Financial Statements 2013 Heritage Oil PLC Financial Statements 2013

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financial statements 2013 Heritage Oil PLC Financial Statements 2013

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.

Contents The Heritage Oil Plc Annual Report and Accounts 2013 consists of four documents.

Highlights 2013 01 strategic report Corporate Social Financial review 02 The Strategic Report provides Responsibility Statement of Directors’ Responsibilities and Compliance 07 an overview of Heritage, its The CSR Report provides processes and a Business Review. detailed information concerning Independent Auditor’s Report to the Members of Heritage Oil Plc 08 Heritage’s CSR strategy, policies, Consolidated income statement 11 systems and performance. Consolidated statement of comprehensive income 12 Consolidated balance sheet 13 Consolidated statement of changes in equity – 2013 14 Corporate Financial Consolidated statement of changes in equity – 2012 15 Governance Statements Consolidated cash flow statement 16 The Corporate Governance The Financial Statements Report Notes to consolidated financial statements 17 Report provides detailed provides detailed information on information on all aspects of Heritage’s financial position. Other Heritage’s corporate governance. Financial statements glossary 44 Advisers and financial calendar IBC Financial Statements 2013 Heritage Oil PLC

Highlights 2013

Financial1 –– Total revenues, net to Heritage, for 2013 of $431.9 million –– Profit after tax from continuing operations of $100.4 million, an increase of 104% year-on-year –– Operating cash flows of $235.3 million in 2013 compared to cash outflows of $207.5 million in 2012 –– Successfully completed the refinancing of the bridge loan facility with a five year $550 million Senior Secured Revolving Reserves Based Lending Facility drawn by Shoreline Natural Resources Limited (“Shoreline”) in Nigeria –– Heritage cash at 31 December 2013 of $183.8 million

1 The Group has changed the accounting policy for the proportion of Shoreline it consolidates into its results and it now proportionally consolidates Shoreline’s financial results using 90% which is the eventual economic rights before completion of the partner’s option.

Operational –– Production from OML 30, Nigeria increased during the year and record gross production since acquisition, of over 50,000 bopd has been achieved –– Maintenance work over OML 30 is progressing as planned –– 2013 average production from the interest in OML 30, Nigeria, net to Heritage of 8,919 bopd and net production from Russia of 577 bopd –– Continued the work programme in Tanzania through processing of 2D seismic data on Rukwa which has identified several prospects in the retained Rukwa South licence area. A geochemical survey of the Kyela licence has been completed and interpretation of the data is proceeding to schedule –– Expanded the exploration portfolio with the farm in to four licences in Papua New Guinea (“PNG”); Petroleum Prospecting Licence 319 (“PPL 319”), Petroleum Retention Licence 13 (“PRL 13”), Petroleum Prospecting Licence 337 (“PPL 337”) and Petroleum Prospecting Licence 437 (“PPL 437”) –– Work programmes in PNG commenced with the acquisition and processing of seismic and evaluation of legacy datasets

All dollars are US dollars unless otherwise stated. Heritage Oil PLC Financial Statements 2013

Financial review

A solid performance

PAUL ATHERTON CHIEF FINANCIAL OFFICER

Selected operational and financial data

2012 2013 restated Change Production bopd 9,496 2,665 256% Sales volume1 bopd 11,529 607 1,800% Average realised price2 $/bbl 111.0 39.7 180% Petroleum revenue2 $ million 431.9 8.8 4,808% Profit from continuing operations after tax $ million 100.4 49.1 104% (Loss)/gain from discontinued operations $ million (483.9) 210.9 n/a Net (loss)/profit $ million (385.5) 260.0 n/a Cash generated by/(used in) continuing operating activities $ million 235.3 (207.5) 214% Total cash investing and capital expenditures $ million 52.0 846.0 Year end cash balance $ million 183.8 86.7

1 For 2012, sales volumes are from the sale of crude from the Zapadno Chumpasskoye Field, Russia. For 2013, sales volumes are from both the Zapadno Chumpasskoye Field in Russia and OML 30 in Nigeria. 2 The Group changed its accounting policy for the proportion of Shoreline it consolidates into its results and it now proportionally consolidates Shoreline’s financial results using 90% which is the eventual economic right due to the holders of Class A shares (see note 5 of the Financial Statements), therefore the petroleum revenue in the table above includes just 90% of Shoreline’s petroleum revenue. Production and sales volumes are presented at Heritage’s current economic share of 97.5%. Financial Statements 2013 Heritage Oil PLC

CORPORATE PERFORMANCE In the 2013 there was a change in inventory of $8.1 million. $8.3 PRODUCTION AND SALES VOLUMES million was held in inventory as at 31 December 2012 and transferred In November 2012, Heritage, through Shoreline, completed the to the income statement in the first quarter of 2013 when the crude acquisition of a 45% interest in a producing oil mining licence in inventory was sold. As at 31 December 2013, there were inventories Nigeria, OML 30, together with a 45% interest in other assets owned of $0.2 million in Nigeria. At 31 December 2013, Heritage’s net under a joint operating agreement for OML 30 (the “Acquisition economic share of barrels held in inventory from OML 30 production Assets”). Shoreline is a special purpose Nigerian company formed was 11,067 barrels compared to 753,380 barrels at the beginning of between a subsidiary of Heritage and a Nigerian partner, Shoreline the year. Power Limited (“Shoreline Power”), which acquired the 45% of OML 30. Production from OML 30 is incorporated within the Group Petroleum operating costs for the Zapadno Chumpasskoye Field in results with effect from 1 November 2012. Average daily production, Russia increased by 3% to $3.1 million in 2013. Average operating net to Heritage’s economic interest, of 8,919 bopd was generated cost per produced barrel of oil increased from $13.37/bbl in 2012 to from OML 30 in Nigeria in 2013. In 2012, there was only two $14.55/bbl in 2013. This was due primarily to production being 5% months’ production post acquisition from OML 30. lower in 2013 compared to the same period last year and the fixed nature of certain costs, including certain personnel. The difference between the production volumes and sales volumes is due to the change in the oil inventory balance during the year. Production and other taxes in Nigeria recognised in 2013 was $88.3 million. Production royalty of $84.5 million was recognised in 2013 Average daily production from the Zapadno Chumpasskoye Field and is calculated on production levels at 20%. In 2013, $3.8 million in Russia decreased from 607 bopd in 2012 to 577 bopd in 2013, was recognised for Education Tax in Nigeria. Education Tax is levied primarily due to natural well decline and the replacement of the on tax adjusted profit before capital allowances. electric submersible pump on horizontal well 363 in the first quarter of 2013. Average production for the second half of 2013 was higher Production tax in Russia for 2013 of $4.6 million was marginally at 680 bopd as a result of resolution of mechanical issues. lower than in 2012 at $4.7 million, which is in line with the slight reduction in revenue. The impact of lower production volumes was REVENUE offset by increased average commodity prices in 2013, as both Heritage’s net economic share of petroleum revenue from its interest production volumes and price are used in the calculation of the tax. in OML 30 was $458.5 million in 2013, however, Heritage proportionally consolidates 90% of Shoreline’s results, and therefore General and administrative expenses increased from $18.7 million in is reflecting petroleum revenue of $423.2 million from OML 30, 90% 2012 to $32.1 million in 2013. This was principally due to additional is the eventual economic right due to the holders of Class A shares, costs arising from the office established by Shoreline in Lagos to (see note 5 of the Financial Statements) for its interest in the licence. support operations in Nigeria. General and administrative expenses Average daily sales volumes in 2013 were 10,953 bopd and the are comprised of salaries of management, finance and administrative average realised commodity price was $114.70/bbl. Sales volumes staff, consulting, legal and professional fees, transportation costs and were higher than production volumes in the year because of the other costs. build-up of inventories at the beginning of the year as the first sale after completion of the acquisition of the interest was in January If share-based compensation expenses are excluded, net general 2013. OML 30 crude is priced using the Forcados benchmark, and administrative expenses increased from $18.5 million in 2012 which trades at a premium to Brent typically of over 2%. to $27.6 million in 2013. In 2013, the Group capitalised $6.3 million (2012 – $5.5 million) of general and administrative costs relating Petroleum revenue from the Zapadno Chumpasskoye Field in Russia to exploration and development activities, including share-based decreased by $0.2 million (2%) to $8.7 million in 2013. This decrease compensation of $1.8 million (2012 – $1.1 million). comprises: Depletion, depreciation and amortisation expenses increased by –– a reduction of $0.5 million from a decrease in sales volumes 226% from $6.9 million in 2012 to $22.5 million in 2013, primarily from 607 bopd in 2012 to 577 bopd in 2013; and as a result of the inclusion of depletion for Heritage’s net interest in –– offset by a $0.3 million increase in average commodity prices OML 30. Depletion for the Zapadno Chumpasskoye Field decreased from $39.74/bbl in 2012 to $41.17/bbl in 2013. in line with the lower production volumes.

