for a appropriate, either issuing unsecured convertible bonds or equity. five-year borrowing base loan initially of $550 million have been agreed subject inter alia to finalisation of documentation and At 31 December 2012, Heritage had net debt of $472.1 million credit committee approval. Heritage is confident that this (31 December 2011 net cash – $171.4 million) (cash and cash refinancing will take place before the bridge facility expires on equivalents less borrowings) and 33% gearing (31 December 2011 – 29 December 2013 though there can be no certainty of this nil) (net debt as a percentage of total capital, total capital is calculated (see note 2a). as “equity” as shown in the consolidated balance sheet plus net debt). Further details on risks and how the Company mitigates them are CRED ITORS ’ PAYM ENT POLICY disclosed in this report on pages 32 to 34. It is the Company and Group’s general policy to settle all debts with creditors on a timely basis and in accordance with the terms of credit INTERNAL CONTROL agreed with each supplier. Average creditor payment days in 2012 A system of internal control was designed and tailored to ensure key were approximately 45 days (2011 – 45 days). risks are addressed appropriately and to provide assurance regarding the reliability of financial reporting and preparation of financial PRIM ARY RISKS AND UNCERTAINTIES FACING statements. Risk and internal control are assessed continually. See THE B U S INESS the Corporate Governance Report on pages 15 and 31 for further Heritage’s business, financial standing and reputation may be impacted details. One weakness identified in its financial procedures reporting by various risks, not all of which are within its control. The Group concerns accounting for complex transactions and the Company identifies and monitors the key risks and uncertainties a"ecting the ensures that it seeks third party advice to mitigate this weakness. Group and runs its business in a way that minimises the impact of such risks where possible. The primary business risks include: As part of the internal control systems, all transactions with related parties are identified, scrutinised and disclosed in the financial – Exploration and development expenditures and success rates – the statements appropriately. Group has experienced management and technical teams with a track record of finding major hydrocarbon discoveries and has a Heritage maintains insurance policies in accordance with industry diversified portfolio of exploration, appraisal, development and standards. Heritage believes that the level of insurance it maintains is production assets. Considerable technical work is undertaken to adequate, based on various factors such as the cost of the policies, reduce related areas of risk and maximise opportunities. industry standard practice and the risks associated with the – Factors associated with operating in developing countries, political, exploration and development of oil and gas properties in the fiscal and regulatory instability – the Group maintains close contact countries in which it operates. Heritage does not insure against with governments in the areas where it operates and, where political risk and, therefore, shareholders have full exposure to the appropriate, invests in community projects. Considerable work is risks and rewards of investing in its territories. undertaken before commencing operations in any new territory. – Title disputes – notwithstanding potential challenges in Malta, Heritage maintains detailed financial models which allow the the Group believes that it has good title to its oil and gas Company to plan future operating and capital activities in an properties. However, the Group cannot control or completely e#cient manner. protect itself against the risk of title disputes or challenges and there can be no assurance that claims or challenges by third PAUL ATHERTON parties against the Group’s properties will not be asserted at a CHIEF FINANCIAL OFFICER future date. Naturally, the Group strives to employ the best 29 APRIL 2013 internal and advisory knowledge available to help to minimise this risk associated with its activities. HERITAGE OIL PLC Annual Review 2012 32

RISKS

Heritage’s business, financial standing and As a global business with activities focused on the exploration, development and production of hydrocarbons, Heritage has to face a reputation may be impacted by various risks, variety of risks and the management of these risks is an essential not all of which are within its control. The element of how the business is run. Accordingly, it is a Board level responsibility. The e"ective management of risk is essential for the Group identifies and monitors the key risks Group to deliver its key strategic and operational objectives whilst also maintaining an excellent health and safety record. The Group’s overall and uncertainties a!ecting the Group and strategy of risk management is to employ suitably skilled personnel, runs the business in a way that minimises implement appropriate policies and procedures and maintain a their impacts where possible. diversified portfolio of assets. Heritage continuously identifies potential risks that could a"ect the Group and the achievement of its business plans and strategic objectives. The identification, together with the mitigation of risks to an acceptable level, is of critical importance to the Group as it continues to grow and generate long-term shareholder value. Key risks are monitored on an ongoing basis by the Executive Directors and senior management with regular reports received on all aspects of the Group’s performance. The Executive Directors, with whom the authority remains, report to the Audit Committee on matters concerning risk.

HEALTH, SAFETY AND ENVIRONMENT

EXPLORATION RISK

LOSS OF KEY FISCAL EMPLOYEES CHANGES PACT POLITICAL/ M

I COUNTRY

SPECIFIC RISKS NEW

OF ACQUISITIONS

E D FUTURE COMMODITY FUNDING PRICES NITU G

A TITLE DISPUTES M – MALTA UNFULFILLED PSA FOREX OBLIGATIONS EXPOSURE

PRIM ARY RISK OTHER POTENTIAL RISKS

LIK ELIHOOD OF OCCURRENCE Annual Review 2012 HERITAGE OIL PLC 33

A summary of the Group’s key ongoing risks, as currently identiﬁed, together with the measures taken to mitigate against these, is provided below. Primary risks faced by Heritage during 2012 and recently are highlighted.

DESCRIPTION OF RISK POTENTIAL IMPACT MITIGATION S TRATEG IC RISKS

Incorrect portfolio mix Company could become reliant on The Group maintains a diverse portfolio of assets across a range of certain local geographical, political geographies and life cycles in order to minimise exposure. In 2012 and cyclical market risks which may Heritage increased its exposure to producing assets. impact achievement of long-term objectives. Acquisitions and disposals E"ective portfolio management The Group and its advisers have considerable experience in is key to achieving long-term the business environment in which the Group operates. This sustainable growth. experience is applied regularly and carefully to assess potential merger, acquisition and disposal opportunities. In 2012 Heritage acquired a major interest in OML 30, Nigeria, through Shoreline and disposed of its interest in Kurdistan. The current management team has raised over $2 billion in cash through disposals.

OPERATIONAL RISKS Exploration and development The failure to sustain exploration The Group has experienced management and technical teams expenditure and success rates success can potentially impact with a track record of finding major hydrocarbon discoveries and investor confidence on generating has a diversified portfolio of exploration, appraisal, development long-term value. and production assets. Technical team has development and production experience. Considerable technical work is undertaken to reduce related areas of risk and maximise opportunities. Factors associated with operating Potential loss of licences or inability The Group maintains close contact with governments in the areas in developing countries, political to operate which may impact on where it operates and, where appropriate, invests in community and regulatory instability achieving long-term objectives. projects. Considerable work is undertaken before commencing operations in any new territory. Fiscal changes Adverse changes could impact The Group continually reviews fiscal regimes and enters into on future revenue streams for the robust, transparent PSAs or licences. Group impacting on medium and long-term value. Unfulfilled PSA obligations Failure to fulfil PSA obligations The Group continually monitors compliance with licence could lead to the loss of a licence. obligations and maintains good working relations with governments and joint venture partners. Title disputes Potential loss of licences or inability Notwithstanding potential challenges in Malta, the Group believes to operate which may impact on it has good title to its oil and gas properties. However, the Group achieving long-term objectives. cannot control or protect itself completely against the risk of title disputes or challenges and there can be no assurance that claims or challenges by third parties against the Group’s properties will not be asserted at a future date. Naturally, the Group strives to employ the best internal and advisory knowledge available to help to minimise this risk associated with its activities. Loss of key employees The loss of key sta" can potentially Remuneration packages are reviewed regularly to ensure key cause short and medium-term executives and senior management are properly remunerated. disruption to the business. Long-term incentive programmes have been established. Employees are encouraged to develop their potential and, where appropriate, to further their careers within the Group. This is one of the Group’s KPIs and sta" turnover continues to remain at very low levels. Environmental issues An environmental incident could The Group undertakes operations to the highest international lead to a loss of reputation and/ environmental standards of the oil industry. EIAs are prepared or revenue. before any major capital expenditure is incurred. Heritage did not incur any significant environmental issues in 2012. HERITAGE OIL PLC Annual Review 2012 34

RISKS CONTINUED

DESCRIPTION OF RISK POTENTIAL IMPACT MITIGATION Health and safety A major event can impact The Group has devised a comprehensive policy framework as well employees, contractors and local as health and safety management and reporting systems. These communities leading to a potential are monitored and reviewed by our CSR Committee and senior loss of reputation and/or revenue. management. The Group also works closely with local authorities where it operates to manage this aspect of our activities. This is a KPI for the Company and Heritage continued to operate with no fatalities or LTIs in 2012.

FINANCIAL RISKS Oil and gas sales volumes and Commodity prices impact on the Whilst not under the direct control of the Company, a large prices Company’s revenue stream and can movement in commodity prices could have a material impact on a"ect investor sentiment. the Group. The Group did not hedge oil prices in 2012. Foreign exchange exposure Could adversely impact the Generally, it is the Group’s policy to conduct and manage its Company’s results. business in US dollars, its reporting currency. Cash balances in Group subsidiaries are primarily held in US dollars, but small amounts may be held in other currencies in order to meet immediate operating or administrative expenses or to comply with local currency regulations. Liquidity risk In the extreme this could impact A formal budgeting and forecasting process is in place and cash the Group’s ability to continue as a forecasts identifying liquidity requirements of the Group are reviewed going concern. regularly to ensure compliance with approved funding plans. Future funding Refinancing of the $550 million Discussions with the existing syndicate of bankers are ongoing bridge facility, which expires no later and the Company is not aware of any reasons why the long- than 29 December 2013, into a long- term financing will not be received. Furthermore, Heritage has term loan doesn’t take place. a variety of di"erent sources of finance available to it, including approaching other financial institutions, obtaining new credit facilities, reinvesting its funds from operations, farm-outs and, when considered appropriate, issuing additional equity.

OTHER RISKS Legal, regulatory and litigation Changes could a"ect the short, The Group’s activities are subject to various laws and regulations medium and long-term value of the around the world. Risks are mitigated by employing skilled and Group. experienced sta" and advisers to conduct proactive assessment, contingency planning and, where necessary, the use of appropriate mitigation techniques. Investor expectations A failure to meet shareholder The Company maintains a regular dialogue with the Group’s expectations can lead to a loss shareholder base and the general public. A Senior Independent of shareholder conﬁdence and Director has been appointed and the Company employs an investor reduction in the share price. relations specialist. The Board is aware of reporting responsibilities and, where necessary, takes advice to ensure that material information is released on a timely basis. It is the Company’s policy not to comment on market rumours or press speculation. Corporate governance and Failure to comply with corporate The Group recognises the importance of maintaining strong business conduct governance codes and practices corporate governance procedures and processes and continues could result in negative sentiment to develop systems in this area. Generally this is managed by towards the Company. employing the skill, expertise and resources of the Group and its advisers. The Board reviews compliance with the Code and other regulatory guidelines regularly and enters into dialogue with major shareholders and institutions. The Board continually makes changes to its procedures in order to ensure adherence to codes and practices. More information is provided in the Corporate Governance Report. Annual Review 2012 HERITAGE OIL PLC 35

ANNUAL REVIEW GLOSSARY

$ US dollars unless otherwise stated AFREN Afren plc API a specific gravity scale developed by the American Petroleum Institute for measuring the relative density of various petroleum liquids, expressed in degrees BBL/BBL S barrel/barrels BBL S / D OR B OPD barrels per day or barrels of oil per day B CF billion cubic feet B OE barrels of oil equivalent1 B OE/D OR B OEPD barrels of oil equivalent per day B ONDS $165,000,000 8.00% convertible bonds repaid 2012 C D P Carbon Disclosure Project COD E UK Corporate Governance Code COMBINED COD E Combined Code of Corporate Governance published in 2008 COM PANY Heritage Oil Plc COND ENS ATE low density, high API hydrocarbon liquids that are present in natural gas fields where it condenses out of the raw gas if the temperature is reduced to below the hydrocarbon dew point temperature of the raw gas CONTING ENT RES OURCES those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations by application of development projects but which are not currently considered to be commercially recoverable due to one or more contingencies CONVERS ION RIG HTS conversion rights under the terms of the Bond C S R Corporate Social Responsibility EIA Environmental Impact Assessment ENI Eni International B.V. FCA Financial Conduct Authority FRC Financial Reporting Council G ENEL ENERG Y Genel Energy plc G ROUP, HERITAG E the Company and all of its subsidiaries HOG L Heritage Oil and Gas Limited HOC OR CORPORATION Heritage Oil Corporation, incorporated in Canada and a wholly owned subsidiary of the Company K PI Key Performance Indicator LEAD potential drilling target that is less well defined than a prospect and requires further data before being considered a prospect for drilling LNG ENERG Y LNG Energy Ltd. L S E London Stock Exchange LTI Lost Time Injury LTIFR Lost Time Injury Frequency Rate per 10,000 hours worked LTIP Long Term Incentive Plan M metres M 3 cubic metres MBBL S thousand barrels MMBBL S million barrels MBOE thousands of barrels of oil equivalent MMBOE millions of barrels of oil equivalent M CF thousand cubic feet M CF/D thousand cubic feet per day MMBTU million british thermal units MMSCF million standard cubic feet MMSCFD million standard cubic feet per day MMST B million stock tank barrels N/A not applicable N G O Non-Governmental Organisation NTC National Transitional Council

1 boes may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. HERITAGE OIL PLC Annual Review 2012 36

ANNUAL REVIEW GLOSSARY CONTINUED

O M L 30 Oil Mining Licence in Nigeria P10 10% certainty P50 50% certainty P90 90% certainty PASS-THROUG H D IVID END special dividend paid to Bondholders PETROD EL Petrodel Resources Limited PETROFRONTIER PetroFrontier Corp. PETROLEUM any mineral, oil or relative hydrocarbon (including condensate and natural gas liquids) and natural gas existing in its natural condition in strata (but not including coal or bituminous shale or other stratiﬁed deposits from which oil can be extracted by destructive distillation) PNG Papua New Guinea POSSI B LE RES ERVES those additional reserves which analysis and geoscience and engineering data suggest are less likely to be recovered than Probable Reserves. The total quantities ultimately recovered from the project have a low probability to exceed the sum of Proved plus Probable plus Possible Reserves PPL Petroleum Prospecting Licence PRL Petroleum Retention Licence PROB A B LE RES ERVES those additional reserves that are less likely to be recovered than Proved Reserves but more certain to be recovered than Possible Reserves. It is equally likely that actual remaining quantities recovered will be greater than or less than the sum of the estimated Proved plus Probable Reserves PROS PECT potential drilling target that is well deﬁned, usually by seismic data PROS PECTIVE RES OURCES those quantities of petroleum which are estimated, as of a given date, to be potentially recoverable from undiscovered accumulations PROVED RES ERVES those quantities of petroleum, which by analysis and geoscience, can be estimated with reasonable certainty to be commercially recoverable. It is likely that the actual remaining quantities recovered will exceed the estimated Proved Reserves P S A OR PS C production sharing agreement or production sharing contract RPS RPS Energy Consultants Limited S AHARA Sahara Oil Services Limited S AHARA OIL Sahara Oil Services Holdings Limited S HORELINE Shoreline Natural Resources Limited S HORELINE POWER Shoreline Power Company Limited S PA Sale and Purchase Agreement TCF trillion cubic feet T S R Total Shareholder Return T SX Toronto Stock Exchange TULLOW Tullow Uganda Limited URA Uganda Revenue Authority U G AND AN ASSETS HOGL’s 50% interests in Blocks 1 and 3A in Uganda WTI West Texas Intermediate

CONVERSION TABLE The following table sets forth standard conversions from Standard Imperial Units to the International System of Units (or metric units).

To convert from To Multiply by boe mcf 6 mcf cubic metres 28.316 cubic metres cubic feet 35.315 bbls cubic metres 0.159 cubic metres bbls oil 6.290 feet metres 0.305 metres feet 3.281 miles kilometres 1.609 kilometres miles 0.621 acres hectares 0.405 Annual Review 2012 HERITAGE OIL PLC

ADVISERS AND FINANCIAL CALENDAR

COMPANY SECRETARY AUDITORS OF THE COMPANY Woodbourne Secretaries (Jersey) Limited KPMG Audit Plc Ordnance House 15 Canada Square 31 Pier Road Canary Wharf St Helier JE4 8PW Jersey London E14 5GL Channel Islands United Kingdom

REGISTERED OFFICE OF THE COMPANY REGISTRARS OF THE COMPANY Ordnance House Computershare Investor Services (Jersey) Ltd 31 Pier Road Queensway House St Helier JE4 8PW Jersey Hilgrove Street Channel Islands St Helier JE1 1ES Jersey Channel Islands HEAD OFFICE AND DIRECTORS’ BUSINESS ADDRESS PRINCIPAL BANKERS OF THE COMPANY Fourth Floor Standard Bank (Europe) Windward House Barclays Bank La Route de la Liberation Investec St Helier JE2 3BQ Jersey Bank of Scotland (Europe) Channel Islands INDEPENDENT PETROLEUM UK OFFICE OF THE COMPANY ENGINEERING CONSULTANTS 34 Park Street TO THE COMPANY London W1K 2JD RPS Energy Consultants Limited United Kingdom 309 Reading Road Henley-on-Thames BROKER AND FINANCIAL ADVISERS Oxfordshire RG9 1EL J.P. Morgan Securities Limited United Kingdom 25 Bank Street Canary Wharf PRESS AGENTS London E14 5JP FTI Consulting United Kingdom Holborn Gate 26 Southampton Buildings ENGLISH LEGAL ADVISERS London WC2A 1PB TO THE COMPANY United Kingdom McCarthy Tétrault Registered Foreign Lawyers & Solicitors FINANCIAL CALENDAR 125 Old Broad Street, 26th Floor Group results for the year to 31 December are announced in March/ London EC2N 1AR April. The Annual General Meeting is held during the second United Kingdom quarter. Half year results to 30 June are announced in August. Additionally, the Group will issue an Interim Management Statement JERSEY LEGAL ADVISERS between 10 weeks after the beginning and six weeks before the end of TO THE COMPANY each half year period. Mourant Ozannes 22 Grenville Street W E B S I T E St Helier JE4 8PX Jersey www.heritageoilplc.com Channel Islands FORWARD-LOOKING STATEMENTS CANADIAN LEGAL ADVISERS The Business Review (contained on pages 12 to 31) contains TO THE COMPANY forward-looking statements with respect to the ﬁnancial condition, McCarthy Tétrault LLP results and operations of the Group. By their nature, forward-looking Suite 3300 statements involve a number of risks, uncertainties or assumptions 421–7th Avenue SW that could cause actual results or events to di!er materially from Calgary Alberta those expressed or implied by the forward-looking statements. T2P 4K9 Canada These risks, uncertainties or assumptions could adversely a!ect the outcome and ﬁnancial e!ects of the plans and events described herein. Forward-looking statements contained in the Business Review regarding past trends or activities should not be taken as a representation that these will continue in the future. Heritage undertakes no obligation to update the forward-looking statements contained in this review or any other forward-looking statements made. H ERITAGEO ILP L C.COM

HERITAGE OIL PL C

Fourth Floor, Windward House La Route de la Liberation St Helier JE2 3BQ Jersey Channel Islands

T: +44 (0) 1534 835 400 F: +44 (0) 1534 835 412 F RAM E WORK

C O RPO RATE GO VERNANCE 2012 HERITAGE OIL PLC Corporate Governance 2012

CONTENTS THE HERITAGE OIL P LC A NNUAL R EPO R T A N D A CCO UNTS 2012 CO N S I S T S OF FOUR DO CUM ENTS A S DETAILED B ELOW.

Highlights 2012 01 Annual Review Corporate Governance Outlook 2013 01 The Annual Review provides an The Corporate Governance Report Annual General Meeting 01 GROWTH overview of Heritage, its processes F RAM E WORK provides detailed information on ANNUAL REVIEW COR PORATE GO VERNANC E 20I 2 2012 Chairman’s Statement 02 and a Business Review. all aspects of Heritage’s corporate Summary of Changes to the Code 04 governance. Statement of Compliance 05 Board of Directors 06 Report of the Directors 08 Report of the Remuneration Committee 18 Report of the Audit Committee 30 Corporate Social Financial Statements Other Committee Reports 32 Responsibility The Financial Statements Report Appendix 1 37 RESPECT DIVERSIFIED provides detailed information on CORPORATE SOCIAL RESPONSIBILITY The CSR Report provides detailed FINANCIAL STATEMENTS Appendix 2 UK Corporate Governance Code 38 20I 2 20I 2 information concerning Heritage’s Heritage’s ﬁnancial position. Corporate governance glossary 53 CSR strategy, policies, systems and Advisers and ﬁnancial calendar IBC performance. Corporate Governance 2012 HERITAGE OIL PLC 01

HIGHLIGH TS – Transformational year with the Company acquiring a signiﬁcant interest in OML 30, Nigeria, through Shoreline Natural Resources Limited (“Shoreline”) 2012 and disposal of its interests in the Kurdistan Region of Iraq (“Kurdistan”) – Various Committees rigorously assessed the entry into Nigeria and the disposal of the Miran asset in Kurdistan – Enhanced the Board through two appointments, including the ﬁrst woman Director – Executive remuneration has developed in line with best practice – Board has reviewed risk management

O U T LO O K – Remuneration Committee will review recent UK government proposals in respect of executive remuneration 2013 – Board will consider UK government proposals to amend narrative reporting requirements for Annual Reports – Board will review amendments to the UK Corporate Governance Code which come into e"ect for ﬁnancial years beginning on or after 1 October 2012

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

All dollars are US dollars unless otherwise stated. HERITAGE OIL PLC Corporate Governance 2012 02

CHAIRMAN’S STATEMENT

A RESPONSIBLE BUSINESS

MICHAEL J. HIBBERD CHAIRMAN

The importance of having well established decision making Dear Shareholder, processes and sound governance procedures was highlighted during This has been an exciting and this process. Throughout the transaction, from its inception to completion, there was a rigorous assessment of the risks, beneﬁts transformational year for Heritage. In and opportunities this acquisition would bring. Various Board line with our vision and strategy for the Committees, including the Audit, Reserves and Anti-Bribery and Corruption Committees were active in reviewing and considering Group we acquired a signiﬁcant interest implications for the Group. The Board is now taking steps to ensure that our values, policies, internal controls and best practices are in the OML 30 licence in Nigeria integrated into the new operation. through Shoreline, our Nigerian joint venture company. For us governance is not just about tick box compliance but is an integral part of doing business. Corporate Governance 2012 HERITAGE OIL PLC 03

BOARD COMPOSITION In addition, there have been some amendments to the UK Corporate The other important governance development during the year Governance Code (the “Code”) which come into e"ect for ﬁnancial was the strengthening of the Board by the appointment of two new years beginning on or after 1 October 2012. These are outlined in the independent Non-Executive Directors, Carmen Rodriguez and Mark following pages. Wherever possible we will seek to introduce these Erwin. Our evaluation process had highlighted the need for these requirements in advance. appointments and we were also aware of the concerns of some shareholders on the balance of independent Directors on the Board. As a Company our priority in 2013 will be to integrate the OML 30 Carmen Rodriguez is the ﬁrst woman Director to be appointed to acquisition into the Group. This will include ensuring that Group the Board, in line with our policy to increase diversity on the Board. policies, such as those relating to anti-bribery and corruption, whistle- Further information on diversity and gender policies may be found blowing and health and safety, are integrated into these operations. in the Report of the Nomination Committee on pages 32 to 33. We continue to support open and constructive dialogue with all of D EVELOPMENTS IN 2012 our shareholders on governance, strategy and executive remuneration I reported in our 2011 Annual Report that our governance focus in and welcome any feedback. 2012 would be on two main areas in particular. These were executive remuneration and the development of our approach to managing risk. MICH AEL J. HIBBERD I can report good progress in both these areas. Details of remuneration C H AIRMAN policy may be found in the Report of the Remuneration Committee on 29 A PRIL 2013 pages 18 to 29 and details of risk management may be found in the Annual Review on pages 32 to 34 and in the Report of the Audit Committee in this report on pages 30 to 32. We will continue to review our narrative reporting to ensure it meets new developments and best practice.

O UR FOC US FOR 2013 The UK government has recently introduced proposals in respect of reporting on executive remuneration which will come into force on 1 October 2013. The Remuneration Committee will be considering these requirements with the aim of providing greater transparency to shareholders. As well as developing remuneration reporting, the Board will be considering UK government proposals to amend narrative reporting requirements for company annual reports. These proposals will require companies to produce a Strategic Report which replaces the Business Review. We believe that our reporting in this respect is already well developed, but we will continue to review our narrative reporting to ensure it meets new developments and best practice. HERITAGE OIL PLC Corporate Governance 2012 04

SUMMARY O F CH ANGES TO T HE COD E WHICH COME INTO EFFECT F OR FINANCIAL YEARS BEGINNING ON OR A F TER 1 OCTOBER 2012

D I V ERSITY AND GEND ER The Nomination Committee should include a description of the Board’s policy on diversity, including gender, any measurable objectives that it has set for implementing the policy and progress on achieving the objectives.

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

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

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

AUD ITORS FTSE 350 companies should put the external audit contract out to tender at least every ten years.

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

AUD IT COMMITTEE REPORTING Additional requirements for information that should be included in the Report of the Audit Committee. These include reporting on significant issues that the Audit Committee considered in relation to the financial statements, how these were addressed, and an explanation of how the Committee assessed the e"ectiveness of the external audit process and the approach taken to the appointment or reappointment of the external auditor. Information on the length of tenure of the current audit firm and when a tender was last conducted is also required.

This information is included in the Report of the Audit Committee on pages 30 to 32. Corporate Governance 2012 HERITAGE OIL PLC 05

STATEMENT O F COMPLIANCE

C OMPLIANC E WITH T H E CODE The following sections of this report describe how the Company has As a company with a Premium Listing on the LSE, the Company is applied the Main Principles of the Code: subject to the Financial Conduct Authority’s (“FCA”) Listing Rules and the requirement to explain how it has applied the Main – Leadership Principles of the Code. A copy of the Code is available from the FCA’s – E"ectiveness website, www.fca.org.uk. The Listing Rules also require a company – Accountability to confirm that it has complied with all the provisions of the Code or – Remuneration explain areas of non-compliance. The Board considers that the – Relations with Shareholders Company has complied with all the provisions of the Code, save in respect of only the following item: Appendix 2, at the back of this document, sets out additional disclosure requirements and detailed compliance with provisions of – Code Provision C.3.1: The Chairman of the Company is a member the Code. of, and chairs, the Audit Committee. The Board believes the Chairman is the most appropriate person to be a member of, and The following statements may be found on page 8 of the Financial chair, the Audit Committee given his extensive financial Statements Report: experience. The Chairman is also considered by the Board to have maintained his independent status. The Board and Nomination i) Statement of the Directors’ Responsibilities for preparing the Committee have reviewed the continued chairing of the Audit Annual Report and Accounts 2012; Committee by the Chairman. Given the size of the Company and ii) Responsibility Statement of the Directors that the financial of the Board the decision was reached that this is still the most statements and management report (which is incorporated in the appropriate Audit Committee leadership role to maintain. Annual Review Report and in the CSR Report) give a fair review of the Company’s business; and The Company has reviewed Executive Directors’ employment iii) Going Concern Statement. contracts annually with external advisers, taking into account shareholder feedback, and internally, within the Remuneration For and on behalf of the Board Committee, more details of which can be found on page 21. After consultation during the year, the notice periods of the Executive MICH AEL J. HIBBERD Directors has been reduced from 24 months to 12 months, e"ective C H AIRMAN 1 January 2013, to bring the Company further in line with 29 APRIL 2013 best practice. HERITAGE OIL PLC Corporate Governance 2012 06

BOARD O F DIRECTORS

M I CHAEL HIBBERD A NTH ONY BUC KINGH AM PAUL AT H ERTON SIR MICHAEL WILKES, KCB Chairman and Non-Executive Chief Executive O#cer Chief Financial O#cer CBE Director Non-Executive Director and Senior Independent Director

Joined Heritage March 2006 Founder of Heritage Joined Heritage March 2000 Appointed to the Board March 2008 Appointed to the Board March 2008 Appointed to the Board Appointed to the Board February 2008 February 2008

Skills and experience and Skills Mr. Hibberd has extensive Mr. Buckingham commenced Mr. Atherton is a qualified Sir Michael Wilkes KCB, CBE, international energy project planning involvement in the oil industry as a accountant, qualifying with retired from the British Army in and capital markets experience. North Sea diver and subsequently Deloitte & Touche, and holds a 1995 as Adjutant General and Mr. Hibberd has been president became a concession negotiator degree in geology from Imperial Middle East Adviser to the British and CEO of MJH Services Inc., a acting for several companies College London. He has a corporate Government. As Adjutant General, corporate finance advisory company, including Ranger and Premier Oil finance background with specific Sir Michael was the most senior since 1995, prior to which he spent plc. He was previously a security experience in the international administrative o#cer within the 12 years with ScotiaMcLeod in adviser to various governments. mining and resource sectors. Army and a member of the Army corporate finance and held the Board. During his distinguished position of director and senior career, he has seen active service vice-president, corporate finance. across the world while also commanding at every level from Platoon to Field Army, including commanding the 22 Special Air Service Regiment and serving as the Director of Special Forces. On leaving the Army in 1995 he was appointed Lieutenant Governor and Commander in Chief of Jersey, where he served until retiring in 2000.

External appointments External – President and CEO of MJH None None – Non-executive director of Services Inc Stanley Gibbons Group – Chairman of Canacol Energy Ltd (AIM listed) – Chairman of Greenﬁelds – Non-executive director of Blue Petroleum Corporation Star Capital plc (AIM listed) – Co-chairman of Sunshine – Non-executive positions on a Oilsands Ltd number of private companies – Director of Montana including Britam Defence Exploration Corp – Director of Pan Orient Energy Corp

Committee membership Committee – Audit Committee – Nomination Committee – Reserves Committee – Audit Committee – Nomination Committee – Corporate Social Responsibility – Corporate Social Responsibility – Remuneration Committee – Reserves Committee Committee Committee – Nomination Committee – Corporate Social Responsibility – Anti-Bribery and Corruption – Anti-Bribery and Corruption Committee Committee Committee – Anti-Bribery and Corruption Committee Corporate Governance 2012 HERITAGE OIL PLC 07

G REGORY T URNB U L L , JOH N MCLEOD CARMEN R ODRIGUEZ M ARK E R W IN QC Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director

Joined Heritage 1997 Appointed to the Board March 2008 Appointed to the Board March 2012 Appointed to the Board May 2012 Appointed to the Board March 2008

Mr. Turnbull is a Senior Partner Mr. McLeod is a Professional Ms. Rodriguez has most recently Mr. Erwin served in the United of the Calgary o#ce of the law Engineer with over 40 years of held the position of Chairperson States Army for over 25 years, firm of McCarthy Tétrault LLP. varied resource extraction and CEO (from 2007 to 2012) of culminating his career as the Chief Mr. Turnbull has extensive experience. He has held positions Sociedad Estatal Española P4R, of Sta" of the United States Army knowledge of corporate governance and has served on various boards S.A., a Spanish government owned Special Operations Command. issues and has acted for many boards including Constellation Oil & consultancy firm specialising in He became a specialist in building of directors and special committees Gas Ltd., Ranger Energy Ltd. and foreign trade, investment and teams of joint, interagency in that regard. Mr. Turnbull started CanArgo Energy Inc., as president co-operation. She was also, until partners working closely with his career with the law firm of and CEO of Arakis Energy recently, a trustee of the Spain- other nations’ leadership, both MacKimmie Matthews in 1979. Company, as vp, operations of China Council Foundation, the military and civilian. In 2011, From 1987 to 2001, he was a partner Pengrowth Gas Company, CEO and Spain-India Council Foundation Mr Erwin started Long Walk with Gowlings LLP (formerly Code director of Rally Energy Corp. and and Casa Arabe. She has previously Enterprise, LLC, a service- Hunter LLP). In 2001 and 2002, he Canoro Resources. He is a member held many other senior executive was a partner with the law firm of and past president of the Association positions including at commodities disabled veteran-owned small Donahue LLP. Mr. Turnbull has of Professional Engineers and trading companies. Ms. Rodriguez business providing consulting and been a partner with the law firm of Geoscientists of Alberta. was awarded the prestigious Órden operational support services. In McCarthy Tétrault LLP since July de Isabel la Católica by King Juan April of 2012, Mr. Erwin was 2002 and was appointed Queen’s Carlos of Spain in 1990, in named CEO of A&K Global Counsel in 2010. recognition of her services to the Health, a medical travel services Spanish people and work with the company operating globally. international community.

– Non-executive director of – President of United Hydocarbon – Spanish Committee of the – Long Walk Enterprise, LLC Crescent Point Energy Corp International Corp United Nations Relief and – CEO A&K Global Health – Non-executive director of Hawk – Director of Paris Energy Inc Works Agency Exploration Ltd – Director of Tuscany Energy Ltd – Plan Espana Foundation – Non-executive director of – Director of Diaz Resources Ltd Hyperion Exploration Corp – Director of Kallisto Energy Corp – Non-executive director of Porto – Director of Emperor Oil Ltd Energy Corp – Non-executive director of Sonde Resources Corp – Non-executive director of Storm Resources Ltd – Non-executive director of Sunshine Oilsands Ltd

None – Audit Committee – Audit Committee – Corporate Social Responsibility – Remuneration Committee – Remuneration Committee Committee – Reserves Committee – Anti-Bribery and Corruption Committee HERITAGE OIL PLC Corporate Governance 2012 08

REPORT OF THE DIRECTORS

LEAD ERSHIP Skills and experience of the Board

Directors of the Company who served in 2012 and up to the date of the signing of this report are: Appointment dates Finance Legal Michael Hibberd1 Mining/exploration/engineering Chairman and Non-Executive Director 18 March 2008 Security/defence Anthony Buckingham2 CEO 25 February 2008 Paul Atherton2 Chief Financial O#cer 6 February 2008 John McLeod1 Non-Executive Director 18 March 2008 Carmen Rodriguez Length of tenure of the Non-Executive Directors Non-Executive Director 22 March 2012 Gregory Turnbull1 Non-Executive Director 18 March 2008 0–4 years Sir Michael Wilkes1 4–5 years Non-Executive Director and Senior Independent Director 18 March 2008 Salim Macki3 Non-Executive Director 12 August 2008 Mark Erwin Non-Executive Director 1 May 2012

1 The Director was appointed on 18 March 2008 and this became e"ective on the Company’s listing on the LSE on 28 March 2008. 2 The Director was appointed as indicated and this became e"ective on the Company’s Balance of Non-Executive and Executive Directors listing on the LSE on 28 March 2008. 3 The Director resigned from the Board on 22 March 2012 and was replaced by Carmen Rodriguez.

Biographical details of all current Directors can be found on pages 6 Non-Executive Chairman to 7 of this report. With the exception of Sir Michael Wilkes, Carmen Executive Directors Rodriguez and Mark Erwin, all the Directors were previously, and Independent Non-Executive continue to be, Directors of HOC. Directors Non-Independent Non-Executive Director C OMPOSITION OF T H E BOARD There are currently eight Directors, six of whom are Non-Executive Directors. The Chairman and three of the Non-Executive Directors are deemed to be independent under the terms of the Code.

The current composition is assessed by the Board to be highly e"ective. There is a balanced mix of skills and experience, a variance in length of tenure of Non-Executive Directors which ensures continuity and new perspectives, and a good balance between Executive and independent Non-Executive Directors. The variety of experience of the Directors, coupled with the recruitment of the Board’s ﬁrst woman Director, Carmen Rodriguez, brings a balanced diversity of thought to Board deliberations. Corporate Governance 2012 HERITAGE OIL PLC 09

APPOINTMENTS TO T H E BOARD C ONFLIC TS OF INTEREST AND RELATED PARTY It is crucial that the appropriate skills and balance of talents are TRANSAC TIONS represented on the Board. This is an area of ongoing focus for the Under the Articles of Association of the Company (the “Articles”), Board which has delegated the tasks of reviewing Board composition, a Director may be a party to, or otherwise interested in, any searching for appropriate candidates and making recommendations transaction or arrangement with the Company as long as they have to the Board on appointment of Directors to the Nomination disclosed to the Directors the nature and extent of any interests at the Committee. In March 2012, Heritage announced the appointment of first meeting of the Directors at which a transaction is considered or Carmen Rodriguez to the Board and the retirement of Salim Macki. as soon as practical after that meeting by notice in writing to the In May 2012, Heritage announced the appointment of Mark Erwin. Secretary. Where disclosure is made to the Secretary, the Secretary The appointments process and role of the Nomination Committee is must inform the other Directors that it has been made and table the described more fully in the Report of the Nomination Committee on notice at the next meeting of the Directors. Any disclosure at a pages 32 to 33. meeting of the Directors must be recorded in the minutes of the meeting. Any potential or actual conflicts of interest are regularly RE- ELEC TION reviewed by the Board. With regard to retirement and re-election of Directors, the Company is governed by its Articles, the Code and the Jersey Companies Law. The Company’s Code of Business Conduct and Ethics also requires Under the Articles, Directors have the power to appoint a Director to Directors (and employees) to avoid conflicts of interest which may the Board during the year but any person so appointed must stand for interfere or appear to interfere with the obligation to act in the best election at the next AGM. All Directors retire and stand for re- interests of the Company. election annually in compliance with the Code. Directors re-elected at the AGM are appointed for a one year term. Related party transactions with Directors are disclosed in note 23 of the notes to the consolidated financial statements in the Financial INDEPENDENC E Statements Report. The current related party transactions relate to The Board’s assessment of the independence and e"ectiveness of provision and personal use of transportation services. the Non-Executive Directors is made regularly. In addition to the requirements of the Code, this assessment includes the Directors’ ROLE OF T H E BOARD total number of commitments, relationships with major suppliers The Board’s principal roles are direction, supervision and or with charities or other entities receiving material support from stewardship. How the Board fulfilled these responsibilities during the the Company. year, for example by directing strategy and objectives and upholding the values and culture of the Group, are shown in the table on page The Board considers that John McLeod, Carmen Rodriguez, 13 which summarises the Board’s activities for the year. The detailed Sir Michael Wilkes, Mark Erwin and Michael Hibberd are responsibilities of the Board are set out in a schedule of matters independent in character and judgement and free from relationships reserved for its attention which is reviewed on a regular basis. The or circumstances which may a"ect their judgement. These criteria also most recent review was carried out early in 2013. applied to Salim Macki whilst he served on the Board before his resignation in March 2012. On appointment, the Chairman was RESPONSIBILITIES O F T H E BOARD considered to be independent and continues to be so. The schedule of matters reserved for the Board sets out its The Board acknowledges that John McLeod does not meet the strict responsibilities. These include: independence criteria set out in the Code as he has served as a Director of HOC, the prior holding company of the Group, for more – approval of strategy and long-term objectives; than nine years and was previously granted options. However, the – establishing and communicating the Company’s values and Board has satisfied itself that neither of these factors impact John standards; McLeod’s independence in character and judgement. His length of – determining the nature and extent of risks that the Board is service on the Board enhances his ability to perform his duties willing to take to achieve its objectives; e"ectively and helps maintain an appropriate balance between – approval of annual budgets, business plans, annual and half experienced Non-Executive Directors and those more recently year reports and dividends; appointed to the Board. John McLeod, like all Directors, stood for – review of press releases and all financial information to be re-election at the last Annual General Meeting and received released to the market; overwhelming support from shareholders and was re-elected. – reviewing performance in light of strategy, objectives and business plans and ensuring corrective action is put in place Gregory Turnbull does not meet the independence criteria set out by if necessary; the Code as he is a partner of McCarthy Tétrault LLP, the Canadian – approving changes to Board composition; legal advisers to the Company. – approval of material acquisitions, disposals and contracts; – considering items of major litigation; – ensuring the e"ectiveness of the Company’s system of internal controls including managing risks; and – approval of Group policies including the Code of Ethics, Anti- Bribery and Corruption, Code of Conduct, health, safety and environmental policies. HERITAGE OIL PLC Corporate Governance 2012 10

REPORT OF THE DIRECTORS CONTINUED

DIVISION OF RESPONSIB ILITIES There is a clear division of responsibility between the roles of the Chairman, Michael Hibberd, and the Chief Executive O#cer (“CEO”), Anthony Buckingham, to ensure an appropriate balance of responsibility and accountability. The Senior Independent Director (“SID”) is Sir Michael Wilkes. The responsibilities of the Chairman, CEO and SID, which have been formalised in writing, were reviewed by the Board during the year. The key responsibilities are summarised below.

CHAIRMAN’ S ROLE C EO’S ROLE SENIOR INDEPENDENT DIREC TOR’ S ROLE

B USINESS STRATEGY AND G O V ERNANCE MANAGEMENT G ENERAL

Upholding the highest standards of Development and implementation of Board To act as a sounding board for the integrity, probity and corporate governance approved objectives and strategy. Oversight Chairman and serve as an intermediary for throughout the Group, particularly at and management of all operations, business the other Directors when necessary. Board level. activities and performance.

R UNNING OF TH E B OARD I N V ESTMENT AND F INANCING SHAREH OLD ERS

Leading the Board and setting its agenda, Recommending annual budgets and To be available to shareholders if they ensuring adequate time is given to business plans to the Board and identifying have concerns which contact through the matters under consideration and ensuring new business opportunities in line with normal channels of Chairman, CEO or Directors receive accurate, timely and strategic plans. Chief Financial O#cer (“CFO”) has failed clear information in order to carry out to resolve. their responsibilities. Managing the Board to allow enough time for discussion of To attend su#cient meetings with major complex or contentious items and, in shareholders and analysts to obtain a particular, strategic issues. balanced understanding of the issues and concerns of such shareholders.

DIRECTORS’ IND U C T I O N , D E V ELOPMENT AND R ISK MANAGEMENT AND E VALUATION CONTROLS CHAIRMAN

Facilitating constructive relationships Ensuring appropriate risk management and To meet with the other Non-Executive between Directors and induction, training internal control systems are in place. Directors at least once a year to appraise the and development needs of Directors. Chairman’s performance and on such other Ensuring that the performance of the occasions as deemed appropriate. Board, its committees and individual Directors is evaluated annually and acting on the results of such evaluation.

R ELATIONS W ITH E XECUTIV E TEAM AND S H AREH OLD ERS MANAGEMENT

Ensuring communication and dialogue Leading the management team, ensuring is entered into with shareholders and the Group policies and procedures are followed e"ective use of the AGM and Extraordinary and the development of a succession plan General Meetings. for senior management. Corporate Governance 2012 HERITAGE OIL PLC 11

GOVERNANC E STRUC TURE

B OARD The Board is supported by the work of its committees and delegates day-to-day management of the Group to senior management

SUPERVISION STEW ARDSH IP Review of performance against strategy Approval of strategy Review of ﬁnancial information Values and standards Review of e"ectiveness of internal controls and risk management Approval of Group policies

B OARD COMMITTEES

AUDIT REMUNERATION NOMINATION RESERVES ANTI- C SR COMMITTEE C OMMITTEE C OMMITTEE C OMMITTEE C OMMITTEE B RIB ERY AND C ORRUPTION C OMMITTEE

Manages relationship Reviews Board Considers independence with external auditor performance of the technical evaluator Oversees external audit process

Considers auditor independence

SENIOR MANAGEMENT/ LEADERSH IP TEAM

The Board delegates management of business and day-to-day C OMMITTEES operational decisions to executives and is responsible for monitoring The Board has delegated certain responsibilities to Committees in line performance. The Executive Directors have close involvement with with recommendations of the Code and to facilitate progressing the the operations of the business through their operational roles and business of the Company. These are the Audit, Remuneration, the Board is supported by a strong and experienced senior Nomination, Reserves, Anti-Bribery and Corruption and CSR management team. Committees. The duties of these Committees are set out in formal Terms of Reference approved by the Board and are available on the NON- E X E C UTIVE DIREC TORS Company’s website www.heritageoilplc.com. Attendance of non- The importance of the role of a Non-Executive Director is recognised Committee member Directors is encouraged at all Committee by the Board. The responsibilities of the Non-Executive Director to meetings unless where matters associated with their own interests constructively challenge and help develop strategy are set out in the are being discussed. individual letters of appointment of each Non-Executive Director. Non-Executive Directors are also speciﬁcally tasked with responsibilities in the areas of strategy, performance, risk and people to ensure the e"ective operation of the Board. Non-Executive Directors are aware of their responsibilities and feel able to raise any concerns at Board meetings, which are minuted accurately in the Board meeting minutes. HERITAGE OIL PLC Corporate Governance 2012 12

REPORT OF THE DIRECTORS CONTINUED

EFFECTIV ENESS

H O W T H E BOARD OPERATES THE B OARD CHARTER Our Board Charter details the basic operation and processes relating to the operation of the Board. It sets out the Directors’ responsibilities and conduct of Directors. It also covers Board meeting procedures concerning agenda, papers, minutes, conﬂict of interest procedures and other governance matters, such as the procedure for Directors to take independent advice if required.

B OARD MEETINGS Board and Committee meeting attendance in 2012. Audit Remuneration Nomination Reserves Anti-Bribery CSR Board Committee Committee Committee Committee Committee Committee (10 meetings) (5 meetings) (3 meetings) (4 meetings) (4 meetings) (2 meetings) (2 meetings) Michael Hibberd 10 5 – 4 4 2 2 Anthony Buckingham 9 – – 4 – – 2 Paul Atherton 10 – – – 4 2 2 Mark Erwin1 5 – – – – 1 1 John McLeod 10 5 3 – 4 – – Salim Macki2 1 – – – – – – Carmen Roderiguez3 7 5 3 – – – – Gregory Turnbull 10 – – – – – – Sir Michael Wilkes 10 5 3 4 – 2 –

1 Mark Erwin was appointed to the Board on 1 May 2012. 2 Salim Macki resigned from the Board on 22 March 2012. 3 Carmen Rodriguez was appointed to the Board on 22 March 2012.