OPERATING RESULTS Exploration expenditures expensed in the year, and not capitalised, Expenses increased from $4.7 million in 2012 to $8.6 million in 2013. Net operating costs included in the Group results for OML 30 were Exploration expenditures in 2013 related principally to activities in $121.2 million. As stated above, Heritage proportionally consolidates Africa as the Company looked to expand its portfolio in one of its 90% of Shoreline’s results (see note 5 of the Financial Statements). core areas. Average operating cost per produced barrel of oil was $39.79/bbl in 2013, as the Group’s share of production is reflected at 97.5%, for the calculation of operating costs per barrel, the value of operating costs used for the calculation was based upon an economic share of 97.5% ($129.5 million). The average operating costs per barrel in 2013 were higher than expected as a result of the lower level of production and a certain portion of the operating costs, such as manpower, being fixed. Heritage Oil PLC Financial Statements 2013

Financial review continued

In 2012, a net gain arising from acquisition of $157.0 million was Heritage holds 1,500,000 of the listed shares in Afren plc (“Afren”). recognised, nil was recognised in 2013. The gain arose as a result of The investment in Afren shares is classified as available-for-sale and the fair value accounting applied to the acquisition of an interest in valued at fair value which is determined using market price at the end OML 30 Nigeria. There was a prior year adjustment to the fair value of of the period. The valuation at market price as at 31 December 2013 the net assets acquired (see note 7 of the Financial Statements). This resulted in a gain of $0.9 million (2012 – $1.1 million) which was was partially offset by costs incurred in respect of the acquisition. recognised in equity.

The Group did not recognise an impairment of intangible exploration RESULTS FROM CONTINUING OPERATIONS and evaluation assets in 2013 compared to an impairment of $34.3 Heritage’s gain after tax from continuing operations in 2013 was million recognised in 2012, which comprised of two elements. Firstly, $100.4 million, compared to $49.1 million in 2012, an improvement after a technical review and consideration of the security situation, of $51.3 million. The adjusted profit from continuing operations in management decided to relinquish the licences in Mali and fully 2013 was $91.6 million compared to a $63.5 million loss in 2012 if write-off all expenditure of $18.4 million. Secondly, after a technical certain non-cash items (share-based compensation expense, review, management decided to write-off expenditure of $15.9 impairment of intangible exploration and evaluation assets, property, million incurred with respect to the Latham licence area in Tanzania, plant and equipment impairment write-down, foreign exchange which has since been relinquished. gains, unrealised gains/losses on revaluation of Afren and PetroFrontier shares and one-off acquisition costs) are excluded. In 2013, the Group recognised an impairment write-down of property, plant and equipment of $2.2 million (2012 – $2.1 million) RESULTS FROM DISCONTINUED OPERATIONS relating to a reduction in the fair value of an aircraft. In 2013, the loss arising from discontinued operations was $483.9 million compared to a profit of $210.9 million in 2012. The loss in Finance income/costs 2013 includes the payment of the Award to Tullow Uganda Limited (a In 2013, interest income was $1.0 million (2012 – $3.2 million). Cash wholly owned subsidiary of Tullow Oil Plc) (“Tullow”), legal fees and and cash equivalents are typically held in interest bearing treasury costs relating to the litigation in regards to the sale of Heritage Oil & accounts. This decrease in interest income is primarily due to a Gas Limited (“HOGL”) 50% interests in Blocks 1 and 3A in Uganda decrease in average cash and cash equivalents balances and balances (the “Ugandan Assets”) and a provision against the receivable due held in restricted cash. from the Ugandan Revenue Authority (the “URA”), which has been recognised for the sake of prudence. Full details of the discontinued Other finance costs increased from $37.4 million in 2012 to $60.2 operations can be found in note 6 of the Financial Statements. million in 2013, due primarily to financing fees and interest charges incurred by Shoreline for a full year, incurred on the bridge facilities PROFIT/(LOSS) PER SHARE for the first half of the year which was refinanced by way of a secured Heritage’s net loss, after the exceptional loss from discontinued reserves based loan at the end of June 2013. This is partially offset by operations in 2013, was $383.5 million, compared to a profit of the elimination of interest charges incurred in 2012 on the $294 $260.0 million in 2012. million exchangeable loan provided by Genel Energy plc (“Genel”) (see the Kurdistan section of note 6 in the Financial Statements), In 2013, the basic and diluted earnings per share from continuing which was cancelled following completion of the sale of this asset. operations was $0.38 and $0.37 respectively, compared to basic and diluted earnings per share of $0.19 and $0.18 respectively in 2012. In 2013, the Group had foreign exchange gains of $0.6 million compared to a $0.1 million loss in 2012. The gain arose from net In 2013, the basic and diluted loss per share was $1.46, compared to foreign exchange gains and losses on revaluation of balances the basic and diluted earnings per share of $1.01 and $0.96 denominated in currencies different from the functional currency. respectively in 2012.

Heritage recognised an unrealised loss on investments of $2.7 million CASH FLOW AND CAPITAL EXPENDITURES in 2013 (2012 – $7.7 million), which comprised of a decrease in Cash provided by continuing operating activities was $235.3 million market value of investments in shares of PetroFrontier Corp. in 2013 compared to cash used in continuing operating activities of (“PetroFrontier”). As at 31 December 2013, the Company held $207.5 million in 2012. Total cash capital expenditures in 2013 were 15,860,467 shares of PetroFrontier representing 19.98% of listed $52.0 million, $794.0 million lower than in 2012, as the prior year shares of the company. The investment in share capital of included the acquisition of the interest in OML 30. The following PetroFrontier is classified as available-for-sale and valued at fair major work programmes and an acquisition were undertaken in 2013: value which is determined using market price at the end of the period. At 31 December 2013, the market price of PetroFrontier shares was Cdn$0.17 per share. Financial Statements 2013 Heritage Oil PLC