A report on the Committee activities can be found later in this report The attendance record of each Director at formal Board meetings is on pages 18 to 36. shown in the table above. In addition to the Board meetings detailed in the table, four written resolutions of the whole Board were passed. The Board met in formal meetings ten times during the year and is As well as formal meetings, the Chairman, CEO and CFO scheduled to meet at least four times a year. In addition, due to the maintained frequent contact with other Directors to discuss any extensive nature of business over the course of the year it was deemed issues they may have had relating to the Group or as regards their necessary to conduct four meetings of a committee of the Board. It areas of responsibility and to keep them fully briefed on the Group’s also engaged informally in numerous ad hoc information calls which operations and initiatives. Additionally, the Chairman and Non- were not convened as formal meetings. The Board believes that one of Executive Directors met and spoke regularly during the year, and on its strengths is in having open communication channels that enable an ad hoc basis, without the Executive Directors being present. its Directors to engage informally on a variety of topics. Corporate Governance 2012 HERITAGE OIL PLC 13

WHAT T H E BOARD DID DURING T H E YEAR How the Board fulﬁlled its responsibilities of direction, supervision and stewardship is highlighted in the summary of the key items reviewed and discussed at Board meetings during the year.

STRATEGY – consideration of possible acquisition of an interest in OML 30, Nigeria (the “Acquisition”), through Shoreline. Included comprehensive review of assets, history, licences, geology, legal due diligence, anti-bribery and corruption issues as well as negotiation of various corporate and ﬁnancing documents; – discussions, updates and review of documentation and approvals for the Acquisition; – consideration of Miran asset disposal in Kurdistan; – review of various press releases and announcements in connection with the Acquisition and the disposal of the interests in the Miran asset; and – review and approval of prospectus and circular in connection with the Acquisition and Miran asset disposal in Kurdistan.

PERF ORMANCE/ RISK – consideration of risks and opportunities in connection with the Acquisition; – review of possible environmental, security and other compliance risks in connection with the Acquisition; – report on due diligence carried out in respect of the Acquisition; – receipt of operational reports; – review of Report of the Reserves Committee and approval of Competent Persons Reports (“CPR”); and – consideration of risks and opportunities in connection with the Miran asset disposal in Kurdistan and relinquishment of licences in Mali.

GOV ERNANCE/ CSR – review of Board Evaluation results; – review of reports from the Remuneration, Audit, Nomination, Anti-Bribery and Corruption, CSR and Reserves Committees; – receipt of reports from the SID; – review of related party transactions and conﬂicts of interest; – review and approval of amended Board Charter; – review and approval of whistle-blower policy; – review and approval of the written responsibilities for the Chairman, CEO and SID; and – approval for setting up a Board Committee to consider, review and approve necessary steps and documentation in connection with the Acquisition, Miran asset disposal in Kurdistan and ﬁnancing arrangements.

F INANCE – reviews of ﬁnancing options relating to the Acquisition and Miran asset disposal in Kurdistan; – consideration and approval of various ﬁnancing arrangements; – review of the Financial Statements, Annual Report and CSR Reports and approval of the same; – review and approval of the year end and interim results; – update on Ugandan tax dispute; – consideration of possible rights issue in connection with the Acquisition; and – reviews of working capital reports.

SUCCESSION PLANNING – review of Nomination Committee Report. Consideration of candidates to be appointed as a Non-Executive Director. Agreement to pursue appointment and to carry out the requisite due diligence and meetings with the highlighted candidates; – resignation of Salim Macki and approval of Carmen Rodriguez as a Director on recommendation of the Nomination Committee; – approval of appointment of Mark Erwin as a Director on recommendation of the Nomination Committee; and – conﬁrmation of succession plan. HERITAGE OIL PLC Corporate Governance 2012 14

REPORT OF THE DIRECTORS CONTINUED

C OMMITMENT, DEVELOPMENT, INFORMATION AND SUPPORT It is in the whole Board’s interest to ensure that all Directors have su#cient time to commit to their duties and that they receive the training and information they require in order to perform e"ectively. Further information on how the Company addresses these issues may be found in Appendix 2 on pages 44 to 45.

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

SUMMARY OF NON- E X E C UTIVE DIREC TORS’ LETTER OF APPOINTMENT

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

T IME C OMMITMENT At least 20 days per annum.

E XPECTED D UTIES Attendance at Board meetings, AGM, meetings of the Non-Executive Directors, meetings with shareholders, training if needed, meetings as part of the Board evaluation process.

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

R OLE OF TH E N ON-E XECUTIV E Key elements of the Non-Executive Director’s role are: DIRECTOR – Strategy – Constructively challenge and develop proposals; – Performance – Scrutinise the performance of management in meeting agreed goals and objectives and monitor reporting of performance; – Risk – Non-Executive Directors should satisfy themselves on the integrity of ﬁnancial information and that ﬁnancial controls and systems of risk management are robust; – People – Determine appropriate levels of remuneration of Executive Directors and prime role in appointing Executive Directors and succession planning.

O UTSID E INTERESTS/ Disclose signiﬁcant commitments to the Board and notify any changes to these in CONF LICTS OF INTEREST advance, disclose any potential or actual conﬂicts of interest.

P RICE SENSITIV E INF O R M AT I O N Compliance with Model Code, Company’s Share Dealing Code and Disclosure and AND SH ARE D EALING Transparency Rules on insider dealing required.

EVALUATION/T RAINING Individual Directors, the Board and its Committees are subject to annual review. Arrangements for training on an ongoing basis are made available if required.

C ONF I D ENTIALITY Duties set out in respect of conﬁdential information of the Company.

INDUC TION The two new Non-Executive Directors who joined the Board during the year underwent an induction process which covered the following areas:

Area Facilitated by B OARD PROCED URES, D UTIES OF A D I R E C TO R , Chairman CORPORATE GOV ERNANCE

S TRATEGY AND BUSINESS D E V ELOPMENTS CEO

FINANCIAL PERF ORMANCE, F I N A N C I A L Chief Financial O#cer REPORTING, BUD GETS, RISK

I N V ESTOR RELATIONS Head of Investor Relations

C OMPANY AND I N D USTRY SPECIF IC Visits to Head O#ce in Jersey and meetings with the Company’s technical team to provide overview of operations Corporate Governance 2012 HERITAGE OIL PLC 15

EVALUATION of failure to achieve business objectives and can only provide The Board undertakes regular evaluations of its own performance as reasonable and not absolute assurance against material misstatement well as that of the various Board Committees and the Chairman and or loss. The risk assessment and internal control procedures were in ensures that an external review is carried out at least once every three place from the start of 2012 to the date of approval of this report and years. An external review is currently being conducted by Hay Group have been reviewed by the Board in accordance with the Financial which also facilitated reviews in 2009 and 2010. In 2011, the review Reporting Council’s guidance on internal control (the “Turnbull was conducted internally by means of a detailed questionnaire. Guidance”). An internal review was conducted by the Chairman in 2012. The Audit Committee reviews regularly, on behalf of the Board, the Overall, evaluations have identified that the Board, its Committees e"ectiveness of the Group’s system of internal control. The review and individual Directors perform well and provide strong and covers all controls, including financial, operational and risk e"ective leadership. Suggestions raised during the year are reviewed management processes. Appropriate actions are put into place to to ensure that progress is made. remedy any weaknesses identified by the review. One weakness identified in its financial procedures reporting concerns accounting ACCOUNTABILITY for complex financial transactions and so the Company ensures that it seeks third party advice to mitigate this weakness.

It is the responsibility of the Board to ensure that there is in place a INTERNAL CONTROL FRAMEW ORK system of checks and balances to manage risk across the Group. It The Board Memorandum sets out the internal control systems has well established internal control procedures which are described of the Group including governance, high level financial controls, below. The Audit Committee is responsible for reviewing and budgeting and forecasting procedures, controls of resources, reporting on the e"ectiveness of the Group’s control systems. accounting and information systems and treasury management. The Board Memorandum of also specifically includes OML 30 acquisition FINANC IAL AND BUSINESS REPORTING risks and controls and integration plans. In addition to high level It is essential that shareholders are provided with a clear assessment of controls, controls are in place at an operational level. These systems the Group’s position and prospects. The Annual Report and Accounts, are based on established management structures with defined lines half yearly report and other periodic financial or trading statements of responsibility and clear delegation of authority. provide this information to shareholders and the market. Financial reporting is controlled principally through the policies set out in the High level controls include: Financial Reporting Procedures Memorandum (the “Board Memorandum”). This was first established as part of the process to – review of management accounts with comparison of actual become listed on the Main Market of the LSE and is reviewed and performance against prior periods and budget; updated on an annual basis. The Board Memorandum was specifically – approval of orders, authorisation of invoices and two signatories updated in 2012 to ensure that established procedures allow the required to make a transfer from the principal bank accounts; Directors to continue to make proper and informed judgements on the – quarterly reconciliation of all control accounts; financial position and prospects of the Group following the – prior approval by the Board for major investments; and Acquisition. The Directors recognise the need to maintain financial – segregation of duties between relevant functions and departments. reporting procedures, to review them on an ongoing basis and to adapt them to changing circumstances and will use the Board Memorandum Entity-level controls set the tone and establish the expectations of the as a basis for further developing control processes. Group’s control environment and are used to monitor the extent to which that tone and expectations are being fulfilled. These include In fulfilling its responsibility to monitor the integrity of financial controls within each of the following elements: reports to shareholders, the Audit Committee reviews accounting principles, policies and practices adopted in the preparation of public – control environment; financial information and examines documentation in relation to – risk assessment; the Annual Report and Accounts and annual financial report – information and communication; and announcements. The ultimate responsibility for reviewing and – monitoring. approving the half year and annual financial statements remains with the Board. R ISK A SSESSMENT Formal risk assessments are conducted periodically during the The Company’s internal controls and reporting procedures and year which cover all material controls, including financial and systems are being implemented by Shoreline, the joint venture operational, and risk management systems. A risk matrix has been company incorporated in Nigeria that owns an interest in OML 30. developed which aids identification of the primary risks the Group faces and likelihood of their occurrence. The primary risks are RISK MANAGEMENT AND INTERNAL CONTROL collated from this assessment with recommended controls to mitigate It is the Board’s responsibility to determine the nature and extent these risks and presented to the Audit Committee for review. The of the significant risks it is willing to take in achieving its strategic Board receives reports of the Audit Committee’s review of the objectives. It also has overall responsibility for the Group’s system of internal control system, risk assessment process and any reports internal control and risk management and has established processes made under its whistle-blowing policy. for identifying, evaluating and managing the significant risks that the Group faces. This includes significant risks that may arise from Details of principal risks and uncertainties, which are those reviewed environmental, social and governance matters. The Group’s system of by the Audit Committee during the year, are discussed on pages 32 to internal control is designed to manage, rather than eliminate, the risk 34 of the Annual Review. HERITAGE OIL PLC Corporate Governance 2012 16

REPORT OF THE DIRECTORS CONTINUED

WHISTLE-BLOW ING POLIC Y ARTIC LES OF ASSOC IATION An important part of the Company’s control processes is having a The Articles govern, amongst other things, the rights and obligations reporting system that can be used by employees to report possible relating to the Company’s shares, powers of the Directors, proceedings fraud or wrongdoing. The whistle-blowing policy and procedures in at general meetings, and the appointment and resignation of the place were reviewed during the year. Information is available to all Directors. The Articles may only be amended by a special resolution employees advising them that they can raise concerns in confidence of the Company’s shareholders. about possible wrongdoing by contacting the Chairman of the Audit Committee. In addition, the Board and Audit Committee receive S H ARE CAPITAL reports of any information reported under the whistle-blowing The Company has two classes of shares, namely the Ordinary Shares procedures and appropriate action is taken as a result. and the special voting share of HOC (the “Special Voting Share”). HOC, the Company’s indirect subsidiary, has Exchangeable Shares RELATIONS WITH SH AREH OLD ERS outstanding that are convertible into Ordinary Shares of the Company. The Ordinary Shares and the Special Voting Share carry no right to The Chairman, with input from the SID and Executive Directors, is fixed income. The Ordinary Shares have a right to one vote for every responsible for ensuring e"ective communication of shareholders’ share at general meetings. The holders of Exchangeable Shares have views to the Board as a whole and will update the rest of the Board rights through the Special Voting Share held by the trustee of the accordingly. Board members are expected to use their best endeavours Voting and Exchange Trust to one vote at general meetings for every to attend meetings with a broad range of shareholders or otherwise Exchangeable Share on the same basis as if they had exchanged them keep in touch with shareholder opinion and discuss strategy and for Ordinary Shares. For clarity, the Voting and Exchange Trust is a governance issues with them as time progresses. In addition, the Canadian Trust that holds the Special Voting Share for the benefit of Company employs an investor relations specialist and an investor the registered holders of the Exchangeable Shares pursuant to the relations programme is in place for the Company to meet major terms of a Voting and Exchange Trust Agreement dated 27 February shareholders and analysts. 2008, as amended on 24 April 2008.

Sir Michael Wilkes, as SID, has the chief responsibility of Subject to applicable statutes, shares in the Company may be issued maintaining su#cient contact with major shareholders to help with such rights or restrictions as the Company may by Special develop a balanced understanding of their issues and concerns. In Resolution determine. Unissued shares are at the disposal of the Board. this role Sir Michael Wilkes is available to shareholders who have concerns that have not been, or cannot be, resolved through The issued share capital of the Company and total voting rights of the discussion with the Chairman, CEO or CFO or where such contact Company as at 29 April 2013 are as follows: is inappropriate. – 255,595,978 Ordinary Shares of the Company are issued and Throughout 2012, Executive Directors and senior management met outstanding, which constitutes 99.1% of the total voting rights of with institutional investors in London and across the UK as well as the Company; and other European, North American and Middle East cities. These – 2,361,018 Exchangeable Shares of HOC, each carrying one voting roadshows, combined with the attendance of various Directors and/or right in the Company, are issued and outstanding, which senior management at several conferences, provided for comprehensive constitutes 0.9% of the total voting rights of the Company. and engaging dialogue with shareholders. In addition, the Company and its advisers entered into discussions with major shareholders in PURCHASE OF O W N S H ARES respect of the resolutions put to its 2012 AGM, particularly in respect At the AGM held on 20 June 2011, a Special Resolution was passed of the resolution concerning the Rule 9 waiver. This enabled by shareholders authorising the Company to make market purchases shareholders to fully understand the reasons for this resolution. of its own shares up to the date of the next AGM. Any shares which have been so purchased may be held as treasury shares or cancelled The Company engages with and considers the views of investor immediately upon completion of the purchase. No such resolution voting advisory services such as that provided by the Institutional was proposed at the AGM held on 21 June 2012. Voting Information Service and RREV Proxy Advisory Services. Details of the Ordinary Shares purchased in 2012, under the 2011 The Board is aware of its reporting responsibilities and, where authority, are provided below: necessary, takes advice to ensure that material information is Aggregate Percentage of consideration released on a timely basis. The Board has recently reviewed its Number issued share paid Disclosure Policy to ensure Directors and management remain aware of shares capital1 $’000 of their responsibilities in relation to the release of price sensitive Shares purchased and held information. It is the Company’s policy not to comment on market in treasury 1,373,708 0.5% 3,323 rumours or press speculation. 1 Percentage of issued share capital as at 1 January 2012. The Group issues its results and other news releases promptly and publishes them on the Company’s website at www.heritageoilplc.com. As at 31 December 2012, the Company held a total of 34,602,442 Other corporate information, including the Annual Report, any Ordinary Shares in treasury equal to 13.3% of the issued share prospectus and, circulars issued during the year and other ﬁnancial capital as at 1 January 2012. As at 29 April 2013, 34,602,442 presentations are also available on the website. Shareholders and other Ordinary Shares were held in treasury. interested parties can subscribe to receive news updates by email by registering online on the website. Corporate Governance 2012 HERITAGE OIL PLC 17

S H AREH OLDER ANALYSIS VOTING Analysis of the Company’s shareholder base, shown on the following Under the Articles, every member and every duly appointed proxy two graphs, indicates that there has been a small change in the profile present at a general meeting has, upon a show of hands, one vote. If of those holding shares in Heritage in 2012. There has been an voting at a general meeting is carried out by poll, every member increase in the retail shareholding and a decrease in investors present in person or by proxy has a vote for each share held. classified as growth and value investors. TRANSFERS December 2011 Subject to the Articles, any member may transfer certificated shares by an instrument of transfer in writing in any usual form or in any other form acceptable to the Directors. Directors may refuse to register any transfer of certificated shares which are not fully paid or Management 34.1% where the register of transfer is not in the acceptable form. Other 12.3% Retail 11.4% POW ERS OF T H E DIREC TORS Value 11.2% Subject to the Articles, relevant statutory law and any direction that Hedge Fund 9.3% may be given by shareholders in general meetings, the business of the Multiple 7.8% Company is managed by the Directors who may exercise all powers Growth 8.3% of the Company. Index 4.4% Quantitative 1.1% RESULTS AND DIVIDENDS The Group’s financial results for the year ended 31 December 2012 Source: J.P. Morgan Securities Ltd. Other consists of trading positions, are set out in the Financial Statements Report of the Company’s 2012 custody and unclassified. Annual Report and Accounts. The Company has not declared or paid any dividends since incorporation other than a special dividend paid December 2012 in 2010 to return part of the sale proceeds from the disposal of Heritage Oil & Gas Limited’s 50% interest in Blocks 1 and 3A in Uganda (the “Ugandan Assets”). Future payments of dividends are expected to depend on the earnings and financial condition of the Management 34.1% Company and such other factors as the Board of Directors of the Retail 12.2% Company consider appropriate. Multiple 9.9% Other 11.6% REGISTRAR Value 9.7% The Company’s share registrar is Computershare Investor Services Hedge Fund 9.2% (Jersey) Limited of Queensway House, Hilgrove Street, St Helier, Growth 7.5% JE1 1ES, Jersey, Channel Islands. Index 4.0% Quantitative 1.8% ANNUAL GENERAL MEETING The 2013 AGM will be held at 22 Grenville Street, St Helier, JE4 8PX, Source: J.P. Morgan Securities Ltd. Other consists of trading positions, custody and unclassified. Jersey, Channel Islands on 20 June 2013. Formal notice of the AGM, including details of special business, is set out in the Notice of AGM MAJ OR S H AREH OLDERS and dispatched to shareholders at least 20 working days before the As at 29 April 2013, the Company had been notified in accordance meeting. The Notice of AGM will also be available on the Company’s with the Disclosure and Transparency Rules, of the following website at www.heritageoilplc.com. interests in voting rights in its issued share capital: The AGM gives shareholders an opportunity to hear about business Ordinary Name Shares held % held1 developments and ask questions of the Directors. Shareholders are Albion2 85,040,340 32.97 encouraged to send questions, prior to the meeting, to the Company’s Lansdowne Partners Limited 28,498,394 11.05 registered o#ce in Jersey. For those shareholders not able to attend Capital Research and Management the meeting, any presentation given at the meeting together with Company 20,991,874 8.14 results of voting will be available on the Company’s website. All of London and Capital Asset Management the Directors are expected to attend the AGM and be available to Ltd 7,825,024 3.03 answer questions. Voting at the AGM will be by poll, which the Directors believe is the most representative way of conducting voting, giving shareholders one vote for each share held and enabling those 1 Includes voting rights attaching to the Special Voting Share as well as the Ordinary Shares. shareholders not able to attend the meeting in person an opportunity 2 Number of Ordinary Shares held by Anthony Buckingham either directly or to vote by lodging a proxy vote. Details of how to vote and deadlines indirectly through Albion. for exercising voting rights are set out in the Notice of AGM. HERITAGE OIL PLC Corporate Governance 2012 18

REPORT OF THE REMUNERATION COMMITTEE

A ROB U S T BU S INESS

JOHN MCLEOD C H A I R M A N O F T H E REMUNERATION COMMITTEE

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

Executive remuneration has continued to remain at the forefront of shareholder, regulatory and media attention during 2012. Over the course of the year we have seen amended investor guidelines and proposed regulatory reporting requirements as a consequence of this sustained interest with the aim of ensuring that executive pay practices are transparent, linked to Company performance and aligned to corporate strategy. In particular, UK government amendments to remuneration reporting regulations will, once ﬁnalised and adopted, alter the content and layout of the Directors’ Remuneration Report. Corporate Governance 2012 HERITAGE OIL PLC 19

To ensure that we will be well positioned to adhere to the changes, Furthermore, any unvested deferred awards will be subject to formal we have continued to improve the quality of our dialogue with clawback measures. Further details of these changes are set out on shareholders and the transparency of our reporting. We continue to pages 23 to 24 of this report. We believe that these amendments will monitor these proposals with interest and intend to be fully compliant not only provide a greater alignment between Directors’ and your once they have been implemented. As such, I believe we are well interests, but reinforces our commitment to ensure our remuneration positioned to adhere to the changes when they come into e"ect. practices align in so far as practicable with recommended UK best practice. We are committed to providing a clear explanation of the underlying principles of our reward policy and ensuring our Executive Directors’ At the same time, following feedback from shareholders and further remuneration arrangements support the delivery of our business internal review, we have also approved changes to the contracts of the strategy and reward for exceptional Company performance. Last year Executive Directors, reducing the notice periods and adopting more we stated that executive remuneration would be a focus for the Board modest termination provisions in the event of a change of control of and in line with this we initiated a thorough review of our pay the Company, in line with best practice. arrangements during the year. This included benchmarking independent market data against global oil companies, thoroughly Together with the rest of the Board I look forward to hearing your reviewing our remuneration policy and, as described last year, views on these matters as well as any other questions you may have commissioning an independent remuneration risk review. concerning the Group’s executive remuneration policy.

We are mindful that the market for experienced and talented oil JOHN MCLEOD executives remains highly competitive and believe that retaining the CHAIRMAN OF THE REMUNERATION current Executive Directors protects the best interests of the Company COMMITTEE and our shareholders. As a result of these reviews, we have made amendments to our remuneration policy which we believe will help to 29 APRIL 2013 ensure the delivery of our long-term strategy and your interests. We have continued to improve the quality of our dialogue with shareholders and the transparency of our reporting.

We have recommended, and the Board has approved, amendments to the bonus plan which we believe will further align our remuneration arrangements with the delivery of our business strategy. We have introduced bonus deferral in our annual bonus scheme, which will apply to this year’s and future years’ bonus awards. Any bonus payments awarded in excess of half of the maximum will now be deferred for one year. HERITAGE OIL PLC Corporate Governance 2012 20

REPORT OF THE REMUNERATION COMMITTEE CONTINUED

MEMB ERS OF THE REMUNERATION WHAT DID THE REMUNERATION COMMITTEE AND ATTENDANCE AT MEETINGS COMMITTEE DO DURING THE YEAR?

Attendance at meetings (3 meetings held) R EMUNERATION John McLeod, Chairman 3 Carmen Rodriguez1 3 Commission and review of report from Hay Group on the Sir Michael Wilkes 3 remuneration of Executive Directors and senior management. Approved base salary increase of 3% to the Executive Directors.

1 Carmen Rodriguez replaced Salim Macki in March 2012. The Remuneration Committee considers wider pay increases to employees as well as general market conditions before The Remuneration Committee has clearly deﬁned Terms of Reference, approving any pay increases to Executives. summarised below, which conform to the requirements of the Code and are available on the Company’s website www.heritageoilplc.com. BONUS E S

Review of annual bonus arrangements for Executive Directors; RES PONS I B ILITIES OF THE REMUNERATION recommendation and implementation of bonus deferral and COMMITTEE formal clawback measures.

The Terms of Reference set out the responsibilities of the L ONG TERM INCENTIV E PLAN (“LTIP”) Remuneration Committee. These include: – to set the remuneration policy for the Chairman, Executive Review of 2011 LTIP and review of 2012 peer group companies Directors and senior executives; to be used for performance conditions. Approval of awards made – to assess and determine total compensation packages available in 2012 to Executive Directors and senior management. Interim to the Executive Directors; review of current performance against the ﬁrst awards made under – to monitor the remuneration of senior management other than the 2011 LTIP. the Executive Directors; – to determine policy and scope for pension rights and any R EPORTING AND GOV ERNANCE compensation payments; – in determining remuneration to give due regard to the Code, Approval of Remuneration Report disclosures. UK Listing Rules and associated guidance; and – to make recommendations to the Board for its approval, and R I SK RE V IEW that of shareholders, on the design of LTIPs and making recommendations for the grant of awards to executives under Commission and review of independent reward risk review such plans. considering how Heritage’s reward policies help to mitigate against, or may potentially exacerbate, risk including those This report has been prepared with reference to the UK Large and identiﬁed by Heritage on pages 36 to 38 of the Annual Review. Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (the “Regulations”) and meets the relevant SERV ICE AGREEMENTS requirements of the Financial Conduct Authority’s Listing Rules. In preparing this report, consideration has also been given to the Recommendation and implementation of amendments to the Code and the Association of British Insurers “Principles of Executive Directors’ service contracts to reduce notice periods. Remuneration” guidelines.

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

A resolution to approve the report will be put to shareholders at the AGM on 20 June 2013. Corporate Governance 2012 HERITAGE OIL PLC 21

UNAUDITED INFORMATION Following a review of the annual bonus arrangements, the REMUNERATION COMMITTEE Remuneration Committee has recommended, and the Board has The Committee met three times during 2012 and the attendance approved, the introduction of a deferred bonus plan, and the record of individual Committee members is shown on page 20 of this introduction of clawback provisions on all bonuses awarded to Corporate Governance Report. Executive Directors. Further details of these proposals are set out in the bonus section of this report. As ever, we are committed to All members of the Remuneration Committee, including John ensuring our policy is appropriate for Heritage in the context of McLeod, the Committee Chairman, are considered by the Board to changing best practice and investor guidelines, discussing with third be independent, as explained in this Corporate Governance Report party advisers and then making recommendations for change where on page 9. necessary and will continue to do so.

In setting the remuneration policy and total compensation package During 2012 the Remuneration Committee also reviewed the LTIP levels for Executive Directors and other senior executives, the peer group for awards made in 2012, to ensure that performance Remuneration Committee gives consideration to the economic against this group continues to be appropriate and stretching for environment, the ﬁnancial and operational performance of the Heritage. After consideration of Heritage’s corporate transactions Group and the remuneration policy and levels for the wider employee during the year, the Board recommended some minor amendments population. In particular, the Remuneration Committee considers to the constituents of this group; the full list of comparator how pay levels in the wider employee population compare against the organisations can be seen on page 24. market and is mindful of the pay di"erentials between top executives and roles at di"erent levels in the structure. In line with our Terms of Following consultations with external advisers and after taking Reference, no individual is involved in setting their own pay. into account feedback from shareholders, the notice periods of the Executive Directors have been reduced from 24 months to ADVICE TO THE REMUNERATION COMMITTEE 12 months, e"ective 1 January 2013, to bring the Company further The Chairman of the Board, CEO and CFO provide internal support in line with best practice. to the Remuneration Committee and attend meetings at the Committee’s invitation except where matters associated with their It remains the Remuneration Committee’s opinion that, in light of own remuneration are being discussed. the geographic areas in which the Company operates, the relatively small number of executives at the Company and the roles conducted The Remuneration Committee has access to external advice as by the Executive Directors, an upper quartile level of total reward is required. During the year, the Committee continued to receive appropriate. However, whilst the policy allows for upper quartile independent advice from external executive reward consultants, levels of reward, these will only be realised for truly exceptional levels Hay Group, on matters under consideration by the Committee. In of performance. addition, Hay Group provided updates on market practice. No other services were provided to the Company by Hay Group during The Remuneration Committee considers that Heritage’s the year. remuneration policy should be su#ciently ﬂexible to reward outstanding performance, in line with the performance-driven Hay Group is a founding member of the Remuneration Consultant’s culture of the Group. Group and a signatory of its code of conduct. The table below summarises the main elements of the Executive EXECUTIVE REWARD POLICY Directors’ remuneration packages and its alignment to Heritage’s During the year, the Remuneration Committee has continued to business strategy. monitor the executive reward policy and principles to ensure that they remain appropriate and continue to support the business strategy. These broad principles, which the Remuneration Committee believes remain appropriate in the current climate, are designed to ensure that the Company:

– has an executive reward framework to help drive future value growth; – retains and, when necessary, recruits management talent of the required ability and experience; – provides overall levels of reward that are appropriate for the Company given its Premium Listing in London, international operations and the global nature of the oil and gas industry; – follows UK best practice in so far that such standards support and enhance the Company’s ability to generate value for shareholders; and – maintains a balance between ﬁxed (base package and beneﬁts) and variable reward (short and long-term incentives) that is appropriate and motivates the right behaviours (see chart on page 23). HERITAGE OIL PLC Corporate Governance 2012 22

REPORT OF THE REMUNERATION COMMITTEE CONTINUED

SUMMARY OF CURRENT REMUNERATION COMPONENTS

C OMPONENT OF EXECUTIVE P OLICY FOR EXECUTIVE A LIG NMENT TO CORPORATE REWARD D IRECTORS STRATEG Y

Base package – typically reviewed annually; – market competitive pay levels enable us – benchmarked against UK and to recruit and retain the best available international oil and gas peer group talent for Heritage; and companies; and – consideration of wider employee pay – increases of 3% awarded for 2013. increases as well as general market conditions.

Annual bonus – maximum opportunity of 300% of base – promotes a high-performance culture; package; – maximum levels of bonuses are only – based on exceptional financial, available for exceptional performance; operational and non-financial – encourages further alignment between achievements; Executive Directors and shareholders; – any award in excess of 150% of salary – strengthens the long-term strategic focus will be deferred for 12 months; of the Board; and – 50% of deferred bonus will be payable in – complies with UK best practice. share price-indexed cash, the remainder will be payable in cash; and – unvested awards are subject to clawback in the event of material misstatement of financial results or misconduct.

2011 LTIP – annual awards of performance shares; – alignment with long-term corporate – maximum award of 300% of base performance and shareholder value; and package; – in line with the stage of Heritage’s – relative Total Shareholder Return development since its London listing, (“TSR”) performance targets measured and in direct response to shareholders’ against a bespoke group of companies views, the vesting schedule of awards over three years; and made under the 2011 LTIP is in line with – awards begin to vest for median typical market practice. performance (at which point 25% vests); full vesting for upper quartile performance.

Pension – allowance of 10% of base package. – below market lower quartile and in line with our high-performance culture. Corporate Governance 2012 HERITAGE OIL PLC 23

BALANCE BETWEEN FIXED AND PERFORMANCE- The table below details the 2013 and 2012 base packages of the RELATED REWARD Executive Directors. The Remuneration Committee firmly believes in “pay for performance” 2013 base 2012 base as demonstrated by the charts below which illustrate the balance Name package package Increase between fixed (base package and benefits, including pension) and Anthony Buckingham £766,514 £744,188 3% variable (bonus and long-term incentives) elements of reward for each of the Executive Directors for exceptional performance. Paul Atherton £567,788 £551,250 3%

Components of Executive Directors’ Reward ANNUAL BONUS Following dialogue with shareholders and in line with Heritage’s CEO CFO continued dedication to aligning with UK corporate governance and market best practice, an extensive review of the annual bonus 100 plan was undertaken during 2012. As a result of this review, the 80% 78% Committee has introduced bonus deferral to the scheme in addition 80 to a formal clawback mechanism for unvested deferred awards.

60 The total maximum bonus award remains at 300% of salary. In line 40 with our performance-driven culture, target bonus opportunity is one third of the maximum. This is lower than is typical in the 20 20% 22% market. For awards made in 2013 in respect of 2012 performance, 0 and all future awards, any bonus payment made in excess of 150% of Fixed reward salary will now be deferred for a period of one year. These deferred Variable reward awards will vest at the end of the one-year deferral period. Half of any deferred award will be delivered in share price-indexed cash which Variable reward includes total 2012 bonus award and the fair value of long-term will increase, or reduce, in line with Heritage’s share price over the incentive awards notionally made on 19 June 2012. deferral period; the remainder of the deferred award will be payable in cash. BASE PACKAG E As a general policy, base packages reflect the Remuneration The Remuneration Committee believes that the introduction of this Committee’s assessment of the appropriate market rates for executive bonus deferral provides further alignment between Executive positions in peer organisations, as well as the individual’s level of Directors and shareholders, as well as strengthening long-term responsibility, experience, criticality and value to the business. Salaries strategic focus. are therefore set at a level to enable the Company to recruit and retain high-calibre individuals in a highly competitive market where there is a BONUS E S PAYAB LE FOR 2012 PERFORMANCE shortage of experienced executives. The Remuneration Committee The Remuneration Committee recommends the level of annual believes that by ensuring Heritage’s market competitiveness in keeping bonuses paid to the Executive Directors and in doing so considers and attracting some of the very best talent in the global oil sector, it is a wide range of financial and non-financial performance indicators both protecting and generating shareholder value and ensuring the over the year. These include, but are not limited to, environmental, long-term success of the Company. health and safety issues, the time dedicated by Directors in developing and expanding Heritage’s portfolio as well as the financial performance Salaries are reviewed annually with any increases becoming e"ective of the Company. in the first quarter of the relevant financial year. To ensure informed decision-making, the Remuneration Committee is provided with In particular, the Committee recognises that during the year the independent benchmark data. As part of the Remuneration Directors have successfully negotiated and e"ected key strategic deals Committee’s review last year, the Company was compared against which will provide the foundation for continued growth, ensuring the three pre-determined peer groups of comparable companies, namely: future success of Heritage. The delivery of a cash-generating asset to Heritage’s portfolio will help to fund the activities of the Company – a comparator group comprising both UK and international oil and going forward. As such, the Committee has recommended bonus gas companies of a similar size and scale to Heritage; awards of 300% of base package in respect of outstanding performance – a peer group comprising those oil and gas companies that are in 2012. These awards will be subject to deferral, with half deferred for often used by equity analysts to evaluate Heritage’s performance; one year in keeping with the new arrangements outlined above. and – the constituents of the FTSE 350 Oil and Gas index.

The Committee recognises that benchmark data forms only one part of any pay-setting exercise and should be viewed in context. When making any decisions regarding proposed salary increases, the Remuneration Committee also has due regard to the salaries of, and the increases awarded to, all Group employees, the views of institutional shareholders and the desire to emphasise the importance of the performance-related elements of the package. For 2013, the Committee has recommended an increase of 3% of salary. HERITAGE OIL PLC Corporate Governance 2012 24

REPORT OF THE REMUNERATION COMMITTEE CONTINUED

C LAWBACK PROVISIONS Aminex PLC Maurel et Prom Reﬂecting our proactive approach to risk management, and our continued commitment to aligning Heritage’s remuneration policy Afren Plc Petroceltic International plc with best practice, the Remuneration Committee has introduced a formal clawback mechanism for unvested deferred bonus awards. Bowleven plc Premier Oil plc These provisions will apply to bonus awards made in 2013, in respect Cadogan Petroleum PLC RusPetro plc of 2012 performance, and any future awards. DNO International Asa Salamander Energy plc Unvested deferred bonus awards may be reduced, either in part or in EnQuest PLC SOCO International plc whole, at the discretion of the Remuneration Committee in the event that, in the opinion of the Committee, any of the following issues arise: Exillon Energy plc Sterling Energy Plc

– if there is later found to be a material misstatement of the financial Hardy Oil & Gas Plc Tullow Oil plc results; JKX Oil & Gas Plc Valiant Petroleum plc – if there is later found to be an error in assessing the extent to which bonus payments were made; or Awards will vest in full for upper quartile performance, reducing on a – if the Director ceases to be an employee of the Company as a straight-line basis to 25% vesting at median. No award will vest for result of serious misconduct. below median performance. LONG -T E R M I N C E N T I V E S 2011 LTIP There is an additional holding period of one year following the vesting of any awards. In order to align the executives’ interests with those of the long-term success of the Company and value delivered to shareholders, the 2008 LTIP Company makes awards of long-term equity-based incentives to those employees with the ability to influence shareholder value. The LTIP was approved by shareholders in June 2008, shortly after Following a comprehensive review of the Company’s remuneration the Company’s flotation on the LSE. However, share price targets for arrangements, the Committee oversaw the introduction of the 2011 these awards were not met and as such the awards lapsed during LTIP. This plan marked the move to annual LTIP awards which the 2011. Following the introduction of the 2011 LTIP, no further awards Committee believes, for a UK-listed global company of Heritage’s will be made under this plan apart from in relation to Anthony size, is appropriate given the current stage of the business’ Buckingham, the only Director who continues to hold LTIPs under development. Further, an annual awarding and vesting schedule the 2008 scheme. avoids a gap in remuneration arrangements and assists the 2008 REPLACEMENT SHARE OPTION SCHEME Committee in keeping, retaining and incentivising the very best talent in a highly competitive sector. This plan replaced the 2008 HOC implemented The Heritage Oil Corporation Plan (the “Original LTIP and all future long-term incentive awards will be made under Plan”) following approval by its shareholders in 2004 and granted this plan apart from those in relation to Anthony Buckingham. options under the Original Plan to its Executive and Non-Executive Anthony Buckingham continues to hold his LTIP award under the Directors and other employees and consultants at that time. The 2008 LTIP on amended performance conditions, revised to reflect grant of options included all the then current Executive and Non- substantially the same terms and conditions as those under the rules Executive Board members and so did not include Sir Michael Wilkes, of the 2011 LTIP. Salim Macki, Carmen Rodriguez and Mark Erwin. As a result of the Group reorganisation and subsequent listing on the Main Market of In line with the Company’s high-performance culture, the plan the LSE, all the Board members were entitled to retain their options allows for upper quartile levels of reward to be delivered, but only for under the Original Plan and exchange them for options to acquire ten upper quartile performance. Ordinary Shares of the Company for every one Common Share they held under option. The Original Plan was then cancelled and, on 18 March 2008, the Company adopted The Heritage Oil Limited The rules of the 2011 LTIP allow for annual awards of performance 2008 Replacement Share Option Scheme (the “Replacement shares of up to 300% of base package to be made to Executive Scheme”) which is substantially in the same form as the Original Directors (which may be exceeded in exceptional circumstances). Plan. The purpose of the Replacement Scheme is to act as a However, it is the Committee’s intention that the Executive Directors replacement to the Original Plan and to honour the options granted will not annually receive the maximum level of award under the plan; under it by granting holders the option to purchase Ordinary Shares. awards granted on 19 June 2012 were the equivalent of 275% of base The Replacement Scheme is administered by the Board and no package. This maximum level of award has been calibrated to be further options will be granted under it. lower, on an annualised basis, than was permissable under the 2008 LTIP and is consistent with the provisional award made to the executives in 2011. The maximum number of Ordinary Shares which may be issued under the Replacement Scheme was 24,545,340, being the equivalent number of shares required to replace the options granted under the Awards vest subject to three year TSR performance conditions Original Plan that were still in existence prior to their cancellation. measured against a bespoke group of peer companies. The comparator group companies were selected on the basis of their size and scale of operations, market capitalisation and geographic spread. Corporate Governance 2012 HERITAGE OIL PLC 25

All options under the Replacement Scheme have now vested and are subject to issuance once the Company is no longer in close period. The Company will not grant any further options under this scheme.

PENSIONS Executive Directors receive pension contributions of an annual amount equal to 10% of their base package into a personal pension scheme nominated by the executive.

OTHER BENEFITS The Company’s policy is to provide Executive Directors with private medical insurance, life insurance and school fees for dependents, but no other beneﬁts in kind which would be typical in the UK, such as a company car. In addition, both Executive Directors are entitled to housing allowances of £100,000 (Anthony Buckingham) and £77,500 (Paul Atherton).

SHAREHOLDING G UIDELINES At present the Committee has not established formal Executive Director shareholding guidelines as, in the opinion of the Committee, these would be superﬂuous at this time. The Executive Directors hold a substantial number of shares in the Company and have interests in shares under various share incentive arrangements as shown in the table below as at 29 April 2013:

Anthony Paul Buckingham Atherton Shares held 85,040,340 2,390,000 Shares vested under the 2008 replacement scheme, yet to be excercised 9,629,510 1,625,000 Interest in shares under the 2011 LTIP schemes 2,498,679 1,850,873 Total number of shares 97,168,529 5,865,873 Notional value of shares at year end, £1 184,231,531 11,121,695 Total value as a multiple of base package 247.6 times 20.2 times

1 Based on a year-end share price of 189.6 pence, assuming full vesting of outstanding LTIP awards.

SERVICE AG REEMENTS The Committee is aware that the legacy service contracts of the Executive Directors were not fully compliant with UK best practice and as such has reviewed these contracts as part of the extensive review of executive remuneration arrangements undertaken during 2012. The Committee has recommended amendments to these contracts in line with UK best practice compliance. The Executive Directors’ service agreements with the Company are for no ﬁxed term. In normal circumstances, the new agreements may be terminated by the Company giving no less than 12 months’ notice and the Director giving six months’ notice.

Date of Unexpired Notice period Notice period Executive Director contract term by Company by Director Anthony Buckingham1,2 28 March 2008 Rolling contract 12 months 6 months Paul Atherton1,2 28 March 2008 Rolling contract 12 months 6 months

1 The Executive Director was appointed previously as indicated on page 8 and this became e"ective on the Company’s listing on the LSE on 28 March 2008. 2 The contracts have been amended to reﬂect the new notice period by the Company.

In the event of a change of control of the Company, if the Executive Directors resign or the Company terminates their appointment within 12 months of such an event, they will each be entitled to an immediate payment in lieu of notice of a sum equivalent to one times their annual base package. In addition, they will be entitled to a payment of Cdn$75,000 in the event they are asked to resign from the Board of HOC in any event other than as a result of a change of control. The Company also may terminate the agreements and make payments in lieu of notice.

Currently the Executive Directors’ service contracts do not provide for mitigation in the event of early termination. The Remuneration Committee has a duty to ensure that contractual terms on termination, and any payments made, are fair to the individual and the Company, that failure is not rewarded and that the duty to mitigate loss is fully recognised. The Executive Directors do not have service contracts with any Group subsidiary.

NON-EXECUTIVE DIRECTORS The Non-Executive Directors do not have service contracts but their terms are set out in a letter of appointment. Their terms of appointment may be terminated by each party giving three months’ notice in writing.

The remuneration of Non-Executive Directors is a matter for the Chairman and the Executive members of the Board. The Company’s policy is to set levels for Non-Executive Directors’ remuneration so as to ensure that they are su#cient to attract, retain and motivate high-quality Directors and reﬂect the above-average time dedicated by the Non-Executive Directors. Fee levels for Non-Executive Directors remain at 2012 levels. HERITAGE OIL PLC Corporate Governance 2012 26

REPORT OF THE REMUNERATION COMMITTEE CONTINUED

Fee levels for 2012 and 2013 are set out below. Actual fees paid for the year ended 31 December 2012 are shown in the Directors’ Emoluments table on page 27.

Non-Executive Directors 2013 2012 Michael Hibberd £126,000 £126,000 Mark Erwin1 £84,000 £56,000 John McLeod £84,000 £84,000 Carmen Rodriguez2 £84,000 £67,300 Salim Macki3 – £18,400 Gregory Turnbull £84,000 £84,000 Sir Michael Wilkes £84,000 £84,000 Additional fee for each day worked in excess of the agreed 20 days per annum £2,000 £2,000

1 Mark Erwin joined the Board on 1 May 2012 and received a pro-rata payment for 2012. 2 Carmen Rodriguez joined the Board in March 2012 and received a pro-rata payment for 2012. 3 Salim Macki resigned from the Board in March 2012 and received a pro-rata payment for 2012.

Michael Hibberd, Gregory Turnbull and John McLeod, being Directors of HOC, will be entitled to a payment of Cdn$75,000 in the event they are asked to resign from the Board of HOC in any event other than as a result of a change of control.

Terms of appointment and reappointment are set out below: Date of Notice Last Non-Executive Directors contract period re-election Michael Hibberd1 28 March 2008 3 months 2012 AGM Mark Erwin2 1 May 2012 3 months N/A John McLeod1 28 March 2008 3 months 2012 AGM Carmen Rodriguez3 22 March 2012 3 months 2012 AGM Gregory Turnbull1 28 March 2008 3 months 2012 AGM Sir Michael Wilkes1 28 March 2008 3 months 2012 AGM

1 The Non-Executive Director was appointed on 18 March 2008 and this became e"ective on the Company’s listing on the LSE on 28 March 2008. 2 Mark Erwin joined the Board on 1 May 2012. 3 Carmen Rodriguez replaced Salim Macki in March 2012.

Non-Executive Directors do not participate in the Company’s pension arrangements. Although they may have previously received grants of options prior to listing on the LSE, they have not and will not receive any further grants or participate in any other long-term incentive arrangements since this time. Corporate Governance 2012 HERITAGE OIL PLC 27

PERFORMANCE G RAPH The following graph shows the Company’s TSR since trading of the Company’s shares began on the LSE on 31 March 2008 to 31 December 2012, against the FTSE 250 Index. The Remuneration Committee has selected the FTSE 250 Index as it represents a broad equity market index which the Company forms a part of and therefore provides a good indication of the Company’s general performance.

TSR

250

200

150

100

0 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jul 10 Sep 10 Dec 10 Apr 11 Jul 11 Oct 11 Dec 11 Mar 12 Jul 12 Sep 12 Heritage Oil Plc FTSE 250 Heritage's shares were suspended in July 2012. Where shares ceased to trade, the TSR line for Heritage is blank.

AUDITED INFORMATION DIRECTORS ’ EMOLUMENTS For the year ended 31 December 2012 Base package/ Annual 2012 2012 2011 2011 fees Beneﬁts1 bonus Total Pensions Total Pensions £’000 £’000 £’000 £’000 £’000 £’000 £’000 Executive Directors Anthony Buckingham 744.2 117.1 2,232.6 3,093.9 74.4 1,363.9 70.9 Paul Atherton 551.3 179.0 1,653.8 2,384.1 55.1 1,078.6 52.5 Non-Executive Directors Michael Hibberd 126.0 – – 126.0 – 120.0 – Mark Erwin2 56.0 – – 56.0 – – – Salim Macki3 18.4 – – 18.4 – 80.0 – John McLeod 84.0 – – 84.0 – 80.0 – Carmen Rodriguez3 67.3 – – 67.3 – – – Gregory Turnbull 84.0 – – 84.0 – 80.0 – Sir Michael Wilkes 84.0 – – 84.0 – 80.0 – Total 1,815.2 296.1 3,886.4 5,997.7 129.5 2,882.5 123.4

1 Shows the taxable value of beneﬁts, comprising private medical insurance, life insurance, school fees and housing allowances of £100,000 (Anthony Buckingham) and £77,500 (Paul Atherton), but excludes pension contributions. 2 Mark Erwin joined the Board on 1 May 2012. 3 Carmen Rodriguez replaced Salim Macki in March 2012.

In 2012, the Company accrued $2.5 million in general and administrative expenses, in relation to an arbitration settlement to a former Director of HOC whose services were terminated in 2006. Further arbitration proceedings have been initiated by this individual. HERITAGE OIL PLC Corporate Governance 2012 28

REPORT OF THE REMUNERATION COMMITTEE CONTINUED

LTIP PERFORMANCE SHARES Conditional awards of performance shares were granted to Executive Directors on 19 June 2012 as shown below.

EXECUTIVE DIRECTORS’ INTERESTS IN PERFORMANCE SHARES Number of Number of Share price Awarded Vested Lapsed shares as at shares as at Date of Earliest at date in the in the in the 31 December 1 January award vesting of grant period period period 2012 2012 Anthony Buckingham1,2 20 June 2011 20 June 2014 212.8p – – – 915,913 915,913 19 June 2012 19 June 2015 129.3 1,582,766 – – 2,498,679 – Paul Atherton1 20 June 2011 20 June 2014 212.8p – – – 678,454 678,454 19 June 2012 19 June 2015 129.3 1,172,419 – – 1,850,873 –

1 In accordance with the Company’s regular LTIP award timetable, shares granted on 19 June 2012 have been notionally awarded until such time that the Company is out of close period. 2 Anthony Buckingham continues to hold his LTIP award under the 2008 LTIP on amended performance conditions, revised to reﬂect substantially the same terms and conditions as those under the rules of the 2011 LTIP and as set out on page 24 of this report.

The table below sets out the direct and indirect interests of the Directors in the share capital of the Company as at 29 April 2013:

Number of Percentage of Ordinary voting share Director Shares1 capital Michael Hibberd 375,000 0.15% Anthony Buckingham2 85,040,340 32.97% Paul Atherton 2,390,000 0.93% Gregory Turnbull 500,070 0.19% John McLeod 20,000 0.01% Mark Erwin 0 0.00% Carmen Rodriguez 0 0.00% Sir Michael Wilkes 0 0.00%

1 Includes Exchangeable Shares. 2 Anthony Buckingham’s Ordinary Shares include the Ordinary Shares held by Albion as at the date of this document, a company owned and controlled by Anthony Buckingham.

There have been no changes in the interests of Directors in the share capital of the Company between the end of the ﬁnancial year and 29 April 2013. Corporate Governance 2012 HERITAGE OIL PLC 29

DIRECTORS’ INTERESTS IN SHARE OPTIONS HELD UNDER THE REPLACEMENT SCHEME A S AT 31 DECEMB ER 2012 At At At date 1 January Options 31 December Exercise Director of grant 2012 exercised 2012 prices Vesting periods Expiry date Michael Hibberd 750,000 750,000 – 750,000 £1.43 14 Dec 06–14 Dec 08 14 Dec 111 250,000 250,000 – 250,000 £2.45 21 Dec 07–21 Dec 09 21 Dec 12 Anthony Buckingham 9,129,510 9,129,510 – 9,129,510 £1.43 14 Dec 06–14 Dec 08 14 Dec 111 500,000 500,000 – 500,000 £2.45 21 Dec 07–21 Dec 09 21 Dec 12 Paul Atherton 1,125,000 1,125,000 – 1,125,000 £1.43 14 Dec 06–14 Dec 08 14 Dec 111 500,000 500,000 – 500,000 £2.45 21 Dec 07–21 Dec 09 21 Dec 12 Gregory Turnbull 300,000 300,000 – 300,000 £1.43 14 Dec 06–14 Dec 08 14 Dec 111 150,000 150,000 – 150,000 £2.45 21 Dec 07–21 Dec 09 21 Dec 12 John McLeod 300,000 125,000 – 125,000 £1.43 14 Dec 06–14 Dec 08 14 Dec 111 150,000 150,000 – 150,000 £2.45 21 Dec 07–21 Dec 09 21 Dec 12

1 The Company has been in a close period since summer 2011 with the result that the term of options which expired since then has been extended and will continue until shortly after the close period is lifted.

Notes: On exercise of each option, the holder is entitled to receive the 100 pence per share dividend paid in August 2010. The ﬁnal exercise prices were converted into GB pounds sterling on the Company’s reorganisation and listing on the Main Market of the LSE using the exchange rate in e"ect on that date.

No options were granted or lapsed during the year under the Replacement Scheme.

The closing share price on 31 December 2012 was 189.6 pence. During the year the highest closing share price was 218.8 pence per share and the lowest closing price was 115.1 pence per share.

This report was approved by the Board on 29 April 2013 and signed on its behalf by:

JOHN MCLEOD CHAIRMAN OF THE REMUNERATION COMMITTEE 29 A PRIL 2013 HERITAGE OIL PLC Corporate Governance 2012 30

REPORT OF THE AUDIT COMMITTEE

ADDRESS FROM THE AUDIT COMMITTEE The Terms of Reference of the Audit Committee, as summarised CHAIRMAN below, were reviewed during 2012. The review involved consideration During the year the focus has been on the acquisition of an interest in of developments in governance matters and good practice in other OML 30, Nigeria, and the sale of the Company’s Kurdistan interests. listed companies. The Terms of Reference of the Committee are The Audit Committee played an important role in overseeing available on the Company’s website www.heritageoilplc.com. potential risks and controls involved with the acquisition and the disposition and financing thereof. In addition to this, the Committee RES PONS I B ILITIES OF THE AUDIT COMMITTEE carried out its normal duties such as reviewing financial reports and debating its approach to risk and internal controls. The Terms of Reference set out the responsibilities of the Audit Committee. These include: The report below sets out details of the Audit Committee’s – to monitor the integrity of the financial statements, including responsibilities, how it operated during the year, business reviewed at annual and half-yearly reports and any other formal meetings and information on the audit process and external auditors. announcement relating to the Group’s financial performance; – review and challenge, where necessary, the consistency of and 2013 promises to be a year of change in the regulatory environment any changes to accounting policies, methods used to account a"ecting audit committees. In line with expected developments, for significant or unusual transactions, whether the Company the Audit Committee will be reviewing proposed changes to going has followed appropriate accounting standards and clarity of concern statements stemming from the Sharman Report and will be disclosures in the Company’s financial reports; implementing provisions to strengthen audit committee reporting as – to review and approve the annual audit plan; required by amendments to the Code. – to review the findings of the audit with the external auditor; – to review the Group’s budgets; MICHAEL J. HIBBERD – to consider the establishment of an internal audit function; CHAIRMAN, AUDIT COMMITTEE – to review the Group’s internal control procedures and risk management systems, including review of the Group’s risk matrix; MEMB ERS OF THE AUDIT COMMITTEE AND – to oversee the relationship with the external auditors and ATTENDANCE AT MEETINGS review the e"ectiveness of the external audit process; – to make recommendations to the Board on the appointment, Attendance at meetings (5 meetings held) review and removal of external auditors and approve the Michael Hibberd, Chairman 5 external auditors’ remuneration; Carmen Rodriguez1 5 – oversee the selection process for new auditors; John McLeod 5 – to assess annually the external auditors’ independence taking Sir Michael Wilkes 5 into account relevant professional and regulatory requirements including reviewing the policy on provision of non-audit 1 Carmen Rodriguez replaced Salim Macki in March 2012. services; – to review whistle-blowing arrangements and the Company’s All members of the Audit Committee, including the Chairman, are procedures to prevent bribery and corruption; and independent Non-Executive Directors. Other members of the Board – to report to the Board on its proceedings, identifying any may be invited to attend meetings as and when appropriate. KPMG matters in respect of which it considers that action or Audit Plc regularly attend Audit Committee meetings and the Audit improvement is needed and making recommendations as to Committee also meets with KPMG Audit Plc, the external auditors, improvements needed. without management present from time to time. HOW THE AUDIT COMMITTEE OPERATES The Chairman of the Company, Michael Hibberd, is a member of, The Audit Committee meets formally at least twice a year to and chairs, the Audit Committee, which is not in line with the discharge its responsibilities and also engages in numerous ad hoc recommendations made in the Code. However, the Board continues discussions. The Audit Committee has a planned annual cycle with to believe that his recent and relevant financial experience, including scheduled meetings fixed at appropriate times during the financial his experience in corporate financial matters, is invaluable in reporting calendar. The agenda is agreed with the Audit Committee supporting the Audit Committee in performing its role. Chairman and includes a number of standard items, such as consideration of the financial statements and audit process. Other items may be added to the agenda by the Chairman, CFO, auditors or other members of the Committee. An aide memoire checklist is used to ensure that the Committee fully covers its remit during the year.

The Chairman ensures that there is adequate time for discussions and members receive full brieﬁng papers before each meeting.

The performance of the Audit Committee was reviewed during the year as part of the external Board performance review and it was concluded that the operation of the Audit Committee continued to remain e"ective. Corporate Governance 2012 HERITAGE OIL PLC 31

AUDIT PROCESS AND AUDIT INFORMATION WHAT DID THE AUDIT COMMITTEE DO The auditors prepare an Audit Plan for their review of the full DURING THE YEAR? year and half year financial statements. The Audit Plan sets out the scope of the audit, areas to be targeted and audit timetable. This During the year the Audit Committee considered the following plan is reviewed and agreed in advance by the Audit Committee. main items of business: Following their review the auditors present their findings to the Audit Committee for discussion. No major areas of concern were F INANCIAL AND BU S INESS REPORTING highlighted by the auditors during the year although they drew attention to the uncertainty surrounding the outcome of the ongoing Review and approval of working capital reports, review of going tax dispute in Uganda. Significant issues considered in relation to the concern and budget assumptions. Review of and discussions financial statements include the Shoreline transaction, the disputes relating to the audit report prepared by KPMG. Review and with the Ugandan government and Tullow Oil plc in relation to approval of the financial statements, review of the Annual Report disposal of the Group’s Ugandan Assets, litigation with a former and Accounts and half-yearly report. Review of the various CEO, and the valuation of intangible exploration assets and property, corporate documents issued during the year concerning the plant and equipment. Actions taken to address these issues were to Acquisition and Miran asset disposal in Kurdistan. Update on ensure that they were accounted for appropriately in accordance with recent accounting issues. EU IFRS and fully disclosed in the accounts.

F INANCE Directors who held o#ce at the date of approval of the Annual Report and Accounts conﬁrm that, so far as they are each aware, there is no Review of convertible bond arrangements and matters related relevant audit information of which the Company’s auditors are to a potential rights o"ering. Discussions in respect of various unaware and each Director has taken all the steps that they ought to Company assets. have taken as a Director to make themselves aware of any relevant audit information and to establish that the Company’s auditors are R I SK AND INTERNAL CONTROL aware of that information.

Discussions on approach to risk and compliance requirements, E X TERNAL AUDITORS A N D A U D I TO R review of the internal control report, identification of one INDEPENDENCE weakness and confirmation that procedures to mitigate against The Audit Committee and Board recognise the importance of the this are in place. Identification of new risks arising from the independence and objectivity of the Group’s external auditors, disposal of interests in Kurdistan and acquisition of assets in KPMG Audit Plc, when performing their role in the Group’s reporting Nigeria. Review of related party transactions. Review of the to shareholders. The Audit Committee has in place policies on: nature and scope of the whistle-blower policy. – the independence and objectivity of the external auditor; A UDIT AND E X TERNAL AUDITOR – employment of former employees of the external auditor; and – use of the external auditors for non-audit services. Review of audit findings report, audit plan and management representation letter. Consideration of auditor independence. These policies are reviewed regularly to ensure they remain in line Consideration of the need for an internal audit function. Review with ethical standards published by the Accounting Practices Board of audit and related fees for KPMG. and best practice with appropriate amendments made.

O THER The Audit Committee’s annual review of the independence of the external auditors includes consideration of information provided by Review of charitable donations, confirmation that there had the external auditors on policies and processes for maintaining been no political donations. Review of the Committee’s Terms independence and monitoring compliance with current regulatory of Reference and approval of amendments concerning reference requirements, including those regarding the rotation of audit partners to the Anti-Bribery and Corruption Committee. Overview of the and sta". The external auditors are required to rotate the audit acquisition of an interest in OML 30, Nigeria, and disposal of partner responsible for the Group audit every five years and the interests in Miran. Discussions concerning the ongoing Ugandan current audit partner has been in place for five years. Consequently tax dispute. Treasury management. there will be a new audit partner starting for the 2013 audit. In addition, in its assessment of the auditors’ independence, the levels of AUDITORS non-audit services provided by the external auditors were reviewed INTERNAL AUDIT by the Audit Committee. At present there is no internal audit function established. The Committee reviewed the need for an internal audit function in 2011 As well as considering independence and objectivity of the external and again in 2012. The Committee advised the Board that it believed auditor, their overall performance and e"ectiveness is reviewed the Company maintains current control systems that are e"ective and regularly by the Audit Committee. This review considers the audit that management oversight is su#cient to highlight any areas of planning process, quality of the audit report, feedback from weaknesses in the financial reporting systems. The need for an management and from KPMG Audit Plc as part of their own internal audit function is reviewed at least annually. control systems. HERITAGE OIL PLC Corporate Governance 2012 32

REP O R T O F T HE AU D I T REPORT OF THE NOMINATION COMMITTEE CONTINUED CO M M I T T EE

The policy on provision of non-audit services to the Company by the MEMB ERS OF THE NOMINATION COMMITTEE external auditor sets down which non-audit services it would be AND ATTENDANCE AT MEETINGS unacceptable for the auditor to provide. These include: Attendance at meetings (4 meetings held) – preparation of accounting records and financial statements that will be subject to external audit; Michael Hibberd, Chairman 4 – actuarial services; Anthony Buckingham 4 – investment advice; Sir Michael Wilkes 4 – secondments to management or financial reporting positions that involve decision making; The majority of the members of the Nomination Committee are – advice to the Remuneration Committee; and independent Non-Executive Directors. External advisers may also be – valuation services. invited to attend meetings as and when appropriate. The Nomination Committee has the power to request the attendance of any other Proposals for the external auditors to carry out all other non-audit Director or member of management, for all or part of any meeting, as services are pre-approved by the Audit Committee to ensure may be considered appropriate by the Chairman of the Committee. independence of the external auditors is not impaired. Other The Nomination Committee meets formally at least once a year and accounting firms are used for the provision of non-audit services also engages in numerous ad hoc discussions. wherever possible except where the knowledge and expertise of the external auditors means that it is more e#cient and e"ective for them The Terms of Reference of the Nomination Committee, as to carry out the work. This is on the overriding principle that the summarised below, were reviewed during 2012. Part of that external auditors’ independence will remain una"ected. In 2012 review involved consideration of developments in governance non-audit services included fees for transaction services which largely matters and good practice in other listed companies. The Terms of related to the Acquisition and were reviewed by the Audit Committee. Reference of the Committee are available on the Company’s website www.heritageoilplc.com. Fees billed by KPMG Audit Plc, the Company’s auditors and its associates, during 2011 and 2012, are summarised below: RES PONS I B ILITIES O F T H E N O M I N AT I O N 2012 2011 $ $ COMMITTEE Audit and audit-related services The Terms of Reference set out the responsibilities of the Group audit of annual statements Nomination Committee. These include: and review of interim statements 300,643 246,307 – to review the structure, size and composition (including the Audit of subsidiary financial balance of knowledge, skills and experience) of the Board in statements 49,555 17,431 order to recommend changes to the Board and to ensure the 350,198 263,738 orderly succession of Directors; Non-audit services – to give full consideration to succession planning for Directors Tax compliance 15,854 14,318 and other senior executives; Advisory 41,884 57,187 – to identify, evaluate and recommend candidates for Transaction services1 1,244,936 – appointment or reappointment as Directors taking into 1,302,674 71,505 account the challenges and opportunities facing the Company and the need for sector and gender representation; – to review outside directorships and time commitments of Non- 1 The majority of 2012 costs relating to the acquisition of an interest in OML 30. Executive Directors; – to ensure that on appointment Non-Executive Directors receive The current auditors, KPMG Audit Plc, have been the Company’s a formal letter of appointment setting out what is expected of auditors since 2008, when the Company listed on the LSE, and them in terms of time commitment, Committee service and previously were auditors to HOC. involvement outside Board meetings; – make recommendations to the Board on suitable candidates Having reviewed the independence and e"ectiveness of the auditors for the Senior Independent Director and membership of the and being satisfied that the auditors remain independent and e"ective Audit and Remuneration Committees, in consultation with the in their role, the Audit Committee has not considered it necessary to Committee Chairmen; and carry out a tender process this year. The Audit Committee therefore – make recommendations to the Board annually on the re- has recommended to the Board that the existing auditors, KPMG appointment of any Non-Executive Directors, giving due Audit Plc, be reappointed. KPMG Audit Plc have expressed their regard to their performance and ability to continue to willingness to continue as auditors. Ordinary resolutions to contribute to the Board. reappoint KPMG Audit Plc as auditors of the Company and authorise the Directors to set their remuneration will be proposed at the forthcoming AGM. Corporate Governance 2012 HERITAGE OIL PLC 33

APPOINTMENT PROCEDURE The Nomination Committee ensures, amongst other things, that there WHAT DID THE NOMINATION is a formal, rigorous and transparent procedure for the appointment of COMMITTEE DO DURING THE YEAR? new Directors. Recommendations are made objectively taking into account the balance of skills, knowledge and independence of a The following main items of business were considered by the candidate. The Nomination Committee will ensure that candidates Nomination Committee during the year: from a wide range of backgrounds are considered and take into account the diversity and gender make-up of the Board. It is recognised that use R E S ULTS OF BOARD EVALUATION of outside advertising or external search consultants will produce a wider range of candidates and the Committee may use these to facilitate Consideration of results of the Board evaluation in relation to the recruitment process as appropriate. Board composition and support for additional independent Non- Executive Directors. During the year the Nomination Committee discussed and considered the make-up and skill set of the Board. The Committee A PPOINTMENTS AND RES IGNATION OF also took into account the need for diversity and gender mix on the D IRECTORS Board and it was important that any candidate could demonstrate that they had su#cient time to dedicate to their role. Discussions in respect of candidates for new Non-Executive Directors, including consideration of Carmen Rodriguez and Given the international nature of the Company’s operations and its Mark Erwin. Following due diligence and meetings with Carmen very specific requirements it was not felt appropriate to use an external Rodriguez, approval of recommendation to the Board of the search consultancy or open advertising. Instead, recommendations appointment of Carmen Rodriguez as a Non-Executive Director. were sought through an extensive network of contacts. A number of Approval of the recommendation for Carmen Rodriguez’s candidates from a wide range of backgrounds were considered by the appointment as a member of the Audit and Remuneration Committee and a short list prepared. Of these, the Nomination Committees. Following meetings with Mark Erwin, Committee recommended Carmen Rodriguez and Mark Erwin for recommendation to the Board to appoint him as an additional appointment as Non-Executive Directors. Non-Executive Director and appointment to the CSR and Anti- Bribery and Corruption Committees. DIVERSITY AND G ENDER Accepting the resignation of Salim Macki from the Board and its The Nomination Committee supports the importance of having Committees and recording of thanks to Mr. Macki for his work as diversity of thought and representation on its Board. However, in a Non-Executive Director. terms of gender, the Company operates in an environment with low representation of women at all levels of the industry. In some I NDUCTION countries of operation cultural di"erences in particular mean that women are under-represented in the workforce. In order to address Consideration of induction process for new Directors and in this, the Company operates equal opportunity policies in all its areas particular identification of courses to enable new Directors to of activity and seeks to encourage the employment of women. The familarise themselves with the oil industry. aim is that over time, women as a percentage of the workforce will increase and lead to a larger pool of potential talent from which to R EPORTING recruit to senior positions. We have developed information systems in order to collate information on female representation and pay within Review and approval of the disclosures made in the Nomination Heritage which will help to inform future policy developments. The Committee Report in the Company’s Annual Report. first female Board member, Carmen Rodriguez, was appointed in March 2012. In addition, there are already a number of senior women SUCCESSION PLANNING in posts throughout the Group with direct lines of communication to members of the Board. The Board has discussed at some length the Review of succession planning for the CEO and agreement that the Davies Report and succession planning, as a result of which it will Company’s plans in this respect were valid and remained in place. actively seek to have female candidates to consider when making Board appointments. R E V IEW OF COMPOS ITION OF THE BOARD AND C OMMITTEES A diversity policy has been approved by the Board which states that the Company will work towards further female appointments to Consideration of feedback from shareholders on composition of senior management positions and the Board. The Company will the Board in respect of independent Non-Executive Directors and continue to encourage increasing diversity across operations and the Audit Committee. support equal opportunity policies across the Group. T ERMS OF REFERENCE The Nomination Committee is responsible for the Board Diversity Policy and monitoring its progress. Review and approval of the Committee’s Terms of Reference. HERITAGE OIL PLC Corporate Governance 2012 34

REPORT OF THE RESERV E S COMMITTEE

MEMB ERS OF THE RES ERV E S C O M M I T T E E A N D WHAT DID THE RES ERV E S C O M M I T T E E ATTENDANCE AT MEETINGS DO DURING THE YEAR?

Attendance at meetings (4 meetings held) During the year the Reserves Committee considered the following John McLeod, Chairman 4 items of business: Michael Hibberd 4 Paul Atherton 4 C OMPETENT PERS ONS REPORT Brian Smith, VP Exploration 1 Consideration and approval of two CPRs prepared by RPS Energy Consultants Limited and approval of the press release announcing Under its Terms of Reference the Reserves Committee will have at the publication of the CPRs. least three members, at least one of which will have relevant technical experience. The Chairman will be an independent Non-Executive EVALUATION OF PROJECTS Director. The Reserves Committee engages in numerous ad hoc discussions and meets formally at least once a year. External advisers Presentation by management of overview of evaluations for may also be invited to attend meetings as and when required. existing projects as well as for the acquisition of a majority interest in OML 30, through Shoreline. The Terms of Reference of the Committee, which are summarised below, are available on the Company’s website www.heritageoilplc.com. P ETROLEUM A SSETS

RES PONS I B ILITIES OF THE RES ERV E S Presentation by management of overview of OML 30 licence, C O M M I T T E E Nigeria, and Zapadno Chumpasskoye Field, Russia, in the CPR. Review of report on the Miran Field, Kurdistan, in the CPR. The primary function of the Reserves Committee is to assist the Board in fulfilling its oversight responsibilities generally with I NDEPENDENT RES ERV E S E VALUATORS respect to the oil and natural gas reserves evaluation process and public disclosure of reserves data and related information Consideration of the appointment of independent reserve evaluators in connection with oil and gas activities. In order to do this the to prepare CPRs in connection with the proposed acquisition of Committee carries out the responsibilities set out in its Terms of OML 30 and disposal of the Company’s interests in the Miran Reference. These include: Field, Kurdistan and which also covered existing projects. – to review, at least annually, the Company’s procedures relating to disclosure of information with respect to oil and R EPORTING gas activities, including its procedures for complying with any disclosure requirements and restrictions; Review of and recommendation to the Board to approve the – to review annually the qualifications and independence of the reserves and resources information contained in the Company’s independent qualified reserves evaluator(s) to be appointed Annual Report. or reappointed by the Board and, in the case of any proposed change in the independent qualified reserves evaluator(s), determine the reasons for the proposed change and whether there have been any disputes between the appointed qualified reserves evaluator(s) and management of the Company; – review the content of a) any statement of reserves data and other information, and b) any report of the independent qualified reserves evaluator(s) and make a recommendation to the Board on approval of such information; and – to review any public disclosure or regulatory filings with respect to any reserves evaluation and oil and gas activities. Corporate Governance 2012 HERITAGE OIL PLC 35

REPORT OF THE ANTI-BRIBERY AND CORRUPTION COMMITTEE

MEMB ERS OF THE ANTI-B RIB E R Y A N D WHAT DID THE ANTI-B RIB E R Y A N D CORRUPTION COMMITTEE AND ATTENDANCE CORRUPTION COMMITTEE DO DURING AT MEETINGS THE YEAR?

Attendance at meetings (2 meetings held) During the year the Anti-Bribery and Corruption Committee Sir Michael Wilkes, Chairman 2 considered the following main items of business: Michael Hibberd 2 Paul Atherton 2 R EPORTING Mark Erwin1 1 Review and approval of the anti-bribery and corruption disclosures 1 Mark Erwin was appointed to the Committee in May 2012. in the Company’s Annual Report.

Under its Terms of Reference the Anti-Bribery and Corruption R EGULATION Committee will consist of at least three members, consisting of Directors or other senior management. The Chairman of the Board Review of any changes to applicable anti-bribery and corruption will not be the Chair of the Committee. The Anti-Bribery and legislation. Corruption Committee oversees the Group’s anti-bribery programme and its ethical policies and practices. The Committee meets formally E DUCATIONAL PROGRAMMES at least once a year. External advisers may also be invited to attend meetings as and when required. Review of procedures established and education programmes in place that had been adopted. The Committee concluded these were The Terms of Reference of the Anti-Bribery and Corruption working well but would continue to be monitored. Discussions Committee, as summarised below, were reviewed during 2012 and relating to the budget for educational purposes. are available on the Company’s website www.heritageoilplc.com. M EMB ERS HIP

RES PONS I B ILITIES OF THE ANTI-B RIB E R Y A N D Consideration of membership of the Committee and approval of the CORRUPTION COMMITTEE appointment of Mark Erwin to the Committee as recommended by the Board. The Terms of Reference set out the responsibilities of the Anti- Bribery and Corruption Committee. These include: R I SK A SSE SSMENT – to maintain the Company’s anti-bribery and corruption policy framework in line with best practice and the appropriate Review of proposed acquisition of an interest in OML 30 in Nigeria international standards and guidelines; and any potential concerns. Review of due diligence undertaken and – to maintain the Company’s Anti-Bribery and Corruption Code agreement that partners, employees and contractors in Nigeria would of Conduct; adhere to the Company’s anti-bribery policies. – to maintain the Company’s anti-bribery and whistle-blowing procedures; T ERMS OF REFERENCE – to monitor related information reported through the Company’s whistle-blowing systems and other communications Review of the Committee’s Terms of Reference. mechanisms and, where necessary, make policy and systems enhancement recommendations to the Board; UK BRIBERY ACT AND CODE OF ETHICS – to assess and monitor bribery and corruption risks in the The Company has a zero tolerance policy to bribery which extends to territories in which the Company operates and plans to operate employees, agents, partners and contractors. in the future; – to assess and monitor bribery and corruption risks relating to The Company has carried out a number of actions in response to new projects and major transactions involving the Company; the introduction of the UK Bribery Act which became e"ective in – to foster knowledge sharing about bribery prevention around July 2011. During 2012 the Company continued in its anti-bribery the Group, with peer group companies and interested third educational programmes and undertook an annual risk assessment. parties such as non-governmental organisations; Furthermore, its anti-bribery procedures are being integrated – to ensure that employees, contractors, agents and suppliers into Shoreline. are fully aware of the Company’s anti-bribery policies and prevention systems (particularly whistle-blowing procedures); As a result of the actions taken, the Company has developed robust and bribery prevention procedures that include: – to ensure that the Company’s Annual and CSR Reports and website contain information that is a fair and coherent reﬂection – rigorous ﬁnancial management systems that aim to prevent of its anti-bribery approach, policies, systems and performance. instances of bribery; – an established whistle-blowing system to assist employees and contractors in reporting any related concerns they may have; – training and human resource systems to ensure employees and contractors are aware of Company procedures concerning the Code of Ethics, corporate entertaining and related policies; HERITAGE OIL PLC Corporate Governance 2012 36

REPORT OF THE ANTI-BRIBERY REPORT OF THE CORPORATE AND CORRUPTION COMMITTEE SOCIAL RESPONSIBIL I T Y CONTINUED COMMITTEE

– internal communications systems to disseminate and inform MEMB ERS OF THE CS R C O M M I T T E E A N D employees and contractors on Company policies and procedures; ATTENDANCE AT MEETINGS – review of operations and risk assessment; – regular consultation and discussion with peer group companies, Attendance at meetings (2 meetings held) investors, non-governmental organisations and regulatory authorities in the territories in which it operates; and Paul Atherton, Chairman 2 – regular review of the Company’s related policies, processes and Anthony Buckingham 2 performance by senior management, the CSR Committee, Audit Michael Hibberd 2 Committee and Anti-Bribery and Corruption Committee. Mark Erwin1 1

The Anti-Bribery and Corruption Committee is aware of the need to 1 Mark Erwin was appointed to the Committee in May 2012. keep the momentum of the initial launch in place. Attention in the forthcoming year will be to ensure processes are properly embedded The CSR Committee meets formally at least once a year and also throughout the Group, training of new employees and refresher engages in numerous ad hoc discussions. External advisers may also training for existing employees as appropriate. In particular attention be invited to attend meetings as and when required. will be focused on the roll out of the Group’s anti-bribery practices to its operations in Nigeria following the acquisition of a majority The Terms of Reference of the CSR Committee, as summarised interest in OML 30 through Shoreline. The programme will be below, were reviewed during 2012 and are available on the monitored and reviewed and adjustments made as appropriate. Company’s website www.heritageoilplc.com.

RES PONS I B ILITIES OF THE CS R C O M M I T T E E

The Terms of Reference set out the responsibilities of the CSR Committee. These include: – to maintain the Company’s CSR Policy Framework in line with best practice and appropriate international standards and guidelines; – to consider the Company’s risks associated with bribery, including reviewing the Company’s policies and systems and ensuring that risk assessments are conducted when the Company commences business in a new country; – to receive reports and review activities from executives and specialist groups managing CSR matters across the Company’s operation; – to develop a framework for submission, assessment and approval of discretionary and obligatory community, social, educational and charitable expenditures undertaken by the Company worldwide; – to prepare an annual Group CSR Report and ensure it reﬂects the Company’s CSR strategy, policies, systems and performance, is coherent and published in a timely manner; – to consider and propose an annual budget for CSR activities as part of the overall Group budget process; and – to review the internal CSR programme of the Company and ensure it has the appropriate standing within the Company.

POLITICAL AND CHARITABLE DONATIONS The Company made charitable, social and community-related donations during the year totalling c.$971,000 (2011 – $700,000). The Group has undertaken a wide range of community projects, including public health, education, environment, public facility and community relations based programmes, further details of which can be found in the separate CSR Report. In line with Group policy, no political donations were made during 2012 (2011 – nil). Corporate Governance 2012 HERITAGE OIL PLC 37

APPENDIX 1

COMPANY HISTORY AND PRINCIPAL ACTIVITIES The Company was incorporated as Heritage Oil Limited on 6 February 2008 in Jersey under the Companies (Jersey) Law 1991, as amended, (the “Jersey Companies Law”) to become the ultimate holding company of the Group. Heritage Oil Limited changed its name to Heritage Oil Plc on 18 June 2009.

The Company has had a Premium Listing on the Main Market of the LSE since March 2008. The Group has two share classes trading: Ordinary Shares issued by the Company which trade on the Main Market of the LSE (symbol HOIL) and Exchangeable Shares issued by Heritage Oil Corporation (“HOC”), a wholly owned subsidiary of the Company, which trade both on the Main Market of the LSE (symbol HOX) and on the Toronto Stock Exchange (symbol HOC). The Company is a member of the FTSE 250 Index.

The Group is an independent, international oil and gas exploration, development and production company with an international focus. It has producing assets in Nigeria and Russia and exploration assets in Tanzania, Papua New Guinea, Malta, Pakistan and Libya. The Group operates through a number of subsidiaries which are proﬁled on page 16 of the Financial Statements Report.

BUSINESS REVIEW The Business Review includes the ﬁnancial performance during the ﬁnancial year, future developments, performance of the Group and principal risks and uncertainties. A review of the Company’s business is incorporated by reference, forming part of this report, and includes information which can be found in the reports noted below:

– the Chief Executive’s Review and Financial Review within the Annual Review on pages 12 to 31; and – the CSR Report.

The cautionary statement concerning “forward-looking statements” on page 37 of the Annual Review forms part of this report and is incorporated by reference.

Important events occurring since the end of the year are detailed in the Financial Statements on page 37. Likely future developments are discussed in the Annual Review on pages 12 to 31.

CHANG E OF CONTROL AG REEMENTS The Company conﬁrms that it is not party to any signiﬁcant agreements that would take e"ect, alter or terminate upon a change of control following a takeover bid except those disclosed below:

– the Executive Directors’ service contracts contain certain provisions in relation to change of control as disclosed in the Remuneration Report; – the LTIP rules contain a provision whereby in the event of a change of control all awards will vest in their entirety subject to the achievement or otherwise of the performance conditions; and – bridge facility. HERITAGE OIL PLC Corporate Governance 2012 38

APPENDIX 2 UK CORPORATE GOVERNANCE CODE

As a Premium Listed company on the LSE, the Company is subject to the UK Corporate Governance Code. The provisions of the Code, and disclosures in relation to how the Company has applied these provisions, is set out below. It is the intention that, by covering routine disclosures in this appendix concerning items that change little from year to year, the main body of the Corporate Governance Report will focus on key items of importance to the Board and Committees during the year.

LOC ATION OF REFER ENCE R E QUIRE M ENT C OMMENTARY DISC LOSURE S

A. L E ADE RSHIP These responsibilities are set A.1 The Role of the Board out in the Schedule of Matters Every company should be headed by an e!ective board, Reserved for the Board, which which is collectively responsible for the success of the are summarised on page 9 of this company. report.

The board’s role is to provide entrepreneurial leadership of the company within a framework of prudent and e"ective controls which enables risk to be assessed and managed. The board should set the company’s strategic aims, ensure that the necessary ﬁnancial and human resources are in place for the company to meet its objectives and review management performance. The board should set the company’s values and standards and ensure that its obligations to its shareholders and others are understood and met.

All directors must act in what they consider to be the best Directors are made aware of their interests of the company, consistent with their statutory duties. statutory duties on joining the Board.

A.1.1 The board should meet su#ciently regularly to discharge A revised Schedule of Matters Page 9 its duties e"ectively. There should be a formal schedule of was reviewed and adopted early matters speciﬁcally reserved for its decision. The annual in 2012. report should include a statement of how the board Board procedures are well Page 13 operates, including a high-level statement of which types of established and details of the decisions are to be taken by the board and which are to be Board’s operation are provided in delegated to management. this report.

A.1.2 The annual report should identify the chairman, the deputy Details of members of the Board Pages 6 to 7 chairman (where there is one), the chief executive, the and their roles are set out in this senior independent director and the chairmen and members report and the table showing of the board committees. It should also set out the number number and attendance at Board of meetings of the board and its committees and individual meetings is shown on page 12. attendance by directors. Attendance at Committee Pages 20 to 36 meetings is shown in the respective Committee Reports. Corporate Governance 2012 HERITAGE OIL PLC 39

LOC ATION OF REFER ENCE R E QUIRE M ENT C OMMENTARY DISC LOSURE S

A.1.3 The company should arrange appropriate insurance cover The Company recognises the in respect of legal action against its directors. potential personal liabilities to which the Directors are subject and believes that it is appropriate to protect Directors from innocent errors or emissions. A Directors’ and O!cers’ Liability insurance policy is maintained to provide the Directors with an indemnity under certain circumstances. This is reviewed annually. Directors are not covered where they have acted fraudulently or dishonestly. Under the Articles, Directors are indemniﬁed out of the assets of the Company against any loss or liability incurred by reasons of having been a Director of the Company.

A.2 Division of Responsibilities Michael Hibberd is the Chairman There should be a clear division of responsibilities at the of the Board and Anthony head of the company between the running of the board Buckingham is the CEO. and the executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision.

A.2.1 The roles of chairman and chief executive should not A summary of the separate duties Page 10 be exercised by the same individual. The division of of the Chairman and CEO is responsibilities between the chairman and chief executive provided in this report. should be clearly established, set out in writing and agreed by the board. A.3 The Chairman These responsibilities are reﬂected Page 10 The chairman is responsible for leadership of the board in the written responsibilities of and ensuring its e!ectiveness on all aspects of its role. the Chairman.

The chairman is responsible for setting the board’s agenda and ensuring that adequate time is available for discussion of all agenda items, in particular strategic issues. The chairman should also promote a culture of openness and debate by facilitating the e"ective contribution of non- executive directors in particular and ensuring constructive relations between executive and non-executive directors. The chairman is responsible for ensuring that the directors receive accurate, timely and clear information. The chairman should ensure e"ective communication with shareholders.

A.3.1 The chairman should, on appointment, meet the The Chairman was considered to independence criteria set out in B.1.1 below. A chief be independent on appointment. executive should not go on to be chairman of the same company. If, exceptionally, a board decides that a chief executive should become chairman, the board should consult major shareholders in advance and should set out its reasons to shareholders at the time of the appointment and in the next annual report. HERITAGE OIL PLC Corporate Governance 2012 40

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LOC ATION OF REFER ENCE R E QUIRE M ENT C OMMENTARY DISC LOSURE S A.4 Non-executive directors These responsibilities are set out As part of their role as members of a unitary board, non- in the Non-Executive Directors’ executive directors should constructively challenge and letters of appointment. help develop proposals on strategy.

Non-executive directors should scruntinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance. They should satisfy themselves on the integrity of ﬁnancial information and that ﬁnancial controls and systems of risk management are robust and defensible. They are responsible for determining appropriate levels of remuneration of executive directors and have a prime role in appointing and, where necessary, removing executive directors, and in succession planning.

A.4.1 The board should appoint one of the independent non- Sir Michael Wilkes is the Senior Page 10 executive directors to be the senior independent director. Independent Director. Details of The senior independent director should be available to the role of the Senior Independent shareholders if they have concerns which contact through Director are provided in this the normal channels of chairman, chief executive or ﬁnance report. director has failed to resolve or for which such contact is inappropriate.

A.4.2 The chairman should hold meetings with the non-executive The Chairman and Non- directors without the executives present. Led by the senior Executive Directors met and independent director, the non-executive directors should spoke regularly during the year, meet without the chairman present at least annually to and on an ad hoc basis, without appraise the chairman’s performance and on such other the Executive Directors being occasions as are deemed appropriate. present. The Non-Executive Directors, led by the Senior Independent Director, appraised the Chairman’s performance as part of the annual performance evaluation undertaken during the year.

A.4.3 Where the directors have concerns which cannot be The Board Charter sets out resolved about the running of the company or a proposed Directors’ responsibilities relating action, they should ensure that their concerns are recorded to the operation of the Board and in the board minutes. On resignation, a non-executive conduct of Directors. It includes director should provide a written statement to the the right to ensure Directors’ chairman, for circulation to the board, if they have such concerns are recorded in Board concerns. minutes and that Non-Executive Directors, on resignation, should provide a written statement to the Chairman of any concerns. Corporate Governance 2012 HERITAGE OIL PLC 41

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B EFFECTIVENESS Details of the skill sets and Page 8 B.1 The Composition of the Board experience of the Directors are The board and its committees should have the appropriate provided in this report, together balance of skills, experience and knowledge of the with the split between Executive company to enable them to discharge their respective Directors, independent and duties and responsibilities e!ectively. non-independent Non-Executive Directors. The board should be of a su#cient size that the requirements of the business can be met and that changes to the board’s composition and that of its committees can be managed without undue disruption and should not be so large as to be unwieldy. The board should include an appropriate combination of executive and non-executive directors (and, in particular, independent non-executive directors) such that no individual or small group of individuals can dominate the board’s decision taking. The value of ensuring that committee membership Committee membership was is refreshed and that undue reliance is not placed on reviewed by the Nomination particular individuals should be taken into account in Committee and individual deciding chairmanship and membership of committees. committees during the year. No one other than the committee chairman and members is This is reﬂected in the Terms of entitled to be present at a meeting of the nomination, audit Reference of all the Committees or remuneration committee, but others may attend at the which may be found on invitation of the committee. the Company’s website at www.heritageoilplc.com.

B.1.1 The board should identify in the annual report each The independence of Directors is Page 9 non-executive director it considers to be independent. discussed in this report. The board should determine whether the director is independent in character and judgement and whether there are relationships or circumstances which are likely to a"ect, or could appear to a"ect, the director’s judgement. The board should state its reasons if it determines that a director is independent notwithstanding the existence of relationships or circumstances which may appear relevant to its determination, including if the director: – has been an employee of the company or group within the last five years; – has, or has had within the last three years, a material business relationship with the company either directly, or as a partner, shareholder, director or senior employee of a body that has such a relationship with the company; – has received or receives additional remuneration from the company apart from a director’s fee, participates in the company’s share option or a performance-related pay scheme, or is a member of the company’s pension scheme; – has close family ties with any of the company’s advisers, directors or senior employees; – holds cross-directorships or has significant links with other directors through involvement in other companies or bodies; – represents a significant shareholder; or – has served on the board for more than nine years from the date of their first election. HERITAGE OIL PLC Corporate Governance 2012 42

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B.1.2 Except for smaller companies, at least half the board, There are eight Directors in total. excluding the chairman, should comprise non-executive The Board considers that four of directors determined by the board to be independent. A the Non-Executive Directors and smaller company should have at least two independent non- the Chairman are independent. executive directors.

B.2 Appointments to the Board These responsibilities are part There should be a formal, rigorous and transparent of the Nomination Committee’s procedure for the appointment of new directors to the board. remit and are included in its Terms of Reference. The search for board candidates should be conducted, and Appointments are made on appointments made, on merit against objective criteria merit and the Nomination with due regard for the beneﬁts of diversity on the board, Committee considers diversity as including gender. part of this process. Succession The board should satisfy itself that plans are in place for planning is regularly discussed at orderly succession for appointments to the board and Nomination Committee meetings. to senior management, so as to maintain an appropriate balance of skills and experience within the company and on the board and to ensure progressive refreshing of the board.

B.2.1 There should be a nomination committee which should The Report of the Nomination Pages 32 to 33 lead the process for board appointments and make Committee is detailed in this recommendations to the board. A majority of members report. of the nomination committee should be independent non-executive directors. The chairman or an independent non-executive director should chair the committee, but the chairman should not chair the nomination committee when it is dealing with the appointment of a successor to the chairmanship. The nomination committee should make available its terms of reference, explaining its role and the authority delegated to it by the board.

B.2.2 The nomination committee should evaluate the balance The Nomination Committee will of skills, experience, independence and knowledge on undertake a review of the skills, the board and, in the light of this evaluation, prepare experience, independence and a description of the role and capabilities required for a knowledge on a regular basis and particular appointment. prepare a description of the role and capabilities for any identiﬁed appointments.

B.2.3 Non-executive directors should be appointed for speciﬁed Non-Executive Directors are Page 8 terms subject to re-election and to statutory provisions appointed for speciﬁed terms relating to the removal of a director. Any term beyond six subject to annual re-election years for a non-executive director should be subject to by shareholders. The length of particularly rigorous review, and should take into account tenure of the Non-Executive the need for progressive refreshing of the board. Directors is set out in this report.

B.2.4 A separate section of the annual report should describe the The Report of the Nomination Pages 32 to 33 work of the nomination committee, including the process it Committee is detailed in this has used in relation to board appointments. An explanation report. should be given if neither an external search consultancy nor open advertising has been used in the appointment of a chairman or a non-executive director. Corporate Governance 2012 HERITAGE OIL PLC 43

LOC ATION OF REFER ENCE R E QUIRE M ENT C OMMENTARY DISC LOSURE S B.3 Commitment All directors should be able to allocate su"cient time to the company to discharge their responsibilities e!ectively.

B.3.1 For the appointment of a chairman, the nomination The Nomination Committee will Pages 6 to 7 committee should prepare a job specification, including an prepare a job specification in the assessment of the time commitment expected, recognising event of the appointment of a the need for availability in the event of crises. A chairman’s new Chairman. other significant commitments should be disclosed to the board before appointment and included in the annual The Chairman’s other significant report. Changes to such commitments should be reported commitments are disclosed to to the board as they arise, and their impact explained in the the Board and may be found in next annual report. the Directors’ biographies in this report.