–– in April, Heritage entered into an agreement with Esrey Energy The RBL Facility, which is secured at the Nigeria level, replaces the Limited (“Esrey Energy”) (formerly LNG Energy Limited) to bridge loan executed as part of the acquisition of a 45% interest in farm-in to two licences onshore PNG; PPL 319 and PRL 13 from the OML 30 licence and provides long-term financing to Shoreline subsidiary companies of Esrey Energy. In return for obtaining up to develop the licence further. The RBL Facility has been arranged to 80% working interests and operatorship, Heritage has paid on more favourable terms and provides greater flexibility than the Esrey Energy $4.0 million in contribution to its back costs on the bridge loan. licences and repaid the costs Esrey Energy incurred for the acquisition of 22 kilometres of 2D seismic data in 2013 as well Like most oil and gas exploration companies, Heritage raises as agreeing to fund a future seismic programme and drill one financing for its activities from time to time using a variety of exploration well; sources. Sources of funding for future exploration and development –– Heritage’s PNG work programme regarding PPL 319 commenced programmes will be derived from inter alia disposal proceeds from in the second quarter of 2013 with the acquisition of 62 the sale of assets, such as the sale of the Company’s interest in the kilometres of 2D seismic data over the Tuyuwopi structure in Miran PSC in 2012 and Company’s Ugandan Assets in 2010 (see note PPL 319. Processing of the acquired seismic data and 6 of the Financial Statements), using its existing treasury resources, reprocessing of c.300 kilometres of legacy seismic data over new credit facilities, reinvesting its funds from operations, farm-outs, licences PPL 319 and PRL 13 was completed in 2013; issuing debt and, when considered appropriate, issuing additional –– in October, Heritage entered into an agreement with Kina equity. Accordingly, the Group potentially has a number of different Petroleum Limited (“Kina”) to farm-in to PPL 337. In return for sources of finance available to it. obtaining a 70% working interest and operatorship, Heritage paid Kina $0.5 million in contribution to its back costs on the CAPITAL STRUCTURE licence and agreed to drill two exploration wells which are Heritage’s financial strategy has been to fund its capital expenditure scheduled to be drilled in 2014; programmes and any potential acquisitions by selling non-core –– in October 2013, Heritage entered into an agreement with Kina assets, reinvesting funds from operations, using existing treasury to farm-in to PPL 437. In return for obtaining a 30% working resources, finding new credit facilities and, when considered interest, Heritage has paid Kina $0.3 million in contribution appropriate, either issuing unsecured convertible bonds or equity. to its back costs on the licence and agreed to acquire a seismic programme which is planned to be acquired within the At 31 December 2013, Heritage had net debt of $331.2 million next year; (31 December 2012 – $434.4 million) (cash and cash equivalents less –– acquisition, processing and interpretation of approximately 600 borrowings) and 28% gearing (31 December 2012 – 27%). Net debt kilometres of 2D seismic data in the Rukwa licence in Tanzania as a percentage of total capital, total capital is calculated as “equity” was completed; as shown in the consolidated balance sheet plus net debt. –– acquisition of an approximately 100 kilometres reconnaissance seismic survey across the Kyela licence in Tanzania was CREDITORS’ PAYMENT POLICY completed in January. The data has been processed and It is the Company and Group’s general policy to settle all debts with interpreted. A geochemical survey of the Kyela licence has been creditors on a timely basis and in accordance with the terms of credit completed and interpretation of the data has commenced; and agreed with each supplier. Average creditor payment days in 2013 –– gas lift compressors were acquired and are in the process of were approximately 45 days (2012 – 45 days). being installed in OML 30, Nigeria. PRIMARY RISKS AND UNCERTAINTIES FACING FINANCIAL POSITION THE BUSINESS LIQUIDITY Heritage’s business, financial standing and reputation may be There was a net increase in cash and cash equivalents in 2013 of impacted by various risks, not all of which are within its control. $96.9 million, following cash receipts from operations received from The Group identifies and monitors the key risks and uncertainties Heritage’s net share in OML 30 and the release of $50 million from affecting the Group and runs its business in a way that minimises restricted cash which had been used to provide security on the bridge the impact of such risks where possible. The primary business facility. In June 2013, Shoreline refinanced its bridge facility loan risks include: through a new five year $550 million Senior Secured Revolving Reserves Based Lending Facility (“RBL Facility”), which can be –– Production delivery risk – failure to control risks could result in increased up to $600 million. At 31 December 2013, Heritage had a delays to projects, cost overruns and not achieving set targets. working capital surplus of $58.3 million, including cash and cash Production operations are closely monitored to ensure that equivalents of $183.8 million. unplanned downtime is kept to a minimum and that operating costs are tightly controlled. Actual production is regularly checked against the annual production forecast. –– Oil and gas sales volumes and prices – whilst not under the direct control of the Company, a material movement in commodity prices could impact on the Group. The Group did not hedge oil prices in 2013. Heritage Oil PLC Financial Statements 2013

Financial review continued

–– Factors associated with operating in developing countries, INTERNAL CONTROL political, fiscal and regulatory instability – the Group maintains A system of internal control was designed and tailored to ensure key close contact with governments in the areas where it operates risks are addressed appropriately and to provide assurance regarding and, where appropriate, invests in community projects. the reliability of financial reporting and preparation of financial Considerable work is undertaken before commencing operations statements. Risk and internal control are assessed continually. One in any new territory. weakness identified in its financial procedures reporting concerns –– Exploration and development expenditures and success rates accounting for complex transactions and the Company ensures that – the Group has experienced management and technical teams it seeks third party advice to mitigate this weakness. with a track record of finding major hydrocarbon discoveries and has a diversified portfolio of exploration, appraisal, As part of the internal control systems, all transactions with related development and production assets. Considerable technical parties are identified, scrutinised and disclosed in the financial work is undertaken to reduce related areas of risk and statements appropriately. maximise opportunities. –– Title disputes – notwithstanding potential challenges in Malta, Heritage maintains insurance policies in accordance with industry the Group believes that it has good title to its oil and gas standards. Heritage believes that the level of insurance it maintains properties. However, the Group cannot control or completely is adequate, based on various factors such as the cost of the policies, protect itself against the risk of title disputes or challenges and industry standard practice and the risks associated with the there can be no assurance that claims or challenges by third exploration and development of oil and gas properties in the parties against the Group’s properties will not be asserted at countries in which it operates. Heritage does not insure against a future date. Naturally, the Group strives to employ the best political risk and, therefore, shareholders have full exposure to internal and advisory knowledge available to help to minimise the risks and rewards of investing in its territories. this risk associated with its activities. –– Provisions for taxes – these are made using the best estimate of Heritage maintains detailed financial models which allow the the amount expected to be paid and are subject to measurement Company to plan future operating and capital activities in an uncertainty as tax filings made by the Company are subject to efficient manner. review and confirmation by government regulatory agencies and such review and reassessment may result in changes. Heritage has previously announced that Shoreline had been in discussions with relevant government departments in Nigeria about its tax status. Post period end the discussions concluded successfully and the Company received, from relevant authorities in Nigeria, Paul Atherton approval of a waiver of petroleum profit tax between 2013 and Chief Financial Officer 2017. Such approvals may be subject to challenge and review by 29 April 2014 local authorities. –– Loss of key employees – remuneration packages are regularly reviewed to ensure key executives and senior management are properly remunerated. 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 Key Performance Indicators and staff turnover continues to remain at low levels. –– Foreign exchange exposure – generally, it is the Group’s policy to conduct and manage its business in US dollars, which is 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. Financial Statements 2013 Heritage Oil PLC

STATEMENTs OF DIRECTORS’ RESPONSIBILITIES AND COMPLIANCE

DIRECTORS’ RESPONSIBILITIES FOR PREPARING RESPONSIBILITY STATEMENT OF THE DIRECTORS THE ANNUAL REPORT AND ACCOUNTS 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 and regulations. applicable accounting standards give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company law requires the Directors to prepare Group financial Company and the undertakings included in the consolidation statements for each financial year. Under that law they are required taken as a whole; and to prepare the Group financial statements in accordance with b) the management report (which is incorporated within the International Financial Reporting Standards (“IFRS”) as adopted Strategic Report, the Corporate Governance Report and the by the European Union (“EU”) and applicable law. Corporate Social Responsibility Report) includes a fair review of the development and performance of the business, the position The Group financial statements are required by law and IFRS as of the Company and the undertakings included in the adopted by the EU to present fairly the financial position of the consolidation taken as a whole, together with a description of Group and the performance for that period. the principal risks and uncertainties that they face.

In preparing the financial statements the Directors are required to: FAIR AND BALANCED STATEMENT The Directors consider that the Annual Report and Accounts, taken –– select suitable accounting policies and then apply them as a whole, is fair, balanced and understandable and provides consistently; information necessary for shareholders to assess the Group’s –– present information, including accounting policies, in a manner performance, business model and strategy. that provides relevant, reliable, comparable and understandable information; GOING CONCERN –– provide additional disclosures when compliance with the The Group’s activities are described in the Strategic Report. The specific requirements in IFRS is insufficient to enable users to financial position of the Group, its cash flows and liquidity position understand the impact of particular transactions, other events are described in the financial review and financial statements within and conditions on the entity’s financial position and financial the Financial Statements Report. In addition, the notes to the performance; financial statements include the Group’s policies and processes for –– state whether they have been prepared in accordance with IFRS managing its capital and its exposures to credit and liquidity risk. as adopted by the EU; and Having reviewed the future plans and projections for the Group and –– prepare the financial statements on a going concern basis unless, its current financial position, the Directors have a reasonable having assessed the ability of the Company to continue as a expectation that the Group has adequate resources to continue in going concern, it is inappropriate to presume the Company will operational existence for the foreseeable future, a period of not less continue in business (see note 2a). than 12 months from the date of this report. In making this assessment they have considered the Company and Group budgets, The Directors are responsible for keeping proper accounting records the cash flow forecasts and reviewed the availability of banking which disclose with reasonable accuracy at any time the financial facilities. For this reason, it continues to adopt the going concern position of the Group and enable them to ensure that its financial basis of accounting in preparing the annual financial statements. statements comply with the Companies (Jersey) Law 1991 (as amended) (the “Jersey Companies Law”). They have general STATEMENT CONCERNING AUDIT INFORMATION responsibility for taking such steps, as are reasonably open to them, Directors who held office at the date of approval of the Annual Report for safeguarding the assets of the Group and to prevent and detect and Accounts confirm that, so far as they are each aware, there is no fraud and other irregularities. relevant audit information of which the Company’s auditors are unaware and each Director has taken all the steps that they ought to Under applicable law, regulations and listing rule requirements, the have taken as a Director to make themselves aware of any relevant Directors are also responsible for the preparation of a Directors’ audit information and to establish that the Company’s auditors are Report, Remuneration Report and Corporate Governance Statement, aware of that information. all of which are in the Corporate Governance Report. For and on behalf of the Board 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 differ from requirements in other jurisdictions. Michael J. Hibberd Chairman