B.3.2 The terms and conditions of appointment of non-executive The terms and conditions of directors should be made available for inspection. The appointment of the Non-Executive letter of appointment should set out the expected time Directors are available on request. commitment. Non-executive directors should undertake that they will have su#cient time to meet what is expected The letters of appointment of Page 14 of them. Their other signiﬁcant commitments should be the Non-Executive Directors set disclosed to the board before appointment, with a broad out the terms of appointment, indication of the time involved and the board should be including the agreed expected informed of subsequent changes. time commitment. This is then assessed as part of performance evaluation to ensure they continue to be able to devote su!cient time to their duties. An example of a Non-Executive Director’s letter of appointment may be found in this report.

Prior to appointment, all Directors are expected to disclose their other time commitments in order to demonstrate that they have su!cient time to fulﬁl their role as a Director.

B.3.3 The board should not agree to a full time executive director The policy on Executive Directors taking on more than one non-executive directorship in taking on external roles is set a FTSE 100 company nor the chairmanship of such a out in the Board Charter. It company. is the Company’s policy that Executive Directors are permitted to accept directorships of other quoted companies provided that they have prior permission of the Chairman. However, an Executive Director will not be permitted to take on more than one non-executive directorship of a FTSE 100 company nor the chairmanship of such a company. HERITAGE OIL PLC Corporate Governance 2012 44

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LOC ATION OF REFER ENCE R E QUIRE M ENT C OMMENTARY DISC LOSURE S B.4 Development The induction programme put Page 14 All directors should receive induction on joining the board in place for the two new Non- and should regularly update and refresh their skills and Executive Directors appointed knowledge. during the year is described in this report. The chairman should ensure that the directors continually update their skills and the knowledge and familiarity with All Directors are actively the company required to fulfil their role both on the board encouraged to question, and on board committees. The company should provide examine and review the Group’s the necessary resources for developing and updating its operations and to undertake directors’ knowledge and capabilities. training applicable to their roles. To function e"ectively, all directors need appropriate Non-Executive Directors develop knowledge of the company and access to its operations an understanding of the views and sta". of major shareholders through various channels, including briefings by the Executive Directors and the Senior Independent Director and by information provided at Board meetings on investor relations strategy. All Directors have the opportunity to update their skills and knowledge on a regular basis through briefings at Board meetings on issues including changes in law and regulation, corporate governance, financial reporting and operational matters.

Directors are in regular communication with senior executives through both formal and informal ad hoc meetings, to ensure an exchange of knowledge and experience between management and Directors. Corporate Governance 2012 HERITAGE OIL PLC 45

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B.4.1 The chairman should ensure that new directors receive a It is part of the Chairman’s Page 10 full, formal and tailored induction on joining the board. written responsibilities to ensure As part of this, the directors should avail themselves of that new Directors receive a full, opportunities to meet major shareholders. formal and tailored induction on joining the Board. Upon joining the Board a Director will participate in an induction programme covering the principles and legal and regulatory duties required of them. This training is tailored to an individual’s needs, taking into account their qualiﬁcations and experience. In addition, meetings are arranged with senior management to enable Non- Executive Directors to develop a detailed understanding of the Company’s business, its strategy and the key risks and challenges facing the Company.

The induction process for the two Page 14 new Directors who joined the Board during the year, Carmen Rodriguez and Mark Erwin, is described in this report.

B.4.2 The chairman should regularly review and agree with each The Chairman regularly reviews director their training and development needs. the training and development needs of Directors as part of the annual evaluation process.

B.5 Information and Support The Chairman, supported by the The board should be supplied in a timely manner with CEO and CFO, ensures that all information in a form and of a quality appropriate to Directors receive accurate, timely enable it to discharge its duties. and clear information to support informed discussions at Board The chairman is responsible for ensuring that the directors meetings. receive accurate, timely and clear information. Management has an obligation to provide such information but directors See disclosure under B.5.2 below should seek clarification or amplification where necessary. in relation to the Company Under the direction of the chairman, the company Secretary. secretary’s responsibilities include ensuring good information flows within the board and its committees and between senior management and non-executive directors, as well as facilitating and assisting with professional development as required. The company secretary should be responsible for advising the board through the chairman on all governance matters.

B.5.1 The board should ensure that directors, especially non- The right of all Directors to executive directors, have access to independent professional access independent professional advice at the company’s expense where they judge it advice whenever it is required necessary to discharge their responsibilities as directors. and at the Company’s expense is Committees should be provided with su#cient resources to written into the Board Charter. undertake their duties. The Terms of Reference of each of the Board Committees sets out that they must be provided with su!cient resources for them to undertake their duties. HERITAGE OIL PLC Corporate Governance 2012 46

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B.5.2 All directors should have access to the advice and services Given the size of the Company, of the company secretary, who is responsible to the board the Board feels that it is in the for ensuring that board procedures are complied with. Both shareholders’ best interests not the appointment and removal of the company secretary to employ a full-time Company should be a matter for the board as a whole. Secretary at this stage in the Company’s development. The current Company Secretary is a corporate entity based in Jersey that deals with the normal statutory compliance for the Company. The Board and its Committees are, therefore, serviced by the Company Secretary or its nominee. The other duties that would normally be carried out by the Company Secretary, such as the provision of information ﬂows to the Board, are dealt with by the Chairman, the CEO or CFO or their nominee. In terms of corporate governance issues, the Board is advised by McCarthy Tétrault, a ﬁrm of registered foreign lawyers and solicitors with o!ces in North America and in London. The Board monitors the provision of company secretarial duties and takes any action as appropriate to ensure its requirements are met. The appointment or removal of the Company Secretary is a matter for the Board as a whole.

B.6 Evaluation The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.

The chairman should act on the results of the performance evaluation by recognising the strengths and addressing the weaknesses of the board and, where appropriate, proposing new members be appointed to the board or seeking the resignation of directors. Individual evaluation should aim to show whether each director continues to contribute e"ectively and to demonstrate commitment to the role (including commitment of time for board and committee meetings and any other duties).

B.6.1 The board should state in the annual report how A review of how performance Page 15 performance evaluation of the board, its committees and its evaluation has been carried out individual directors has been conducted. may be found in this report. Corporate Governance 2012 HERITAGE OIL PLC 47

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B.6.2 Evaluation of the board of FTSE 350 companies should be In 2012 the performance review externally facilitated at least every three years. A statement was conducted internally by should be made available of whether an external facilitator means of interviews by the has any other connection with the company. Chairman. The last externally facilitated performance review was carried out by the Group in 2010. A further externally facilitated evaluation is taking place in 2013.

B.6.3 The non-executive directors, led by the senior independent The evaluation of the Chairman’s director, should be responsible for performance evaluation performance is conducted by the of the chairman, taking into account the views of executive Non-Executive Directors, led by directors. Sir Michael Wilkes as the Senior Independent Director, and also takes into account the views of the Executive Directors.

B.7 Re-election All directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance.

B.7.1 All directors of FTSE 350 companies should be subject With regard to retirement and to annual election by shareholders. All other directors re-election of Directors, the should be subject to election by shareholders at the ﬁrst Company is governed by its annual general meeting after their appointment, and to re- Articles, the Code and the Jersey election thereafter at intervals of no more than three years. Companies Law. Under the Non-executive directors who have served longer than nine Articles, Directors have the power years should be subject to annual re-election. The names to appoint a Director to the Board of directors submitted for election or re-election should during the year but any person be accompanied by su#cient biographical details and any so appointed must stand for other relevant information to enable shareholders to take an election at the next AGM. Having informed decision on their election. considered feedback and investor sentiment during the year it was agreed that with e#ect from the 2012 AGM, all Directors will retire and stand for re-election annually. Directors re-elected at the AGM will be appointed for a one-year term.

B.7.2 The board should set out to shareholders in the papers The Notice of Annual General accompanying a resolution to elect a non-executive director Meeting includes in the notes why they believe an individual should be elected. The accompanying the resolutions to chairman should conﬁrm to shareholders when proposing elect Non-Executive Directors re-election that, following formal performance evaluation, why the Board believes that the individual’s performance continues to be e"ective and individual should be elected. to demonstrate commitment to the role. HERITAGE OIL PLC Corporate Governance 2012 48

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C. A CCOUN TABILITY AN D AUDIT C.1 Financial and Business Reporting The board should present a balanced and understandable assessment of the company’s position and prospects. The board’s responsibility to present a balanced and understandable assessment extends to interim and other price-sensitive public reports and reports to regulators as well as to information required to be presented by statutory requirements.

C.1.1 The directors should explain in the annual report their The responsibility statements Pages 8 to 9 responsibility for preparing the annual report and accounts of the Directors and the and there should be a statement by the auditors about their Independent Auditor’s Report reporting responsibilities. may be found in the Financial Statements Report.

C.1.2 The directors should include in the annual report an A full review and report on the explanation of the basis on which the company generates Company’s business model and or preserves value over the longer term (the business strategy may be found in the model) and the strategy for delivering the objectives of Annual Review Report, which the company. accompanies this Corporate Governance Report.

C.1.3 The directors should report in annual and half-yearly A statement on going concern Page 8 ﬁnancial statements that the business is a going concern, may be found in the Financial with supporting assumptions or qualiﬁcations as necessary. Statements Report.

C.2 Risk Management and Internal Control The Board’s responsibilities for The board is responsible for determining the nature risk and internal control are set and extent of the signiﬁcant risks it is willing to take out in the Schedule of Matters in achieving its strategic objectives. The board should Reserved for the Board. maintain sound risk management and internal control systems.

C.2.1 The board should, at least annually, conduct a review of the Details of the Group’s risk Page 15 e"ectiveness of the group’s risk management and internal management and internal control control systems and should report to shareholders that they systems may be found in this have done so. The review should cover all material controls, report and further details may including ﬁnancial, operational and compliance controls. be found in the Annual Review Report.

C.3 Audit Committee and Auditors The board should establish formal and transparent arrangements for considering how they should apply the corporate reporting and risk management and internal control principles and for maintaining an appropriate relationship with the company’s auditors.

C.3.1 The board should establish an audit committee of at least The Audit Committee Report Pages 30 to 32 three, or in the case of smaller companies two, independent may be found in this report. non-executive directors. In smaller companies the company chairman may be a member of, but not chair, the committee in addition to the independent non-executive directors, provided he or she was considered independent on appointment as chairman. The board should satisfy itself that at least one member of the audit committee has recent and relevant ﬁnancial experience. Corporate Governance 2012 HERITAGE OIL PLC 49

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C.3.2 The main role and responsibilities of the audit committee A summary of the Terms of Page 30 should be set out in written terms of reference and should Reference of the Audit Committee include: may be found in this report. – to monitor the integrity of the financial statements of the company, and any formal announcements relating to the company’s financial performance, reviewing significant financial reporting judgements contained in them; – to review the company’s internal financial controls and, unless expressly addressed by a separate board risk committee composed of independent directors, or by the board itself, to review the company’s internal control and risk management systems; – to monitor and review the e"ectiveness of the company’s internal audit function; – to make recommendations to the board, for it to put to the shareholders for their approval in general meeting, in relation to the appointment, re-appointment and removal of the external auditor and to approve the remuneration and terms of engagement of the external auditor; – to review and monitor the external auditor’s independence and objectivity and the e"ectiveness of the audit process, taking into consideration relevant UK professional and regulatory requirements; and – to develop and implement policy on the engagement of the external auditor to supply non-audit services, taking into account relevant ethical guidance regarding the provision of non-audit services by the external audit firm; and to report to the board, identifying any matters in respect of which it considers that action or improvement is needed and making recommendations as to the steps to be taken.

C.3.3 The terms of reference of the audit committee, including its The Terms of Reference of the Pages 30 to 32 role and the authority delegated to it by the board, should Audit Committee are available on be made available. A separate section of the annual report the Company’s website should describe the work of the committee in discharging www.heritageoilplc.com. those responsibilities. The Report of the Audit Committee can be found in this report.

C.3.4 The audit committee should review arrangements by which A whistle-blowing policy is in sta" of the company may, in conﬁdence, raise concerns operation across the Group. Any about possible improprieties in matters of ﬁnancial feedback from these arrangements reporting or other matters. The audit committee’s objective is regularly reviewed by the should be to ensure that arrangements are in place for Audit Committee along with the the proportionate and independent investigation of such operation of the policy. matters and for appropriate follow-up action. HERITAGE OIL PLC Corporate Governance 2012 50

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C.3.5 The audit committee should monitor and review the At present there is no internal e"ectiveness of the internal audit activities. Where there audit function established. The is no internal audit function, the audit committee should Audit Committee reviewed consider annually whether there is a need for an internal the need for an internal audit audit function and make a recommendation to the board, function in 2011 and again in and the reasons for the absence of such a function should be 2012. It concurred with the explained in the relevant section of the annual report. opinion of the Board, which maintains that the current control systems in place and management oversight are su!cient to highlight any areas of weaknesses in the ﬁnancial reporting systems. The need for an internal audit function is reviewed at least annually.

C.3.6 The audit committee should have primary responsibility Information on the external Pages 31 to 32 for making a recommendation on the appointment, auditors can be found in re-appointment and removal of the external auditors. this report. If the board does not accept the audit committee’s recommendation, it should include in the annual report, and in any papers recommending appointment or reappointment, a statement from the audit committee explaining the recommendation and should set out reasons why the board has taken a di"erent position.

C.3.7 The annual report should explain to shareholders how, if Disclosures in respect of auditor Pages 31 to 32 the auditor provides non-audit services, auditor objectivity objectivity and independence and independence is safeguarded. may be found in the Report of the Audit Committee.

D. R E MUNERATION Disclosures relating to Pages 20 to 29 D.1 The Level and Components of Remuneration remuneration and the provisions Levels of remuneration should be su"cient to attract, of Section D of the Code may retain and motivate directors of the quality required to be found in the Report of the run the company successfully, but a company should Remuneration Committee. avoid paying more than is necessary for this purpose. A signiﬁcant proportion of executive directors’ remuneration should be structured so as to link rewards to corporate and individual performance. The performance-related elements of executive directors’ remuneration should be stretching and designed to promote the long-term success of the company. The remuneration committee should judge where to position their company relative to other companies. But they should use such comparisons with caution, in view of the risk of an upward ratchet of remuneration levels with no corresponding improvement in performance. They should also be sensitive to pay and employment conditions elsewhere in the group, especially when determining annual salary increases. Corporate Governance 2012 HERITAGE OIL PLC 51

LOC ATION OF REFER ENCE R E QUIRE M ENT C OMMENTARY DISC LOSURE S D.2 Procedure There should be a formal and transparent procedure for developing policy on executive remuneration and for ﬁxing the remuneration packages of individual directors. No director should be involved in deciding his or her own remuneration. The remuneration committee should consult the chairman and/or chief executive about their proposals relating to the remuneration of other executive directors. The remuneration committee should also be responsible for appointing any consultants in respect of executive director remuneration. Where executive directors or senior management are involved in advising or supporting the remuneration committee, care should be taken to recognise and avoid conﬂicts of interest. The chairman of the board should ensure that the company maintains contact as required with its principal shareholders about remuneration.

E. R E LATION S WITH SHARE HOLDE RS Regular investor reports are made E.1 Dialogue with Shareholders to the whole Board to ensure There should be a dialogue with shareholders based on the that any major issues raised by mutual understanding of objectives. The board as a whole shareholders are reviewed. has responsibility for ensuring that a satisfactory dialogue with shareholders takes place. Whilst recognising that most shareholder contact is with the chief executive and ﬁnance director, the chairman should ensure that all directors are made aware of their major shareholders’ issues and concerns. The board should keep in touch with shareholder opinion in whatever ways are most practical and e#cient.

E.1.1 The chairman should ensure that the views of shareholders Regular investor relation reports are communicated to the board as a whole. The chairman are made to the Board. should discuss governance and strategy with major shareholders. Non-executive directors should be o"ered the opportunity to attend scheduled meetings with major shareholders and should expect to attend meetings if requested by major shareholders. The senior independent director should attend su#cient meetings with a range of major shareholders to listen to their views in order to help develop a balanced understanding of the issues and concerns of major shareholders.

E.1.2 The board should state in the annual report the steps Details are provided in this Page 16 they have taken to ensure that members of the board, report. and in particular the non-executive directors, develop an understanding of the views of major shareholders about the company, for example through direct face-to-face contact, analysts’ or brokers’ brieﬁngs and surveys of shareholder opinion. HERITAGE OIL PLC Corporate Governance 2012 52

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LOC ATION OF REFER ENCE R E QUIRE M ENT C OMMENTARY DISC LOSURE S E.2 Constructive Use of the AGM The board should use the AGM to communicate with investors and to encourage their participation.

E.2.1 At any general meeting, the company should propose a Proxy forms allow shareholders separate resolution on each substantially separate issue, to vote for or against a resolution and should in particular propose a resolution at the AGM or to withhold their vote. It is relating to the report and accounts. For each resolution, made clear on the proxy form proxy appointment forms should provide shareholders with that a vote withheld is not a vote the option to direct their proxy to vote either for or against in law and will not be counted the resolution or to withhold their vote. The proxy form as a vote either for or against and any announcement of the results of a vote should make the resolution. it clear that a “vote withheld” is not a vote in law and will not be counted in the calculation of the proportion of the votes for and against the resolution.

E.2.2 The company should ensure that all valid proxy The collation of proxy votes is appointments received for general meetings are properly undertaken by the Company’s recorded and counted. For each resolution, where a vote has Registrar, Computershare. been taken on a show of hands, the company should ensure Information on proxy voting, that the following information is given at the meeting including votes for, against and and made available as soon as reasonably practicable votes withheld, are released to on a website which is maintained by or on behalf of the the market after the AGM or any company: general meeting. Where voting is – the number of shares in respect of which proxy carried out by poll, the Company appointments have been validly made; releases details of the poll voting – the number of votes for the resolution; as soon as possible after the – the number of votes against the resolution; and meeting. – the number of shares in respect of which the vote was directed to be withheld.

E.2.3 The chairman should arrange for the chairmen of the audit, All the Directors, including remuneration and nomination committees to be available to the chairmen of the Board answer questions at the AGM and for all directors to attend. Committees, attended the AGM in 2012 and it is intended will do so again in 2013.

E.2.4 The company should arrange for the Notice of the AGM Formal notice of the AGM, and related papers to be sent to shareholders at least 20 including details of special working days before the meeting. business, is set out in the Notice of AGM and dispatched to shareholders at least 20 working days before the meeting. The Notice of AGM will also be available on the Company’s website www.heritageoilplc.com. Corporate Governance 2012 HERITAGE OIL PLC 53

CORPORATE GOVERNANCE GLOSSARY

$ US dollars unless otherwise stated AGM Annual General Meeting ALBION Albion Energy Limited API a speciﬁc gravity scale developed by the American Petroleum Institute for measuring the relative density of various petroleum liquids, expressed in degrees ARTICLES Articles of Association of the Company BBL/BBLS barrel/barrels BBLS/D OR BOPD barrels per day or barrels of oil per day BCF billion cubic feet BOE barrels of oil equivalent1 BOE/D OR BOEPD barrels of oil equivalent per day CODE UK Corporate Governance Code COMPANY Heritage Oil Plc CSR Corporate Social Responsibility DAVIES REPORT report issued in February 2011 concerning the representation of women on company boards DTR Financial Conduct Authority’s Disclosure and Transparency Rules EU European Union FCA Financial Conduct Authority GROUP, HERITAGE the Company and all of its subsidiaries HOC OR CORPORATION Heritage Oil Corporation, incorporated in Canada and a wholly owned subsidiary of the Company IFRS International Financial Reporting Standards JERSEY COMPANIES LAW Companies (Jersey) Law 1991 KPI Key Performance Indicator LSE London Stock Exchange LTI Lost Time Injury LTIFR Lost Time Injury Frequency Rate LTIP Long Term Incentive Plan M metres M 3 cubic metres MBBLS thousand barrels MMBBLS million barrels MBOE thousands of barrels of oil equivalent MMBOE millions of barrels of oil equivalent MCF thousand cubic feet MCF/D thousand cubic feet per day MMBTU million british thermal units MMSCF million standard cubic feet MMSCF/D million standard cubic feet per day MMSTB million stock tank barrels N/A not applicable OML 30 Oil Mining Licence 30 ORIGINAL PLAN HOC plan P E T R O L E U M any mineral, oil or relative hydrocarbon (including condensate and natural gas liquids) and natural gas existing in its natural condition in strata (but not including coal or bituminous shale or other stratiﬁed deposits from which oil can be extracted by destructive distillation) PSA OR PSC production sharing agreement or production sharing contract

CORPORATE GOVERNANCE GLOSSARY CONTINUED

REGULATIONS UK Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 REPLACEMENT SCHEME the Heritage Oil Limited 2008 Replacement Share Option Scheme SHORELINE Shoreline Natural Resources Limited SPECIAL VOTING SHARE Special Voting Share of HOC TSR Total Shareholder Return TSX Toronto Stock Exchange TURNBULL GUIDANCE FRC’s guidance on internal control UK BRIBERY ACT The UK Bribery Act 2010 which was introduced in July 2011 UK STEWARDSHIP CODE code introduced by the FRC in July 2010 which aims to enhance the quality of engagement between institutional investors and companies 2008 LTIP 2008 Long Term Incentive Plan 2011 LTIP 2011 Long Term Incentive Plan

C O N V E RSION TABLE The following table sets forth standard conversions from Standard Imperial Units to the International System of Units (or metric units).

NOTES HERITAGE OIL PLC Corporate Governance 2012 56

NOTES Corporate Governance 2012 HERITAGE OIL PLC

ADVISERS AND FINANCIAL CALENDAR

CANADIAN LEGAL ADVISERS TO THE COMPANY McCarthy Tétrault LLP Suite 3300 421–7th Avenue SW Calgary Alberta T2P 4K9 Canada H ERITAGEO ILPLC. C OM

HERITAGE OIL PLC

Fourth Floor, Windward House La Route de la Liberation St Helier JE2 3BQ Jersey Channel Islands

T: +44 (0) 1534 835 400 F: +44 (0) 1534 835 412 RES PECT

C O RPO RATE SOCIAL RES P O N S I B ILITY 2012 HERITAGE OIL PLC Corporate Social Responsibility Report 2012

CONTENTS THE HERITAGE OIL P LC A NNUAL R EPO R T A N D A CCO UNTS 2012 CO N S I S T S OF FOUR DO CUM ENTS A S DETAILED B ELOW.

O VERVIEW Annual Review Corporate Governance Highlights 2012 01 The Annual Review provides an The Corporate Governance Report Outlook 2013 01 GROWTH overview of Heritage, its processes F RAM E WORK provides detailed information on ANNUAL REVIEW COR PORATE GO VERNANC E 20I 2 2012 The CSR Committee Chairman’s Statement 02 and a Business Review. all aspects of Heritage’s corporate About this report 04 governance. Our CSR framework 05 CSR policy framework 06 Targets and achievements 08

KEY A REAS Environment and sustainability 10 Corporate Social Financial Statements Health and safety 12 Responsibility The Financial Statements Report RESPECT DIVERSIFIED provides detailed information on Employees 14 CORPORATE SOCIAL RESPONSIBILITY The CSR Report provides detailed FINANCIAL STATEMENTS 20I 2 20I 2 Community and human rights 16 information concerning Heritage’s Heritage’s ﬁnancial position. Business conduct 18 CSR strategy, policies, systems and Corporate governance 20 performance.

A DDITIO NAL I N FOR M ATIO N Risk management 22 Global Reporting Initiative 23 CSR glossary 35 Advisers and ﬁnancial calendar IBC Corporate Social Responsibility Report 2012 HERITAGE OIL PLC 01

HIGHLIGH TS OPERATIONAL – Approximately US$971,000 spent on Corporate Social Responsibility 2012 (“CSR”) related initiatives, c.39% higher than 2011 – Community projects implemented through health, education and social programme investments across all operating regions – Zero whistle-blowing cases or breaches in business conduct principles – Zero Lost Time Incidents (“LTIs”) or fatalities across all operations – Employment of local people remains high across all operations – Acquired an interest in a producing oil mining licence, OML 30 in Nigeria through Shoreline Natural Resources Limited (“Shoreline”) – Commenced adoption of Heritage’s CSR policies and systems in the Shoreline joint venture

Employees Environment and sustainability Number of local people employed, % Environmental incidents, ﬁnes or sanctions, all operations

100

75 0

50 Health and safety LTIs, all operations a

25 i n n a ta a i a s z i t s i l s n k al a u a a 0 Kurdistan T R M M P Libya 0 Business conduct Community and human rights Breaches in business conduct policies Health and social programme investments, $’000 0 $220 Corporate governance – Enhanced Board through two appointments, including the ﬁrst woman Director – Developed executive remuneration policy in line with best practice – Reviewed policies and commenced their implementation to Shoreline

OUTLOOK – Continue to extend our practices to our operations in Nigeria – Review the impact of mandatory reporting on greenhouse gas 2013 (“GHG”) emissions

All dollars are US dollars unless otherwise stated. HERITAGE OIL PLC Corporate Social Responsibility Report 2012 02

T HE CSR CO MMITTEE CHAIRM AN’S STATEM ENT

ENGAGING WITH C O MMUNITIES

PAUL ATH ERTON CHAIRM AN, CSR CO MMITTEE

Our business in new territories brings new challenges which we are This has been an exciting year confident of meeting through the application of our existing approach for Heritage as the Company has and policies. We are aware of the importance of e"ective engagement with all stakeholders, therefore it is embedded within our business undergone a transformational model. We aim to operate to the highest international social, rebalancing of the portfolio. We have environmental and safety standards within the industry and believe it is important to maintain a positive influence in areas where we entered two new regions; Nigeria conduct our business. We are continuing to extend our philosophy and more recently, Papua New Guinea and practices to Shoreline’s operations in Nigeria. and have exited the Kurdistan Region The CSR Committee is tasked with developing, implementing and overseeing our CSR strategy systems and performance and ensuring of Iraq (“Kurdistan”) and Mali. For these are in line with our overall business aims and objectives. During 2013 Mark Erwin was appointed to the Board and given his exploration we are increasingly forced international experience also appointed to the CSR Committee. The to consider frontier areas in order to Terms of Reference for this Committee can be found on our website continue Heritage’s phenomenal track www.heritageoilplc.com. record of success. Our CSR policy framework, on pages 6 to 7, supports our business model and sets out the essential core values that make Heritage a good corporate citizen. We measure ourselves against deliberately high standards and recognise the importance of being a partner of choice. We identify specific responsibilities in each of the six core areas of potential impact and opportunity, specific to the CSR aspects of our activities. Adherence to these CSR values is viewed as one of the key factors in securing the long-term operational success of the Company. Corporate Social Responsibility Report 2012 HERITAGE OIL PLC 03

I am pleased to report that during 2012 we continued to have an We acknowledge that being listed on the London Stock Exchange excellent health and safety record with no LTIs or fatalities. During will require disclosing GHG as part of our Director’s report from the year, community projects were implemented in our main areas of reporting periods beginning 1 October 2013. With our primary operation and there were no environmental incidents. Our initiatives activities to date being in exploration we have not produced material over the year were focused on health, education and social investments amounts of GHG emissions and consequentially have not reported across our operating regions. Furthermore, we continue to operate this information. However, with the acquisition of OML 30 we are with high standards of both business conduct and corporate formulating processes to secure the relevant information and will governance. We have expanded our Board through the appointment look to adopt IPIECAs petroleum industry guidelines for reporting of two new Non-Executive Directors; Carmen Rodriguez and Mark greenhouse gas emissions. The Company continued with its Erwin. We have reviewed and amended our Executive remuneration participation in the Carbon Disclosure Project in 2012. and increased our corporate governance disclosure as can be seen in Appendix 2 of the separate Corporate Governance Report. In Nigeria, conclusions from recent consultations with communities’ within the OML 30 licence have allowed Heritage and its partners to In 2012 we acquired an interest in OML 30, Nigeria, through gain an understanding of the fundamental issues of concern arising Shoreline, and we have begun to implement our CSR polices in this from activities in the area. This will enable Heritage to engage joint venture. A natural part of a new project involves consultation accordingly in the interest of the impacted communities as well as with local communities and this has begun within OML 30 where helping to restore and build an environment that is consistent such there are over 90 communities within the licence area. Shoreline is that all can benefit. This will be done by: an indigenous company which we believe will help to incentivise local support. – ensuring regular and transparent dialogue with all communities; – ensuring that there is no discrimination with regards to This is our fifth CSR Report and it has been prepared based on our employment and that, wherever possible, priority will be given to operating principles and with the help of stakeholder feedback. In members of the local communities; this report you will find an overview of key areas of impact and – increasing resources towards pipeline and asset security; and opportunity, specific to the CSR aspects of our activities: – ensuring that any CSR related initiatives are o"ered equally to all a"ected communities. – environment and sustainability – oil and gas operations have the potential to damage the environment but, if managed well, any In 2012, as in previous years, we set ourselves targets across these activity impacts can be minimised; areas and I am pleased to report we achieved all. Our targets for this – health and safety – health and safety is a priority and a key year are set out on page 9 of this CSR Report. element of all our activities; – employees – our ability to create sustainable shareholder value We continue to welcome feedback from, and dialogue with, is linked to our ability to recruit, motivate and retain high interested parties concerning all aspects of this report. Contact calibre sta"; details are noted at the back of this report and can also be found on – community and human rights – we ensure that relationships with our website www.heritageoilplc.com. our neighbours and local communities are conducted sensitively and with mutual respect; I would like to thank our Directors, employees and contractors for – business conduct – we uphold the highest standards of business the continued excellent performance of our Company in all aspects conduct across all our operations; and of our CSR approach and for their continued commitment and – corporate governance – we are committed to protecting the dedication to respecting our vision and legacy in the many areas in interests of all stakeholders through compliance with relevant which we operate. legal and regulatory environments and through the e"ective management of risk. PAUL ATH ERTON CHAIRM AN, CSR CO MMITTEE HERITAGE OIL PLC Corporate Social Responsibility Report 2012 04

A BOUT T HIS REPORT

This report relates to the period 1 January 2012 to 31 December 2012 In this report we disclose information and should be read in conjunction with the entire Heritage relating to our CSR strategy, policies, Oil Annual Report and Accounts for 2012, in particular the Corporate Governance Report, and the Company website systems and performance in 2012. www.heritageoilplc.com. We also detail our future aims, targets Our principal activities during 2012 were in Kurdistan and Russia and objectives. and, as such, a majority of the information in this CSR Report relates to our operations in these regions. Our recent acquisition, through Shoreline, a joint venture between Heritage and its Nigerian Partner, Shoreline Power Company, of a 45% interest in OML 30, Nigeria, is not reported on with regards to 2012 as only two months of activities have not enabled us to justiﬁably forecast or compare the data.

CSR WITHIN THE HERITAGE BUSINESS MODEL Heritage’s business model balances the exploration and appraisal process with cash generating production assets supported by high standards of governance, regional knowledge and contacts and an e"ective CSR approach. Our vision is to be a leading exploration and production company whilst also generating shareholder returns. We believe this to be fundamental in creating shared economic wealth. Therefore, we have a responsibility to ensure that we deliver on our business objectives in a way that beneﬁts all stakeholders.

Heritage considers this framework, supported by robust policies, systems and exemplary performance, as a key element of long-term success and managing relationships with stakeholders to be important in developing and maintaining a reputation as a preferred partner of choice.

MATERIALITY AND COMPLETENESS By using the GRI G3.1 Guidelines (the “G3.1 Guidelines”) and the recently published oil and gas sector supplement as a foundation we are able to report on key operational material. The Global Reporting Initiative (“GRI”) table on pages 24 to 34 contains information set out in the G3.1 Guidelines. In addition, we also determine materiality by assessing the signiﬁcance and relevance of the information by considering:

– Heritage’s policy position on the issue; – its impact on shareholder value in the short, medium and long-term; – the level of stakeholder interest in the matter (assessed by dialogue with contractors, employees, suppliers, shareholders, research organisations, Non-Governmental Organisations (“NGOs”), governments and advisers); and – the degree of interest in the issue emanating from public arenas, reﬂected through reporting in the media.

The CSR Committee continues to review the scope of this information and intends to reﬁne the reporting process over time taking into account the issues noted above and changes in our business activities.

EXTERNAL ASSURANCE Information within this report has not been externally verified as we do not believe this would be of material benefit at this time. Every e"ort has been made to ensure that information contained in this report is accurate. The CSR Committee continues to review this matter of external verification and to assess whether any change is required. Corporate Social Responsibility Report 2012 HERITAGE OIL PLC 05

OUR CSR FRAM EWORK

Heritage considers that an e"ective OUR AREAS OF IMPACT AND OPPORTUNITY Heritage recognises specific responsibilities in each of six core CSR framework, supported by robust areas of potential impact and opportunity, specific to the CSR policies, systems and exemplary aspects of our activities. Adherence to these CSR values is viewed performance is paramount in securing as a key factor in securing the long-term success of the Company. We aim to apply targets, across our identified areas of impact and long-term success. The framework opportunity, to focus employees and enable the Company and supports our core business model stakeholders to monitor performance. together with high standards of governance and regional knowledge.

OUR CSR VISION Environment and sustainability – to be a responsible and transparent business in all the areas in which we operate, believing this is fundamental in generating Aim to make a positive contribution to global long-term growth for the Company; sustainability and to protect the environment – to create lasting legacies for local communities; – to operate to the highest international social, environmental and safety standards; and – to maintain high standards of corporate governance. Health and safety

CSR encompasses the Company’s management of relationships with A core element of all activities and a natural priority shareholders, employees, contractors, partners and the local communities where we work, together with the impact it has on society and the environment. Employees CSR IN ACTION Our approach to CSR supports the business model and sets out the Our ability to create shareholder value is linked with our essential core values that we believe make Heritage a good corporate ability to recruit and retain high calibre sta" citizen. The Company sets itself a high standard against which to measure itself and recognises the importance of being a partner of choice. Community and human rights

Our approach to CSR includes how we conduct relationships with all Active and enduring relationships are an essential and of our stakeholders and the wider impact we can have on society and fundamental element of our business the environment.

We undertake CSR related initiatives across our asset portfolio where Business conduct we are actively working. We maintain robust policies with respect to all matters OUR CSR STRATEGY concerning our business conduct

SET POLICIES Corporate governance

As a Company with a Premium Listing, Heritage DEVISE AND MAINTAIN SYSTEMS maintains high corporate governance standards

MEASURE AND M O N I TO R PERFORM ANCE

COMMUNIC AT E A N D R E P O R T TO STAKEHOLDERS

APPLY STA KEHOLDER FEEDBACK HERITAGE OIL PLC Corporate Social Responsibility Report 2012 06

C SR POLIC Y FRAM EWORK

employees to respect di"erent cultures, traditions and employment The CSR policy framework sets out the practices across our business areas. We share common goals with our essential core values which Heritage employees and contractors, in particular the elimination of workplace injuries, and are committed to good corporate values and responsible believes make the Company a good behaviour. We recognise achievement and create opportunities for corporate citizen. The framework individuals at all levels of our businesses. In dealing with our employees we act in compliance with national regulatory defines how the Company should requirements and our obligations under relevant national and operate across all levels of business, international laws. setting a high standard against which ILO DE C LARATION ON FUND A M ENTAL PRINC IPLES AND RIGH TS AT WORK to measure. We support the four fundamental principles contained within the International Labour Organisation (“ILO”) Declaration. In accordance with local legislation and practice, we respect freedom of association, the right to collective bargaining, employment that is freely chosen with no use of forced or child labour and we do not discriminate on the basis of gender, colour, ethnicity, culture, Our approach to: religion, sexual orientation or disability. ENV IRONM ENTAL AND SUSTAINAB ILITY MATTERS E Q UAL OPPORTUNITY ENV IRONM ENTAL We value all employees for their contribution to the business and We aim to make a positive contribution to the protection of the are committed to diversity and opportunities for advancement. environment where we operate and to minimise any adverse e"ects These factors are not influenced by any considerations other than of our operations. Wherever possible, we will prevent, or otherwise performance and aptitude. Employees are provided with the minimise, mitigate and remediate, harmful e"ects of our operations opportunity to develop their potential and, where appropriate, on the environment. We will also promote, encourage and prioritise to develop their careers further within the Group. reuse and recycling methods throughout our operations and endeavour to meet the challenges presented by climate change. O CCUPATIONAL HEALTH We aim to protect the physical health of all of our employees and SUSTAINAB LE BUSINESS contractors whilst in the workplace. In particular, we endeavour to We aim to contribute positively to global sustainability through meet any challenges presented to our employees and the wider our operations, the development of our fields, our adoption of communities in which they live and operate. new technologies and the conduct of our relationships with all stakeholders.

Our approach to: Our approach to: COMMUNITY AND HUMAN RIGHTS MATTERS HEALTH AND SAFETY MATTERS C O MMUNITIES Health and safety is a natural priority and a core element of all of our It is important to the Company that relationships with neighbours activities. All energy companies face a wide range of health and safety and local communities are conducted sensitively and with mutual matters ranging from industrial accidents to occupational illnesses. respect. These relationships recognise that active and enduring Our goal, and a key performance indicator of the Company, is zero partnerships are a central and fundamental element of our business. injuries and fatalities across all areas of our operations. We aim to We aim to promote the sharing of economic beneﬁt created by our ensure that important factors, such as an understanding of cultural activities through the conduct of our community relationships. di"erences in host countries and use of external contractors, are addressed in the development of our health and safety systems and UNITED NATIONS UNIV ERSAL DE C LARATION O F procedures with a view to constructing, maintaining and developing H U M AN RIGH TS world class safety systems across all of our operations. We support human rights, consistent with the stipulations contained within the United Nations Universal Declaration of Human Rights and remain committed to upholding these principles. We endeavour to ensure that these commitments extend to all of our supply chains and we work with our partners and contractors to ensure that they Our approach to: are part of our contractual requirements. EMPLOYEE MATTERS E M PLOYEES UNITED NATIONS DE C LARATION ON T H E RIGH TS Our ability to create sustainable shareholder value is linked to our O F IND IGENOUS PEOPLES ability to recruit, motivate and retain high calibre sta" as detailed in Heritage supports the principles which underpin the United Nations the risk section in the Annual Review on pages 32 to 34. Ensuring Declaration on the Rights of Indigenous Peoples. In particular we that relationships between our employees are cohesive, safe and support rights to culture, identity, language, employment, health e"ective is important to our Company and we expect all our and education. Corporate Social Responsibility Report 2012 HERITAGE OIL PLC 07

LAND A CCESS C O M PETITION We ensure that we receive the widest possible support for our We always aim to compete vigorously with our competitors, but in a proposals throughout the life cycle of our activities. We do this by fair and responsible way, and aim to ensure that our success is built working in partnership with our stakeholders to optimally and upon excellence. When in contact with our competitors, employees sensitively co-ordinate relevant economic, technical and sustainable are required to avoid disclosing confidential information and we will development factors in an integrated process. not make improper attempts to acquire competitor trade secrets or other confidential information. Employees will not undertake any arrangements or practices that may conflict with laws applicable to the conduct of our business. Our approach to: BUSINESS CONDUCT MATTERS POLITIC AL INV OLV E M ENT Heritage does not, directly or indirectly, participate in party politics Our approach to: and the Company does not provide financial support to political parties or politicians. CORPORATE GOVERNANCE MATTERS C O M PLIANC E WITH T H E LAW AND RELEVANT B RIB ERY AND CORRUPTION REGULATIONS Heritage is resolutely opposed to bribery and corruption in whatever We are committed to protecting interests of our shareholders and other forms they may take. Gifts or entertainment may only be o"ered to a stakeholders through compliance with relevant legal and regulatory third party if they are consistent with usual business practice in the environments and similarly through e"ective management of business relevant territory, are modest in value and cannot be interpreted as a risks. We comply fully with all relevant national and international laws form of inducement. and act in accordance with local guidelines and regulations, including those that are industry specific and govern our operations. It is Heritage’s policy that revenues, purchases and services from suppliers are made solely on the basis of price, quality, performance, It is the responsibility of senior personnel to ensure, by taking legal or value and for their benefit. Sales, purchases or award of contracts other advice where appropriate, that they are aware of all local laws should never be made as the result of giving or receiving inducements and regulations that may a"ect the area of the business in which they in the form of gifts, money or entertainment from third parties or are engaged. favours in any other form. A CCOUNTING AND REC ORD S Employees should not accept gifts, money or entertainment from third Heritage maintains accounting systems that identify clearly the true party organisations or individuals, where these might reasonably be nature of all business transactions, assets and liabilities, in line with considered likely to influence business transactions. Gifts, other than relevant regulatory, accounting and legal requirements. No record or trivial ones of low value, are not accepted. In a culture where such an entry may be false, distorted, incomplete or suppressed. action might cause o"ence, the gift must be declared to the Company and, if practical, donated to an appropriate charity. All Group reporting must be accurate and complete and in compliance in all material respects with stated accounting policies Heritage has a robust Anti-Bribery and Corruption policy. and procedures. Employees must not materially misstate, or knowingly misrepresent, management information for personal gain TREATM ENT O F CUSTOM ERS or any other reason. We regard mutual trust and confidence with our contractors and customers as very important. We require employees to deliver high E X TERNAL REPORTING levels of service consistently, surpassing expectations and meeting Our businesses may be required to make statements or provide their changing requirements. reports to regulatory bodies, government agencies or other government departments. Our businesses will take care to RELATIONS WITH SUPPLIERS ensure that such statements or reports are correct, timely and not We ensure that all of our suppliers are treated fairly and responsibly. misleading. Senior management must be made aware of any sensitive All potential suppliers will have a reasonable opportunity to win disclosure before it is made. We ensure that statements made to the business with us. We aim to pay our suppliers on time and in media are correct and not misleading. Media enquiries are referred to accordance with agreed terms of trade. Suppliers will conduct their our media experts and/or advisers and statements are only made by activities in accordance with our own policies. designated spokespersons. We provide, through our Group website www.heritageoilplc.com, the Annual Report and Accounts and other statements, including this report, appropriate information to enable shareholders and stakeholders to assess the performance of the Company. We always comply with applicable laws and regulations concerning disclosure of information about the Group. HERITAGE OI L PLC Corporate Social Responsibility Report 2012 08

TARGETS AND ACHIEVEMENTS

We aim to apply targets to enable stakeholders to assess our performance. In the table below we show our achievements against our 2012 targets and detail further targets for 2013.

2012 PR O GRESS

– no major spills or environmental incidents; Environment and – no exceptional ﬁnes or sanctions related to our environmental management; and sustainability – Environmental Impact Assessments (“EIAs”) conducted for all major work programmes.

– no fatalities or LTIs; Health and safety – continued knowledge sharing amongst sta! and peer group; and – no ﬁnes or sanctions related to our health and safety management.

– majority of employees drawn from each country of operation; Employees – contributed to training for sta!; – promoted diversity; and – continued to keep sta! turnover at low levels.

– no human rights violations; Community and human rights – no ﬁnes or sanctions related to our community and human rights management and activities; – further engagement with stakeholders for relevant programmes in our areas of operation; and – continued dialogue with specialist organisations.

– no ﬁnes or sanctions related to poor business conduct; Business conduct – continued to develop systems to identify risks; and – monitored developments and peer group best practice.

– reported ﬁndings and decisions of the CSR Committee; Corporate governance – prepared a diversity policy, including gender, for the Board; – provided clear information on executive pay; – developed our approach to managing risk; and – continued emphasis on Company best practice and compliance with the UK Corporate Governance Code (the “Code”). Corporate Social Responsibility Report 2012 HERITAGE OI L PLC 09

2013 TARGETS

2012 TARGETS ACHIEVED – no major spills or environmental incidents; – no exceptional ﬁnes or sanctions related to our environmental management; and – EIAs to be conducted for all major work programmes.

2012 TARGETS ACHIEVED – no fatalities or LTIs; and – no ﬁnes or sanctions related to our health and safety management.

2012 TARGETS ACHIEVED – use local sta! where appropriate; – promote training for sta!; – promote knowledge sharing amongst sta!; – remain committed to diversity; and – keep sta! turnover at low levels.

2012 TARGETS ACHIEVED – active engagement with stakeholders for relevant programmes in our areas of operation; – no human rights violations; – no ﬁnes or sanctions related to our community and human rights management and activities; and – continue dialogue with specialist organisations.

2012 TARGETS ACHIEVED – no ﬁnes or sanctions related to poor business conduct; – continue to develop systems to identify risks; and – monitor developments and peer group best practice.

2012 TARGETS ACHIEVED – report publicly the ﬁndings and decisions of the CSR Committee; – review recent UK government proposals in respect of executive remuneration and narrative reporting; – continue to develop our approach to managing risk; and – review amendments to the Code. HERITAGE OI L PLC Corporate Social Responsibility Report 2012 10

ENVIRONMENT & SUSTAINABILITY

Oil and gas operations have the potential to damage the environment but, if managed well, any negative impacts of activities can be minimised.

2012 HIGHL IGHTS POTENTIAL IMPACT AND OPPORTUNITY

– once more we can report that we have had no The potential environmental impact of our activities includes: – the impact of wells, pipelines and other infrastructure with a major environmental incidents, such as spills, resulting e!ect on biodiversity; during the year; – the accidental release of hydrocarbons or chemicals; and – we conducted EIAs for all major work – emissions which can a!ect air quality and can potentially be linked with climate change. programmes in line with local regulations; and – minimal gas was ﬂared in Kurdistan during A strong environmental performance is key to maintaining our well testing operations. reputation and ability to generate shareholder value. Consequently, we undertake operations in accordance with the high international standards of the oil industry and EIAs are conducted before any major capital expenditure is incurred. In doing so we maintain a reputation of being considered as a partner of choice.

MITIGATIO N O F IMPACT

We have speciﬁc Group requirements and recommendations governing our identiﬁcation and management of potential impacts of projects that carry particular environmental and social risks; these apply to new projects and acquisition negotiations.

We have developed systems and practices that are designed to help us: – identify and assess potential environmental impacts in the early stages of a project or acquisition; Number of environmental incidents – take necessary action to mitigate impacts throughout our operations; and ZERO – leave a limited footprint, in line with local regulations. Corporate Social Responsibility Report 2012 HERITAGE OI L PLC 11

O UR APPR OACH Q&A We work to understand and manage the sensitivities of the environments in which we operate, and our responsibilities to them, Do the effects of the Company’s throughout the lifecycle of our operations. We are committed to activities on the environment represent making a positive contribution to the protection of the environment a material potential risk to its in areas in which we operate and aim to minimise any adverse e!ects shareholders and stakeholders? of our operations. We want to contribute positively to global sustainability through our operations, the development of our ﬁelds, During 2012, the Company’s activities, the adoption of new technologies and the conduct of our prior to any mitigation, presented a small relationships with all stakeholders. environmental impact, representing an immaterial risk to its shareholders and Due to the nature of exploration activities, we often operate in remote stakeholders. locations, without access to grid electricity, where we are reliant on generators to power our equipment. To minimise our impact in these How will Heritage prepare for areas, we are focused on restricting and reducing ﬂaring and using the highest standard, most energy e#cient equipment available, which also the mandatory reporting of GHG has the e!ect of reducing our energy costs. Additionally, our camps emissions that comes into force in and sites are designed to facilitate minimal environmental footprints. October 2013?

We identify and assess potential environmental impacts at the In the view of improving and achieving planning stage of our operations. We protect, as best we can, the local consistency in the accounting and environment during operations and aim to restore it to the same reporting of GHG emissions resulting from standard that we found it in once activities are completed. This Heritage’s activities, the Company will restoration activity is conducted in conjunction with local authorities look at how this will impact on reporting and communities where we operate. and consider appropriate guidelines for disclosure of GHG emissions. None of our active operations during 2012 were in protected areas or areas of high biodiversity value. HERITAGE OIL PLC Corporate Social Responsibility Report 2012 12

HEALTH & SAFETY

Health and safety is a priority and key element of all of our activities. All energy companies face a wide range of health and safety challenges ranging from industrial accidents to occupational illnesses.

2012 HIGHL IGHTS POTENTIAL IMPACT AND OPPORTUNITY

– zero fatalities and LTIs reported across our A major event can impact on our employees, contractors and local communities leading to a potential loss of reputation. operations; – no exceptional ﬁnes or sanctions related to our Our ability to demonstrate a strong track record is an important health and safety management; and factor in obtaining stakeholder approval for proposed projects. A strong health and safety record is one of our key business drivers and – continued focus on training. also forms part of our Key Performance Indicators (“KPIs”) by which we monitor our performance.

MITIGATIO N O F IMPACT

E!ective safety performance across our operations depends on the right behaviour and attitude. This requires: – setting the right expectations for all employees and contractors – we require that everyone behaves in a safe manner and follows all applicable safety rules; – empowering people to intervene to stop a task if they believe it to be unsafe or intervene if a colleague’s behaviour could lead to harm; – accountability – requiring people to take responsibility for their own safety and the safety of others and to be accountable for their behaviour; and – leadership – managers and supervisors are expected to lead by example and demonstrate their personal commitment to safety; – safety management systems being implemented at all sites, both operational and administrative. Number of fatalities or LTIs ZERO Corporate Social Responsibility Report 2012 HERITAGE OIL PLC 13

O UR APPR OACH Q&A We are very proud of our health and safety performance and believe it assists in making us a partner of choice. Safeguarding people working How does Heritage ensure that its for our Company and ensuring that all of our operations are designed contractors and sub-contractors adhere and managed properly and to high international standards is always to its health and safety standards? at the core of how we operate our business. Our goal in this area is zero injuries and fatalities across all areas of our operations and to Our local managers are tasked with minimise and/or negate operational health issues. ensuring that all of our employees, contractors and sub-contractors are fully It is the Company’s responsibility to minimise our employees’ aware of the Company’s policies and exposure to health and safety risks of any kind. In implementing procedures in this important area. We health and safety systems, we balance the need to protect our workers regularly review our systems to ensure with the knowledge that working practices and traditions vary by that they are commensurate with best location and so we amend or tailor where necessary. All sites are practice, taking into account local health covered by safety management systems with general managers and safety culture. This can vary widely responsible for overall safety measures. We also ensure that our and we therefore take an individual contractors adopt these principles. approach in each area to ensure compliance with our corporate standards. Our employees have the authority to intervene in a task if they believe it could lead to harm or is considered unsafe.

We do, however, appreciate that no organisation is immune to a crisis, which can happen at any time. Due to the potential consequences that these can have, we recognise the importance of being prepared for such an unfortunate incident. We continually review crisis management systems to ensure that our processes match our needs and requirements. HERITAGE OIL PLC Corporate Social Responsibility Report 2012 14

EMPLOYEES

Our ability to create sustainable shareholder value is linked to our ability to recruit, motivate and retain high calibre sta". Heritage aims to ensure that relationships between our employees are cohesive, safe and e"ective.

2012 HIGHL IGHTS POTENTIAL IMPACT AND OPPORTUNITY

– we continued to operate with a high percentage Our ability to create sustainable shareholder value relies on our ability to recruit, motivate and retain employees with a diverse range of local workers drawn from our areas of of skills. We believe that our competitive advantage is derived as operation, using expatriates only when much from our people as from our asset base and attractive and particular skill sets were not available locally; growing business opportunities. The loss of key employees is one of the primary risks of the business which can potentially cause short – sta! turnover has remained low at 3%; and medium-term disruption to operations. – approximately $651,000 spent on training; – on the job training and third party training We believe that our success has been attributable in part to assembling the right team of people and we focus on how to attract, provided to local personnel; and manage and engage both employees and contractors. – increased number of female employees across several regions. Our continued focus on recruiting, where possible, from local communities is an important factor in maintaining excellent stakeholder relationships.

MITIGATIO N O F IMPACT

To ensure successful recruitment, motivation and retention in a challenging, international market for skills and experience, we aim for: – a competitive approach to remuneration with packages reviewed regularly; – establishing long-term incentive schemes; – learning and development programmes that enhance employees’ careers; Amount spent on training – a commitment to diversity; – a focus on recruitment from within host countries and communities, where certain skill sets are available; and – workplaces that motivate and engage employees at all levels, and $651,000 which are free from discrimination and harassment of any kind. Corporate Social Responsibility Report 2012 HERITAGE OIL PLC 15

O UR APPR OACH Q&A We value all employees for their contribution to our business. Opportunities for advancement are equal and not influenced by Does Heritage try to secure staff considerations other than performance and aptitude. Employees are locally or are there a large number of provided with the opportunity to develop their potential and, where expatriates in its areas of operation? appropriate, to further their careers within the Group. Heritage continues to operate with a high Sta! are motivated to develop within a flexible framework and are percentage of workers drawn from local encouraged to provide feedback on their expectations. Local sourcing communities, as can be seen on page 1. is important to our business practices and we aim to contract services Where particular skill sets are not to local firms where possible. For example, many of our transport available locally then expatriates are used and security needs have been fulfilled using local firms. but training schemes are devised to help transfer skills to local labour. Training of employees and contractors continued to receive high priority in 2012 and we have continued to invest heavily in this area. How important are staff within the We believe there is a strong business case for investing in development Heritage business model? of our workforce as this can result in e#ciency savings, reduce time lost through injury and assist in identifying opportunities for improving our business. The success of Heritage’s business model is a reflection of having experienced sta! that It is our responsibility to train all workers to provide better access to enjoy working within the Company. It is job opportunities in the long term. We emphasise transferable skills therefore important to ensure that sta! and a broad range of learning, as well as the basic aim of developing a are correctly remunerated and motivated to knowledgeable, productive and happy workforce. develop their potential within the Group. HERITAGE OI L PLC Corporate Social Responsibility Report 2012 16

COMMUNITY & HUMAN RIGHTS

We ensure that relationships with our neighbours and local communities are conducted sensitively and with mutual respect. Enduring partnerships are a central and fundamental element of these relationships.

2012 HIGHL IGHTS POTENTIAL IMPACT AND OPPORTUNITY

– in Kurdistan we helped with repairing roads The support of host communities, governments and other stakeholders is crucial in the achievement of our long-term business close to our operations; and objectives. If managed incorrectly we could potentially: – across our operations we participated in many – alienate communities, leading to conﬂict and disruption; and healthcare, environmental and – create a culture of dependency upon our Company or create conﬂict between communities and governments. training initiatives. Managed correctly, we can work together with local communities to generate shared long-term prosperity, some of which will stem from required health and education initiatives.

MITIGATIO N O F IMPACT

To ensure that we maintain healthy relationships with local communities and governments we: – promote sharing of economic benefits created by our activities through the conduct of community relationships and are firmly committed to upholding principles set out in the United Nations Universal Declaration of Human Rights; – enter into long-term sustainable community projects requested by local communities; – seek to ensure access to land is secured using approaches that are sensitive to local concerns and values; – generate socio-economic benefits that address long-term local needs; and Amount spent on health and social programmes in 2012 – provide opportunities for local suppliers when there is often a significant gap between the highly technical requirements of the $220,000 industry and the level of skills available locally. Corporate Social Responsibility Report 2012 HERITAGE OIL PLC 17

O UR APPR OACH Q&A We view stakeholder engagement as an integral part of our business model. The success of projects in the di!erent parts of the world is Many of Heritage’s operations dependent on relationships with governments, local authorities and are located in areas of economic local communities. deprivation. How does the Company address this? A natural part of a new project development involves consultation with local communities as well as government authorities, to identify ways Heritage always develops close in which our expertise can be best applied. Our licence to operate in relationships with local authorities and any area is dependent on being viewed as a positive force by those most communities in areas where it operates. directly a!ected by our operations and therefore it is in our interest to An important element of these consult stakeholders and ﬁnd ways to be a trusted and useful partner. relationships is the design and operation of sustainable development programmes We believe that by partnering with other organisations such as that aim to address important aspects of NGOs, governments (local and national) and other companies, we local need. reduce the risk of creating dependency, encourage dialogue and manage expectations. It is our intention to improve conditions in the These activities are always performed in vicinity of our operations and we try to invest in sustainable projects conjunction with local stakeholders and where local communities have a sense of ownership, thus increasing their input in the process is important their long-term e!ects. However, in terms of having the greatest when establishing our CSR programmes. impact, we believe this is best achieved through helping countries realise their natural resource potential to create shared economic We have developed a successful approach wealth for everyone. to this area from our experience and we apply this in the territories where we now Sponsorship of individuals to schools and universities has been a operate. We will look to engage with feature of the Heritage CSR policy as this has beneﬁts that reach out communities in Nigeria, through our joint into the longer term for the communities. We also provide healthcare venture, Shoreline. and other social welfare schemes where appropriate.

Comments and feedback are welcomed and can be provided by referring to the contact information at the back of this CSR Report or on our website www.heritageoilplc.com. HERITAGE OIL PLC Corporate Social Responsibility Report 2012 18

BUSINESS CONDUCT

We uphold the highest standards of business conduct across all of our operations. We are resolutely opposed to bribery and corruption in whatever forms they may take and do not participate in, or ﬁnance, party politics.

2012 HIGHL IGHTS POTENTIAL IMPACT AND OPPORTUNITY

– the Company had no material breaches of its Failure to comply with the highest standards of corporate conduct, which is expected by our diverse stakeholders, will impact on our policies during 2012; reputation and ability to be viewed as a partner of choice. – over the year we engaged with a number of stakeholders (including NGOs, investors and Good corporate conduct makes sound business sense which guides correct actions and enhances our reputation amongst stakeholders. research companies), increasing their understanding of our approach and allowing us to apply their feedback to develop our systems MITIGATIO N O F IMPACT and procedures, where necessary; and We recognise the Company can mitigate any disruptive impact – we reviewed our whistle-blowing procedure. through committing to: – develop and maintain systems to identify potential risks; – continue to develop policies in accordance with a changing regulatory background; – ensure employees and contractors are aware of procedures; and – instil a sense of accountability amongst all members of sta!.

Number of Company policy breaches ZERO Corporate Social Responsibility Report 2012 HERITAGE OIL PLC 19

O UR APPR OACH Q&A We conduct our activities predominantly in developing countries. Our approach both within these territories and in the parts of the Are your Company policies static or world where we may wish to conduct business in the future, is have they been developed over time? dependent upon how our relationships are conducted. We are, in particular, resolutely opposed to bribery and corruption in whatever The Company reviews it’s policies through form they may take. Our policies preclude ﬁnancial support for its various committees regularly and political parties, require that relationships are conducted with mutual develops them to enable best practice trust and conﬁdence and that suppliers and competitors are treated in the relevant areas of operation. Heritage fairly. We aim to ensure that this fundamental aspect of our business will ensure these policies are adopted extends to all of our relationships with our host governments and by Shoreline, our Nigerian joint venture. local authorities, suppliers, customers, business partners, employees, contractors and other key stakeholders.

The Company has whistle-blowing procedures and systems that are reviewed regularly. These aim to ensure that employees and other parties connected with the Company have the opportunity to conﬁdentially report breaches of business conduct policies. Details of these procedures are available to all of our employees at all of our o#ces. The Chairman, CEO or Chairman of the Audit Committee receive any reports and are responsible for their follow-up. The outcomes of these instances are reported to and monitored by either the Audit Committee or the Board. HERITAGE OIL PLC Corporate Social Responsibility Report 2012 20

CORPORATE GOVERNANCE

Heritage is committed to protecting interests of shareholders and stakeholders, through compliance with relevant legal and regulatory environments and through e"ective management of risk.

2012 HIGHL IGHTS POTENTIAL IMPACT AND OPPORTUNITY

– continued working towards compliance in Failure to comply with corporate governance codes and practices could result in adverse sentiment towards the Company. accordance with the Code; – established a diversity policy; and A strong and transparent approach to corporate governance viewed – proportion of female workforce increased. favourably by the Company’s current and potential shareholders.

MITIGATIO N O F IMPACT

We recognise the importance of maintaining strong corporate governance procedures and processes and continue to develop systems. We do this through: – employing the skill, expertise and resources of the Group and its advisers; – reviewing compliance with corporate governance codes and other regulatory guidelines routinely; – regular updates on potential changes to the regulatory landscape; – complying with all relevant national and international laws and acting in accordance with local guidelines and regulations (including those that are industry speciﬁc) that govern our operations; and – establishing Board level responsibility and accountability.

Chairman, CEO and CFO Corporate Social Responsibility Report 2012 HERITAGE OIL PLC 21

O UR APPR OACH Q&A Responsible business practices are a way of doing business within our Company rather than an isolated exercise and this is How has the focus on governance underpinned by how our Board and committees operate. We have changed in 2012? a corporate governance framework which supports an enterprising management team whilst also managing the risks that are inherent in Over 2012 the Company has focused running a growing exploration and production business. on Directors’ remuneration, a theme that will continue into 2013 with new Our sound governance procedures were highlighted during the proposals from the UK government, and acquisition of an interest in OML 30, Nigeria, through Shoreline. also on management of risk. Throughout the transaction there was a rigorous assessment of the risks, beneﬁts and opportunities that this acquisition would bring. How does the Heritage Board avoid “Group Think”? Over the course of the year we have strengthened our Board with two appointments; Carmen Rodriguez and Mark Erwin. Both Heritage has a diversiﬁed Board with appointments bring a wealth of knowledge and experience to relevant experience in legal, corporate the Board. and foreign a!airs. The wide range of expertise helps to promote debate and We have also reviewed Directors’ remuneration and will continue avoid issues such as “Group think”. to look at this important area in line with proposals by the UK government. We have reduced the service contracts of the Executives over the year to bring the Company further in line with the Code.

Further detail on all aspects of Corporate Governance can be found in the Corporate Governance Report and the full Terms of Reference of the Committees are available on the Company’s website www.heritageoilplc.com. HERITAGE OIL PLC Corporate Social Responsibility Report 2012 22

RISK MANAGEMENT

The Company faces many risks, certain of which are detailed in the Annual Review on pages 32 to 34. Detailed below are certain risks that are speciﬁcally related to CSR.

DESCRIPTION OF RISK POTENTIAL IMPACT MITIGATION Environment and sustainability Threats to licence to operate, financial The Group conducts EIAs before commencing any major penalties and reputational harm as a activity, has systems in place to ensure that sites are properly result of environmental damage. Similar restored and aims to minimise any negative impacts of consequences can result from a failure to activities during project life cycles. return sites to their natural state. Employees Di!culties in attracting and retaining Heritage o"ers competitive remuneration packages, including the best employees can potentially cause performance-related pay, professional training, promotes short and medium-term disruption to equal opportunities and provides a positive working the business. environment. Community and human rights Threats to licence to operate, day-to- Heritage employs a high percentage of local personnel from day operational di!culties, financial regions of operation. The Company also consults local penalties and reputational harm which communities and stakeholders throughout all stages of can a"ect the long-term objectives of operations to ensure mutually beneficial outcomes. the business. Health and safety A major event can impact employees, The Company provides health and safety training at all levels contractors and local communities of operations, and continually monitors performance and leading to a potential loss of reputation risks. The Company aims to maintain international health and/or revenue. and safety management systems of the highest standard. Business conduct Short and medium-term disruption to The Company develops close, positive and transparent working the business and reputational harm. relationships with host governments and business partners. Business conduct policies and procedures established by the Company are robust and systems are continually reviewed. Improper business behaviour is prohibited. Corporate governance Failure to comply with corporate Heritage recognises the importance of maintaining strong governance codes and practices could corporate governance procedures and processes. The Group result in adverse sentiment towards continues to develop systems in this area and generally this the Company. is managed by employing the skill, expertise and resources of the Group and its advisers. The Board reviews compliance with the Code and other regulatory guidelines regularly. More information on corporate governance is provided in the separate Corporate Governance Report. Corporate Social Responsibility Report 2012 HERITAGE OIL PLC 23

GLOBAL REPORTING INITIATIVE

The G3.1 Guidelines are the most widely used and recognised sustainability reporting framework. These are cross-sector and appropriate for use by companies globally.

The table below is the GRI Application Level Table which we have This section of our report provides the entirety of the CSR related used for self-assessment of our CSR reporting. The GRI’s sector information that Heritage collects. We provide this in the interest of supplement for the oil and gas industry was published in February transparency and for comparative purposes, and its collection helps 2012 and has been used in the preparation of this report. us identify areas in which we can improve our performance. Data and comments presented here should be considered in the context of our Heritage uses the G3.1 Guidelines and the GRI sector supplement to Company’s operations. help develop our own reporting. These are taken into consideration when preparing the content of our CSR report. Rather than We have self-declared our reporting as Application Level C. We attempting to cover all sections of the G3.1 Guidelines in equal believe this is an appropriate level for this stage in the development detail, we focus on the CSR related impacts and opportunities as we of our business and CSR reporting, given our size and nature of believe these are the most material. operations. We aim to enhance our reporting year-on-year but have chosen not to set a target date for reaching the next application level as this would not ﬁt with the nature of our business model.

Report application level C C+ B B+ A A+ G3.1 profile Report on: Report on all criteria Same as requirement for 1.1 listed for Level C plus: Level B. disclosures 2.1–2.10 1.2 3.1–3.8, 3.10–3.12 3.9, 3.13 4.1–4.4, 4.14–4.15 4.5–4.13, 4.16–4.17

G3.1 management Not required. Management approach Management approach disclosures for each disclosures for each approach disclosures indicator category. indicator category. Standard disclosures

G3.1 performance Report on a minimum Report externally assured Report on a minimum Report externally assured Report on each core Report externally assured of ten performance of 20 performance G3.1 and sector indicators and sector indicators, including at indicators, at least one supplement indicator supplement performance least one from each of: from each of: economic, with due regard to the economic, social and environmental, human materiality principle by indicators environmental. rights, labour, society either: a) reporting on and product the indicator; or b) responsibility. explaining the reason for its omission. HERITAGE OIL PLC Corporate Social Responsibility Report 2012 24

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Economic EC1 Direct economic value generated and Total direct economic value generated – Performance distributed, including revenues, operating and distributed not measured. Indicators costs, employee compensation, donations and other community investments, retained earnings and payments to capital providers and governments.

EC2 Financial implications and other risks See environment and sustainability 10, 11 and opportunities for the organisation’s section. activities due to climate change.

EC3 Coverage of the organisation’s deﬁned Not applicable. – beneﬁt plan obligations.

EC4 Signiﬁcant ﬁnancial assistance received No assistance received. – from government.

Non-core EC5 Range of ratios of standard entry level Heritage pays competitive entry level – indicator wage by gender compared to local wages and provides training and minimum wage at signiﬁcant locations of other beneﬁts to attract a high quality operation. workforce.

EC6 Policy, practices and proportion of In accordance with policy local 7 spending on locally based suppliers at suppliers have been used whenever signiﬁcant locations of operation. possible.

EC7 Procedures for local hiring and proportion Policy is to employ members of 14 of senior management hired from the local the local community where possible. community at locations of signiﬁcant Percentage of employees hired locally operation. in Kurdistan 43%; Tanzania 76%; Mali 100%; Malta 100%; Pakistan 100%; Libya 100%; Russia 98%.

EC8 Development and impact of infrastructure Compliant – see Community and 16 investments and services provided Human Rights section for more primarily for public beneﬁt through information. commercial, in-kind, or pro bono engagement.

Non-core EC9 Understanding and describing signiﬁcant Activities during 2012 were of limited – indicator indirect economic impacts, including the economic impact. extent of impacts.

Environmental EN1 Materials used by weight or volume. Not applicable to our 2012 operations. – Performance Indicators

EN2 Percentage of materials used that are Not applicable to our 2012 operations. – recycled input materials.

EN3 Direct energy consumption by primary Russia: – energy source. Primary energy source; diesel powered generators. Total 2012 consumption of 1.5 GWh. Kurdistan: Primary energy source; diesel powered generators. Consumption not known but not considered material.

EN4 Indirect energy consumption by primary Not measured. – source. Corporate Social Responsibility Report 2012 HERITAGE OIL PLC 25

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Non-core EN5 Energy saved due to conservation and Not measured. – indicator e!ciency improvements.

Non-core EN6 Initiatives to provide energy-e!cient None in 2012. – indicator or renewable energy-based products and services, and reductions in energy requirements as a result of these initiatives.

Non-core EN7 Initiatives to reduce indirect energy Russia: – indicator consumption and reductions achieved. Maintaining lowest possible process temperatures. Energy consumption reductions not quantiﬁed.

EN8 Total water withdrawal by source. Russia: – 12.5m3 potable water used at site. 198m3 water used for technical needs.

Non-core EN9 Water sources signiﬁcantly a"ected by Water usage not material. – indicator withdrawal of water.

Non-core EN10 Percentage and total volume of water Water usage not material. – indicator recycled and reused.

EN11 Location and size of land owned, leased, Not currently active in any such areas 10 managed in, or adjacent to, protected – see Environment and sustainability areas and areas of high biodiversity value section and asset overview map on outside protected areas. pages 2 to 3 within the Annual Review.

EN12 Description of signiﬁcant impacts of No signiﬁcant impact for 2012. 8, 10 activities, products and services on biodiversity in protected areas and areas of high biodiversity value outside protected areas.

Non-core EN13 Habitats protected or restored. None. – indicator

Non-core EN14 Strategies, current actions, and future plans EIAs, taking into account biodiversity, 8, 10 indicator for managing impacts on biodiversity. to be performed on all future assets. No current operations in areas of high biodiversity.

Non-core EN15 Number of International Union for Not measured but none believed to be – indicator Conservation of Nature (“IUCN”) Red in the licence areas in which we operate. List species and national conservation list species with habitats in areas a"ected by operations, by level of extinction risk.

EN16 Total direct and indirect greenhouse gas Russia: emissions by weight. 3,969 tonnes of associated gas ﬂared and vented annually. Kurdistan: Not measured. Minimal ﬂaring occurred during well testing.

EN17 Other relevant indirect greenhouse gas Not measured. – emissions by weight.

Non-core EN18 Initiatives to reduce greenhouse gas Environmental management systems in – indicator emissions and reductions achieved. place. Reductions not measured.

EN19 Emissions of ozone-depleting substances Not measured. – by weight. HERITAGE OIL PLC Corporate Social Responsibility Report 2012 26

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EN20 NOx, SOx, and other signiﬁcant air Not measured. – emissions by type and weight.

EN21 Total water discharge by quality and None. – destination.

EN22 Total weight of waste by type and disposal Russia: – method. 82.5m3 of household waste. Class 4 – low hazard wastes 1m3 of waste oil. Class 3 – low hazard waste 35m3 of utility ﬂuid (septic tanks). Classes 4&5 – low hazardous waste Kurdistan: Waste collection in place, any drilling cuttings removed and deposited at specially dedicated areas. Weight of waste not known.

EN23 Total number and volume of signiﬁcant No spills. 8 spills.

Non-core EN24 Weight of transported, imported, No waste transported, imported, – indicator exported, or treated waste deemed exported or treated which is deemed hazardous under the terms of the Basel hazardous under the Basel Convention Convention Annex I, II, III and VIII and Annex I, II, III and VIII. percentage of transported waste shipped internationally.

Non-core EN25 Identity, size, protected status, and No water bodies a"ected. – indicator biodiversity value of water bodies and related habitats signiﬁcantly a"ected by the reporting organisation’s discharges of water and run-o".

EN26 Initiatives to mitigate environmental Operations are run as e!ciently as 8, 10 impacts of products and services and possible to minimise environmental extent of impact mitigation. impacts of activities. EIAs are carried out before all major work programmes.

EN27 Percentage of products sold and their Not applicable to our operations. – packaging materials that are reclaimed by category.

EN28 Monetary value of significant fines and No material fines, warnings or 8 total number of non-monetary sanctions sanctions. for non-compliance with environmental laws and regulations.

Non-core EN29 Signiﬁcant environmental impacts of Not applicable to our operations. – indicator transporting products and other goods and materials used for the organisation’s operations and transporting members of the workforce.

Non-core EN30 Total environmental protection EIAs conducted. – indicator expenditures and investments by type. Corporate Social Responsibility Report 2012 HERITAGE OIL PLC 27

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Labour LA1 Total workforce by employment type, Geographical breakdown of sta" – practices and employment contract, and region, broken provided in note 10 on page 30 in the decent work down by gender. Financial Statements Report. performance indicators

LA2 Total number and rate of new employee 3% sta" turnover for the Company. – hires and employee turnover by age group, gender, and region.

Non-core LA3 Benefits provided to full-time employees Standard benefit packages. – indicator that are not provided to temporary or part-time employees, by significant locations of operation.

LA4 Percentage of employees covered by None. – collective bargaining agreements.

LA5 Minimum notice period(s) regarding Seven days. Heritage does not have any – signiﬁcant operational changes, including collective bargaining agreements in whether it is speciﬁed in collective place. agreements.

Non-core LA6 Percentage of total workforce represented Not measured. – indicator in formal joint management-worker health and safety committees that help monitor and advise on occupational health and safety programmes.

LA7 Rates of injury, occupational diseases, No injuries across all operations. 8 lost days, and absenteeism and number of work-related fatalities by region and gender.

LA8 Education, training, counselling, Health and safety training covers 12 prevention, and risk-control programmes serious disease prevention and control in place to assist workforce members, where appropriate. Occupational and their families, or community members operational health and safety training regarding serious diseases. given to all employees.

Non-core LA9 Health and safety topics covered in formal No agreements with trade unions. – indicator agreements with trade unions.

LA10 Average hours of training per year per Not measured. – employee by gender and by employee category.

Non-core LA11 Programmes for skills management Reviewed in Employees section. 14 indicator and lifelong learning that support the continued employability of employees and assist them in managing career endings.

Non-core LA12 Percentage of employees receiving regular Not measured. – indicator performance and career development reviews, by gender.

LA13 Composition of governance bodies and See Corporate Governance Report for – breakdown of employees per employee composition of governance bodies. category according to gender, age group, minority group membership and other indicators of diversity. HERITAGE OIL PLC Corporate Social Responsibility Report 2012 28

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LA14 Ratio of basic salary and remuneration of Not measured. – women to men by employee category, by signiﬁcant locations of operation.

LA15 Return to work and retention rates after Not measured. – parental leave, by gender.

Human rights HR1 Percentage and total number of signiﬁcant Not measured. – performance investment agreements and contracts indicators that include clauses incorporating human rights concerns, or that have undergone human rights screening.

HR2 Percentage of signiﬁcant suppliers, All suppliers must agree to abide by – contractors and other business partners Heritage’s policy on human rights. No that have undergone human rights actions taken. screening and actions taken.

HR3 Total hours of employee training on Not measured. – policies and procedures concerning aspects of human rights that are relevant to operations, including the percentage of employees trained.

HR4 Total number of incidents of No incidents. – discrimination and corrective actions taken.

HR5 Operations and significant suppliers No operations identified as having – identified in which the right to exercise significant risk in this area. Freedom of freedom of association and collective association and collective bargaining bargaining may be violated or at are guaranteed to all workers. significant risk, and actions taken to support these rights.

HR6 Operations and significant suppliers No operations identified as having 6 identified as having significant risk for significant risk. CSR policy framework incidents of child labour and measures prohibits the use of child labour. taken to contribute to the e"ective abolition of child labour.

HR7 Operations and significant suppliers No operations identified as having 6 identified as having significant risk significant risk. CSR policy framework for incidents of forced or compulsory prohibits the use of forced or labour and measures to contribute to compulsory labour. the elimination of all forms of forced or compulsory labour.

Non-core HR8 Percentage of security personnel trained in All suppliers must agree to abide by – indicator the organisation’s policies or procedures Heritage’s policy on human rights. No concerning aspects of human rights that actions taken. are relevant to operations.

Non-core HR9 Total number of incidents of violations No violations. – indicator involving rights of indigenous people and actions taken.

HR10 Percentage and total number of operations Not measured. – that have been subject to human rights reviews and/or impact assessments.

HR11 Number of grievances related to human No grievances raised. – rights ﬁled, addressed and resolved through formal grievance mechanisms. Corporate Social Responsibility Report 2012 HERITAGE OIL PLC 29

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Society SO1 Percentage of operations with All operations have local community 16 performance implemented local community engagement, impact assessments indicators engagement, impact assessments and and development programmes. See development programmes. community and human rights section.

SO2 Percentage and total number of business 100% of business units analysed. – units analysed for risks related to corruption.

SO3 Percentage of employees trained in the 100% of relevant employees trained. – organisation’s anti-corruption policies and procedures.

SO4 Actions taken in response to incidents of No incidents. – corruption.

SO5 Public policy positions and participation in No positions or participation. – public policy development and lobbying.

Non-core SO6 Total value of ﬁnancial and in-kind No contributions made. – indicator contributions to political parties, politicians, and related institutions by country.

Non-core SO7 Total number of legal actions for anti- No legal actions. – indicator competitive behaviour, anti-trust, and monopoly practices and their outcomes.

SO8 Monetary value of significant fines and total No fines or sanctions. – number of non-monetary sanctions for non- compliance with laws and regulations.

SO9 Operations with signiﬁcant potential No applicable operations. – or actual negative impacts on local communities.

SO10 Prevention and mitigation measures Not applicable to our operations. – implemented in operations with signiﬁcant potential or actual negative impacts on local communities.

Product According to GRI the Product Until recently Heritage only owned one – responsibility Responsibility Indicator set addresses oil producing asset which is in Russia. performance the e"ects of products and services In November 2012 Heritage acquired a indicators management on customers and users. 45% participating interest in Nigeria’s OML 30, through Shoreline. As the Company currently deals in small volumes of raw material commodities, we do not believe that these indicators are applicable to our business. We consider this will change as our working interest production increases.

Oil and OG1 Volume and type of estimated proved See website for further information. – gas sector reserves and production. supplement indicators

OG2 Total amount invested in renewable energy. No investment this year. –

OG3 Total amount of renewable energy No renewable energy generated – generated by source. at source. HERITAGE OIL PLC Corporate Social Responsibility Report 2012 30

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OG4 Number and percentage of signiﬁcant EIAs, taking into account biodiversity, 10 operating sites in which biodiversity risk to be performed on all future assets. has been assessed and monitored. No current operations in areas of high biodiversity.

OG5 Volume and disposal of formation or Water usage not material. – produced water.

OG6 Volume of flared and vented hydrocarbon. Russia: – 3,969 tonnes of associated gas flared annually. Kurdistan: Not measured, very minimal flaring occurred during well testing.

OG7 Amount of drilling waste (drill mud and Russia: cuttings) and strategies for treatment and Not Applicable disposal. Kurdistan: Waste collection was in place, any drilling cuttings removed and deposited at specially dedicated areas. Weight of waste not measured.

OG8 Benzene, lead and sulphur content in Not measured. – fuels.

OG9 Operations where indigenous N/A – communities are present or a"ected by activities and where speciﬁc engagement strategies are in place.

OG10 Number and description of signiﬁcant No disputes. – disputes with local communities and indigenous peoples.

OG11 Number of sites that have been None. – decommissioned and sites that are in the process of being decommissioned.

OG12 Operations where involuntary No involuntary resettlements during – resettlement took place, the number of the year. households resettled in each and how their livelihoods were a"ected in the process.

OG13 Number of process safety events by No process safety events. – business activity.

OG14 Volume of biofuels produced and None. – purchased meeting sustainability criteria. Corporate Social Responsibility Report 2012 HERITAGE OIL PLC 31

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Standard 1.1 Statement from the most senior decision- See CSR Committee Chairman’s 2 to 3 disclosures maker of the organisation (e.g., CEO, statement within this CSR Report. chair, or equivalent senior position) about the relevance of sustainability to the organisation and its strategy.

1.2 Description of key impacts, risks and See risk section on pages 32 to 34 in the – opportunities. Annual Review.

2.1 Name of the organisation. Heritage Oil Plc. –

2.2 Primary brands, products, and/or services. Heritage Oil Plc. –

2.3 Operational structure of the organisation, See note 1 on page 16 in the Financial – including main divisions, operating Statements Report. companies, subsidiaries and joint ventures.

2.4 Location of organisation’s headquarters. See inside back cover of this CSR Report. IBC

2.5 Number of countries where the See asset review on pages 2 to 3 of the – organisation operates and names of Annual Review. countries with either major operations or that are speciﬁcally relevant to the sustainability issues covered in the report.

2.6 Nature of ownership and legal form. Jersey incorporated with Premium – Listing on the London Stock Exchange.

2.7 Markets served (including geographic N/A – breakdown, sectors served and types of customers/beneﬁciaries).

2.8 Scale of the reporting organisation. See pages 2 to 3 of the Annual Review. –

2.9 Signiﬁcant changes during the reporting See Financial Statements Report on – period regarding size, structure, or pages 2 to 7. ownership (see guidelines for details).

2.10 Awards received in the reporting period. None. –

3.1 Reporting period (e.g., ﬁscal/calendar 1 January 2012–31 December 2012. – year) for information provided.

3.2 Date of most recent previous report (if any). CSR Report 2011 published April 2012. –

3.3 Reporting cycle (annual, biennial, etc.) Annual. –

3.4 Contact point for questions regarding the See inside back cover of this CSR IBC report or its contents. Report.

3.5 Process for deﬁning report content. See About this report within this CSR 4 Report.

3.6 Boundary of the report (e.g., countries, The Annual Report and Accounts – divisions, subsidiaries, leased facilities, covers the entirety of Heritage’s joint ventures, suppliers). operations. See pages 2 to 3 of the Annual Review for further information.

3.7 State any speciﬁc limitations on the scope Information on our interest in a – or boundary of the report. Nigerian asset. Heritage only acquired an interest in OML 30 in November 2012, through our joint venture Shoreline. Therefore there is not enough information available to justiﬁably comment on. HERITAGE OIL PLC Corporate Social Responsibility Report 2012 32

GLOBAL REPORTING INITIATIVE CONTINU ED

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3.8 Basis for reporting on joint ventures, Shoreline, a joint venture between a – subsidiaries, leased facilities, outsourced Heritage subsidiary and its Nigerian operations and other entities that partner, Shoreline Power Company, has can signiﬁcantly a"ect comparability a 45% participating interest in OML 30, from period to period and/or between Nigeria. Under optimal conditions this organisations. asset will have the potential to produce substantial quantities of petroleum. Whilst information has not been reported on this joint venture and asset in this report, it may have the ability to signiﬁcantly a"ect comparability in the future.

3.9 Data measurement techniques and See About this report, within this CSR 4 the bases of calculations, including Report. assumptions and techniques underlying estimations applied to the compilation of the Indicators and other information in the report.

3.10 Explanation of the e"ect of any No restatements. – restatements of information provided in earlier reports, and the reasons for such restatement (e.g., mergers/acquisitions, change of base years/periods, nature of business, measurement methods).

3.11 Signiﬁcant changes from previous None. – reporting periods in the scope, boundary, or measurement methods applied in the report.

3.12 Table identifying the location of the See GRI index within this CSR Report. 23 Standard Disclosures in the report.

3.13 Policy and current practice with regard External assurance has not been sought 4 to seeking external assurance for the – see About this report, within this CSR report. If not included in the assurance Report. report accompanying the sustainability report, explain the scope and basis of any external assurance provided. Also explain the relationship between the reporting organisation and the assurance provider(s).

4.1 Governance structure of the organisation, See page 11 of the Corporate – including committees under the highest Governance Report. governance body responsible for speciﬁc tasks, such as setting strategy or organisational oversight.

4.2 Indicate whether the Chair of the highest See page 5 of the Corporate Governance – governance body is also an executive Report; Chairman is an independent o!cer (and, if so, their function within Non-Executive Director. the organisation’s management and the reasons for this arrangement).

4.3 For organisations that have a unitary See pages 6 to 7 of the Corporate – board structure, state the number Governance Report. and gender of members of the highest governance body that are independent and/or non-executive members. Corporate Social Responsibility Report 2012 HERITAGE OIL PLC 33

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4.4 Mechanisms for shareholders and See page 16 of the Corporate – employees to provide recommendations or Governance Report. direction to the highest governance body.

4.5 Linkage between compensation for See the Corporate Governance Report, – members of the highest governance in particular the Remuneration Report body, senior managers and executives on pages 18 to 29. (including departure arrangements) and the organisation’s performance (including social and environmental performance).

4.6 Processes in place for the highest See CSR policy framework and page 9 6 to 7 governance body to ensure conﬂicts of of the Corporate Governance Report. interest are avoided.

4.7 Process for determining the composition, See page 9 of the Corporate Governance – qualiﬁcations and expertise of the Report. members of the highest governance body and its committees, including any consideration of gender and other indicators of diversity.

4.8 Internally developed statements of mission See CSR policy framework within this 6 to 7 or values, codes of conduct and principles CSR Report. relevant to economic, environmental and social performance and the status of their implementation.

4.9 Procedures of the highest governance See Corporate Governance Report, – body for overseeing the organisation’s in particular the Report of the CSR identiﬁcation and management of Committee on page 36. economic, environmental and social performance, including relevant risks and opportunities and adherence or compliance with internationally agreed standards, codes of conduct and principles.

4.10 Processes for evaluating the highest See page 15 of the Corporate – governance body’s own performance, Governance Report. particularly with respect to economic, environmental and social performance.

4.11 Explanation of whether and how the See Financial review and section on – precautionary approach or principle is risks on pages 26 to 34 in the Annual addressed by the organisation. Review.

4.12 Externally developed economic, None. – environmental and social charters, principles, or other initiatives to which the organisation subscribes or endorses.

4.13 Memberships in associations (such as Jersey Financial Services. – industry associations) and/or national/ international advocacy organisations.

4.14 List of stakeholder groups engaged by the Not reported. – organisation.

4.15 Basis for identiﬁcation and selection of See CSR policy framework within this 6 to 7 stakeholders with whom to engage. CSR Report. HERITAGE OIL PLC Corporate Social Responsibility Report 2012 34

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4.16 Approaches to stakeholder engagement, See Community and human rights 16 to 17 including frequency of engagement by within this CSR Report. type and by stakeholder group.

4.17 Key topics and concerns that have been See Community and human rights 16 to 17 raised through stakeholder engagement within this CSR Report. and how the organisation has responded to those key topics and concerns, including through its reporting. Corporate Social Responsibility Report 2012 HERITAGE OIL PLC 35

C SR GLOSSARY

$ US dollars unless otherwise stated API a specific gravity scale developed by the American Petroleum Institute for measuring the relative density of various petroleum liquids, expressed in degrees BBL/BBLS barrel/barrels BBLS/D OR BOPD barrels per day or barrels of oil per day B C F billion cubic feet BIOD IVERSITY the number and variety of organisms found within a specified region BOE barrels of oil equivalent1 BOE/D OR BOEPD barrels of oil equivalent per day C EO Chief Executive O!cer C FO Chief Financial O!cer C O D E 2010 UK Corporate Governance Code C OMPANY Heritage Oil Plc C OND ENSATE low density, high API hydrocarbon liquids that are present in natural gas fields where it condenses out of the raw gas if the temperature is reduced to below the hydrocarbon dew point temperature of the raw gas C ONTINGENT RESOU R C ES those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations by application of development projects but which are not currently considered to be commercially recoverable due to one or more contingencies C SR Corporate Social Responsibility EIA Environmental Impact Assessment, which determines the impact operations may have on the environment EMS Environmental Management System, which is a system that manages the impact of the environment and is designed to minimise any negative e"ects operations may have GJ gigajoules GRI Global Reporting Initiative; an organisation which has developed the most widely used sustainability reporting framework GREENHOU SE GAS, GHG a gas, such as carbon dioxide or methane, which re-emits infrared radiation and is responsible for the greenhouse e"ect GROU P, HER I TAGE the Company and all of its subsidiaries HAZMAT hazardous material, solids, liquids and gases that can harm people, other living organisms, property or the environment HOC OR C ORPORATION Heritage Oil Corporation, incorporated in Canada and a wholly owned subsidiary of the Company I UCN International Union for Conservation of Nature ILO International Labour Organisation KPI Key Performance Indicator LEAD potential drilling target that is less well defined than a prospect and requires further data before being considered a prospect for drilling LPG liquid petroleum gas LSE London Stock Exchange LTI Lost Time Injury LTIFR Lost Time Injury Frequency Rate per 10,000 hours worked M metres M3 cubic metres MBBLS thousand barrels MMBBLS million barrels MBOE thousands of barrels of oil equivalent MMBOE millions of barrels of oil equivalent M C F thousand cubic feet M C F/D thousand cubic feet per day MMBTU million british thermal units MMC F million cubic feet MMC F/D million cubic feet per day MMSTB million stock tank barrels N/A not applicable NATU RAL RESOU R C E(S) a naturally occurring resource, or resources, such as oil, coal, and gas NGLS natural gas liquids

ANNUAL REVIEW GLOSSARY CONTINU ED

NGO Non-Governmental Organisation PETROLEU M any mineral, oil or relative hydrocarbon (including condensate and natural gas liquids) and natural gas existing in its natural condition in strata (but not including coal or bituminous shale or other stratiﬁed deposits from which oil can be extracted by destructive distillation) PROSPEC T potential drilling target that is well deﬁned, usually by seismic data PROSPEC TIVE RESOU R C ES those quantities of petroleum which are estimated, as of a given date, to be potentially recoverable from undiscovered accumulations PROVED RESERVES those quantities of petroleum, which by analysis and geoscience, can be estimated with reasonable certainty to be commercially recoverable. It is likely that the actual remaining quantities recovered will exceed the estimated proved reserves PSA OR PSC production sharing agreement or production sharing contract STAKEHOLD ER a person or group with a direct interest, involvement, or investment in our activities. Heritage’s stakeholders include employees, shareholders, local communities, NGOs, the media, governments, regulatory authorities and research organisations TC F trillion cubic feet TSR Total Shareholder Return TSX Toronto Stock Exchange WTI West Texas Intermediate

CONVERSION TABLE The following table sets forth standard conversions from Standard Imperial Units to the International System of Units (or metric units).

ADVISERS AND FINANCIAL CALENDAR

CANADIAN LEGAL ADVISERS TO THE COMPANY McCarthy Tétrault LLP Suite 3300 421–7th Avenue SW Calgary Alberta T2P 4K9 Canada H ERITAGEO ILPLC. C OM

HERITAGE OIL PLC

Fourth Floor, Windward House La Route de la Liberation St Helier JE2 3BQ Jersey Channel Islands

T: +44 (0) 1534 835 400 F: +44 (0) 1534 835 412 DIVERS I F IED

F INANCIAL S TATEM ENTS 2012 HERITAGE OIL PLC Financial Statements 2012

CONTENTS THE HERITAGE OIL P LC A NNUAL R EPO RT AND A CCO UNTS 2012 CO N S I S T S OF FOUR DOCUM ENTS A S D ETAILED B ELOW.