Paul Atherton Chief Financial Officer 29 April 2014 Heritage Oil PLC Financial Statements 2013

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF HERITAGE OIL PLC

Opinions and conclusions arising from capital transactions and transferring funds by loan or dividend our audit cross border. The tax treatment of these transactions can often 1 Our opinion on the Group financial be complex, and the monetary amounts involved are invariably STATEMENTS is unmodified significant. In addition, the Group has experience of tax We have audited the Group financial statements of Heritage Oil Plc for authorities in some cases adopting new legislation the year ended 31 December 2013 which comprise the Consolidated retrospectively. Until the annual computations for tax in each Income Statement, the Consolidated Statement of Comprehensive relevant jurisdiction are agreed and finalised, the Group Income, the Consolidated Balance Sheet, the Consolidated Statement therefore faces the risk of tax adjustments arising. of Changes in Equity, the Consolidated Cash Flow Statement and the –– Our response – Our audit procedures in this area included related notes on pages 11 to 43 within this Financial Statements among others engaging our own tax specialists to inspect the tax Report. In our opinion, the Group financial statements: calculations prepared for accounting purposes as well as local tax filings and to assess whether these calculations have been –– give a true and fair view, in accordance with International made in accordance with local tax laws and applicable Financial Reporting Standards as adopted by the European accounting guidance. We have also obtained correspondence Union, of the state of the Group’s affairs as at 31 December 2013 with local tax authorities and inspected correspondence with the and of its loss for the year then ended; and Group’s own tax advisers to identify potential disagreements. –– have been properly prepared in accordance with the Companies We have also considered the adequacy of the Group’s disclosure (Jersey) Law 1991. in relation to the material tax figures in the financial statements.

2 Our assessment of risks of material Proportional consolidation of Shoreline misstatement Refer to page 39 of the Corporate Governance Report (Report of the In arriving at our audit opinion above on the financial statements the Audit Committee), page 18 (note 2d) and pages 26 to 28 (note 5) risks of material misstatement that had the greatest effect on our within this Financial Statements Report. audit were as follows: –– The risk – The Group has a contractual economic interest in the Completeness of costs recorded by the joint venture Shoreline joint venture, Shoreline. Certain terms of the joint venture Natural Resources Limited (“Shoreline”) agreement, as well as the commercial underlying reality of Refer to page 39 of the Corporate Governance Report (Report of the operating in Nigeria, mean that there is judgement in Audit Committee), page 18 (note 2d) and pages 26 to 28 (note 5) determining what proportion of the Group’s economic interest within this Financial Statements Report. should be used as the basis for proportional consolidation in the financial statements. The Group elected to change its accounting –– The risk – The Group has a long-term 90% economic interest policy in 2013 from proportionally consolidating 97.5% of in the joint venture, Shoreline, which it proportionately Shoreline to proportionally consolidating 90% (the long-term consolidates. Shoreline owns 45% of the rights to the oil economic interest as set out in the joint venture agreement) and producing licence OML 30 with the balance of 55% held by recognising an additional asset for the additional 7.5% of a third party, Nigerian Petroleum Development Company economic interest that Heritage is initially entitled to. (“NPDC”), which is also the operator; the rights permit –– Our response – Our audit procedures included, among others, Shoreline and NPDC to extract and sell oil from the Nigerian considering based on our accounting expertise and experience based field. As Shoreline is not the operator, it is entirely reliant the continuing merits of both the old and the new accounting on NPDC for the timely and accurate capture and processing of policies and whether there were other alternatives. We all oil production data and the majority of cost data. As such considered whether the practical experience of Shoreline over some costs are accrued at the period end based on estimates the initial months of the arrangement have altered the balance and budgeted numbers. of relative merit in favour of a new policy. We also considered –– Our response – Our audit procedures in this area included, the adequacy of the Group’s disclosures about the change in among others, assessing the processes and controls put in place this policy. by Shoreline to confirm the completeness and accuracy of the billing statements provided by NPDC. We obtained the Recoverability of intangible exploration assets ($112 million) approved budget agreed between Shoreline and NPDC and Refer to page 38 of the Corporate Governance Report (Report of the performed analytical procedures comparing budgeted and actual Audit Committee), pages 18 to 19 (note 2e) and page 35 (note 11) costs and sought explanations for any material differences. We within this Financial Statements Report. assessed post year end cash payments and billing statements to assess whether costs have been recognised in the correct period –– The risk – The Group has a number of intangible exploration and agreed expenses and liabilities to operator statements. assets, licenses and related assets on its balance sheet. In addition to the country and political risk there is judgement Accounting for Tax involved in assessing the recoverable amount of these assets at Refer to page 39 of the Corporate Governance Report (Report of the the year end due to the uncertainties that are inherent in any Audit Committee), page 21 (note 2q) and page 33 (note 9) within this early stage oil exploration activity. Financial Statements Report. –– Our response – Our audit procedures included, among others, obtaining evidence of the progress of exploration in relation to –– The risk – The Group operates in a number of different tax selected assets and assessing impairment indicators by reference jurisdictions. The Group has a history of undertaking significant to: licence terms and expiry dates, the political and economic environment relevant to the respective jurisdiction and drilling Financial Statements 2013 Heritage Oil PLC

and exploration results obtained during the year. Where An audit for Group reporting purposes was performed at the key assumptions have been made by the Group, we have challenged reporting component in Nigeria. The Group audit team performed those by reference to our own expectations based on our the audit of the remaining key components of the Group, to a knowledge of the business, our evidence obtained, and our wider component materiality of $16 million. Component materiality was set industry knowledge. We also considered the adequacy of the at $12.4 million for the Nigerian audit. Detailed audit instructions Group’s disclosures. were sent to this component auditor. These instructions covered the significant audit areas that should be covered by these audits (which Valuation of property, plant and equipment (PP&E) within Shoreline included the relevant risks of material misstatement detailed above) ($2,782 million) and set out the information required to be reported back to the Refer to page 38 of the Corporate Governance Report (Report of the Group audit team. The Group audit team visited Nigeria. Audit Committee), page 18 (note 2b) and pages 31 to 32 (note 7) Additionally, telephone meetings were also held with these auditors. within this Financial Statements Report. This audit covered 98% of Group revenue; 100% of Group profit before taxation; and 90% of Group total assets. –– The risk – The Group recognised $2,795m of PP&E on the acquisition of its interest in OML 30. Given the political risk of 4 Our opinion under the terms of operating in Nigeria and the fluctuations in the price of oil, there OUR engagement on the Directors’ is a risk over the recoverability of these assets. Remuneration Report is unmodified –– Our response – Our audit procedures included, among others, In addition to our audit of the financial statements, the Directors detailed testing of the Group’s impairment assessment for OML have engaged us to audit the information in the Report of the 30. We obtained the discounted cash flow model prepared by the Remuneration Committee within the Corporate Governance Report Group, and checked the calculation of the Net Present Value that is described as having been audited, which the Directors have (“NPV”) derived by this model. We agreed key inputs in the decided to prepare (in addition to that required to be prepared) as model to internally and externally derived sources. Certain of if the Company were required to comply with the requirements of the key inputs, specifically recoverable reserves, oil price, Schedule 8 to The Large and Medium-sized Companies and Groups discount rate, capital and operating costs, inflation, exchange (Accounts and Reports) Regulations 2008 (SI 2008 No. 410) made rates, and sales terms, require significant estimation and under the UK Companies Act 2006. judgement in their selection, and can have a significant impact on the derived NPV. For these key inputs, we critically assessed In our opinion the part of the Directors’ Remuneration Report within the reasonableness of the Group’s assumptions by reference to the Corporate Governance Report which we were engaged to audit external data and forecasts, along with reports from the Group’s has been properly prepared in accordance with SI 2008 No. 410 made external consultants. These included, amongst others, technical under the UK Companies Act 2006, as if those requirements were to reserve reports and oil price forecasts. We also assessed the apply to the Company. competence and independence of the Group’s external consultants. We obtained also supporting information to assess 5 wE have nothing to report in respect whether conditions had deteriorated since the acquisition date of OF the matters on which we are OML 30 including comparing previous oil price forecasts to REquired to report by exception actual prices obtained, forecast production to actual production Under ISAs (UK and Ireland) we are required to report to you rates and net profit forecast to actual profit obtained. We if, based on the knowledge we acquired during our audit, we assessed the adequacy of the Group’s disclosures on impairment have identified other information in the annual report that included in note 12 to the financial statements. contains a material inconsistency with either that knowledge or the financial statements, a material misstatement of fact, 3 Our application of materiality and an or that is otherwise misleading. Overview of the scope of our audit The materiality for the Group financial statements as a whole was set In particular, we are required to report to you if: at $20 million. This has been determined with reference to a benchmark of Group total assets, which we consider to be one of the –– we have identified material inconsistencies between the principal considerations for members of the Company in assessing knowledge we acquired during our audit and the Directors’ the financial performance of the Group. Materiality represents 0.6% statement that they consider that the Annual Report and of Group total assets and 1.3% of Group total assets adjusted for Financial Statements taken as a whole is fair, balanced and restricted cash and deferred tax liabilities as disclosed on the face understandable and provides the information necessary for of the balance sheet. shareholders to assess the Group’s performance, business model and strategy; or We agreed with the Audit Committee to report to it all uncorrected –– the Report of the Audit Committee does not appropriately misstatements we identified through our audit with a value in excess address matters communicated by us to the Audit Committee. of $0.25 million, in addition to other audit misstatements below that threshold that we believe warranted reporting on qualitative grounds. In addition we considered whether any corrected misstatements identified during the course of the audit should be communicated to the Audit Committee to assist it in fulfilling its governance responsibilities. Heritage Oil PLC Financial Statements 2013