Highlights 2012 01 Annual Review Corporate Governance Financial review 02 The Annual Review provides an The Corporate Governance Report Statement of Directors’ Responsibilities 08 GROWTH overview of Heritage, its processes F RAM E WORK provides detailed information on ANNUAL REVIEW COR PORATE GO VERNANC E 20I 2 2012 Independent Auditor’s Report to and a Business Review. all aspects of Heritage’s corporate the Members of Heritage Oil Plc 09 governance. Consolidated income statement 10 Consolidated statement of comprehensive income 11 Consolidated balance sheet 12 Consolidated statement of changes in equity – 2012 13 Consolidated statement of changes in equity – 2011 14 Consolidated cash flow statement 15 Corporate Social Financial Statements Notes to consolidated financial statements 16 Responsibility The Financial Statements Report RESPECT DIVERSIFIED provides detailed information on CORPORATE SOCIAL RESPONSIBILITY The CSR Report provides detailed FINANCIAL STATEMENTS 20I 2 20I 2 O T H ER information concerning Heritage’s Heritage’s financial position. Financial statements glossary 40 CSR strategy, policies, systems and Advisers and financial calendar IBC performance. Financial Statements 2012 HERITAGE OIL PLC 01

HIGHLIGH TS FINANCIAL – Since the acquisition of an interest in OML 30, revenues net to Heritage of 2012 $234.5 million have been generated – Shoreline made a cash payment of $52.5 million, in April 2013, to reduce the bridge loan to $497.5 million – Heritage had cash at 31 December 2012 of c.$90 million, excluding amounts relating to the tax dispute of c.$405 million and amounts used as part security in respect of OML 30 of $101 million – Average gross production from OML 30 has been 20,350 bopd since the acquisition – Production from the interest in OML 30, Nigeria, net to Heritage of 12,350 bopd for November and December 2012 and net production from Russia of 607 bopd for the year

OPERATIONAL – Acquired an interest in OML 30, Nigeria, through Shoreline Natural Resources Limited (“Shoreline”), whose ownership interests are held by Heritage Oil SNR (Nigeria B.V.), a wholly owned subsidiary of Heritage and a local Nigerian partner, Shoreline Power Company (“Shoreline Power”) – Acquisition provided a material change in proved and probable reserves for Heritage, which RPS Energy Consultants Ltd (“RPS”) independently estimate at 412 MMbbls, for interests in Nigeria and Russia, as at 31 March 2012 – Disposed of interests in the Miran asset, in the Kurdistan Region of Iraq (“Kurdistan”), for $450 million – Extended acreage in Tanzania, adding to acreage Heritage believes could be geologically analogous to the Lake Albert Basin, providing the Company with a key advantage in assessing the blocks – Commenced the work programme in Tanzania through the acquisition of 2D seismic on Rukwa and the acquisition of a very high resolution gravity survey on Kyela – Farmed in to two licences in Papua New Guinea (“PNG”); Petroleum Prospecting Licence 319 (“PPL 319”) and Petroleum Retention Licence 13 (“PRL 13”), which are believed to be in an attractive geological fairway

All dollars are US dollars unless otherwise stated. HERITAGE OIL PLC Financial Statements 2012 02

FINANCIAL REVIEW

CONSISTENT GROWTH

PAUL AT H ERTON CHIEF F INANCIAL O FFICER

SELECTED OPERATIONAL AND FINANCIAL DATA

2012 2011 Change P RO FORMA P ROD UCTION1 bopd 12,957 673 1,825% S ALES VOLUME2 bopd 607 671 (10%) AVERAGE REALISED PRICE $/bbl 39.7 36.9 8%

P ETROLEUM REVENUE $ million 8.8 9.0 (2%) LOSS FROM CONTINUING OPERATIONS AFTER TAX $ million (182.3) (63.0) (189%) G AIN/(LOSS) FROM D ISCONTINUED OPERATIONS $ million 210.9 (3.9) n/a N ET PROFIT/(LOSS) $ million 28.6 (66.9) n/a

TOTAL CASH INVESTING AND C A P I TA L EXPEND ITURES $ million 910.0 134.9 YEAR END CASH BALANCE $ million 89.6 310.9

CORPORATE PERFORMANCE are included in capital expenditure and other income statement PROD UCTION AND SALES VOLUMES accounts. General and administrative expenses are comprised of Petroleum revenue was generated in 2012 from the Zapadno salaries of management, finance and administrative sta", consulting, Chumpasskoye Field in Russia. Production from the Zapadno legal and professional fees, transportation costs and other costs. Chumpasskoye Field decreased from an average daily production of 673 bopd in 2011 to 607 bopd in 2012, primarily due to natural If share-based compensation expenses are excluded, net general and decline and a mechanical problem occurring on well 363 which has administrative expenses increased from $17.4 million in 2011 to been repaired. $18.5 million in 2012. In 2012, the Group capitalised $5.5 million (2011 – $5.5 million) of general and administrative costs relating to In November 2012, Heritage, through Shoreline Natural Resources exploration and development activities, including share-based Limited (“Shoreline”), completed the acquisition of a 45% interest in compensation of $1.1 million (2011 – $1.1 million). a producing oil mining licence in Nigeria (“OML 30”) together with a 45% interest in other assets owned under a joint operating agreement Depletion, depreciation and amortisation expenses increased by 144% for OML 30 (the “Acquisition Assets”). Shoreline is a special purpose to $6.4 million in 2012, primarily as a result of the inclusion of Nigerian company formed between a subsidiary of Heritage and a depletion for Heritage’s net interest in OML 30. Depletion for the Nigerian partner, Shoreline Power Company Limited (“Shoreline Zapadno Chumpasskoye Field decreased in line with the lower Power”), which acquired the 45% of OML 30. Production from production volumes. OML 30 is incorporated within the Group results with e"ect from 1 November 2012. Average daily production, net to Heritage’s Exploration expenditures expensed in the year, and not capitalised, economic interest, of 12,350 bopd was generated from OML 30 in decreased from $12.3 million in 2011 to $4.7 million in 2012. Nigeria for November and December 2012. Exploration expenditures in 2012 related principally to activities in Africa as the Company looked to expand its portfolio in one of its The di"erence between the production volumes and sales volumes core areas. is due to the change in the oil inventory balance during the year. Expenses of acquisition in 2012 of $72.4 million (2011 – nil) related REVENUE principally to costs incurred and accrued for legal and professional Petroleum revenue from the Zapadno Chumpasskoye Field in Russia fees and include stamp duty of $10.5 million and transfer tax of decreased by $0.2 million (2%) to $8.8 million in 2012. This decrease $10.4 million arising from the purchase of the Acquisition Assets. comprised: In 2012, the Group recognised an impairment of intangible – $(0.8) million from a decrease in sales volumes from 671 bopd in exploration and evaluation assets of $34.3 million (2011 – 2011 to 607 bopd in 2012; and $10.8 million). The impairment recognised in 2012 comprised two – $0.6 million from an 8% increase in average commodity prices elements. Firstly, after a technical review and consideration of the from $36.86/bbl in 2011 to $39.74/bbl in 2012. security situation, management decided to relinquish the licences in Mali and fully write-o" all expenditure of $18.4 million. Secondly, There was no petroleum revenue recognised from OML 30 in Nigeria after a technical review, management decided to write-o" for 2012, as the first lifting was in January 2013. All 2012 production expenditure of $15.9 million incurred with respect to the Latham from OML 30 is therefore reflected as inventory at year end. The licence area in Tanzania. The impairment recognised in 2011 of average commodity price achieved from sales of OML 30 crude in the $10.8 million related to the Kimbiji licence in Tanzania. first quarter of 2013 was $116.87/bbl. In 2012, the Group recognised an impairment write-down of OPERATING RESULTS property, plant and equipment of $2.1 million (2011 – nil) relating Expenses to a reduction in the fair value of an aircraft due to unfavourable Petroleum operating costs for the Zapadno Chumpasskoye Field in economic conditions. Russia increased by 3% to $3.0 million in 2012. Average operating cost per produced barrel of oil increased from $11.82/bbl in 2011 to Finance income/costs $13.37/bbl in 2012, due primarily to higher well workover costs to In 2012, interest income was $3.2 million (2011 – $5.7 million). Cash repair a mechanical problem on well 363, together with higher and cash equivalents are typically held in interest bearing treasury fuel costs. accounts. This decrease in interest income is primarily due to a decrease in average cash and cash equivalents balances. Net operating costs for OML 30 were $1.0 million. Petroleum operating costs for OML 30 in Nigeria for November and December Other finance costs increased from $3.7 million in 2011 to $39.8 2012 were $10.0 million, but as 2012 production was held in inventory million in 2012, due primarily to financing fees and interest charges as at 31 December 2012, there is a transfer of operating expenses of incurred for the bridge facilities and guarantee relating to the $9.0 million to inventory. At 31 December 2012, Heritage’s net Acquisition Assets, interest charges incurred on the $294 million economic share of barrels held in inventory from OML 30 exchangeable loan provided by Genel (see the Kurdistan disposal production was 753,380 barrels. section of the Financial Review on page 5) and interest charges incurred on the loan provided in August 2012 of $30 million to Production tax in Russia decreased from $4.9 million in 2011 to refinance the acquisition of an aircraft. The impact of the new $4.7 million in 2012 as a result of lower production volumes, the financing arrangements was partially o"set by lower convertible bond impact of which was partially o"set by increased average commodity accretion expense following repayment of the convertible bond at term prices in 2012, as both production volumes and price are used in the in February 2012. calculation of the tax. In 2012, the Group had foreign exchange losses of $0.1 million General and administrative expenses decreased from $19.9 million in compared to $0.2 million in 2011. The loss arose from net foreign 2011 to $18.7 million in 2012. This was due, principally, to a higher exchange gains and losses on revaluation of balances denominated in percentage of sta" being seconded directly to projects and those costs currencies di"erent from the functional currency. HERITAGE OIL PLC Financial Statements 2012 04

FINANCIAL REVIEW CONTINUED

Heritage recognised an unrealised loss on investments of $7.7 million Under the terms of the call option agreement between Heritage and in 2012 (2011 – $20.3 million), which comprised of a decrease in Shoreline, as amended by an addendum 25 June 2012, (“Shoreline market value of investments in shares of PetroFrontier Corp. Option Agreement”), Shoreline Power had an option to increase its (“PetroFrontier”). As at 31 December 2012, the Company had economic interest in Shoreline by purchasing 30% of the shares from acquired 15,860,467 shares of PetroFrontier representing 19.98% Heritage. Shoreline Power exercised the option in December 2012 of listed shares of the company. The investment in share capital of and payment is anticipated to be received in the second quarter of PetroFrontier is classified as available-for-sale and valued at fair value 2013. On completion Heritage’s economic share in Shoreline will which is determined using market price at the end of the period. At reduce from 97.5% to 68.25%. 31 December 2012, the market price of PetroFrontier shares was Cdn$0.35 per share. The Acquisition Assets meet the criteria of a business as set out in IFRS 3 Business Combinations (“IFRS 3”), as they represent an Heritage held 1,500,000 warrants in Afren plc (“Afren”) with an integrated set of activities and assets capable of being conducted and exercise price of £0.60 per warrant, which were received as partial managed for purpose of providing a return, therefore the Acquisition consideration from the sale of Heritage Congo Limited in 2006. has been accounted for in accordance with IFRS 3. On 4 November 2011, the Afren warrants were exercised and the Company acquired 1,500,000 of the listed shares in Afren. The The fair value allocation of the Acquisition Assets is based upon investment in Afren shares is classified as available-for-sale and an independent review. The Company used the data from the valued at fair value which is determined using market price at the end independent review to calculate the fair value of the assets taking of the period. The valuation at market price as at 31 December 2012 proved and probable reserves. In accordance with IAS 12, a deferred resulted in a gain of $1.1 million (2011 – $0.1 million) which was tax liability has been recognised for the di"erence between the fair recognised in equity. value allocated to property, plant and equipment and the value of the consideration that can be claimed as a capital allowance to o"set the ACQUISITION OF AN INTEREST IN OML 30 future tax liability, calculated on a tax rate of 65.75% for the first five On 29 June 2012, Shoreline entered into an agreement (the years and rising to 85% after five years. As only a portion of the “Acquisition Agreement”) with The Shell Petroleum Development purchase consideration is available to be claimed as a capital Company of Nigeria Limited (“Shell”), Total E&P Nigeria Limited allowance and the tax rates are high, this has resulted in the (“Total”) and Nigerian Agip Oil Company Limited (“Agip”) (the recognition of a significant deferred tax liability. As a result of the “Vendors”) to acquire the Acquisition Assets for cash consideration impact of the deferred tax liability recognised, the purchase of $850 million, net of costs (the “Acquisition”). consideration is higher than the aggregate of the fair value of the identifiable assets and liabilities and therefore goodwill has been Shoreline is a private limited Nigerian company whose ownership recognised. The fair value of the identifiable assets and liabilities is interests are held by Heritage Oil SNR (Nigeria) B.V., a wholly owned provisional and if new information is obtained within one year of the subsidiary of Heritage, and a local Nigerian partner, Shoreline Power. acquisition date the acquisition accounting may be revised.

At an extraordinary general meeting (“EGM”) on 30 August 2012, The following table provides additional information with respect to the shareholders of the Company approved the Acquisition, and on the identifiable assets acquired and liabilities assumed at Heritage’s 9 November 2012 Heritage announced the completion of the current e"ective 97.5% share of net assets of Shoreline: Acquisition, e"ective 1 November 2012. 1 November 2012 The Acquisition Assets were acquired for cash consideration of $’000 $850,000,000, net of costs, of which: (i) a deposit of $85,000,000 Property, plant and equipment 2,483,317 was paid by Shoreline upon the signing of the Acquisition Agreement Intangible assets – goodwill 351,370 (with $5,000,000, being the portion of such deposit not exceeding Deferred tax liabilities (1,983,189) 1% of the market capitalisation of the Company as at 29 June 2012, Site restoration provision (22,748) paid to the Vendors, and the remaining $80,000,000, paid into a Net assets 828,750 dedicated escrow account); and (ii) the balance of the consideration, being $765,000,000 which was paid on completion. The loss on acquisition at Heritage’s current e"ective 97.5% share of results of Shoreline has been derived as follows: The Acquisition was partially financed by a $550,000,000 secured Year ended bridge facility provided by The Standard Bank of South Africa 31 December 2012 (“Standard Bank Plc”) to Shoreline. The Company has placed $’000 $50,000,000 in an escrow account with Standard Bank Plc as Consideration paid (828,750) security for the bridge facility. Standard Bank Plc also provided a $50,000,000 letter of credit (the “Letter of Credit”) to the Nigerian Fair value of net assets acquired 828,750 Petroleum Development Company (“NPDC”), to cover Shoreline’s Less: working capital requirements under the joint operating agreement Other expenses (72,351) for OML 30. Heritage provided cash collateral of $51,000,000 to Expenses of acquisition (72,351) Standard Bank Plc to guarantee this Letter of Credit which also covers any interest which may be due under the Letter of Credit. Both Other expenses incurred on the Acquisition include costs of the amount held in escrow and the guarantee for the Letter of Credit professional fees ($24.1 million), taxes arising on the Acquisition are classified as restricted cash in the balance sheet at 31 December ($20.8 million), success fee ($10.6 million – see note 23) and other 2012 (see note 2a). costs ($16.9 million). Financial Statements 2012 HERITAGE OIL PLC 05

RESULTS FROM CONTINUING OPERATIONS The profit on disposal of discontinued operations has been derived Heritage’s loss after tax from continuing operations in 2012 was as follows: Year ended $182.3 million, compared to $63.0 million in 2011. The adjusted loss 31 December from continuing operations in 2012 was $65.5 million compared to 2012 $’000 $29.4 million in 2011 if certain non-cash items (share-based compensation expense, impairment of intangible exploration and Consideration received evaluation assets, property, plant and equipment impairment Sales proceeds 462,366 588 write-down, foreign exchange gains, unrealised gains/losses on Working capital adjustments revaluation of Afren warrants, unrealised loss on investment in Total disposal consideration 462,954 PetroFrontier shares and one-o" acquisition costs) are excluded. Less: Carrying amount of net assets sold (224,006) D ISPOSALS Other expenses (22,620) Kurdistan Gain on disposal of discontinued operations 216,328 During 2012 the Group disposed of its entire business in the Kurdistan Region of Iraq (“Kurdistan”) which has therefore been classified as a discontinued operation. The disposal was completed The expenses incurred on disposition include costs of bank fees ($4.0 in two distinct transactions. On 21 August 2012, the Group disposed million), professional fees ($5.0 million) and sta" costs recharged and of a 26% interest in the production sharing contract relating to the other costs ($13.6 million). Miran Block (the “Miran PSC”) in Kurdistan and corresponding interest in the related joint operating agreement (the “Miran JOA”) to Uganda Genel Energy plc (“Genel”) in exchange for cash of $156 million (the On 18 December 2009, Heritage announced that it and its wholly “Sale”). On the same date, Genel provided a loan of $294 million to owned subsidiary Heritage Oil & Gas Limited (“HOGL”), had the Group (the “Loan”). entered into a Sale and Purchase Agreement (“SPA”), with ENI International B.V. (“Eni”) for the sale of HOGL’s 50% interests in The Loan bore interest of 8% and had a fixed term ending on the date Blocks 1 and 3A in Uganda (the “Ugandan Assets”). On 17 January which is the earlier of: (i) 15 months after the date of the completion 2010, Tullow Uganda Limited (“Tullow”) exercised its rights of of the Acquisition; and (ii) 6 February 2014. The Loan had an option, pre-emption. The transaction was overwhelmingly approved by following the election of either the Company or Genel and subsequent Heritage shareholders at the General Meeting on 25 January 2010. approval from the shareholders of the Company, to be repaid through the transfer to Genel of Heritage’s remaining 49% interest in the Miran On 27 July 2010, Heritage announced that HOGL had completed the PSC in Kurdistan and the corresponding interest in the Miran JOA. disposal of the Ugandan Assets. Tullow paid cash of $1.45 billion, The Loan terms also provided for the interim funding by Genel of including $100 million from a contractual settlement, of which Heritage’s expenditure on its 49% interest in the Miran PSC by way Heritage received and retained $1.045 billion. of increases in the Loan with e"ect from 1 July 2012. The Ugandan Revenue Authority (“URA”) contends that income In December 2012, following Heritage’s election to repay the Loan tax is due on the capital gain arising on the disposal and it raised in exchange for the transfer of a 49% interest in the Miran PSC to assessments of $404,925,000 prior to completion of the disposal. Genel, Heritage’s shareholders approved the repayment and the Heritage’s position, based on comprehensive advice from leading exchange became unconditional. Shareholder approval was received legal and tax experts in Uganda, the United Kingdom and North in December and the transaction completed shortly thereafter. America, is that no tax should be payable in Uganda on the disposal of the Ugandan Assets and that – even if tax were payable – under the Year ended 31 December terms of the production sharing agreements with the Ugandan 2012 2011 $’000 $’000 government relating to the Ugandan Assets (the “PSAs”), HOGL should be indemnified by the Ugandan government (under the Gain on disposal of discontinued contract stabilisation clause). operations 216,328 – 216,328 – On closing, Heritage deposited $121,477,500 with the URA, representing 30% of the disputed tax assessment of $404,925,000. The following table provides additional information with respect to $121,477,500 has been classified as a deposit in the balance sheet at the Sale amounts included in the balance sheet at 12 December 2012. 31 December 2012. A further $283,447,000 has been retained in escrow with Standard Chartered Bank in London, pursuant to an 12 December 2012 agreement between HOGL, Tullow and Standard Chartered Bank $’000 pending resolution between the Ugandan government and HOGL Assets of the tax dispute. Including accrued interest, an amount of Non-current assets $286,915,000 (2011 – $284,479,000) is classified as restricted cash Intangible exploration and evaluation assets 225,101 in the balance sheet at 31 December 2012. Total assets 225,101 In August 2010, the URA issued a further income tax assessment Liabilities of $30 million representing 30% of the additional contractual Non-current liabilities settlement amount of $100 million. HOGL has challenged the Provisions 1,095 Ugandan tax assessments on the disposal of HOGL’s entire interest in the Ugandan Assets. Total liabilities 1,095 Net assets 224,006 HERITAGE OIL PLC Financial Statements 2012 06

FINANCIAL REVIEW CONTINUED

In November 2011 and December 2011, the Tax Appeals Tribunal PROFIT PER S H ARE in Uganda dismissed HOGL’s applications in relation to the two Heritage’s net profit in 2012 was $28.6 million, compared to a net assessments amounting to $434,925,000. The rulings from the Tax loss of $66.9 million in 2011. Appeals Tribunal in Uganda are part of a domestic process and are not final and determinative. HOGL has appealed the rulings, which it In 2012, the basic earnings and diluted earnings per share was $0.11, believes are fatally flawed in many respects, through the Ugandan compared to the basic and diluted loss per share of $0.25 in 2011. court system commencing with the High Court and subsequently the Court of Appeal and Supreme Court if necessary. In 2012, the basic and diluted loss per share from continuing operations was $0.71 compared to $0.23 in 2011. In May 2011, HOGL commenced international arbitration proceedings in London against the Ugandan government in accordance with CASH FLOW AND CAPITAL EXPENDITURES provisions of the PSAs. HOGL is seeking a decision requiring, among Cash used in continuing operating activities was $181.1 million other things, the return or release of approximately $405 million, plus in 2012 compared to $34.6 million in 2011. Total cash capital interest, in aggregate currently on deposit with the URA or in escrow expenditures in 2012 were $910.0 million, $775.1 million higher than with Standard Chartered Bank in London. HOGL made a number of in 2011. The following major work programmes and an acquisition claims in the arbitration proceedings that tax had been improperly were undertaken in 2012: imposed on it which the arbitration tribunal ruled on 3 April 2013 to be outside its jurisdiction. The tribunal ruled at the same time that – acquired Acquisition Assets in Nigeria for $828.8 million; there were two areas of HOGL’s claims which it will consider, in – drilling and testing of the Miran West-3 well completed in respect of contractual stabilisation clause protection and breach of May 2012; other contractual obligations. Accordingly, the arbitration proceedings – initial work-over operations to prepare the Miran West-1 well, now concern HOGL’s claims that the Ugandan government wrongfully Kurdistan, for completion took place during September 2012; or unreasonably delayed consent to the sale by HOGL of the rights – planning and development studies on the Miran Field and Front under the PSAs and that the Ugandan government should indemnify End Engineering Design studies on a gas export pipeline took HOGL with respect to any tax liability which arose due to changes in place in 2012; and law that materially reduced the economic benefits to be derived by – in Tanzania the work programme commenced in the recently HOGL from the PSAs. awarded Kyela and Rukwa licences with reprocessing of legacy 2D seismic data and acquisition of a high resolution gravity survey. The determination by the arbitral tribunal marks the end of the preliminary phase. The proceedings will now continue to deal B U Y BACK PROGRAMME with the merits phase of Heritage’s contractual claims against the At the Annual General Meeting (“AGM”) held on 20 June 2011, Ugandan government and the underlying substantive Ugandan tax a special resolution was passed by shareholders authorising the matters remain under appeal in the Ugandan courts. Company to make market purchases of its own shares up to the date of the next AGM. Any shares which have been so purchased may be On 15 April 2011, Heritage and its wholly owned subsidiary HOGL, held as treasury shares or cancelled immediately upon completion of received Particulars of Claim filed in the High Court of Justice in the purchase. No such resolution was proposed at the AGM held on England by Tullow seeking $313,447,500 for alleged breach of contract 21 June 2012. Purchased Ordinary Shares are held in treasury. as a result of HOGL’s and Heritage’s refusal to reimburse Tullow in relation to a payment made by Tullow of $313,447,500 on 7 April 2011 In July 2011, the Company announced that the share purchases to the URA. Heritage and HOGL have filed their Defence and would be made via a trading plan to allow the buy back programme Counterclaim against Tullow seeking instead the release to HOGL to continue independently through close periods. The trading plan of the $283,447,000 plus interest currently being held in escrow with agreement was terminated by the Company in May 2012. Standard Chartered Bank in London. The case commenced to be heard in the High Court in March 2013 and a first instance decision is As at 31 December 2012, the Company held a total of 34,602,442 expected to be received later this year. Heritage and HOGL believe that Ordinary Shares in treasury equal to 12% of the issued share capital the claim has no merit and are in the process of vigorously and robustly as at 1 January 2013. The total acquisition cost of these shares was defending it. $126.9 million.

Although disputes of this nature are inherently uncertain, the As at 31 December 2012, Heritage had 255,585,078 Ordinary Shares Directors believe that the monies on deposit and held in escrow will in issue (excluding treasury shares) as well as 2,371,918 exchangeable ultimately be recovered by Heritage. shares of no par value of Heritage Oil Corporation (“HOC”, the “Corporation”), each carrying one voting right in Heritage. The total The results of the Ugandan operations have been classiﬁed as number of voting rights in Heritage, excluding treasury shares as discontinued operations. The loss on disposal of discontinued operations at 29 April 2013 was 257,956,996. (comprising legal fees and costs relating to the litigation described above) for the years ended 31 December 2012 and 2011 is as follows: R EPAY MENT OF C ONVERTIBLE B OND S In February 2012, Heritage repaid $127.1 million to holders of the Year ended 31 December $165,000,000 8% convertible bonds (the “Bonds”), on maturity of 2012 2011 $’000 $’000 the Bonds. Loss on disposal of discontinued P ETROF RONTIER SH ARES operations (5,407) (3,933) As at 31 December 2012, the Company had acquired 15,860,467 (5,407) (3,933) of the listed shares of PetroFrontier, representing 19.98% of the company. Total share acquisition costs amounted to $32.2 million. Financial Statements 2012 HERITAGE OIL PLC 07

FINANCIAL POSITION – Oil and gas sales volumes and prices – whilst not under the direct LIQ UID ITY control of the Company, a material movement in commodity There was a net decrease in cash and cash equivalents in 2012 prices could impact on the Group. The Group did not hedge oil of $221.2 million. At 31 December 2012, Heritage had a working prices in 2012. capital deficit of $17.7 million, including cash and cash equivalents – Loss of key employees – remuneration packages are regularly of $89.6 million. The deficit is a result of the current short term reviewed to ensure key executives and senior management are borrowing facility used in the acquisition of the Acquisition properly remunerated. Long term incentive programmes have Assets, which will be replaced in 2013 by a long term facility (see been established. Employees are encouraged to develop their note 2a). Like most oil and gas exploration companies, Heritage potential and, where appropriate, to further their careers within raises financing for its activities from time to time using a variety of the Group. This is one of the Group’s Key Performance Indicators sources. Sources of funding for future exploration and development and sta" turnover continues to remain at low levels. programmes will be derived from inter alia disposal proceeds from – Foreign exchange exposure – generally, it is the Group’s policy the sale of assets, such as the sale of the Company’s interest in the to conduct and manage its business in US dollars, which is its Miran PSC in 2012 and Company’s Ugandan Assets in 2010 (see reporting currency. Cash balances in Group subsidiaries are disposals section of the Financial Review on pages 5 and 6), using its primarily held in US dollars but small amounts may be held in other existing treasury resources, new credit facilities, reinvesting its funds currencies in order to meet immediate operating or administrative from operations, farm-outs and, when considered appropriate, expenses or to comply with local currency regulations. issuing debt and additional equity. Accordingly, the Group has a – Future funding – Shoreline’s purchase of the Acquisition Assets number of di"erent sources of finance available to it potentially. was in part funded by a $550 million bridge facility arranged by Standard Bank Plc which expires no later than 29 December 2013. CAPITAL STRUCTURE At the time of the acquisition Standard Bank Plc agreed, subject to Heritage’s financial strategy has been to fund its capital expenditure a number of substantive conditions, to refinance this into a long programmes and any potential acquisitions by selling non-core term loan. Discussions have progressed well with Standard Bank assets, reinvesting funds from operations, using existing treasury Plc and the other banks in the lending syndicate and terms for a resources, finding new credit facilities and, when considered five-year borrowing base loan initially of $550 million have been appropriate, either issuing unsecured convertible bonds or equity. agreed subject inter alia to finalisation of documentation and credit committee approval. Heritage is confident that this At 31 December 2012, Heritage had net debt of $472.1 million (31 refinancing will take place before the bridge facility expires on December 2011 net cash – $171.4 million) (cash and cash equivalents 29 December 2013 though there can be no certainty of this less borrowings) and 33% gearing (31 December 2011 – nil) (net debt (see note 2a). as a percentage of total capital, total capital is calculated as “equity” as shown in the consolidated balance sheet plus net debt). Further details on risks and how the Company mitigates them are disclosed in the Annual Review on pages 32 to 34. CRED ITORS’ PAY MENT POLICY It is the Company and Group’s general policy to settle all debts with INTERNAL CONTROL creditors on a timely basis and in accordance with the terms of credit A system of internal control was designed and tailored to ensure key agreed with each supplier. Average creditor payment days in 2012 risks are addressed appropriately and to provide assurance regarding were approximately 45 days (2011 – 45 days). the reliability of financial reporting and preparation of financial statements. Risk and internal control are assessed continually. See PRIMARY RISKS AND UNCERTAINTIES FACING the Corporate Governance Report on pages 15 and 31 for further T H E BUSINESS details. One weakness identified in its financial procedures reporting Heritage’s business, financial standing and reputation may be impacted concerns accounting for complex transactions and the Company by various risks, not all of which are within its control. The Group ensures that it seeks third party advice to mitigate this weakness. identifies and monitors the key risks and uncertainties a"ecting the Group and runs its business in a way that minimises the impact of such As part of the internal control systems, all transactions with related risks where possible. The primary business risks include: parties are identified, scrutinised and disclosed in the financial statements appropriately. – Exploration and development expenditures and success rates – the Group has experienced management and technical teams with a Heritage maintains insurance policies in accordance with industry track record of finding major hydrocarbon discoveries and has a standards. Heritage believes that the level of insurance it maintains is diversified portfolio of exploration, appraisal, development and adequate, based on various factors such as the cost of the policies, production assets. Considerable technical work is undertaken to industry standard practice and the risks associated with the reduce related areas of risk and maximise opportunities. exploration and development of oil and gas properties in the – Factors associated with operating in developing countries, political, countries in which it operates. Heritage does not insure against fiscal and regulatory instability – the Group maintains close contact political risk and, therefore, shareholders have full exposure to the with governments in the areas where it operates and, where risks and rewards of investing in its territories. appropriate, invests in community projects. Considerable work is undertaken before commencing operations in any new territory. Heritage maintains detailed financial models which allow the – Title disputes – notwithstanding potential challenges in Malta, Company to plan future operating and capital activities in an the Group believes that it has good title to its oil and gas e#cient manner. properties. However, the Group cannot control or completely protect itself against the risk of title disputes or challenges and PAUL ATH ERTON there can be no assurance that claims or challenges by third C H IEF FINANCIAL OFFICER parties against the Group’s properties will not be asserted at a 29 APRIL 2013 future date. Naturally, the Group strives to employ the best internal and advisory knowledge available to help to minimise this risk associated with its activities. HERITAGE OIL PLC Financial Statements 2012 08

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

The statement below explains the Directors’ responsibility for RESPONSIBILITY STATEMENT OF THE preparation of the Annual Report and Accounts 2012. DIRECTORS We confirm on behalf of the Board that to the best of our knowledge: The Directors are responsible for preparing the Annual Report and Accounts for the Group in accordance with applicable Jersey law a) the financial statements prepared in accordance with the applicable and regulations. accounting standards give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the Company law requires the Directors to prepare Group financial undertakings included in the consolidation taken as a whole; and statements for each financial year. Under that law they are required b) the management report (which is incorporated within the Annual to prepare the Group financial statements in accordance with Review, the Corporate Governance Report and the Corporate International Financial Reporting Standards (“IFRS”) as adopted Social Responsibility Report) includes a fair review of the by the European Union (“EU”) and applicable law. development and performance of the business, the position of the Company and the undertakings included in the consolidation The Group financial statements are required by law and IFRS as taken as a whole, together with a description of the principal risks adopted by the EU to present fairly the financial position of the and uncertainties that they face. Group and the performance for that period. GOING CONCERN In preparing the financial statements the Directors are required to: The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the – select suitable accounting policies and then apply them foreseeable future, the key facts taken into account are dealt with consistently; in note 2a, and therefore believe that it is appropriate to adopt – present information, including accounting policies, in a manner the going concern basis of accounting in preparing the annual that provides relevant, reliable, comparable and understandable financial statements. information; – provide additional disclosures when compliance with the specific For and on behalf of the Board requirements in IFRS is insu#cient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; – state whether they have been prepared in accordance with IFRS as adopted by the EU; and – prepare the financial statements on a going concern basis unless, MICH AEL J. HIBBERD having assessed the ability of the Company to continue as a going C H AIRMAN concern, it is inappropriate to presume the Company will continue in business (see note 2a).

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the ﬁnancial position of the Group and enable them to ensure that its ﬁnancial PAUL ATH ERTON statements comply with the Companies (Jersey) Law 1991 (as C H IEF FINANCIAL OFFICER amended) (the “Jersey Companies Law”). They have general 29 APRIL 2013 responsibility for taking such steps, as are reasonably open to them, for safeguarding the assets of the Group and to prevent and detect fraud and other irregularities.

Under applicable law, regulations and listing rule requirements, the Directors are also responsible for the preparation of a Directors’ Report, Remuneration Report and Corporate Governance Statement, all of which are in the Corporate Governance Report.

The Directors are responsible for the maintenance and integrity of the statutory and audited information on the Company’s website www.heritageoilplc.com. Jersey legislation and United Kingdom regulation, governing the preparation and dissemination of ﬁnancial statements, may di"er from requirements in other jurisdictions. Financial Statements 2012 HERITAGE OIL PLC 09

IND EPEND ENT AUD ITOR’S REPORT TO T HE MEMBERS OF HERITAGE OIL PLC

We have audited the Group financial statements of Heritage Oil Plc for the Opinion on financial statements year ended 31 December 2012 which comprise the Consolidated Income In our opinion the Group financial statements: Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the Consolidated Statement of Changes in – give a true and fair view, in accordance with IFRS as adopted by the Equity, the Consolidated Cash Flow Statement and the related notes on EU, of the state of the Group’s a"airs as at 31 December 2012, and of pages 10 to 39 within this Financial Statements Report. The financial its profit for the year then ended; and reporting framework that has been applied in their preparation is – have been properly prepared in accordance with the Companies applicable law and International Financial Reporting Standards (“IFRS”) (Jersey) Law 1991. as adopted by the EU. Emphasis of matter – uncertain outcome of tax dispute In addition to our audit of the financial statements, the Directors In forming our opinion on the financial statements, which is not have engaged us to audit the information in the Report of the modified, we have considered the adequacy of the disclosures made Remuneration Committee within the Corporate Governance Report that in note 6 to the Group financial statements concerning the dispute as is described as having been audited, which the Directors have decided to to whether or not tax is payable on the disposal of the Group’s interests prepare (in addition to that required to be prepared) as if the Company in Uganda. In this respect, based on advice received, the Directors were required to comply with the requirements of Schedule 8 to the UK believe that the amounts on deposit ($121,477,500) and held in escrow Companies Act 2006 The Large and Medium-sized Companies and ($286,915,000) shown in the consolidated balance sheet will be Groups (Accounts and Reports) Regulations 2008 (SI 2008 No. 410). recovered. However, the ultimate outcome of the matter is uncertain This report is made solely to the Company’s members, as a body, in and it may be some considerable time before the issue is resolved. accordance with Article 113A of the Companies (Jersey) Law 1991 and, in Opinion on other matter under the terms of our engagement respect of the separate opinion in relation to the Directors’ Remuneration In our opinion: Report and reporting as if the Company were required to comply with the Listing Rules applicable to companies incorporated in the UK, on terms – the part of the Directors’ Remuneration Report within the Corporate that have been agreed. Our audit work has been undertaken so that we Governance Report which we were engaged to audit has been properly might state to the Company’s members those matters we are required to prepared in accordance with Schedule 8 to the Companies Act 2006 state to them in an auditor’s report and, in respect of the separate opinion The Large and Medium-sized Companies and Groups (Accounts and in relation to the Directors’ Remuneration Report and reporting as if the Reports) Regulations 2008, as if those requirements were to apply to Company were required to comply with the Listing Rules applicable to the Company. companies incorporated in the UK, those matters that we have agreed to state to them in our report, and for no other purpose. To the fullest extent Matters on which we are required to report by exception permitted by law, we do not accept or assume responsibility to anyone We have nothing to report in respect of the following: other than the Company and the Company’s members, as a body, for our Under the Companies (Jersey) Law 1991 and the terms of our audit work, for this report, or for the opinions we have formed. engagement we are required to report to you if, in our opinion: Respective responsibilities of Directors and auditor – proper accounting records have not been kept by the Company, or As explained more fully in the Statement of Directors’ Responsibilities – proper returns adequate for our audit have not been received from set out on page 8 of this Financial Statements Report, the Directors are branches not visited by us; or responsible for the preparation of Group financial statements which give – the Company’s accounts and the part of the Directors’ Remuneration a true and fair view. Our responsibility is to audit, and express an opinion Report within the Corporate Governance Report which we were on, the financial statements in accordance with applicable law and engaged to audit are not in agreement with the accounting records and International Standards on Auditing (UK and Ireland). Those standards returns; or require us to comply with the Auditing Practices Board’s Ethical – we have not received all the information and explanations we require Standards for Auditors. for our audit. Scope of the audit of the financial statements Under the Listing Rules we are required to review: An audit involves obtaining evidence about the amounts and disclosures in the financial statements su#cient to give reasonable assurance that the – the part of the Corporate Governance Statement on page 5 in the financial statements are free from material misstatement, whether caused Corporate Governance Report relating to the Company’s compliance by fraud or error. This includes an assessment of: whether the accounting with the nine provisions of the UK Corporate Governance Code policies are appropriate to the Group’s circumstances and have been specified for our review. consistently applied and adequately disclosed; and the reasonableness In addition to our audit of the financial statements, the Directors have of significant accounting estimates made by the Directors; and the overall engaged us to review certain other disclosures as if the Company were presentation of the financial statements. In addition we read all the required to comply with the Listing Rules applicable to companies financial and non-financial information in the Company’s 2012 Annual incorporated in the UK. Under the terms of our engagement we are Report (which comprises four documents: Annual Review, Corporate required to review: Governance Report, Corporate Social Responsibility Report and Financial Statements Report) to identify material inconsistencies with the audited – the Statement of Directors’ Responsibilities, set out on page 8 of the financial statements. If we become aware of any apparent material Financial Statements Report, in relation to going concern; and misstatements or inconsistencies we consider the implications for – certain elements of the report to shareholders by the Board on our report. Directors’ remuneration. Jimmy Daboo for and on behalf of KPMG Audit Plc Chartered Accountants and Recognised Auditor 29 April 2013 HERITAGE OIL PLC Financial Statements 2012 10

CONSOLIDATED INCOME STATEMENT Y EARS END ED 31 DECEMBER 2012 AND 2011

2012 2011 $’000 $’000 Revenue Petroleum 8,834 9,030 Expenses Petroleum operating (12,956) (2,920) Change in inventory 8,991 – Production tax (4,700) (4,905) General and administrative (note 23) (18,718) (19,856) Other income 759 – Expenses of acquisition (note 7) (72,351) – Depletion, depreciation and amortisation (6,429) (2,630) Exploration expenditures (note 2e) (4,696) (12,319) Impairment of intangible exploration assets (note 11) (34,277) (10,775) Impairment of property, plant and equipment (note 12) (2,086) – Operating loss (137,629) (44,375) Finance income/(costs) Interest income 3,154 5,741 Other finance costs (note 8) (39,757) (3,681) Foreign exchange losses (142) (209) Unrealised losses on other financial assets (note 13) (7,746) (20,282) (44,491) (18,431) Loss from continuing operations before tax (182,120) (62,806) Income tax expense (note 9) (184) (152) Loss from continuing operations after tax (182,304) (62,958) Gain/(loss) in relation to disposals of discontinued operations (note 6) 210,921 (3,933) Profit/(loss) for the year attributable to owners of the Company 28,617 (66,891) Net loss per share from continuing operations (dollars) Basic (0.71) (0.23) Diluted (0.71) (0.23) Net earnings/(loss) per share from discontinued operations (dollars) Basic 0.82 (0.02) Diluted 0.78 (0.02) Net earnings/(loss) per share (dollars) Basic 0.11 (0.25) Diluted 0.11 (0.25)

The notes are an integral part of these consolidated ﬁnancial statements. Financial Statements 2012 HERITAGE OIL PLC 11

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Y EARS END ED 31 DECEMBER 2012 AND 2011

2012 2011 $’000 $’000 Profit/(loss) for the year 28,617 (66,891) Other comprehensive income/(loss) Exchange di"erences on translation of foreign operations (note 20) 2,053 (883) Net change in fair values of available-for-sale financial assets (6,651) (18,765) Net change in fair values of available-for-sale financial assets reclassified to the income statement 7,746 18,885 Other comprehensive income/(loss), net of income tax 3,148 (763) Total comprehensive income/(loss) for the year 31,765 (67,654) Attributable to: Owners of the Company 31,765 (67,654)

The total comprehensive income for the year of $31,765,000 (2011 loss – $67,654,000) includes gain of $210,921,000 (2011 loss – $3,933,000) from discontinued operations (note 6).

The notes are an integral part of these consolidated ﬁnancial statements. HERITAGE OIL PLC Financial Statements 2012 12

CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2012 AND 2011

2012 2011 $’000 $’000 ASSETS Non-current assets Intangible exploration and evaluation assets (note 11) 71,420 271,859 Intangible goodwill assets (note 7 and note 11) 351,370 – Property, plant and equipment (note 12) 2,589,751 106,852 Other ﬁnancial assets (note 13) 8,749 13,268 3,021,290 391,979 Current assets Inventories 9,083 78 Prepaid expenses 1,960 1,344 Trade and other receivables (note 14) 11,798 1,788 Deposit with the URA (note 6) 121,477 121,477 Restricted cash (note 6 and note 7) 387,917 284,479 Cash and cash equivalents (note 15) 89,634 310,882 621,869 720,048 3,643,159 1,112,027 LIABILITIES Current liabilities Trade and other payables (note 16) 108,453 35,391 Current tax liabilities (note 9) 194 104 Borrowings (note 17) 530,967 134,397 639,614 169,892 Non-current liabilities Borrowings (note 17) 30,757 5,110 Provisions (note 18) 23,010 783 Deferred tax (note 9) 1,983,224 38 2,036,991 5,931 2,676,605 175,823 Net assets 966,554 936,204 SHAREHOLDERS’ EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY Share capital (note 19) 342,359 345,682 Reserves 88,382 83,326 Retained earnings 535,813 507,196 966,554 936,204

The notes are an integral part of these consolidated ﬁnancial statements. Financial Statements 2012 HERITAGE OIL PLC 13

CONSOLIDATED STATEMENT OF CH ANGES IN EQ UITY – 2012

Year ended 31 December 2012 Available Foreign -for-sale Equity currency investments Share-based portion of Share translation revaluation payments Retained convertible Total capital reserve reserve reserve earnings debt equity $’000 $’000 $’000 $’000 $’000 $’000 $’000 Balance at 1 January 2012 345,682 (1,823) 120 60,380 507,196 24,649 936,204 Total comprehensive income for the year Profit for the year – – – – 28,617 – 28,617 Other comprehensive income/(loss) Exchange di"erences on translation of foreign operations – 2,053 – – – – 2,053 Net change in fair value of available-for-sale financial assets – – (6,651) – – – (6,651) Net change in fair value of available-for-sale financial asset reclassified to the income statement – – 7,746 – – – 7,746 Total other comprehensive income – 2,053 1,095 – – – 3,148 Total comprehensive income for the year – 2,053 1,095 – 28,617 – 31,765 Transactions with owners, recorded directly in equity Contributions by and distributions to owners Share buy back (3,323) – – – – – (3,323) Share-based payment transactions (note 22) – – – 1,908 – – 1,908 Total transactions with owners (3,323) – – 1,908 – – (1,415) Balance at 31 December 2012 342,359 230 1,215 62,288 535,813 24,649 966,554

The notes are an integral part of these consolidated ﬁnancial statements. HERITAGE OIL PLC Financial Statements 2012 14

CONSOLIDATED STATEMENT OF CH ANGES IN EQ UITY – 2011

Year ended 31 December 2011 Available Foreign -for- sale Equity currency investments Share-based portion of Share translation revaluation payments Retained convertible Total capital reserve reserve reserve earnings debt equity $’000 $’000 $’000 $’000 $’000 $’000 $’000 Balance at 1 January 2011 460,280 (940) – 62,969 575,867 24,649 1,122,825 Total comprehensive loss for the year Loss for the year – – – – (66,891) – (66,891) Other comprehensive income/(loss) Exchange di"erences on translation of foreign operations – (883) – – – – (883) Net change in fair value of available-for-sale financial assets – – (18,765) – – – (18,765) Net change in fair value of available-for-sale financial asset reclassified to the income statement – – 18,885 – – – 18,885 Total other comprehensive income/(loss) – (883) 120 – – – (763) Total comprehensive income/(loss) for the year – (883) 120 – (66,891) – (67,654) Transactions with owners, recorded directly in equity Contributions by and distributions to owners Share buy back (123,575) – – – – – (123,575) Exercise of share options net of attributable dividends (note 22) 1,225 – – (1,225) (1,780) – (1,780) Share-based payment transactions and exercise of share options 7,752 – – (1,364) – – 6,388 Total transactions with owners (114,598) – – (2,589) (1,780) – (118,967) Balance at 31 December 2011 345,682 (1,823) 120 60,380 507,196 24,649 936,204

The notes are an integral part of these consolidated ﬁnancial statements.

Financial Statements 2012 HERITAGE OIL PLC 15

CONSOLIDATED CASH FLOW STATEMENT Y EARS END ED 31 DECEMBER 2012 AND 2011

2012 2011 $’000 $’000 Cash provided by (used in) operating activities Net loss from continuing operations for the year (182,304) (62,958) Items not a"ecting cash Depletion, depreciation and amortisation 6,429 2,630 Finance costs – accretion expenses 758 1,352 Foreign exchange gains 1,745 (665) Share-based compensation 826 2,525 Loss on other financial assets 7,746 20,282 Impairment of intangible exploration and evaluation assets 34,277 10,775 Impairment of property, plant and equipment 2,086 – (Increase)/decrease in trade and other receivables (8,966) 139 Increase in prepaid expenses (616) (599) (Increase)/decrease in inventory (9,004) 18 Increase/(decrease) in trade and other payables 69,265 (7,187) Change in restricted cash (103,438) (876) Increase/(decrease) in tax payable 87 (55) Continuing operations (181,109) (34,619) Discontinued operations (note 6) (5,407) (4,137) (186,516) (38,756) Investing Acquisition of business joint venture (828,750) – Property, plant and equipment expenditures (7,926) (6,864) Intangible exploration and evaluation expenditures (71,309) (96,469) Other financial assets (2,037) (31,612) (910,022) (134,945) Discontinued operations Consideration on disposal (note 6) 156,588 – Transaction related expenses and other – disposal of Miran PSC (5,999) – Transaction related expenses and other – disposal of Ugandan Assets – 9,901 (759,433) (125,044) Financing Share buy back (3,323) (123,575) Shares issued for cash, proceeds from exercise of share options – 2,659 Payment on exercise of share options (note 22) – (1,780) Proceeds from loans raised 872,616 – Payment of transaction costs for loans (9,120) – Repayment of long-term debt (135,954) (810) 724,219 (123,506) Decrease in cash and cash equivalents (221,730) (287,306) Cash and cash equivalents – beginning of year 310,882 598,275 Foreign exchange (loss)/gain on cash held in foreign currency 482 (87) Cash and cash equivalents – end of year 89,634 310,882 Non-cash investing and financing activities (note 25) Supplementary information The following have been included within cash flows for the year under operating and investing activities Interest received 3,278 6,170 Interest paid 32,244 10,429

The notes are an integral part of these consolidated ﬁnancial statements. HERITAGE OIL PLC Financial Statements 2012 16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 REPORTING ENTITY debt and additional equity. Accordingly, the Group has a number of Heritage Oil Plc (the “Company”) was incorporated under the Jersey di!erent sources of finance available and the Directors are confident Companies Law on 6 February 2008 as Heritage Oil Limited. The that additional finance will be raised as and when needed. Company changed its name to Heritage Oil Plc on 18 June 2009. Its primary business activity is the exploration, development and The Group’s activities are described in the Annual Review. The production of petroleum and natural gas in Africa, the Middle East financial position of the Group, its cash flows and liquidity position and Russia. The Company was established in order to implement a are described in the financial review and financial statements corporate reorganisation of HOC. within the Financial Statements Report. In addition, the notes to the financial statements include the Group’s policies and processes These consolidated financial statements include the results of the for managing its capital and its exposures to credit and liquidity Company and all subsidiaries over which the Company exercises risk. Having reviewed the future plans and projections for the control. The Company together with its subsidiaries are referred to as Group and its current financial position, the Directors believe it to the Group. The key subsidiaries consolidated within these financial be appropriate for the financial statements to have been prepared on statements include inter alia Heritage Oil Corporation, Heritage Oil a going concern basis. In making this assessment they have & Gas Limited, Heritage Oil and Gas (U) Limited, Heritage Energy considered the Company and Group budgets, the cash flow Middle East Limited, Heritage DRC Limited, Coatbridge Estates forecasts and reviewed the availability of banking facilities. Limited, ChumpassNefteDobycha, Neftyanaya Geologicheskaya Kompaniya, Heritage Mali Block 7 Limited, Heritage Mali Block 11 In reaching this conclusion, the Directors have considered the Limited, Begal Air Limited, Heritage Oil & Gas Holdings Limited, following factor in particular. Eagle Drill Limited, Heritage Oil International Malta Limited, 1381890 Alberta ULC, Heritage Oil Cooperatief U.A, Heritage Oil Refinancing of Shoreline Holdings Limited, Darwin Air Limited, Heritage Tanzania Kimbiji- Shoreline’s purchase of the Acquisition Assets was in part funded Latham Limited, Heritage Oil Tanzania Limited, Heritage Oil (UK) by a $550 million bridge facility arranged by Standard Bank Plc Limited, Heritage Rukwa (TZ) Limited, Heritage Energy Limited, which expires no later than 29 December 2013. At the time of the Heritage Energy International Limited, Sahara Oil Services Limited, acquisition Standard Bank Plc agreed, subject to a number of Sahara Oil Services Holdings Limited, and Heritage Oil SNR substantive conditions, to refinance this into a long term loan. (Nigeria) B.V. Discussions have progressed well with Standard Bank Plc and the other banks in the lending syndicate and terms for a five-year The financial statements were approved by the Board and authorised borrowing base loan initially of $550 million have been agreed for issuance on 29 April 2013. subject inter alia to finalisation of documentation and credit committee approval. The Directors are confident that this refinancing 2 SIGNIFICANT ACCOUNTING POLICIES will take place before the bridge loan expires on 29 December 2013 The principal accounting policies applied in the preparation of these though there can be no certainty of this. Upon completion of the consolidated financial statements are set out below. These policies refinancing, the amount of $101 million currently deposited as have been consistently applied to all the years presented, unless security for the bridge facility will be released to the Group. Based on otherwise stated. forecasts for a period in excess of 12 months, the Group would have su#cient funds to finance its activities well into 2014 (even taking A) BASIS OF PREPARATION account of an adverse outcome in the Uganda tax dispute as The consolidated financial statements have been prepared in described in note 6). accordance with IFRS as adopted by the EU. In the very unlikely event that the refinancing does not complete and The consolidated financial statements have been prepared under the alternative financing for Shoreline is not forthcoming, and assuming historical cost convention, as modified by the revaluation of certain that the Uganda tax dispute has not been resolved in the Group’s financial assets and liabilities at fair value. favour resulting in the return of a significant amount of cash (see note 6), the Group may not have su#cient cash available to complete its The Company’s consolidated financial statements are presented in work programme and meet its expenditure for the foreseeable future thousand US dollars unless otherwise stated. US dollars are the and could need to raise funds to continue its activities by early 2014 Company’s functional and presentation currency. at the latest. In these circumstances the Directors would consider all available alternatives including the sale or farm down of oil and gas The Group had available cash of $90 million at 31 December 2012, properties, the sale of other assets and the raising of debt and/or excluding amounts related to the tax dispute with the Ugandan equity finance by Heritage. There can be no guarantee that any of government and amounts held in restricted cash for the Acquisition. these actions would succeed or that they would raise su#cient funds Based on its current plans and knowledge, its projected capital to allow Shoreline to be refinanced. expenditure and operating cash requirements, the Group has su#cient cash to finance its operations for more than 12 months from the date The Group’s business activities, together with the factors likely to of this report. As for most oil and gas exploration companies, Heritage a!ect its future development, performance and position are set out raises financing for its activities from time to time using a variety of in the Annual Review on pages 16 to 34. The financial position of sources. Sources of funding for future exploration and development the Group, its cash flows and liquidity position are described in the programmes will be derived from inter alia disposal proceeds from the Financial Review on pages 2 to 7 of this report. In addition, note 3 of sale of assets, such as the disposal of its interest in the Miran PSC in the financial statements includes the Group’s policies and processes 2012 and its disposal of the Ugandan Assets in 2010 (note 6), using its for managing its capital; its financial risk management; and its existing treasury resources, new credit facilities, reinvesting its funds exposure to foreign exchange risk, commodity price risk, from operations, farm-outs and, when considered appropriate, issuing credit risk and liquidity risk. Financial Statements 2012 HERITAGE OIL PLC 17

2 SIGNIFICANT ACCOUNTING POLICIES Segment results that are reported to the CEO and CFO include CONTINUED items directly attributable to a segment as well as those that can be B) SEGMENT REPORTING allocated on a reasonable basis. Unallocated items comprise mainly The preparation of financial statements in conformity with IFRS corporate assets, corporate o#ces expenses and liabilities. requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of Segment capital expenditure is the total cost incurred during the applying the Company’s accounting policies. The areas involving period to acquire property, plant and equipment, and intangible a higher degree of judgement or complexity, or areas where assets other than goodwill. assumptions and estimates are significant to the consolidated financial statements, are disclosed in note 4. D) JOINT ARRANGEMENTS AND JOINTLY CONTROLLED ENTITIES C) CONSOLIDATION The majority of exploration, development and production activities The consolidated financial statements incorporate the assets and are conducted jointly with others under contractual arrangement liabilities of all subsidiaries of the Company as at 31 December 2012 and, accordingly, the Group only reflects its proportionate interest in and 2011 and the results of all subsidiaries for the years then ended. such assets, liabilities, revenues and expenses.

Subsidiaries are all entities, including special purpose entities over Jointly controlled entities are those entities over whose activities the which the Company has the power to govern the financial and Group has joint control, established by contractual agreement and operating policies, so as to obtain benefits from its activities, requiring unanimous consent for strategic, financial and operating generally accompanying a shareholding of more than one half of the decisions. The Group only reflects its proportionate interest in such voting rights. The existence and e!ect of potential voting rights that assets, liabilities, revenues and expenses. are currently exercisable or convertible are considered when assessing whether the Company controls another entity. Subsidiaries are fully E) EXPLORATION AND EVALUATION consolidated from the date on which control is transferred to the EXPENDITURES Company. They are deconsolidated from the date that control ceases. The Group applies a modified full cost method of accounting for exploration and evaluation (“E&E”) costs, having regard to the The purchase method of accounting is used to account for the requirements of IFRS 6 Exploration for and Evaluation of Mineral acquisition of businesses by the Group. The cost of an acquisition is Resources. Under the modified full cost method of accounting, costs measured as the fair value of the assets given, equity instruments of exploring for and evaluating oil and gas properties are capitalised issued and liabilities incurred or assumed at the date of exchange. on a licence or prospect basis and the resulting assets are tested for Identifiable assets acquired and liabilities and contingent liabilities impairment by reference to appropriate cost pools. Such cost pools assumed in a business combination are measured initially at their fair are based on geographic areas and are not larger than a segment. The values at the acquisition date, irrespective of the extent of any minority Group had eight cost pools in 2012 (2011 – seven cost pools); Nigeria interest. The excess of the cost of acquisition over the fair value of the (entered in 2012); Kurdistan (discontinued in 2012); Russia; Pakistan; Group’s share of the net fair value of the identifiable assets, liabilities Malta; Mali (discontinued in 2012), Tanzania and Libya. and contingent liabilities acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary E&E costs related to each licence/prospect are initially capitalised acquired, the di!erence is recognised immediately in the income within ‘Intangible exploration and evaluation assets’. Such E&E costs statement. Expenses related to acquisitions are included in the may include costs of licence acquisition, technical services and studies, consolidated income statement as incurred. seismic acquisition, exploration drilling and testing, the projected costs of retiring the assets, if any, and directly attributable general and Inter-company transactions, balances and unrealised gains administrative expenses, but do not include costs incurred prior to on transactions between Group entities (the Company and its having obtained the legal rights to explore an area, which are expensed subsidiaries) are eliminated. For the purposes of consolidation, the directly to the income statement as they are incurred. accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Company. Where the Company farms-in to licences and incurs costs in excess of its own share of licence costs as consideration, these costs are The Group determines and presents operating segments based on the capitalised as its own share. information that internally is provided to the Chief Executive O#cer (“CEO”) and Chief Financial O#cer (“CFO”), who are the Group’s Tangible assets acquired for use in E&E activities are classified as chief operating decision makers. property, plant and equipment; however, to the extent that such a tangible asset is consumed in developing an intangible E&E asset, the An operating segment is a component of the Group that engages amount reflecting that consumption is recorded as part of the cost of in business activities from which it may earn revenues and incur the intangible asset. expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. An operating segment’s Intangible E&E assets related to each exploration licence/prospect operating results are reviewed regularly by the CEO and CFO to are not depreciated and are carried forward until the existence, or make decisions about resources to be allocated to the segment and otherwise, of commercial reserves has been determined. The Group’s assess its performance, and for which discrete financial information definition of commercial reserves for such purpose is proved and is available. probable reserves on an entitlement basis. HERITAGE OIL PLC Financial Statements 2012 18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

2 SIGNIFICANT ACCOUNTING POLICIES expected to be derived from production of commercial reserves. Where CONTINUED the E&E asset to be tested falls outside the scope of any established Proved and probable reserves are the estimated quantities of crude cost pool, there will generally be no commercial reserves and the E&E oil, natural gas and natural gas liquids which geological, geophysical asset concerned will be written o! in full. and engineering data demonstrate with a speciﬁed degree of certainty (see below) to be recoverable in future years from known reservoirs F) PROPERTY, PLANT AND EQUIPMENT and which are considered commercially producible. There should be i) Development and production assets a 50% statistical probability that the actual quantity of recoverable The Group had an interest in Russia at the development and reserves will be more than the amount estimated as proved and production stage during the years covered by these ﬁnancial probable and a 50% statistical probability that it will be less. The statements and acquired an interest in Nigeria, which is at the equivalent statistical probabilities for the proven component of development and production stage, and is included in the Group’s proved and probable reserves are 90% and 10%, respectively. results from November 2012.

Such reserves may be considered commercially producible if Development and production assets are accumulated on a field-by- management has the intention of developing and producing them field basis and represent the cost of developing the commercial and such intention is based upon: reserves discovered and bringing them into production, together with the E&E expenditures incurred in finding commercial reserves – a reasonable assessment of the future economics of such transferred from intangible E&E assets as outlined above, the production; projected cost of retiring the assets and directly attributable general – a reasonable expectation that there is a market for all or and administrative expenses. substantially all the expected hydrocarbon production; and – evidence that the necessary production, transmission and The net book values of producing assets are depleted on a field-by- transportation facilities are available or can be made available. field basis using the unit of production method by reference to the ratio of production in the year to the related commercial reserves of Furthermore: the field, taking into account estimated future development expenditures necessary to bring those reserves into production. i) Reserves may only be considered proved and probable if producibility is supported by either actual production or a conclusive An impairment test is performed whenever events and circumstances formation test. The area of reservoir considered proved includes: (a) arising during the development or production phase indicate that the that portion delineated by drilling and defined by gas-oil and/or carrying value of a development or production asset may exceed its oil-water contacts, if any, or both; and (b) the immediately adjoining recoverable amount. The aggregate carrying value is compared portions not yet drilled, but which can be reasonably judged as against the expected recoverable amount of the cash generating unit, economically productive on the basis of available geophysical, generally by reference to the present value of the future net cash flows geological and engineering data. In the absence of information on expected to be derived from the production of commercial reserves. fluid contacts, the lowest known structural occurrence of The cash generating unit applied for impairment test purposes is hydrocarbons controls the lower proved limit of the reservoir. generally the field, except that a number of field interests may be ii) Reserves which can be produced economically through grouped as a single cash generating unit where the cash flows application of improved recovery techniques, such as fluid generated by the fields are interdependent. injection, are only included in the proved and probable classification when successful testing by a pilot project, the ii) Other assets operation of an installed programme in the reservoir, or other Other property, plant and equipment are stated at cost less reasonable evidence (such as, experience of the same techniques accumulated depreciation and any impairment in value. The assets’ on similar reservoirs or reservoir simulation studies) provides useful lives and residual values are assessed on an annual basis. support for the engineering analysis on which the project or Furniture and fittings are depreciated using the reducing balance programme was based. method at 20% per year.

If commercial reserves have been discovered, the related E&E assets Land is not subject to depreciation. are assessed for impairment on a cost pool basis as set out below and any impairment loss is recognised in the income statement. The Aircraft are depreciated over their expected useful life of 60 months. carrying value, after any impairment loss, of the relevant E&E assets Depreciation is charged so as to write-o! the cost, less estimated is then reclassiﬁed as development and production assets within residual value of aircraft on a straight-line basis. property, plant and equipment. Corporate capital assets are depreciated on a straight-line basis over An E&E asset is assessed for impairment when facts and circumstances their estimated useful lives. The building is depreciated on a suggest that the carrying amount may exceed its recoverable amount. straight-line basis over 40 years with nil residual value. Such circumstances include the point at which a determination is made as to whether or not commercial reserves exist. Where the E&E asset G) CASH AND CASH EQUIVALENTS concerned falls within the scope of an established full cost pool, the Cash and cash equivalents include cash on hand, deposits held at E&E asset is tested for impairment together with any other E&E call with banks and other short-term highly liquid investments with assets and all development and production assets associated with that original maturities of three months or less. Cash and cash equivalents cost pool, as a single cash generating unit. The aggregate carrying value are stated at amortised cost using the e!ective interest rate method. is compared against the expected recoverable amount of the pool, generally by reference to the present value of the future net cash ﬂows Financial Statements 2012 HERITAGE OIL PLC 19

2 SIGNIFICANT ACCOUNTING POLICIES less costs to sell if their carrying amount will be recovered principally CONTINUED through a sale transaction rather than through continuing use. H) TRADE AND OTHER RECEIVABLES Trade and other receivables are recognised initially at fair value and Non-current assets, including those that are part of a disposal group subsequently measured at amortised cost using the e!ective interest are not depreciated or amortised while they are classified as held for method, less provision for impairment. A provision for impairment of sale. Interest and other expenses attributable to the liabilities of a trade receivables is established when there is objective evidence that disposal group classified as held for sale continue to be recognised. the Group will not be able to collect all amounts due according to the original terms of the receivables. Non-current assets classified as held for sale and the assets of a disposal group classified as assets held for sale are presented separately, as I) INVENTORIES current assets, from the other assets in the balance sheet. The liabilities Inventories consist of petroleum, condensate, liquid petroleum gas of a disposal group classified as held for sale are presented separately, as and materials that are recorded at the lower of weighted average cost current liabilities, from other liabilities in the balance sheet. and net realisable value. Cost comprises direct materials, direct labour, depletion and those overheads that have been incurred in A discontinued operation is a component of the Group’s business bringing the inventories to their present location and condition. Net that represents a separate major line of business or geographical realisable value is the estimated selling price in the ordinary course of area of operations that has been disposed of or is held for sale, or is a business, less applicable variable selling expenses. Provision is made subsidiary acquired exclusively with a view to resale. Classification as for obsolete, slow-moving or defective items where appropriate. a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When J) INVESTMENTS an operation is classified as a discontinued operation, from the The Group classifies its investments in the following categories: comparative income statement is represented as if the operation financial assets at fair value through the income statement and had been discontinued from the start of the comparative period. available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management L) TRADE AND OTHER PAYABLES determines the classification of its investments at initial recognition. These amounts represent liabilities for goods and services provided During the years covered by these financial statements the Group did to the Group prior to the end of the financial year which are unpaid. not have any investments classified as “held to maturity investments”. M) BORROWINGS i) Financial assets at fair value through the income statement Borrowings are initially recognised at fair value, net of transaction Financial assets held for trading are carried at fair value with changes costs incurred. Borrowings are subsequently measured at amortised in fair value recognised in the income statement. A financial asset is cost. Any di!erence between the proceeds (net of transaction costs) classified in this category if acquired principally for the purpose of and the redemption amount is recognised in the income statement selling in the short term. Derivatives are classified as held for trading over the period of the borrowings using the e!ective interest method. unless they are designated as hedges. Convertible bonds are separated into liability and derivative liability Gains or losses arising from changes in the fair value of the “financial components (being the Bondholders’ conversion option) and each assets at fair value through the income statement” category are component is recognised separately. On initial recognition, the fair presented in the income statement within “Unrealised losses on value of the liability component of a convertible bond is determined other financial assets” in the year in which they arise. using a market interest rate for an equivalent non-convertible bond. This amount is recorded as a liability on an amortised cost basis ii) Available-for-sale financial assets using the e!ective interest method until extinguished on conversion Available-for-sale financial assets, comprising principally marketable or maturity of the Bonds. The Company reassesses the classification equity securities, are non-derivatives that are either designated in this during the life of the convertible bond and reclassifies between category or not classified. They are included in non-current assets liabilities and equity when appropriate. unless management intends to dispose of the investment within 12 months of the balance sheet date. Borrowings are removed from the balance sheet when the obligation specified in the contract is discharged, cancelled or expired. The Changes in the fair value of monetary securities classified as di!erence between the carrying amount of a financial liability that available-for-sale (other than impairment losses and foreign exchange has been extinguished or transferred to another party and the gains and losses which are recognised in the income statement) are consideration paid, including any non-cash assets transferred or recognised in equity. Upon sale of a security classified as available- liabilities assumed, is recognised in finance income or costs. for-sale, the cumulative gain or loss previously recognised in equity is recognised in the income statement. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least The Group assesses at each balance sheet date whether there is 12 months after the balance sheet date. objective evidence that a financial asset or a group of financial assets is impaired. Measurement is assessed by reference to the fair value of N) BORROWING COSTS the financial asset or group of financial assets. Borrowing costs incurred for the construction of any qualifying asset are capitalised during the period of time that is required to complete K) NON-CURRENT ASSETS HELD FOR SALE AND and prepare the asset for its intended use or sale. Other borrowing DISCONTINUED OPERATIONS costs are expensed. Non-current assets, or disposal groups, are classified as assets held for sale and stated at the lower of their carrying amount and fair value HERITAGE OIL PLC Financial Statements 2012 20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

2 SIGNIFICANT ACCOUNTING POLICIES R) FOREIGN CURRENCY TRANSLATION CONTINUED Items included in the financial statements of each of the Company’s The capitalisation rate used to determine the amount of borrowing consolidated subsidiaries are measured using the currency of the costs to be capitalised is the weighted average interest rate applicable to primary economic environment in which the subsidiary operates (the the Group’s outstanding borrowings during the year. For the year ended “functional currency”). The Company’s consolidated financial 31 December 2012, this was 2.1% (31 December 2011 – 13.02%). statements are presented in thousand US dollars, which is the Company’s functional and presentation currency. O) PROVISIONS Asset retirement obligations Foreign currency transactions are translated into the respective Provision is made for the estimated cost of any asset retirement functional currencies of Group entities using the exchange rates obligations when the Group has a present legal or constructive obligation prevailing at the dates of the transactions. Foreign exchange gains as a result of past events, it is probable that an outflow of resources will and losses resulting from the settlement of such transactions and be required to settle the obligation and the amount has been reliably from the translation at year end exchange rates of monetary assets estimated. Provisions are not recognised for future operating losses. and liabilities denominated in foreign currencies are recognised in Asset retirement obligation expense is capitalised in the relevant asset the income statement. category unless it arises from the normal course of production activities. The results and financial position of all the Company’s consolidated Provisions are measured at the present value of management’s best subsidiaries (none of which has a functional currency that is the estimate of expenditure required to settle the present obligation at the currency of a hyperinflationary economy) that have a functional balance sheet date. The discount rate used to determine the present currency di!erent from the presentation currency are translated into value reflects current market assessments of the time value of money the presentation currency as follows: and the risks specific to the liability. i) assets and liabilities for each balance sheet presented are Subsequent to the initial measurement of the asset retirement translated at the closing rate at the date of that balance sheet; obligation, the obligation is adjusted at the end of each year to reflect ii) income and expenses for each year are translated at average the passage of time and changes in the estimated future cash flows exchange rates (unless this is not a reasonable approximation of underlying the obligation. The increase in the provision due to the the cumulative e!ect of the rates prevailing on the transaction passage of time is recognised as finance costs whereas changes in the dates, in which case income and expenses are translated at the estimated future cash flows are added to or deducted from the related dates of the transactions); and asset in the current period. iii) all resulting exchange di!erences are recognised as either income or expense in a separate component of equity. P) REVENUE RECOGNITION Revenue from the sale of petroleum and natural gas is recognised Foreign currency loans and overdrafts are designated as, and are at the fair value received or receivable and is recorded when the considered to be, hedges of the exchange rate exposure inherent in significant risks and rewards of ownership of the product are foreign currency net investments and, to the extent that the hedge is transferred to the buyer. For sales of oil and gas this is usually when e!ective, exchange di!erences giving rise to changes in the carrying legal title passes to the external party which occurs on shipment of value of foreign currency loans are also recognised as income or oil and gas to the buyer. Interest income is recognised on a time expense directly in equity. All other exchange di!erences giving rise proportion basis using the e!ective interest method. to changes in the carrying value of foreign currency loans and overdrafts are recognised in the income statement. Q) INCOME TAXES Current income tax is based on taxable profit for the year. Taxable When a foreign operation is sold, a proportionate share of the profit di!ers from profit as reported in the income statement because cumulative exchange di!erences previously recognised in equity are it excludes items that are never taxable or deductible as well as those recognised in the income statement, as part of the gain or loss on sale that are taxable or deductible in a di!erent period. The Group’s where applicable. current tax assets and liabilities are calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. S) SHARE-BASED COMPENSATION PLANS The Group applies the fair value method of accounting to all equity- Deferred income tax is provided in full, using the balance sheet method, classified share-based compensation arrangements for both employees on temporary di!erences arising between the tax bases of assets and and non-employees. Compensation costs of equity-classified awards to liabilities and their carrying amounts in the consolidated financial employees are measured at fair value of the awards at the grant date statements. Deferred income tax is determined using tax rates (and and recognised over the periods during which the employees become laws) that have been enacted or substantively enacted by the balance unconditionally entitled to the options. The compensation cost is sheet date and are expected to apply when the related deferred income charged to the income statement with a corresponding increase in tax asset is realised or the deferred income tax liability is settled. equity. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest. Deferred tax assets are recognised for deductible temporary di!erences and unused tax losses only if it is probable that future The compensation cost of equity-classified awards to non-employees taxable amounts will be available to utilise those temporary is initially measured at fair value of the awards at the grant date and di!erences and losses. periodically remeasured to fair value until the non-employees’ performance is complete, and recognised over the periods during Deferred tax assets and liabilities are o!set when there is a legally which the non-employees become unconditionally entitled to the enforceable right to o!set current tax assets and liabilities and when options. The compensation cost is charged to income with a the deferred tax balances relate to the same taxation authority. corresponding increase to share-based payment reserve. Financial Statements 2012 HERITAGE OIL PLC 21

2 SIGNIFICANT ACCOUNTING POLICIES income, expenses, assets and liabilities of Shoreline being CONTINUED included in the Group’s consolidated financial statements on a Dividends declared but not paid out before exercise of the option are “line by line” basis. It is expected that equity accounting will recognised only when the exercise price, reduced for the dividends be required for Shoreline from 1 January 2014 which will declared, becomes a recognised receivable upon exercise. The substantially change the presentation of the Group’s financial obligation to pay the dividends reduces the unrecognised receivable statements but have no impact on its net profit or net assets. due from the option holder. The dividends are netted against the iv) IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure amount with the proceeds from the exercise price and not recognised of Interests in Other Entities, IFRS 13 Fair Value Measurement as a separate distribution in equity. (endorsed for use in the EU) and IAS 27 Separate Financial Statements (2011) (not yet endorsed for use in the EU) are e!ective Upon the exercise of the award, consideration received is recognised for accounting periods commencing 1 January 2013. None of the in equity (notes 19). amendments are expected to have a significant impact upon the Group’s net results, net assets and disclosures. T) SHARE CAPITAL v) Presentation of Items of Other Comprehensive Income Ordinary and Exchangeable Shares are classified as share capital. (Amendments to IAS 1) (endorsed for use in the EU) is e!ective Incremental costs directly attributable to the issue of new shares for periods commencing 1 July 2012. It is not expected to have a or options are shown in equity as a deduction, net of tax, from significant impact on the disclosures of the Group. the proceeds. vi) O!setting Financial Assets and Financial Liabilities (Amendments to IAS 32) (endorsed for use in the EU) is e!ective for periods If the Company reacquires its own equity instruments the cost is commencing 1 January 2014. It is not expected to have a deducted from equity and the associated shares are cancelled or held significant impact on the disclosures of the Group. in treasury. 3 RISK MANAGEMENT U) EARNINGS PER SHARE The Group’s activities expose it to a variety of financial risks that arise Basic earnings per share is calculated by dividing the profit attributable as a result of its exploration, development, production and financing to equity holders of the Company by the weighted average number of activities. The Group’s overall risk management programme focuses on Ordinary and Exchangeable Shares outstanding during the financial the unpredictability of financial markets and seeks to minimise period. The rights of di!erent classes of shares are the same and potential adverse e!ects on the Group’s financial performance. therefore economically equivalent. As such, Ordinary and Exchangeable Shares are treated as one class of shares for the earnings A) FINANCIAL RISK MANAGEMENT per share calculation. Diluted earnings per share adjusts the figures i) Foreign exchange risk used in the determination of basic earnings per share to take into Foreign exchange risk arises when transactions and recognised assets account the after income tax e!ect of interest and other financing costs and liabilities of the Group entity concerned are denominated in a associated with dilutive potential Ordinary Shares and the weighted currency that is not the Company’s functional currency. The Group average number of shares assumed to have been issued for no operates internationally and is exposed to foreign exchange risk consideration in relation to dilutive potential Ordinary Shares. arising from currency exposures to the US dollar.

The if-converted method used in the calculation of diluted earnings There are no forward exchange rate contracts in place at, or per share assumes the conversion of convertible securities at the later subsequent to, 31 December 2012. of the beginning of the reported period or issuance date, if dilutive. At 31 December 2012, if the Canadian dollar had strengthened/ V) NEW ACCOUNTING STANDARDS AND weakened by 10% against the US dollar with all other variables held INTERPRETATIONS constant, the loss from continuing operations for the year would have Certain new accounting standards and interpretations have been been $43,000 (31 December 2011 – $40,000) higher/(lower), mainly published that are not mandatory for the year ended 31 December as a result of foreign exchange gains/losses on translation of 2012. The Company’s assessment of the impact of these new standards Canadian dollar-denominated general and administrative expenses and interpretations which have not been adopted is set out below. and cash at bank. i) IFRS 9 Financial Instruments (not yet endorsed for use in the EU) At 31 December 2012, if the Russian rouble had strengthened/ is e!ective for accounting periods commencing 1 January 2013. weakened by 10% against the US dollar with all other variables held The expected impact is still being assessed by management, but is constant, the loss from continuing operations for the year would have expected to only impact disclosures of the Group. been $(1,334,000) (31 December 2011 – $(1,160,000)) higher/(lower), ii) The amendments to IAS 19 Employee Beneﬁts (endorsed by the mainly as a result of foreign exchange gains/losses on translation EU) are e!ective for accounting periods beginning on or after of Russian rouble-denominated cash at bank and monetary assets 1 January 2013. This is not expected to have a signiﬁcant impact and liabilities. upon the Group’s net results, net assets or disclosures. iii) IFRS 11 Joint Arrangements and IAS 28 Investments in Associates At 31 December 2012, if the GB pound sterling had strengthened/ and Joint Ventures (endorsed for use in the EU) are e!ective for weakened by 10% against the US dollar with all other variables held accounting periods commencing 1 January 2014. The expected constant, the loss from continuing operations for the year would have impact is still being assessed by management, to ascertain the been $1,258,000 (31 December 2011 – $1,354,000) higher/(lower), impact upon the Group’s net results, net assets and disclosures. mainly as a result of GB pound sterling-denominated general and The Group’s business in Nigeria is held through Shoreline, a joint administrative expenses and foreign exchange gains/losses on venture in which it has a 97.5% economic interest. The Group’s translation of GB pound sterling-denominated long-term loan and accounting policies currently result in 97.5% interest in the cash at bank. HERITAGE OIL PLC Financial Statements 2012 22

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

3 RISK MANAGEMENT iv) Credit risk CONTINUED All of the Company’s production and revenue in 2011 was derived from At 31 December 2012, if the Swiss franc had strengthened/weakened Russia. In 2012 the Company’s production and revenue was derived by 10% against the US dollar with all other variables held constant, from Russia for the full year, and for November and December 2012 the loss from continuing operations for the year would have been production was also derived from Nigeria. In 2012 all sales were to a $(29,000) (31 December 2011 – $469,000) higher/(lower), mainly as maximum of four (2011 – eight) customers in Russia, there were no sales a result of foreign exchange gains/losses on translation of Swiss of production from Nigeria until 2013, which has one customer which is franc-denominated receivable and monetary liabilities. a subsidiary of a super major oil company. All of Shoreline’s production is contracted to be sold to a subsidiary of Royal Dutch Shell Plc until At 31 December 2012, if the Nigerian Naira had strengthened/ January 2018. weakened by 10% against the US dollar with all other variables held constant, the loss from continuing operations for the year would have Trade debtors of the Company are subject to internal credit review to been $692,000 (31 December 2011 – nil) higher/(lower), mainly as a minimise the risk of non-payment. The Company does not anticipate result of Nigerian Naira-denominated operating costs, general and any default as it transacts with creditworthy counterparties. No credit administrative expenses and foreign exchange gains/losses on limits were exceeded during the reporting years and management does translation of Nigerian Naira-denominated cash at bank. not expect any losses from non-performance by these counterparties. The Company is also exposed to credit risk in relation to regular joint ii) Commodity price risk venture billings which are typically outstanding for one month and in The Company is exposed to commodity price risk to the extent that relation to its cash balances held with reputable banks. it sells its entitlement to petroleum on a floating price basis. The Company may consider partly mitigating this risk in the future. v) Liquidity risk Liquidity risk is the risk that the Group will not have su#cient funds The table below summarises the impact of increases/decreases of to meet liabilities. Cash forecasts identifying liquidity requirements the relevant oil benchmark on the Company’s loss for the year. The of the Group are produced quarterly. These are reviewed regularly to analysis is based on the assumption that commodity prices had ensure su#cient funds exist to finance the Company’s current increased/decreased by 5% with all other variables held constant: operational and investment cash flow requirements.

Year ended 31 December Management monitors rolling forecasts of the Company’s cash 2012 2011 $’000 $’000 position on the basis of expected cash flow. Brent light crude 206 216 The Group had available cash of $90 million at 31 December 2012. 206 216 Based on its current plans and knowledge, its projected capital expenditure and operating cash requirements, the Group has su#cient The loss from continuing operations for the year would increase/ cash to finance its operations for more than 12 months from the date of decrease as a result of commodity revenues received. Following this report. Shoreline’s acquisition of an interest in OML30 in Nigeria in November 2012 (see note 7) the Group is significantly more exposed The Company’s financial liabilities consist of trade and other to the e!ect of commodity price changes on its revenue than the payables and borrowings. Trade and other payables are due within above table indicates. 12 months, and borrowings fall due as outlined in notes 16 and 17. iii) Interest rate risk B) CAPITAL RISK MANAGEMENT The Group had fixed rate convertible bonds in the years under review, The Company’s objectives when managing capital are to safeguard therefore it was not exposed to interest rate risk with respect to this the Company’s ability to continue as a going concern in order to fixed rate borrowing. In January 2005, a wholly owned subsidiary of provide returns for shareholders, benefits for other stakeholders and the Company received a sterling-denominated loan of £4.5 million to to maintain an optimal capital structure to reduce the cost of capital. refinance the acquisition of a corporate o#ce. Interest on the loan is Capital consists of share capital and retained earnings and reserves. variable at a rate of Bank of Scotland base rate plus 1.4% (note 17). In October 2007, a wholly owned subsidiary of the Company received a The Company monitors capital on the basis of the gearing ratio. This long-term loan of $9.45 million with a variable rate of LIBOR plus 1.6% ratio is calculated as net debt divided by total capital. Net debt is (note 17), the loan was repaid in October 2012. In August 2012, a calculated as total borrowings less cash and cash equivalents. Total wholly owned subsidiary of the Company received a long-term loan of capital is calculated as “equity” as shown in the consolidated balance $30 million to refinance the acquisition of an aircraft. Interest on the sheet plus net debt. Year ended 31 December loan is at a fixed rate of 5.5%, therefore the Group was not exposed to 2012 2011 interest rate risk with respect to this fixed rate borrowing. In November $’000 $’000 2012 Shoreline, whose ownership interests are held by Heritage and Total borrowings 561,724 139,507 Shoreline Power, drew down on a $550 million secured bridge facility Less cash and cash equivalents (note 15) (89,634) (310,882) provided by Standard Bank Plc, with a variable rate of LIBOR plus 8% Net debt/(cash) 472,090 (171,375) (note 17). An increase/decrease of LIBOR by 1% would result in an increase/decrease of the Company’s loss from continuing operations for Total equity 966,554 936,204 the year by $844,000 (31 December 2011 – $58,000). Total capital 1,438,644 936,204 Gearing ratio 33% 0% Financial Statements 2012 HERITAGE OIL PLC 23

4 CRITICAL ACCOUNTING ESTIMATES, The level of estimated commercial reserves is also a key determinant ASSUMPTIONS AND JUD GEMENTS in assessing whether the carrying value of any of the Group’s In the process of applying the Company’s accounting policies, development and production assets has been impaired. which are described in note 2, management makes estimates and assumptions concerning the future. The resulting accounting C) FAIR VALUE OF FINANCIAL INSTRUMENTS estimates will, by definition, seldom equal the related actual results. The Group’s accounting policies and disclosures require the The estimates and assumptions that have a significant risk of causing determination of the fair value of financial instruments. Fair values a material adjustment to the carrying amounts of assets and liabilities have been determined for measurement and/or disclosure purposes within the next financial year are discussed below. based on the following methods:

A) RECOVERABILITY OF E&E COSTS i) Non-derivative financial instruments Under the modified full cost method of accounting for E&E costs, These comprise investments in equity and debt securities, trade and certain costs are capitalised as intangible assets by reference to other receivables, cash and cash equivalents, loans and borrowings, appropriate cost pools, and are assessed for impairment when current tax liabilities and trade and other payables. Non-derivative circumstances suggest that the carrying amount may exceed its financial instruments are recognised initially at fair value plus, for recoverable value. Such circumstances include, but are not limited to: instruments not at fair value through the income statement, any directly attributable transaction costs. i) the period for which the entity has the right to explore in the specific area has expired during the period, or will expire in the Fair value of investments in equity and debt securities is determined near future, and is not expected to be renewed; by reference to their quoted closing bid price at the reporting date. ii) substantive expenditure on further exploration for, and evaluation of, mineral resources in the specific area is neither budgeted nor Fair value of all other non-derivative financial instruments is planned; calculated based on the present value of future principal and interest iii) exploration for, and evaluation of, mineral resources in the cash flows, discounted at the applicable market rate of interest at the specific area have not led to the discovery of commercially viable reporting date. quantities of mineral resources and the entity has decided to discontinue such activities in the specific area; and ii) Derivatives iv) su#cient data exists to indicate that, although a development in Derivatives are recognised initially at fair value; attributable the specific area is likely to proceed, the carrying amount of the transaction costs are recognised in the income statement when exploration and evaluation asset is unlikely to be recovered in full incurred. Subsequent to initial recognition, derivatives are measured from successful development or by sale. at fair value. Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics This assessment involves judgment as to: (i) the likely future and risks of the host contract and the embedded derivative are not commerciality of the asset and when such commerciality should be closely related, a separate instrument with the same terms as the determined; (ii) future revenues and costs pertaining to any wider embedded derivative would meet the definition of a derivative and cost pool with which the asset in question is associated; and (iii) the the combined instrument is not measured at fair value through the discount rate to be applied to such revenues and costs for the purpose income statement. of deriving a recoverable value. Note 11 discloses the carrying amounts of the Group’s E&E assets. Consequently, major uncertainties a!ect The fair value of derivative financial instruments is based on their the recoverability of these costs which is dependent on the Group listed market prices, if available. If a listed market price is not achieving commercial production or the sale of the assets. Note 24 available, then fair value is estimated by discounting the di!erence discloses contingencies relating to title risks. The Company assessed between the contractual forward price and the current forward price whether these risks are contingencies or indicators of impairment and for the residual maturity of the contract using a risk free interest rate concluded that they are contingencies. There are licences that are due (based on government bonds). for renewal in 2012. The Group is confident they will be renewed. IFRS 7 requires the classification of fair value measurements using B) RESERVE ESTIMATES a fair value hierarchy that reflects the significance of the inputs Estimates of recoverable quantities of proved and probable reserves used in making the assessments. The fair value hierarchy has the include assumptions regarding commodity prices, exchange rates, following levels: discount rates, production and transportation costs for future cash flows. It also requires interpretation of complex and di#cult – Level 1: quoted prices (unadjusted) in active markets for identical geological and geophysical models in order to make an assessment of assets or liabilities. the size, shape, depth and quality of reservoirs and their anticipated – Level 2: inputs other than quoted prices included within Level 1 recoveries. The economic, geological and technical factors used to that are observable for the asset or liability, either directly (i.e. as estimate reserves may change from period to period. Changes in prices) or indirectly (i.e. derived from prices). reported reserves can impact asset carrying values and the asset – Level 3: inputs for the assets or liability are not based on retirement obligation due to changes in expected future cash flows. observable market data (unobservable inputs). Reserves are integral to the amount of depletion charged to the income statement and the calculation of inventory. HERITAGE OIL PLC Financial Statements 2012 24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

4 CRITICAL ACCOUNTING ESTIMATES, ASSUMPTIONS AND JUD GEMENTS CONTINUED D) FAIR VALUE OF ASSETS AND LIABILITIES ACQUIRED IN A BUSINESS COMBINATION The Group’s accounting policies and disclosures require the determination of the fair value of assets and liabilities acquired in a business combination. Fair value of all identiﬁable assets acquired and liabilities assumed is calculated based on the discounted cash ﬂows expected to be derived from the use of the asset acquired.

5 SEGMENT INFORMATION The Group has a single class of business which is international exploration, development and production of petroleum oil and natural gas. The geographical areas are deﬁned by the Company as operating segments in accordance with IFRS 8 Operating Segments. The Group operates in a number of geographical areas based on location of operations and assets, being Russia, Kurdistan (discontinued in 2012), Pakistan, Tanzania, Malta, Nigeria (entered in 2012), Mali (discontinued in 2012), Uganda (discontinued in 2010) and Libya (entered in 2011). The Group’s reporting segments comprise each separate geographical area in which it operates.

Year ended 31 December 2012 Depreciation, External Segment Total Total Capital depletion and revenue result assets liabilities additions amortisation $’000 $’000 $’000 $’000 $’000 $’000 Russia 8,834 (1,158) 61,206 1,618 2,985 1,468 Libya – (26) 21,348 – 1,173 – Pakistan – – 5,046 21 55 – Tanzania – (15,977) 11,347 1,733 11,812 – Mali – (18,370) 6 – 499 – Malta – – 23,375 79 3,307 – Nigeria – new in 2012 – (108,639) 2,890,757 2,593,015 2,767 4,008 Kurdistan – discontinued operations – 216,328 – – 41,766 – Uganda – discontinued operations – (5,407) – – – – Total for reportable segments 8,834 66,751 3,013,085 2,596,466 64,364 5,476 Corporate – (38,134) 630,074 80,139 663 953 Elimination of discontinued operations – (210,921) – – – – Total from continuing operations 8,834 (182,304) 3,643,159 2,676,605 65,027 6,429

Year ended 31 December 2011 Depreciation, External Segment Total Total Capital depletion and revenue result assets liabilities additions amortisation $’000 $’000 $’000 $’000 $’000 $’000 Russia 9,030 (2,641) 58,811 1,814 9,233 1,624 Kurdistan – – 203,113 16,311 54,405 – Libya – (586) 20,176 – 20,176 – Pakistan – – 4,820 – 460 – Tanzania – (12,136) 15,251 271 3,271 – Mali – – 17,871 – 14,859 – Malta – – 20,091 58 6,346 – Uganda – discontinued operations – (3,933) – – – – Total for reportable segments 9,030 (19,296) 340,133 18,454 108,750 1,624 Corporate – (47,595) 771,894 157,369 335 1,006 Elimination of discontinued operations – 3,933 – – – – Total from continuing operations 9,030 (62,958) 1,112,027 175,823 109,085 2,630

The Group’s 2012 revenue of $8,834,000 was from four Russian based customers. One (2011 – three) customer had purchases of more than 10% of revenue. The total revenue relating to this one (2011 – three) customer was $6,623,000 (2011 – $7,026,000). The remaining three customers account for revenue of $2,211,000 (2011 – $2,004,000).

In 2012, impairment losses relating to Mali of $18,370,000 (2011 – nil), Tanzania of $15,907,000 (2011 – $10,775,000) and corporate of $2,086,000 (2011 – nil) are included in the segmental result.

There have been no changes to the basis of segmentation or the measurement basis for the segment result since 31 December 2011. Financial Statements 2012 HERITAGE OIL PLC 25

5 SEGMENT INFORMATION CONTINUED J OINTLY CONTROLLED ENTITY Shoreline is a jointly controlled entity whose ownership interests are held by Heritage Oil SNR (Nigeria B.V.), a wholly owned subsidiary of Heritage and a local Nigerian partner, Shoreline Power.

The Group’s net economic share in Shoreline, as at 31 December 2012, is 97.5% and the Shoreline results are proportionally consolidated within the Group results.