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF HERITAGE OIL PLC continued

Under the Companies (Jersey) Law 1991 and the terms of our Scope of an audit of financial statements engagement we are required to report to you if, in our opinion: performed in accordance with ISAs (UK and Ireland) –– proper accounting records have not been kept by the Company; A description of the scope of an audit of financial statements is or provided on our website at www.kpmg.com/uk/auditscopeother2013. –– proper returns adequate for our audit have not been received This report is made subject to important explanations regarding our from branches not visited by us; or responsibilities, as published on that website, which are incorporated –– the Company’s accounts and the part of the Directors’ into this report as if set out in full and should be read to provide an Remuneration Report within the Corporate Governance Report understanding of the purpose of this report, the work we have which we were engaged to audit are not in agreement with the undertaken and the basis of our opinions. accounting records and returns; or –– we have not received all the information and explanations we The purpose of this report and require for our audit. restrictions on its use by persons other than the Company’s members as a body Under the Listing Rules we are required to review the part of the This report is made solely to the Company’s members, as a body, in Corporate Governance Statement on page 5 in the Corporate accordance with Article 113A of the Companies (Jersey) Law 1991 Governance Report relating to the Company’s compliance with the and, in respect of the separate opinion in relation to the Directors’ nine provisions of the 2010 UK Corporate Governance Code Remuneration Report and reporting as if the Company were required specified for our review. to comply with the Listing Rules applicable to companies incorporated in the UK, on terms that have been agreed. Our audit –– In addition to our audit of the financial statements, the Directors work has been undertaken so that we might state to the Company’s have engaged us to review certain other disclosures as if the members those matters we are required to state to them in an Company were required to comply with the Listing Rules auditor’s report and, in respect of the separate opinion in relation to applicable to companies incorporated in the UK. the Directors’ Remuneration Report and reporting as if the Company were required to comply with the Listing Rules applicable to Under the terms of our engagement we are required to review the companies incorporated in the UK, those matters that we have agreed Directors’ statement, set out on page 7 within this Financial to state to them in our report, and for no other purpose. To the fullest Statements Report, in relation to going concern. extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, We have nothing to report in respect of the above responsibilities. as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and auditor As explained more fully in the Responsibility Statement of the Lynton Richmond Directors set out on page 7 within this Financial Statements Report, for and on behalf of KPMG Audit Plc the Directors are responsible for the preparation of Group Financial Chartered Accountants and Recognised Auditor Statements which give a true and fair view. Our responsibility is to 15 Canada Square audit, and express an opinion on, the Group Financial Statements in London accordance with applicable law and international Standards of E14 5GL Auditing (UK and Ireland). Those standards require us to comply 29 April 2014 with the UK Ethical Standards for Auditors. Financial Statements 2013 Heritage Oil PLC

CONSOLIDATED INCOME STATEMENT Years ended 31 December 2013 and 2012

2012 2013 restated $’000 $’000 Revenue Petroleum 431,924 8,834 Expenses Petroleum operating (124,328) (12,187) Change in inventory (8,090) 8,299 Production and other taxes (92,919) (4,700) General and administrative (note 23) (32,061) (18,697) Other income – 759 Net gain arising from acquisition (note 7) – 157,021 Depletion, depreciation and amortisation (22,479) (6,895) Exploration expenditures (note 2e) (8,612) (4,696) Loss on disposal of capital equipment (2) – Impairment of intangible exploration assets (note 11) – (34,277) Impairment of property, plant and equipment (note 12) (2,246) (2,086) Operating profit 141,187 91,375 Finance income/(costs) Interest income 970 3,154 Other finance costs (note 8) (60,200) (37,372) Foreign exchange gains/(losses) 550 (142) Unrealised losses on other financial assets (note 13) (2,706) (7,746) (61,386) (42,106) Profit from continuing operations before tax 79,801 49,269 Income tax income/(expense) (note 9) 20,578 (184) Profit from continuing operations after tax 100,379 49,085 (Loss)/gain in relation to disposals of discontinued operations (note 6) (483,914) 210,921 (Loss)/profit for the year attributable to owners of the Company (383,535) 260,006 Net earnings per share from continuing operations (dollars) Basic 0.38 0.19 Diluted 0.37 0.18 Net (loss)/earnings per share from discontinued operations (dollars) Basic (1.84) 0.82 Diluted (1.84) 0.78 Net (loss)/earnings per share (dollars) Basic (1.46) 1.01 Diluted (1.46) 0.96

The notes are an integral part of these consolidated financial statements. Heritage Oil PLC Financial Statements 2013

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Years ended 31 December 2013 and 2012

2012 2013 restated $’000 $’000 (Loss)/profit for the year (383,535) 260,006 Other comprehensive income/(loss) Exchange differences on translation of foreign operations (note 20) (2,631) 2,053 Net change in fair values of available-for-sale financial assets (1,765) (6,651) Net change in fair values of available-for-sale financial assets reclassified to the income statement 2,706 7,746 Other comprehensive (loss)/income, net of income tax1 (1,690) 3,148 Total comprehensive (loss)/income for the year (385,225) 263,154 Attributable to: Owners of the Company (385,225) 263,154

1 All may be classified subsequent to income statement.

The total comprehensive loss for the year of $385,225,000 (2012 income – $263,154,000) includes loss of $483,914,000 (2012 gain – $210,921,000) from discontinued operations (note 6).

The notes are an integral part of these consolidated financial statements. Financial Statements 2013 Heritage Oil PLC

CONSOLIDATED BALANCE SHEET As at 31 December 2013 and 2012

2012 2013 restated $’000 $’000 ASSETS Non-current assets Intangible exploration and evaluation assets (note 11) 112,267 71,420 Property, plant and equipment (note 12) 2,884,786 2,900,266 Other financial assets (note 13) 6,707 8,749 3,003,760 2,980,435 Current assets Inventories 307 8,391 Prepaid expenses 4,267 1,920 Trade and other receivables (note 14) 32,580 39,966 Deposit with the URA (note 6) – 121,477 Restricted cash 45,000 387,917 Cash and cash equivalents (note 15) 183,825 86,712 265,979 646,383 3,269,739 3,626,818 LIABILITIES Current liabilities Trade and other payables (note 16) 131,243 104,051 Current tax liabilities (note 9) 96 194 Provisions (note 18) 121,641 121,641 Borrowings (note 17) 112,707 490,401 365,687 716,287 Non-current liabilities Borrowings (note 17) 402,302 30,757 Provisions (note 18) 23,384 21,260 Deferred tax (note 9) 1,639,763 1,660,571 2,065,449 1,712,588 2,431,136 2,428,875 Net assets 838,603 1,197,943 SHAREHOLDERS’ EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY Share capital (note 19) 410,746 342,359 Reserves 44,190 88,382 Retained earnings 383,667 767,202 838,603 1,197,943

The notes are an integral part of these consolidated financial statements. Heritage Oil PLC Financial Statements 2013

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY – 2013

Year ended 31 December 2013 Foreign Available-for- currency sale investments Share-based Equity portion translation revaluation payments Retained of convertible Share capital reserve reserve reserve earnings debt Total equity $’000 $’000 $’000 $’000 $’000 $’000 $’000 Balance at 1 January 2013 – signed accounts 342,359 230 1,215 62,288 535,813 24,649 966,554 Prior year adjustments – – – – 231,389 – 231,389 Balance at 1 January 2013 – restated 342,359 230 1,215 62,288 767,202 24,649 1,197,943 Total comprehensive income/(loss) for the year Loss for the year – – – – (383,535) – (383,535) Other comprehensive income/(loss) Exchange differences on translation of foreign operations – (2,631) – – – – (2,631) Net change in fair value of available-for-sale financial assets – – (1,765) – – – (1,765) Net change in fair value of available-for-sale financial asset reclassified to the income statement – – 2,706 – – – 2,706 Total other comprehensive income/(loss) – (2,631) 941 – – – (1,690) Total comprehensive income/(loss) for the year – (2,631) 941 – (383,535) – (385,225) Transactions with owners, recorded directly in equity Contributions by and distributions to owners Share-based payment transactions (note 22) 68,387 – – (42,502) – – 25,885 Total transactions with owners 68,387 – – (42,502) – – 25,885 Balance at 31 December 2013 410,746 (2,401) 2,156 19,786 383,667 24,649 838,603

The notes are an integral part of these consolidated financial statements. Financial Statements 2013 Heritage Oil PLC

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY – 2012

Year ended 31 December 2012 – restated Foreign Available-for- currency sale investments Share-based Retained Equity portion translation revaluation payments earnings of convertible Total equity Share capital reserve reserve reserve restated debt restated $’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 – – – – 260,006 – 260,006 Other comprehensive income/(loss) Exchange differences 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 – 260,006 – 263,154 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 62,288 767,202 24,649 1,197,943

The notes are an integral part of these consolidated financial statements. Heritage Oil PLC Financial Statements 2013

CONSOLIDATED CASH FLOW STATEMENT Years ended 31 December 2013 and 2012

2012 2013 restated $’000 $’000 Cash provided by (used in) operating activities Net profit from continuing operations for the year 100,379 49,085 Items not affecting cash Depletion, depreciation and amortisation 22,479 6,895 Finance costs – accretion expenses 11,083 758 Foreign exchange (gains)/losses (2,490) 1,745 Share-based compensation 5,792 826 Loss on other financial assets 2,706 7,746 Impairment of intangible exploration and evaluation assets – 34,277 Impairment of property, plant and equipment 2,246 2,086 Gain from acquisition arising from fair value accounting – (226,369) Decrease/(increase) in trade and other receivables 6,218 (37,134) Increase in prepaid expenses (2,346) (576) Decrease/(increase) in inventory 8,084 (8,312) Increase in trade and other payables 46,841 64,863 Change in restricted cash 55,135 (103,438) (Decrease)/increase in tax payable (20,806) 87 Continuing operations 235,321 (207,461) Discontinued operations (note 6) (13,360) (5,407) 221,961 (212,868) Investing Acquisition of business joint venture – (765,000) Property, plant and equipment expenditures (12,149) (7,680) Intangible exploration and evaluation expenditures (39,867) (71,309) Other financial assets – (2,037) (52,016) (846,026) Discontinued operations Consideration on disposal (note 6) – 156,588 Transaction related expenses and other – disposal of Miran PSC (10,940) (5,999) Transaction related expenses and other – disposal of Ugandan Assets (note 6) (347,979) – Movement from restricted cash 287,781 – (123,154) (695,437) Financing Share buy back – (3,323) Shares issued for cash, proceeds from exercise of share options 13,278 – Proceeds from loans raised 521,165 832,050 Payment of transaction costs for loans (12,381) (9,120) Repayment of short-term and long-term debt (523,975) (135,954) (1,913) 683,653 Increase/(decrease) in cash and cash equivalents 96,894 (224,652) Cash and cash equivalents – beginning of year 86,712 310,882 Foreign exchange gain/(loss) on cash held in foreign currency 219 482 Cash and cash equivalents – end of year 183,825 86,712 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 1,077 3,278 Interest paid 46,652 32,244

The notes are an integral part of these consolidated financial statements. Financial Statements 2013 Heritage Oil PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. REPORTING ENTITY variety of sources. Sources of funding for future exploration and Heritage Oil Plc (the “Company”) was incorporated under the Jersey development programmes will be derived from inter alia disposal Companies Law on 6 February 2008 as Heritage Oil Limited. The proceeds from the sale of assets, such as the disposal of its interest Company changed its name to Heritage Oil Plc on 18 June 2009. in the Miran PSC in 2012 and its disposal of the Ugandan Assets Its primary business activity is the exploration, development and in 2010 (note 6), using its existing treasury resources, new credit production of petroleum and natural gas in Africa, the Middle East facilities, reinvesting its funds from operations, farm-outs and, and Russia. The Company was established in order to implement when considered appropriate, issuing debt and additional equity. a corporate reorganisation of Heritage Oil Corporation. Accordingly, the Group has a number of different sources of finance available and the Directors are confident that additional finance will These consolidated financial statements include the results of the be raised as and when needed. Company and all subsidiaries over which the Company exercises control. The Company together with its subsidiaries are referred to as The Group’s activities are described in the Strategic Report. The the Group. The key subsidiaries consolidated within these financial financial position of the Group, its cash flows and liquidity position statements include inter alia Heritage Oil Corporation, Heritage Oil are described in the financial review and financial statements within & Gas Limited, Heritage DRC Limited, Coatbridge Estates Limited, the Financial Statements Report. In addition, the notes to the ChumpassNefteDobycha, Neftyanaya Geologicheskaya Kompaniya, financial statements include the Group’s policies and processes for Begal Air Limited, Heritage Oil & Gas Holdings Limited, Eagle Drill managing its capital and its exposures to credit and liquidity risk. Limited, Heritage Oil International Malta Limited, 1381890 Alberta Having reviewed the future plans and projections for the Group and ULC, Heritage Oil Cooperatief U.A, Heritage Oil Holdings Limited, its current financial position, the Directors believe it to be Darwin Air Limited, Heritage Tanzania Limited, Heritage Oil appropriate for the financial statements to have been prepared on a Tanzania Limited, Heritage Oil (UK) Limited, Heritage Rukwa (TZ) going concern basis. In making this assessment they have considered Limited, Heritage Energy Limited, Heritage Energy International the Company and Group budgets, the cash flow forecasts and Limited, Sahara Oil Services Limited, Sahara Oil Services Holdings reviewed the availability of banking facilities. Limited, Heritage Oil SNR (Nigeria) B.V., Heritage PNG 337 Limited, Heritage PNG 319 Limited, Heritage PNG 13 Limited, Heritage In reaching this conclusion, the Directors have considered in Niugini Limited and Heritage PNG 437 Limited. particular the mechanism by which cash is transferred by Shoreline to Heritage. One of the conditions of the RBL Facility, is that The financial statements were approved by the Board and authorised Shoreline can only transfer funds to its shareholders once it has for issuance on 29 April 2014. successfully completed a loan redetermination exercise. A redetermination exercise has to be completed every six months for 2. SIGNIFICANT ACCOUNTING POLICIES the RBL facility (each June and December), and Shoreline has the The principal accounting policies applied in the preparation of these option to carry out additional redetermination exercises on a consolidated financial statements are set out below. These policies quarterly basis if required. In December 2013, Shoreline successfully have been consistently applied to all the years presented, unless carried out the first redetermination of the loan and transferred funds otherwise stated. to its shareholders. When reviewing future cash flows for the Group, the phasing of cash flows from Shoreline is taken into account to A) BASIS OF PREPARATION ensure that the Group has sufficient funds to cover its outflows. The consolidated financial statements have been prepared in accordance with IFRS as adopted by the EU. The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out The consolidated financial statements have been prepared under the in the Chief Executive’s letter. The financial position of the Group, historical cost convention, as modified by the revaluation of certain its cash flows and liquidity position are described in the Financial financial assets and liabilities at fair value. Review. In addition, note 3 of the Financial Statements includes the Group’s policies and processes for managing its capital; its financial The Company’s consolidated financial statements are presented in risk management; and its exposure to foreign exchange risk, thousand US dollars unless otherwise stated. US dollars are the commodity price risk, credit risk and liquidity risk. Company’s functional and presentation currency. The preparation of Financial Statements in conformity with IFRS The Group had available cash of $184 million at 31 December 2013, requires the use of certain critical accounting estimates. It also excluding amounts deposited as part security in respect of OML 30. requires management to exercise its judgement in the process of Based on its current plans and knowledge, its projected capital applying the Company’s accounting policies. The areas involving expenditure and operating cash requirements, the Group has a higher degree of judgement or complexity, or areas where sufficient cash to finance its operations for more than 12 months from assumptions and estimates are significant to the consolidated the date of this report. As for most oil and gas exploration companies, financial statements, are disclosed in note 4. Heritage raises financing for its activities from time to time using a Heritage Oil PLC Financial Statements 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