Summarised ﬁnancial information for the Group’s share of Shoreline is shown below: 2012 $’000 Loss before interest and taxation (44,327) Finance costs (31,004) Loss before interest and taxation (75,331) Taxation 2,635 Loss for the year (72,696) Assets Non-current asset 2,833,874 Current Asset 56,883 Total assets 2,890,757 Liabilities Current liabilities 584,579 Non-current liabilities 2,005,937 Total liabilities 2,590,516 300,241 Group share of net assets as above 300,241 Loans made by Group companies to jointly controlled entities 375,543 675,784

Shoreline does not have any commitments or contingent liabilities.

6 D ISCONTINUED OPERATIONS K URDISTAN During 2012 the Group disposed of its entire business in Kurdistan which has therefore been classiﬁed as a discontinued operation. The disposal was completed in two distinct transactions. On 21 August 2012, the Group disposed of a 26% interest in the Miran PSC in Kurdistan and corresponding interest in the Miran JOA to Genel in exchange for cash of $156 million. On the same date, Genel provided a loan of $294 million to the Group.

The Loan bore interest of 8% and had a ﬁxed term ending on the date which is the earlier of: (i) 15 months after the date of the completion of the Acquisition; and (ii) 6 February 2014. The Loan had an option that, following the election of either the Company or Genel and subsequent approval from the shareholders of the Company, to be repaid through the transfer to Genel of Heritage’s remaining 49% interest in the Miran PSC in Kurdistan and the corresponding interest in the Miran JOA. The Loan terms also provided for the interim funding by Genel of Heritage’s expenditure on its 49% interest in the Miran PSC by way of increases in the Loan with e!ect from 1 July 2012.

In December 2012, following Heritage’s election to repay the Loan in exchange for the transfer of a 49% interest in the Miran PSC to Genel, Heritage’s shareholders approved the repayment and the exchange became unconditional. Shareholder approval was received in December and the transaction completed shortly thereafter. Year ended 31 December 2012 2011 $’000 $’000 Gain on disposal of discontinued operations 216,328 – 216,328 – HERITAGE OIL PLC Financial Statements 2012 26

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

6 D ISCONTINUED OPERATIONS CONTINUED The following table provides additional information with respect to the Sale amounts included in the balance sheet as at 12 December 2012.

12 December 2012 $’000 Assets Non-current assets Intangible exploration and evaluation assets 225,101 Total assets 225,101 Liabilities Non-current liabilities Provisions 1,095 Total liabilities 1,095 Net assets 224,006

The proﬁt on disposal of discontinued operations has been derived as follows: Year ended 31 December 2012 $’000 Consideration received Sales proceeds 462,366 Working capital adjustments 588 Total disposal consideration 462,954 Less: Carrying amount of net assets sold (224,006) Other expenses (22,620) Gain on disposal of discontinued operations 216,328

The expenses incurred on disposition include costs of bank fees ($4.0 million), professional fees ($5.0 million) and sta! costs recharged and other costs ($13.6 million).

U GANDA On 18 December 2009, Heritage announced that it and its wholly owned subsidiary HOGL, had entered into a SPA with Eni for the sale of the Ugandan Assets. On 17 January 2010, Tullow exercised its rights of pre-emption. The transaction was overwhelmingly approved by Heritage shareholders at the General Meeting on 25 January 2010.

The URA contends that income tax is due on the capital gain arising on the disposal and it raised assessments of $404,925,000 prior to completion of the disposal. Heritage’s position, based on comprehensive advice from leading legal and tax experts in Uganda, the United Kingdom and North America, is that no tax should be payable in Uganda on the disposal of the Ugandan Assets and that – even if tax were payable, under the PSAs, HOGL should be indemniﬁed by the Ugandan government (under the contract stabilisation clause).

On closing, Heritage deposited $121,477,500 with the URA, representing 30% of the disputed tax assessment of $404,925,000. $121,477,500 has been classiﬁed as a deposit in the balance sheet at 31 December 2012. A further $283,447,000 has been retained in escrow with Standard Chartered Bank in London, pursuant to an agreement between HOGL, Tullow and Standard Chartered Bank pending resolution between the Ugandan government and HOGL of the tax dispute. Including accrued interest, an amount of $286,915,000 (2011 – $284,479,000) is classiﬁed as restricted cash in the balance sheet at 31 December 2012.

In August 2010, the URA issued a further income tax assessment of $30 million representing 30% of the additional contractual settlement amount of $100 million. HOGL has challenged the Ugandan tax assessments on the disposal of HOGL’s entire interest in the Ugandan Assets.

In November 2011 and December 2011, the Tax Appeals Tribunal in Uganda dismissed HOGL’s applications in relation to the two assessments amounting to $434,925,000. The rulings from the Tax Appeals Tribunal in Uganda are part of a domestic process and are not ﬁnal and determinative. HOGL has appealed the rulings, which it believes are fatally ﬂawed in many respects, through the Ugandan court system commencing with the High Court and subsequently the Court of Appeal and Supreme Court if necessary. Financial Statements 2012 HERITAGE OIL PLC 27

6 D ISCONTINUED OPERATIONS CONTINUED In May 2011, HOGL commenced international arbitration proceedings in London against the Ugandan government in accordance with provisions of the PSAs. HOGL is seeking a decision requiring, among other things, the return or release of approximately $405 million, plus interest, in aggregate currently on deposit with the URA or in escrow with Standard Chartered Bank in London. HOGL made a number of claims in the arbitration proceedings that tax had been improperly imposed on it which the arbitration tribunal ruled on 3 April 2013 to be outside its jurisdiction. The tribunal ruled at the same time that there were two areas of HOGL’s claims which it will consider, in respect of contractual stabilisation clause protection and breach of other contractual obligations. Accordingly, the arbitration proceedings now concern HOGL’s claims that the Ugandan government wrongfully or unreasonably delayed consent to the sale by HOGL of the rights under the PSAs and that the Ugandan government should indemnify HOGL with respect to any tax liability which arose due to changes in law that materially reduced the economic beneﬁts to be derived by HOGL from the PSAs.

The determination by the arbitral tribunal marks the end of the preliminary phase. The proceedings will now continue on to deal with the merits phase of Heritage’s contractual claims against the Ugandan government and the underlying substantive Ugandan tax matters remain under appeal in the Ugandan courts.

On 15 April 2011, Heritage and its wholly owned subsidiary HOGL, received Particulars of Claim filed in the High Court of Justice in England by Tullow seeking $313,447,500 for alleged breach of contract as a result of HOGL’s and Heritage’s refusal to reimburse Tullow in relation to a payment made by Tullow of $313,447,500 on 7 April 2011 to the URA. Heritage and HOGL have filed their Defence and Counterclaim against Tullow seeking instead the release to HOGL of the $283,447,000 plus interest currently being held in escrow with Standard Chartered Bank in London. The case commenced to be heard in the High Court in March 2013 and a first instance decision is expected to be received later this year. Heritage and HOGL believe that the claim has no merit and are in the process of vigorously and robustly defending it.

Although disputes of this nature are inherently uncertain, the Directors believe that the monies on deposit and held in escrow will ultimately be recovered by Heritage.

The results of the Ugandan operations have been classiﬁed as discontinued operations. The loss on disposal of discontinued operations (comprising legal fees and costs relating to the litigation described above) for the years ended 31 December 2012 and 2011 is as follows:

Year ended 31 December 2012 2011 $’000 $’000 Loss on disposal of discontinued operations (5,407) (3,933) (5,407) (3,933)

7 ACQUISITION OF AN INTEREST IN OML 30 On 29 June 2012, Shoreline entered into the Acquisition Agreement with Shell, Total and Agip to acquire the Acquisition Assets for cash consideration of $850 million, net of costs.

Shoreline is a private limited Nigerian company whose ownership interests are held by Heritage Oil SNR (Nigeria) B.V., a wholly owned subsidiary of Heritage, and a local Nigerian partner, Shoreline Power.

At an EGM on 30 August 2012, the shareholders of the Company approved the Acquisition and on 9 November 2012 Heritage announced the completion of the Acquisition, e!ective 1 November 2012.

The Acquisition Assets were acquired for cash consideration of $850,000,000, net of costs, of which: (i) a deposit of $85,000,000 was paid by Shoreline upon the signing of the Acquisition Agreement (with $5,000,000, being the portion of such deposit not exceeding 1% of the market capitalisation of the Company as at 29 June 2012, paid to the Vendors, and the remaining $80,000,000, paid into a dedicated escrow account); and (ii) the balance of the consideration, being $765,000,000 which was paid on completion.

The Acquisition was partially ﬁnanced by a $550,000,000 secured bridge facility provided by Standard Bank Plc to Shoreline. The Company has placed $50,000,000 in an escrow account with Standard Bank Plc as security for the bridge facility. Standard Bank Plc also provided the Letter of Credit to NPDC, to cover Shoreline’s working capital requirements under the joint operating agreement for OML 30. Heritage provided cash collateral of $51,000,000 to Standard Bank Plc to guarantee this Letter of Credit which also covers any interest which may be due under the Letter of Credit. Both the amount held in escrow and the guarantee for the Letter of Credit are classiﬁed as restricted cash in the balance sheet at 31 December 2012 (see note 2a).

Under the terms of the Shoreline Option Agreement, Shoreline Power had an option to increase its economic interest in Shoreline by purchasing 30% of the shares from Heritage. Shoreline Power exercised the option in December 2012 and payment is anticipated to be received in the second quarter of 2013. On completion Heritage’s economic share in Shoreline will reduce from 97.5% to 68.25%.

The Acquisition Assets meet the criteria of a business as set out in IFRS 3, as they represent an integrated set of activities and assets capable of being conducted and managed for purpose of providing a return, therefore the Acquisition has been accounted for in accordance with IFRS 3. HERITAGE OIL PLC Financial Statements 2012 28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

7 ACQUISITION OF AN INTEREST IN OML 30 CONTINUED The fair value allocation of the Acquisition Assets is based upon an independent review. The Company used the data from the independent review to calculate the fair value of the assets taking proved and probable reserves. In accordance with IAS 12, a deferred tax liability has been recognised for the di!erence between the fair value allocated to property, plant and equipment and the value of the consideration that can be claimed as a capital allowance to o!set the future tax liability, calculated on a tax rate of 65.75% for the first five years and rising to 85% after five years. As only a portion of the purchase consideration is available to be claimed as a capital allowance and the tax rates are high, this has resulted in the recognition of a significant deferred tax liability. As a result of the impact of the deferred tax liability recognised, the purchase consideration is higher than the aggregate of the fair value of the identifiable assets and liabilities and therefore goodwill has been recognised. The fair value of the identifiable assets and liabilities is provisional and if new information is obtained within one year of the acquisition date the acquisition accounting may be revised.

The following table provides additional information with respect to the identiﬁable assets acquired and liabilities assumed at Heritage’s current e!ective 97.5% share of net assets of Shoreline: 1 November 2012 $’000 Property, plant and equipment 2,483,317 Intangible assets – goodwill 351,370 Deferred tax liabilities (1,983,189) Site restoration provision (22,748) Net assets 828,750

The loss on acquisition at Heritage’s current e!ective 97.5% share of results of Shoreline has been derived as follows: Year ended 31 December 2012 $’000 Consideration paid (828,750) Fair value of net assets acquired 828,750 Less: Other expenses (72,351) Loss on acquisition (72,351)

Other expenses incurred on the Acquisition include costs of professional fees ($24.1 million), taxes arising on the Acquisition ($20.8 million), success fee ($10.6 million – see note 23) and other costs ($16.9 million).

8 OTHER FINANCE COSTS Year ended 31 December 2012 2011 $’000 $’000 Interest on long-term debt 9,417 261 Interest on short-term debt 22,891 – Interest on convertible bonds 1,303 10,168 Upfront fees for bridge facility 5,555 – Accretion of convertible debt 694 6,006 Accretion of upfront fees for bridge facility 4,117 – Accretion of ﬁnancing charges 79 – Accretion of asset retirement obligation 15 50 44,071 16,485 Amount capitalised (4,314) (12,804) Finance costs expensed (39,757) 3,681

Finance costs are capitalised in non-current asset categories. Financial Statements 2012 HERITAGE OIL PLC 29

9 INCOME TAX EXPENSE Recognised in the income statement: Year ended 31 December 2012 2011 $’000 $’000 Current tax expense 189 114 Deferred tax expense (5) 38 Total tax expense 184 152

Current tax expense relates to the proﬁt on operations of the Group’s UK subsidiary.

The Group did not recognise any income tax in other comprehensive income or directly in equity. The Group is subject to income taxes in certain territories in which it owns licences or has taxable operations. All of the Group’s operating activities are outside of Jersey. In the UK, the tax rate applicable to the Group’s operations is 25% (2011 – 26%). It is the UK government’s intention to enact legislation which will reduce the main rate of UK corporation tax to 20% by 2015.

The Group has available tax deductions of $72,115,000 (31 December 2011 – $17,210,000) and tax losses of $191,353,000 (31 December 2011 – $105,374,000), of which $191,353,000 expires from 2013 to 2032, and the remaining nil (31 December 2011 – nil) does not have an expiry period. No deferred tax assets have been recognised for the beneﬁt of tax deductions and tax losses because realisation of the deferred tax assets in the foreseeable future is not su#ciently likely.

Factors a!ecting the current tax charge for the year: Year ended 31 December 2012 2011 $’000 $’000 Proﬁt/(loss) for the year 28,801 (66,739) Standard tax rate 0% 0% Tax on (loss)/proﬁt at standard rate – – E!ect of higher tax rates in foreign jurisdiction (49,253) (3,493) E!ective weighted average tax rate (73.38)% 5.23% Change in statutory tax rate – 158 Expenses not deductible for tax purposes 1,543 13,047 Foreign exchange gains – 893 Change in recognised deductible temporary di!erences (5) – E!ect of tax losses not recognised 47,899 (10,453) Tax charge 184 152

2012 $’000 The balance comprises temporary di!erences attributable to: Available tax losses and deductions 72,980 Deferred tax asset (unrecognised) 72,980

The tax rate applied in respect of foreign jurisdictions is the local tax rate applicable to the nature of the proﬁts arising.

R ECOGNISED DEFERRED TAX LIABILITY Deferred tax liabilities attributable to the following: Year ended 31 December 2012 2011 $’000 $’000 Property, plant and equipment 1,980,589 38 Inventory 2,635 – Deferred tax liability 1,983,224 38 HERITAGE OIL PLC Financial Statements 2012 30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

10 STAFF COSTS The average number of employees (including Directors) and consultants employed/contracted by the Group during the year, analysed by category, was: Year ended 31 December 2012 2011 Jersey 5 4 Canada 4 5 Russia 43 42 Europe 28 24 Uganda 1 1 Kurdistan 28 27 Pakistan 7 16 Tanzania 15 13 Nigeria 4 – United States of America 1 – Mali 1 1 South Africa 1 2 Libya 2 4 Total 140 139

The aggregate payroll expenses of those employees (including Executive Directors) and consultants were as follows: Year ended 31 December 2012 2011 $’000 $’000 Salaries and other short-term beneﬁts 30,004 19,076 Share-based compensation 2,156 3,597 Total employee remuneration 32,160 22,673 Capitalised portion of total remuneration 16,245 13,441

In 2012, $16,245,000 (2011 – $13,441,000) of the costs for employee remuneration were capitalised into either property, plant and equipment or intangible exploration and evaluation assets dependant on the activities of the employees. Employee costs are either directly allocated to non-current assets, in cases where an employee is solely employed on a capital project, or allocated dependant on time spent on capital projects.

Key management compensation was: Year ended 31 December 2012 2011 $’000 $’000 Salaries and other short-term beneﬁts 7,817 4,689 Share-based compensation 1,430 2,276 9,247 6,965

See note 23 “Related Party Transactions” for disclosures relating to an arbitration settlement with a former director of HOC.

11 INTANGIBLE EXPLORATION AND EVALUATION ASSETS AND GOOD WILL 31 December 2012 2011 $’000 $’000 At 1 January 271,859 183,424 E!ect of movement in exchange di!erences 327 (307) Additions 58,612 99,517 Disposal of Kurdistan assets (225,101) – Goodwill on Acquisition Assets 351,370 – Impairment loss (34,277) (10,775) At 31 December 422,790 271,859

No intangible exploration and evaluation assets have been pledged as security. Financial Statements 2012 HERITAGE OIL PLC 31

11 INTANGIBLE EXPLORATION AND EVALUATION ASSETS AND GOOD WILL CONTINUED The balances at the end of the years are as follows: 31 December 2012 2011 $’000 $’000 Russia 11,171 10,844 Kurdistan – 183,335 Pakistan 4,503 4,448 Malta 23,295 19,988 Mali – 17,871 Tanzania 11,102 15,197 Libya 21,349 20,176 Goodwill: Nigeria 351,370 – Balance – end of year 422,790 271,859

On 25 August 2011, the Group acquired 15,300,000 shares, representing 51% of the shares and voting interests, in Sahara Oil Services Holdings Limited, a company wholly owning Sahara Oil Services Limited (“Sahara”) for $19.5 million. Sahara has the rights to own and operate oil and gas licences in Libya. This acquisition was accounted as an intangible exploration and evaluation asset. The Group agreed to pay the vendors additional consideration of $5 million becoming due on signing of an oil service contract.

In 2012, the Group recognised an impairment of intangible exploration and evaluation assets of $34,277,000 (2011 – $10,775,000). The impairment recognised in 2012 comprised two elements. Firstly, after a technical review and consideration of the security situation in country, management decided to relinquish the licences in Mali and fully write-o! expenditure of $18,370,000. Secondly, after a technical review management decided to write-o! expenditure of $15,907,000 incurred with respect to the Latham licence area in Tanzania. In 2011, after a technical review management decided to write-o! expenditure of $10,775,000 incurred related to the Kimbiji licence area in Tanzania.

In 2012, the Group disposed of its assets in Kurdistan. The impact of this disposal is described in note 6.

In 2012, the Group acquired the Acquisition Assets in Nigeria and recognised goodwill on allocation of the fair value of the assets and liabilities acquired. The impact of the Acquisition is described in note 7.

12 PROPERTY, PLANT AND EQUIPMENT Petroleum and Drilling natural gas and barge Land and interests equipment buildings Aircraft Other Total $’000 $’000 $’000 $’000 $’000 $’000 Cost At 1 January 2011 47,745 3,545 11,985 55,489 3,320 122,084 Additions 9,233 – – – 335 9,568 Disposals – – – – (185) (185) E!ect of movements in exchange rates (2,054) – – – – (2,054) At 31 December 2011 54,924 3,545 11,985 55,489 3,470 129,413 Additions 5,753 – – – 662 6,415 Acquisition (note 7) 2,483,317 – – – – 2,483,317 E!ect of movements in exchange rates 1,677 – – – – 1,677 At 31 December 2012 2,545,671 3,545 11,985 55,489 4,132 2,620,822 Depletion, depreciation, amortisation and impairment losses At 1 January 2011 (6,945) (2,898) (730) (6,892) (2,626) (20,091) Charge for the year (1,624) – (138) (553) (315) (2,630) Disposals – – – – 160 160 At 31 December 2011 (8,569) (2,898) (868) (7,445) (2,781) (22,561) Charge for the year (5,477) – (103) (554) (295) (6,429) Disposals – – – – 5 5 Impairment losses – – – (2,086) – (2,086) At 31 December 2012 (14,046) (2,898) (971) (10,085) (3,071) (31,071) Net book value: At 31 December 2011 46,355 647 11,117 48,044 689 106,852 At 31 December 2012 2,531,625 647 11,014 45,404 1,061 2,589,751

The corporate o#ce, which represents the land and building category, and an aircraft serve as security for long-term loans (note 17). HERITAGE OIL PLC Financial Statements 2012 32

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

12 PROPERTY, PLANT AND EQUIPMENT CONTINUED In 2012, the carrying value of an aircraft was written down to the fair value less cost to sale of $40.0 million because of a reduction in fair value of an aircraft due to unfavourable economic conditions. This resulted in an impairment write down of $2,086,000 recognised in the income statement in 2012.

13 OTHER FINANCIAL ASSETS 31 December 2012 2011 $’000 $’000 Investment in listed securities 8,749 13,268 8,749 13,268

On 4 November 2011, the Afren warrants, which were previously classiﬁed as held for trading, were exercised and the Company acquired 1,500,000 of the listed shares in Afren. The investment in Afren shares is classiﬁed as available-for-sale and valued at fair value which is determined using market price at the end of the period. The valuation at market price at 31 December 2012 resulted in a gain of $1,095,000 (2011 – $120,000) which was recognised in equity. In 2011, loss on revaluation of Afren warrants of $1,550,000 was recognised in the income statement.

As at 31 December 2012, the Company had acquired 15,860,467 of the listed shares of PetroFrontier representing 19.98% of the shares of PetroFrontier. The investment in share capital of PetroFrontier is classiﬁed as available-for-sale and valued at fair value which is determined using market price at the end of the year.

The Group recorded an impairment of its investment in PetroFrontier to reﬂect the market value as at 31 December 2012. The loss of $7,746,000 recognised in the available-for-sale reserve for this investment has been reclassiﬁed to the income statement.

14 TRAD E AND OTHER RECEIVABLES 31 December 2012 2011 $’000 $’000 Trade receivables 105 189 Other receivables 11,693 1,599 11,798 1,788

Trade receivables are due within 30 days from the invoice date. Joint ventures billings are typically paid within 30 days from the invoice date. Interest is not normally charged on the receivables. The carrying amount of trade and other receivables approximates to their fair value. The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable.

As of 31 December 2012, trade and other receivables of $11,798,000 (31 December 2011 – $1,788,000) were neither past due nor impaired. Trade and other receivables relate to a number of independent customers and joint venture partners for whom there is no recent history of default. The ageing analysis of these trade and other receivables is as follows: 31 December 2012 2011 $’000 $’000 Up to 3 months 8,123 805 3 to 6 months 3,015 772 6 to 12 months 82 104 Over 12 months 578 107 11,798 1,788

Trade and other receivables analysed by currency are as follows: 31 December 2012 2011 $’000 $’000 US dollars 11,240 933 Russian roubles 24 100 Swiss francs 296 452 Canadian dollars 15 34 GB pounds sterling 192 248 Nigerian Naira 3 – Euros 28 21 11,798 1,788 Financial Statements 2012 HERITAGE OIL PLC 33

15 CASH AND CASH EQUIVALENTS 31 December 2012 2011 $’000 $’000 Cash at bank and in hand 89,634 310,882

Cash at bank and in hand includes cash held in interest-bearing accounts.

16 TRAD E AND OTHER PAYABLES D UE WITHIN ONE YEAR 31 December 2012 2011 $’000 $’000 Trade payables 12,330 14,986 Other payables and accrued liabilities 96,123 20,405 108,453 35,391

Trade and other payables and accrued liabilities comprise current amounts outstanding for trade purchases, ongoing costs and $37,346,000 for deferred revenue. The carrying amount of trade and other payables approximates to their fair value.

17 BORROWINGS 31 December 2012 2011 $’000 $’000 Non-current borrowings Non-current portion of long-term debt – secured 30,757 5,110 30,757 5,110 Current borrowings Convertible bonds – unsecured – 126,406 Short-term debt – secured 527,365 – Current portion of long-term debt – secured 3,602 7,991 530,967 134,397

2007 CONVERTIBLE BONDS On 16 February 2007, the Company raised $165 million by completing the private placement of convertible bonds. Issue costs amounted to $6,979,000 resulting in net proceeds of $158,021,000. HOC issued 1,650 $100,000 unsecured convertible bonds at par, which had a maturity of ﬁve years and one day and an annual coupon of 8% payable semi-annually on 17 August and 17 February of each year. Bondholders had the right to convert the Bonds into Ordinary Shares at a price of $4.70 per share at any time. The number of Ordinary Shares receivable on conversion of the Bonds is ﬁxed. The Company had the right to redeem, in whole or part, the Bonds for cash at any time on or before 16 February 2008, at 150% of par value. This right was not exercised.

The fair value of the host liability component of the Bonds (net of issue costs) was estimated at $140,154,000 on 16 February 2007. The di!erence between the $165 million due on maturity and the initial liability component is accreted using the e!ective interest rate method and is recorded as finance costs. As the Company call option meant that conversion feature could be settled in cash in accordance with IAS 32, the conversion was treated as a derivative liability. The fair value of this derivative liability (estimated using the Black-Scholes option pricing model) was $17,867,000 at 16 February 2007 and subsequent gains and losses were recorded in finance income and costs up to the expiry of the Company call option on 17 February 2008. As a result of the expiry of this option, and hence the cash settlement feature, the Company has reassessed the classification of the conversion option and determined that it qualifies to be treated as equity under IAS 32, being an option to convert a fixed amount of cash for a fixed number of shares. Therefore, the fair value of the conversion option was reclassified to equity at that date.

Bondholders had a put option requiring the Company to redeem the Bonds at par, plus accrued interest, in the event of a change of control of the Company or revocation or surrender of the Zapadno Chumpasskoye licence in Russia (the “contingent put option”). In the event of a change of control and redemption of the Bonds or exercise of the conversion rights, a cash payment of up to $19,700 on each Bond will be made to a Bondholder, the amount of which depends upon the date of redemption and market value of shares at the date of any change of control event. The contingent put option has been valued separately. The fair value of the contingent put option was estimated de minimis by the Company at 31 December 2011. The fair value measurement of the contingent put option was categorised as Level 2.

Convertible bonds were repaid in full in February 2012. HERITAGE OIL PLC Financial Statements 2012 34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

17 BORROWINGS CONTINUED C URRENT BORROWINGS In November 2012, Shoreline, whose ownership interests are held by Heritage and Shoreline Power, drew down on the $550,000,000 secured bridge facility provided by Standard Bank Plc to acquire the Acquisition Assets in Nigeria. Interest on the loan is at a rate of LIBOR plus 8% for 2012. In April 2013, Shoreline made a payment of $52,500,000 to Standard Bank Plc as a prepayment against the principal amount due. The secured bridge facility is a short-term facility which will be replaced in 2013 by a ﬁve-year reserves based loan, secured at the Shoreline level.

L ONG-TERM DEBT In January 2005, a wholly owned subsidiary of the Company received a sterling denominated loan of £4.5 million to refinance the acquisition of a corporate o#ce. Interest on the loan was fixed at 6.515% for the first five years and is now variable at a rate of Bank of Scotland base rate plus 1.4%. The loan, which is secured on the property, is scheduled to be repaid by 240 instalments of capital and interest at monthly intervals, subject to a residual debt at the end of the term of the loan of $3.5 million (£1.86 million). The principal balance outstanding as at 31 December 2012 was $5.4 million (£3.3 million) (31 December 2011 – $5.6 million (£3.6 million)).

In October 2007, a wholly owned subsidiary of the Company received a loan of $9.45 million to refinance the acquisition of an aircraft. Interest on the loan was variable at a rate of LIBOR plus 1.6%. The loan, which was secured on the aircraft, was scheduled to be repaid by 19 consecutive quarterly instalments of principal. Each instalment equals $118,000 with the final instalment being $7,218,000. The Corporation provided a corporate guarantee to the lender. The additional security of $2,454,000 was paid to the bank on 19 January 2010 to maintain the loan to value ratio specified in the loan agreement. In October 2012 the remaining balance of the loan was paid to the lender and the additional security was released by the bank.

In August 2012, a wholly owned subsidiary of the Company received a loan of $30.0 million to reﬁnance the acquisition of an aircraft. Interest on the loan is at a rate of 5.5%. The loan, which is secured on the aircraft, is scheduled to be repaid by 19 consecutive quarterly instalments of principal. Each instalment equals $789,000 with the ﬁnal instalment being $15,000,000.

FAIR VALUES At 31 December 2012, the fair values of borrowings were approximately $nil (31 December 2011 – $126.4 million) for the convertible bonds, $34.4 million (31 December 2011 – $13.1 million) for the long-term debt and $527.4 million (31 December 2011 – nil) for the short- term debt.

18 PROVISIONS The Group’s asset retirement obligation results from net ownership interests in petroleum and natural gas assets including well sites and gathering systems. The Group estimates the total undiscounted inflation adjusted amount of cash flows required to settle its asset retirement obligation to be approximately $224,680,000, which is expected to be incurred in the period between 2012 and 2035. A cost pool specific discount rate related to the liability of 9% was used to calculate the fair value of the asset retirement obligation in Russia (2011 – 9%), 10% was used in Kurdistan in 2012 (2011 – 10%) and 10% was used in Nigeria in 2012 (2011 – nil).

A reconciliation of the asset retirement obligation is provided below: 31 December 2012 $’000 At 1 January 783 Additions 476 Acquisition (note 7) 22,748 Disposal (1,095) Accretion expense (note 8) 98 At 31 December 23,010 Financial Statements 2012 HERITAGE OIL PLC 35

19 SHARE CAPITAL The Company was incorporated under the Jersey Companies Law on 6 February 2008. The Company’s authorised share capital is an unlimited number of Ordinary Shares without par value. At incorporation, there was one Ordinary Share issued at $42. On 22 February 2008, a second Ordinary Share was issued at $41.

As part of the Reorganisation described in the 2008 Annual Report and Accounts, the rights of di!erent classes of shares are the same and therefore economically equivalent. As such, Ordinary and Exchangeable Shares were treated as one class of shares for the net earnings/(loss) per share calculation.

O RDINARY SHARES Year ended 31 December 2012 Year ended 31 December 2011 Amount Amount Number $’000 Number $’000 At 1 January 256,519,296 343,280 284,899,830 457,746 Exchange of Exchangeable Shares for Ordinary Shares 439,490 376 155,700 132 Issued on exercise of share options (note 22) – – 4,692,500 8,977 Shares bought back and held in treasury (1,373,708) (3,323) (33,228,734) (123,575) At 31 December 255,585,078 340,333 256,519,296 343,280

S PECIAL VOTING SHARE Year ended 31 December 2012 Year ended 31 December 2011 Amount Amount Number $’000 Number $’000 At 1 January 1 – 1 – Issued during the year – – – – At 31 December 1 – 1 –

E XCHANGEABLE SHARES OF HOC EACH CARRYING ONE VOTING RIGHT IN THE COMPANY

Year ended 31 December 2012 Year ended 31 December 2011 Amount Amount Number $’000 Number $’000 At 1 January 2,811,408 2,402 2,967,108 2,534 Exchange of Exchangeable Shares for Ordinary Shares (439,490) (376) (155,700) (132) At 31 December 2,371,918 2,026 2,811,408 2,402 Balance of Ordinary Shares of the Company, excluding treasury shares, and Exchangeable Shares of HOC at 31 December 257,956,996 342,359 259,330,704 345,682

At the AGM held on 20 June 2011, a special resolution was passed by shareholders authorising the Company to make market purchases of its own shares up to the date of the next AGM. Any shares which have been so purchased may be held as treasury shares or cancelled immediately upon completion of the purchase. No such resolution was proposed at the AGM held on 21 June 2012. Purchased Ordinary Shares are held in treasury. At 31 December 2012, the Company held 34,602,442 Ordinary Shares in treasury. HERITAGE OIL PLC Financial Statements 2012 36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

20 RESERVES A ) AVAILABLE- FOR- SALE INVESTMENTS REVALUATION RESERVE Changes in the fair value and exchange di!erences arising on translation of available-for-sale investments such as equities, classiﬁed as available-for-sale ﬁnancial assets, are taken to the available-for-sale investments revaluation reserve (note 2j). Amounts are recognised in the income statement when the associated assets are sold or impaired.

B ) FOREIGN CURRENCY TRANSLATION RESERVE Exchange di!erences arising on translation of a foreign controlled entity are included in the foreign currency translation reserve (note 2r). The reserve will be recognised in the income statement when the net investment is sold.

C ) SHARE- BASED PAYMENTS RESERVE The share-based payments reserve (note 2s) is used to recognise the fair value of options and LTIP awards issued, but not exercised, to employees.

D ) EQUITY PORTION OF CONVERTIBLE DEBT The fair value of the conversion feature of convertible bonds is classiﬁed as the equity portion of convertible debt which is included in reserves in the balance sheet.

21 EARNINGS/(LOSS)/PER SHARE The following table summarises the weighted average Ordinary and Exchangeable Shares used in calculating net earnings per share:

Year ended 31 December 2012 2011 Weighted average Ordinary and Exchangeable Shares Basic 258,315,902 269,676,216 Diluted 270,229,757 284,594,888

The reconciling item between basic and diluted weighted average number of Ordinary Shares is the dilutive e!ect of share options, LTIP awards and convertible bonds. A total of nil options (31 December 2011 – nil), 3,898,754 shares relating to the LTIP (31 December 2011 – nil) and nil shares relating to the convertible bonds (31 December 2011 – 27,042,553) were excluded from the above calculation, as they were anti-dilutive. However, since the Company has made a loss in 2011 for the purposes of calculating diluted loss per share, all potential Ordinary Shares have been treated as anti-dilutive in that year.

22 SHARE-BASED PAYMENTS S HARE OPTIONS The Company had a share option plan whereby certain Directors, o#cers, employees and consultants of the Group have been granted options to purchase Ordinary Shares. Under the terms of the plan, options granted normally vest one-third immediately and one-third in each of the years following the date granted and have a life of ﬁve years.

Ordinary Share options outstanding and exercisable: Year ended 31 December 2012 Year ended 31 December 2011 Average Average Number exercise price Number exercise price of options (GBP) £ of options (GBP) £ At 1 January 18,904,510 1.62 23,597,010 1.52 Exercised (note 19) – – (4,692,500) 1.13 Balance – end of year 18,904,510 1.62 18,904,510 1.62 Exercisable – at 31 December 18,904,510 1.62 18,904,510 1.62

Number of options Remaining Exercise price (GBP) Outstanding Exercisable life (years) £1.08–£1.43 15,454,510 15,454,510 – £2.45–£2.51 3,450,000 3,450,000 – 18,904,510 18,904,510 –

Following the payment of a special dividend of 100 pence per share in August 2010 (see note 19), share options holders are entitled to receive £1 per share when an option is exercised. The net exercise price for the 2,150,000 options exercised was less than 100 pence per share, which resulted in net payment of $1,780,000 to the option holders on exercise of these share options during the period ended 31 December 2011. Financial Statements 2012 HERITAGE OIL PLC 37

22 SHARE-BASED PAYMENTS CONTINUED L ONG TERM INCENTIVE PLAN (“LTIP”) On 20 June 2011, the shareholders of the Company at the AGM approved the 2011 LTIP. Under the terms of the plan, the LTIP awards will be in the form of full-value shares, subject to three-year performance conditions agreed by the Remuneration Committee when the award is made. At the end of the three-year performance period, to the extent that awards vest, there is an additional holding period of one year. Eligible employees will normally be considered by the Remuneration Committee for an award once each year.

Awards made in 2011 are subject to relative Total Shareholder Return (“TSR”) performance conditions. The awards will vest in line with the following schedule: Percentage of award vesting Upper quartile 100% of the award Between median and upper quartile 25% – 100% on a straight line basis Median 25% Below median 0%

TSR will be measured in comparison to a peer group of 18 international oil companies selected based on one of, or a combination of, size (market capitalisation, revenue, turnover, cash expenditure or a combination thereof), area of operations and country of domicile. The TSR measurement will be conducted by independent consultants in discussion with the Remuneration Committee.

Since there are market-related conditions the awards of shares under LTIP were fair valued using the Monte Carlo model which takes into account the market-based performance conditions, which e!ectively estimate the number of shares expected to vest. The expected volatility was assessed based on the historic volatility of the Company’s TSR and volatility of the TSR of each company within the comparator group. No subsequent adjustment is made to the fair value charge for shares that do not vest in the event that these performance conditions are not met. Adjustments are, however, made for leavers. The fair value of the awards is recognised as an employee expense with the corresponding increase in equity. The total amount to be expensed is spread over the vesting period during which the employees become unconditionally entitled to the shares and options.

The table below summarises the main assumptions used to fair value the awards made under the above LTIP and the fair values of the shares granted.

Award date 20 June 2011 Vesting period 3 years Exercise price Nil Share price at date of grant £2.128 Expected volatility 55% Risk free interest 1.3% Fair value as at grant date £1.630 Number of shares granted 2,834,367

There is further information on the 2011 LTIP on page 24 of the Corporate Governance Report.

The 2008 Long Term Incentive Plan (Performance Share Plan) (the “2008 LTIP”) was approved by Shareholders at the AGM on 19 June 2008. The 2008 LTIP compared the Company’s TSR over a three-year period ended 19 June 2011 against a comparator group of 18 international oil companies. The 2008 LTIP comprised of two plans, one for members of sta! and another for the Executive Directors. The plan for the Executive Directors included an additional share price performance condition over-and-above the Company’s relative TSR performance.

Independent executive reward consultants, Hay Group, compared the Company’s TSR against the comparator group during this three year period. It was found that while Heritage exceeded the TSR performance measure, the additional 2008 LTIP performance conditions for the Executive Directors were not met and so none of their awards over 3,507,246 shares vest. While performance conditions for the sta! plan were achieved, with the result that all of the awards of 1,419,187 shares could have vested in accordance with the plan, participants have agreed (due to a range of contributing factors) to forego 25% of their potential awards in accordance with the 2008 LTIP rules. As a result, awards over a total of only 1,064,372 shares will vest. The Remuneration Committee also approved of such a reduction in accordance with the 2008 LTIP rules.

Pursuant to the waiver of the application of Rule 9 of the City Code approved by shareholders at the last AGM, the Remuneration Committee agreed with Anthony Buckingham, the Company’s CEO, to issue his 2011 LTIP awards under the 2008 LTIP, however, Anthony Buckingham’s awards fully reﬂect the terms and conditions of all the other 2011 LTIP awards.

The share-based payment recognised with respect to share options and LTIP awards previously granted, in the year ended 31 December 2012, was $1,909,000 (31 December 2011 – $3,675,000) out of which $1,082,000 (31 December 2011 – $1,114,000) was capitalised. HERITAGE OIL PLC Financial Statements 2012 38

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

23 RELATED PARTY TRANSACTIONS During the year ended 31 December 2012, the Company incurred transportation costs of $116,000 (31 December 2011 – $245,000) with respect to the services provided by a company indirectly owned by Anthony Buckingham, CEO and a Director of the Company.

Anthony Buckingham used the corporate jet a few times during 2012 for personal trips. The cost of these trips was reimbursed at independently assessed commercial rates of $525,000 (31 December 2011 – $306,000).

Related party transactions described above have been made on an arm’s length basis.

In 2012, the Company accrued $2.5 million in general and administrative expenses, in relation to an arbitration settlement to a former director of HOC whose services were terminated in 2006.

Included in expenses of the Acquisition is a success fee of $10.6 million paid to a related party of Shoreline Power, Heritage’s Nigerian partner in Shoreline.

Included in trade and other receivables is $9.6 million relating to Shoreline Power’s 2.5% economic share of the intercompany loan provided by Heritage to Shoreline as at 31 December 2012.

24 COMMITMENTS AND CONTINGENCIES Heritage’s net share of outstanding contractual commitments at 31 December 2012 was estimated at:

Less than After Total 1 year 1–3 years 4–5 years 5 years $’000 $’000 $’000 $’000 $’000 Current-term debt, including interest 561,009 561,009 – – – Long-term debt, including interest 40,893 5,246 9,939 22,363 3,345 601,902 566,255 9,939 22,363 3,345 E!ect of interest (31,076) (26,402) (2,733) (1,736) (205) Total repayments of borrowings 570,826 539,853 7,206 20,627 3,140 Operating leases 6,109 333 649 367 4,760 Work programme obligations1 38,081 24,011 14,070 – – Total contractual obligations 44,190 24,344 14,719 367 4,760

1 Work programme obligation includes minimum required ﬁnancial commitments for the Group to fulﬁl the requirements of licences and production sharing contracts.

Of the total contractual obligations of $44,190,000 (2011 – $89,148,000), $13,317,000 (2011 – $39,812,000) relates to the Company’s share of obligations for its joint arrangements.

The Company may have a potential residual obligation to satisfy any shortfall in o#cers’ and former o#cers’ secured real estate borrowings in the event of default, a shortfall on the proceeds from the disposal of the properties and the individuals being unable to repay the balance. The value of the residual obligation was estimated as insigniﬁcant.

In many of the countries in which the Group operates, land title systems are not developed to the extent found in many industrial countries and there may be no concept of registered title. Although the Group believes that it has title to its oil and gas properties, it cannot control or completely protect itself against the risk of title disputes or challenges. There can be no assurance that claims or challenges by third parties against the Group’s properties will not be asserted at a future date.

The Group received a letter from the Chairman of the Management Committee of the National Oil Company of Libya dated 28 February 2008, stating that the Block 7 licence area lies within the Libyan continental shelf and a portion of this area has already been licensed to Sirte Oil Company. This letter also demands that the Group refrain from any activities over, or concerning, the Block 7 licence area and asserts the Libyan government’s right to invoke Libyan and international law to protect its rights in the Block 7 licence area. The Directors believe that the Libyan government’s claims are unfounded. Financial Statements 2012 HERITAGE OIL PLC 39

25 NON-CASH INVESTING AND FINANCING ACTIVITIES SUPPLEMENTARY INFORMATION

Year ended 31 December 2012 2011 $’000 $’000 Capitalised portion of share-based compensation (1,082) (1,114) Capitalised portion of interest (1,547) (12,804) Non-cash property, plant and equipment additions relating to the capitalised portion of share-based compensation 2,629 13,918

On 22 August 2012 Heritage drew down on the Loan provided by Genel. The Loan had an option that, following the election of either the Company or Genel and subsequent approval from the shareholders of the Company, the Loan could be repaid through the transfer to Genel of Heritage’s remaining 49% interest in the Miran PSC in Kurdistan and the corresponding interest in the Miran JOA. Shortly after receiving shareholder approval at the EGM held on 12 December 2012, the loan was repaid in exchange for the transfer of a 49% interest in the Miran PSC to Genel.

26 SUBSEQUENT EVENTS On 2 April 2013 Heritage announced that it had agreed with LNG Energy Ltd. (“LNG Energy”) to farm-in to two licences onshore Papua New Guinea. The transaction completed in April 2013 and Heritage has been appointed operator.

Heritage has agreed to acquire up to an 80% working interest in two licences, Petroleum Prospecting Licence No:319 and Petroleum Retention Licence No:13 from subsidiary companies of LNG Energy. In return for obtaining the 80% working interests and operatorship Heritage has paid LNG Energy $4.0 million in contribution to its back costs on the licence and will fund the costs of the seismic acquisition and the cost of drilling an exploration well. HERITAGE OIL PLC Financial Statements 2012 40

FINANCIAL STATEMENTS GLOSSARY

$ US dollars unless otherwise stated AFREN Afren plc AGIP Nigerian Agip Oil Company Limited AGM Annual General Meeting BBL/BBLS barrel/barrels BBLS/D OR BOPD barrels per day or barrels of oil per day BONDS $165,000,000 8.00% convertible bonds repaid 2012 COMPANY Heritage Oil Plc CONDENSATE low density, high API hydrocarbon liquids that are present in natural gas ﬁelds where it condenses out of the raw gas if the temperature is reduced to below the hydrocarbon dew point temperature of the raw gas CONVERSION RIGHTS conversion rights under the terms of the Bond E&E exploration and evaluation EGM extraordinary general meeting ENI ENI International B.V. GENEL Genel Energy plc GROUP, HERITAGE the Company and all of its subsidiaries HOC OR CORPORATION Heritage Oil Corporation, incorporated in Canada and a wholly owned subsidiary of the Company IFRS International Financial Reporting Standards HOGL Heritage Oil & Gas Limited JERSEY COMPANIES LAW Companies (Jersey) Law 1991 (as amended) KRG Kurdistan Regional Government LNG ENERGY LNG Energy Ltd. LOAN $294 million loan provided by Genel LSE London Stock Exchange LTIP Long Term Incentive Plan MIRAN JOA the joint operating agreement relating to the Miran Block in Kurdistan MIRAN PSC the production sharing contract relating to the Miran Block in Kurdistan OML 30 Oil Mining Licence in Nigeria PETROFRONTIER PetroFrontier Corp. PSAS the production sharing agreements with the Ugandan government relating to the Ugandan Assets PASS-THROUGH DIVIDEND special dividend paid to Bondholders SAHARA Sahara Oil Services Limited SALE the disposal of a 26% interest in the Miran PSC and corresponding interest in the Miran JOA SHELL The Shell Petroleum Development Company of Nigeria Limited SHORELINE Shoreline Natural Resources Limited SHORELINE POWER Shoreline Power Company Limited SPA Sale and Purchase Agreement TOTAL Total E&P Nigeria Limited TSR Total Shareholder Return TSX Toronto Stock Exchange TULLOW Tullow Uganda Limited UGANDAN ASSETS HOGL’s 50% interests in Blocks 1 and 3A in Uganda URA Uganda Revenue Authority VENDORS Shell, Total and Agip 2008 LTIP 2008 Long Term Incentive Plan C O N V E R S I O N TA B L E The following table sets forth standard conversions from Standard Imperial Units to the International System of Units (or metric units).

A DVISERS AND FINANCIAL CALENDAR

CANADIAN LEGAL ADVISERS TO THE COMPANY McCarthy Tétrault LLP Suite 3300 421–7th Avenue SW Calgary Alberta T2P 4K9 Canada H ERITAGEO ILPLC. C OM

HERITAGE OIL PLC

Fourth Floor, Windward House La Route de la Liberation St Helier JE2 3BQ Jersey Channel Islands

T: +44 (0) 1534 835 400 F: +44 (0) 1534 835 412