2. SIGNIFICANT ACCOUNTING POLICIES Segment results that are reported to the CEO and CFO include items continued directly attributable to a segment as well as those that can be The consolidated financial statements incorporate the assets and allocated on a reasonable basis. Unallocated items comprise mainly liabilities of all subsidiaries of the Company as at 31 December 2013 corporate assets, corporate offices expenses and liabilities. and 2012 and the results of all subsidiaries for the years then ended. Segment capital expenditure is the total cost incurred during the B) CONSOLIDATION period to acquire property, plant and equipment, and intangible Subsidiaries are all entities, including special purpose entities over assets other than goodwill. which the Company has the power to govern the financial and operating policies, so as to obtain benefits from its activities, D) JOINT ARRANGEMENTS AND JOINTLY generally accompanying a shareholding of more than one half of the CONTROLLED ENTITIES voting rights. The existence and effect of potential voting rights that The majority of exploration, development and production activities are currently exercisable or convertible are considered when assessing are conducted jointly with others under contractual arrangements whether the Company controls another entity. Subsidiaries are fully and, accordingly, the Group only reflects its proportionate interest consolidated from the date on which control is transferred to the in such assets, liabilities, revenues and expenses. Company. They are deconsolidated from the date that control ceases. Jointly controlled entities are those entities over whose activities the The purchase method of accounting is used to account for the Group has joint control, established by contractual agreements and acquisition of businesses by the Group. The cost of an acquisition requiring unanimous consent for strategic, financial and operating is measured as the fair value of the assets given, equity instruments decisions. The Group only reflects its proportionate interest in such issued and liabilities incurred or assumed at the date of exchange. assets, liabilities, revenues and expenses. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their In the specific case of the Group proportional consolidation of fair values at the acquisition date, irrespective of the extent of any Shoreline, the Directors have made a policy decision change. The minority interest. The excess of the cost of acquisition over the fair details are set out in note 5. This has resulted in a restatement of value of the Group’s share of the net fair value of the identifiable prior year comparatives. assets, liabilities and contingent liabilities acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the E) EXPLORATION AND EVALUATION net assets of the subsidiary acquired, the difference is recognised EXPENDITURES immediately in the income statement. Expenses related to The Group applies a modified full cost method of accounting for acquisitions are included in the consolidated income statement exploration and evaluation (“E&E”) costs, having regard to the as incurred. requirements of IFRS 6 Exploration for and Evaluation of Mineral Resources. Under the modified full cost method of accounting, costs Inter-company transactions, balances and unrealised gains on of exploring for and evaluating oil and gas properties are capitalised transactions between Group entities (the Company and its on a licence or prospect basis and the resulting assets are tested for subsidiaries) are eliminated. For the purposes of consolidation, impairment by reference to appropriate cost pools. Such cost pools the accounting policies of subsidiaries have been changed where are based on geographic areas and are not larger than a segment. The necessary to ensure consistency with the policies adopted by Group had seven cost pools in 2013 (2012 – eight cost pools); Nigeria the Company. (entered in 2012); Russia; Tanzania; Papua New Guinea (entered in 2013); Malta; Pakistan; Libya; Kurdistan (discontinued in 2012) and C) SEGMENT REPORTING Mali (discontinued in 2012). The Group determines and presents operating segments based on the information that internally is provided to the Chief Executive Officer E&E costs related to each licence/prospect are initially capitalised (“CEO”) and Chief Financial Officer (“CFO”), who are the Group’s within “Intangible exploration and evaluation assets”. Such E&E chief operating decision makers. costs may include costs of licence acquisition, technical services and studies, seismic acquisition, exploration drilling and testing, the An operating segment is a component of the Group that engages in projected costs of retiring the assets, if any, and directly attributable business activities from which it may earn revenues and incur general and administrative expenses, but do not include costs expenses, including revenues and expenses that relate to transactions incurred prior to having obtained the legal rights to explore an with any of the Group’s other components. An operating segment’s area, which are expensed directly to the income statement as they operating results are reviewed regularly by the CEO and CFO to are incurred. make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information Where the Company farms-in to licences and incurs costs in excess is available. of its own share of licence costs as consideration, these costs are capitalised as its own share. Financial Statements 2013 Heritage Oil PLC

2. SIGNIFICANT ACCOUNTING POLICIES If commercial reserves have been discovered, the related E&E assets continued are assessed for impairment on a cost pool basis as set out below and Tangible assets acquired for use in E&E activities are classified as any impairment loss is recognised in the income statement. The property, plant and equipment; however, to the extent that such a carrying value, after any impairment loss, of the relevant E&E assets tangible asset is consumed in developing an intangible E&E asset, is then reclassified as development and production assets within the amount reflecting that consumption is recorded as part of the property, plant and equipment. cost of the intangible asset. An E&E asset is assessed for impairment when facts and Intangible E&E assets related to each exploration licence/prospect circumstances suggest that the carrying amount may exceed its are not depreciated and are carried forward until the existence, or recoverable amount. Such circumstances include the point at which otherwise, of commercial reserves has been determined. The Group’s a determination is made as to whether or not commercial reserves definition of commercial reserves for such purpose is proved and exist. Where the E&E asset concerned falls within the scope of an probable reserves on an entitlement basis. established full cost pool, the E&E asset is tested for impairment together with any other E&E assets and all development and Proved and probable reserves are the estimated quantities of crude production assets associated with that cost pool, as a single cash oil, natural gas and natural gas liquids which geological, geophysical generating unit. The aggregate carrying value is compared against and engineering data demonstrate with a specified degree of certainty the expected recoverable amount of the pool, generally by reference (see below) to be recoverable in future years from known reservoirs to the present value of the future net cash flows expected to be and which are considered commercially producible. There should be derived from production of commercial reserves. Where the E&E a 50% statistical probability that the actual quantity of recoverable asset to be tested falls outside the scope of any established cost pool, reserves will be more than the amount estimated as proved and there will generally be no commercial reserves and the E&E asset probable and a 50% statistical probability that it will be less. The concerned will be written off in full. equivalent statistical probabilities for the proven component of proved and probable reserves are 90% and 10%, respectively. F) PROPERTY, PLANT AND EQUIPMENT i) Development and production assets Such reserves may be considered commercially producible if The Group had an interest in Russia at the development and management has the intention of developing and producing them production stage during the years covered by these financial and such intention is based upon: statements and acquired an interest in Nigeria, which is at the development and production stage, and is included in the Group’s –– a reasonable assessment of the future economics of such results from November 2012. production; –– a reasonable expectation that there is a market for all or Development and production assets are accumulated on a field-by- substantially all the expected hydrocarbon production; and field basis and represent the cost of developing the commercial –– evidence that the necessary production, transmission and reserves discovered and bringing them into production, together transportation facilities are available or can be made available. with the E&E expenditures incurred in finding commercial reserves transferred from intangible E&E assets as outlined above, the Furthermore: projected cost of retiring the assets and directly attributable general and administrative expenses. i) Reserves may only be considered proved and probable if producibility is supported by either actual production or a The net book values of producing assets are depleted on a field-by- conclusive formation test. The area of reservoir considered field basis using the unit of production method by reference to the proved includes: (a) that portion delineated by drilling and ratio of production in the year to the related commercial reserves defined by gas-oil and/or oil-water contacts, if any, or both; and of the field, taking into account estimated future development (b) the immediately adjoining portions not yet drilled, but which expenditures necessary to bring those reserves into production. can be reasonably judged as economically productive on the basis of available geophysical, geological and engineering data. An impairment test is performed whenever events and circumstances In the absence of information on fluid contacts, the lowest arising during the development or production phase indicate that the known structural occurrence of hydrocarbons controls the lower carrying value of a development or production asset may exceed its proved limit of the reservoir. recoverable amount. The aggregate carrying value is compared ii) Reserves which can be produced economically through against the expected recoverable amount of the cash generating unit, application of improved recovery techniques, such as fluid generally by reference to the present value of the future net cash flows injection, are only included in the proved and probable expected to be derived from the production of commercial reserves. classification when successful testing by a pilot project, the The cash generating unit applied for impairment test purposes is operation of an installed programme in the reservoir, or other generally the field, except that a number of field interests may be reasonable evidence (such as, experience of the same techniques grouped as a single cash generating unit where the cash flows on similar reservoirs or reservoir simulation studies) provides generated by the fields are interdependent. support for the engineering analysis on which the project or programme was based. Heritage Oil PLC Financial Statements 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

2. SIGNIFICANT ACCOUNTING POLICIES Gains or losses arising from changes in the fair value of the “financial continued assets at fair value through the income statement” category are ii) Other assets presented in the income statement within “Unrealised losses on other Other property, plant and equipment are stated at cost less financial assets” in the year in which they arise. accumulated depreciation and any impairment in value. The assets’ useful lives and residual values are assessed on an annual basis. ii) Available-for-sale financial assets Furniture and fittings are depreciated using the reducing balance Available-for-sale financial assets, comprising principally marketable method at 20% per year. equity securities, are non-derivatives that are either designated in this category or not classified. They are included in non-current assets Land is not subject to depreciation. unless management intends to dispose of the investment within 12 months of the balance sheet date. Aircraft are depreciated over their expected useful life of 60 months. Depreciation is charged so as to write-off the cost, less estimated Changes in the fair value of monetary securities classified as residual value of aircraft on a straight-line basis. available-for-sale (other than impairment losses and foreign exchange gains and losses which are recognised in the income statement) are Corporate capital assets are depreciated on a straight-line basis recognised in equity. Upon sale of a security classified as available- over their estimated useful lives. The building is depreciated on a for-sale, the cumulative gain or loss previously recognised in equity straight-line basis over 40 years with nil residual value. is recognised in the income statement.

G) CASH AND CASH EQUIVALENTS The Group assesses at each balance sheet date whether there is Cash and cash equivalents include cash on hand, deposits held at call objective evidence that a financial asset or a group of financial assets with banks and other short-term highly liquid investments with is impaired. Measurement is assessed by reference to the fair value of original maturities of three months or less. Cash and cash equivalents the financial asset or group of financial assets. are stated at amortised cost using the effective interest rate method. K) NON-CURRENT ASSETS HELD FOR SALE AND H) TRADE AND OTHER RECEIVABLES DISCONTINUED OPERATIONS Trade and other receivables are recognised initially at fair value and Non-current assets, or disposal groups, are classified as assets held subsequently measured at amortised cost using the effective interest for sale and stated at the lower of their carrying amount and fair value method, less provision for impairment. A provision for impairment of less costs to sell if their carrying amount will be recovered principally trade receivables is established when there is objective evidence that through a sale transaction rather than through continuing use. the Group will not be able to collect all amounts due according to the original terms of the receivables. Non-current assets, including those that are part of a disposal group are not depreciated or amortised while they are classified as held for I) INVENTORIES sale. Interest and other expenses attributable to the liabilities of a Inventories consist of petroleum, condensate, liquid petroleum gas disposal group classified as held for sale continue to be recognised. and materials that are recorded at the lower of weighted average cost and net realisable value. Cost comprises direct materials, direct Non-current assets classified as held for sale and the assets of a labour, depletion and those overheads that have been incurred in disposal group classified as assets held for sale are presented bringing the inventories to their present location and condition. Net separately, as current assets, from the other assets in the balance realisable value is the estimated selling price in the ordinary course of sheet. The liabilities of a disposal group classified as held for sale are business, less applicable variable selling expenses. Provision is made presented separately, as current liabilities, from other liabilities in the for obsolete, slow-moving or defective items where appropriate. balance sheet.

J) INVESTMENTS A discontinued operation is a component of the Group’s business that The Group classifies its investments in the following categories: represents a separate major line of business or geographical area of financial assets at fair value through the income statement and operations that has been disposed of or is held for sale, or is a available-for-sale financial assets. The classification depends on the subsidiary acquired exclusively with a view to resale. Classification as purpose for which the investments were acquired. Management a discontinued operation occurs upon disposal or when the operation determines the classification of its investments at initial recognition. meets the criteria to be classified as held for sale, if earlier. When During the years covered by these Financial Statements the Group an operation is classified as a discontinued operation, then the did not have any investments classified as “held to maturity comparative income statement is represented as if the operation investments”. had been discontinued from the start of the comparative period. i) Financial assets at fair value through the income statement L) TRADE AND OTHER PAYABLES Financial assets held for trading are carried at fair value with changes These amounts represent liabilities for goods and services provided to in fair value recognised in the income statement. A financial asset is the Group prior to the end of the financial year which are unpaid. classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are classified as held for trading unless they are designated as hedges. Financial Statements 2013 Heritage Oil PLC

2. SIGNIFICANT ACCOUNTING POLICIES P) REVENUE RECOGNITION continued Revenue from the sale of petroleum and natural gas is recognised M) BORROWINGS at the fair value received or receivable and is recorded when the Borrowings are initially recognised at fair value, net of transaction significant risks and rewards of ownership of the product are costs incurred. Borrowings are subsequently measured at amortised transferred to the buyer. For sales of oil and gas this is usually when cost. Any difference between the proceeds (net of transaction costs) legal title passes to the external party which occurs on shipment of and the redemption amount is recognised in the income statement oil and gas to the buyer. Interest income is recognised on a time over the period of the borrowings using the effective interest method. proportion basis using the effective interest method. Income for the Group’s share in the Trans Forcados pipeline is accounted for once Borrowings are removed from the balance sheet when the obligation the operator of OML 30 advises Shoreline of the amounts received. specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that Q) INCOME TAXES has been extinguished or transferred to another party and the Current income tax is based on taxable profit for the year. Taxable consideration paid, including any non-cash assets transferred or profit differs from profit as reported in the income statement because liabilities assumed, is recognised in finance income or costs. it excludes items that are never taxable or deductible as well as those that are taxable or deductible in a different period. The Group’s Borrowings are classified as current liabilities unless the Group has current tax assets and liabilities are calculated using tax rates that an unconditional right to defer settlement of the liability for at least have been enacted or substantively enacted by the balance sheet date. 12 months after the balance sheet date. Deferred income tax is provided in full, using the balance sheet N) BORROWING COSTS method, on temporary differences arising between the tax bases of Borrowing costs incurred for the construction of any qualifying asset assets and liabilities and their carrying amounts in the consolidated are capitalised during the period of time that is required to complete financial statements. Deferred income tax is determined using tax and prepare the asset for its intended use or sale. Other borrowing rates (and laws) that have been enacted or substantively enacted by costs are expensed. the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax The capitalisation rate used to determine the amount of borrowing liability is settled. costs to be capitalised is the weighted average interest rate applicable to the Group’s outstanding borrowings during the year. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future O) PROVISIONS taxable amounts will be available to utilise those temporary Asset retirement obligations differences and losses. Provision is made for the estimated cost of any asset retirement obligations when the Group has a present legal or constructive Deferred tax assets and liabilities are offset when there is a legally obligation as a result of past events, it is probable that an outflow enforceable right to offset current tax assets and liabilities and when of resources will be required to settle the obligation and the amount the deferred tax balances relate to the same taxation authority. has been reliably estimated. Provisions are not recognised for future operating losses. Asset retirement obligation expense is capitalised R) FOREIGN CURRENCY TRANSLATION in the relevant asset category unless it arises from the normal course Items included in the financial statements of each of the Company’s of production activities. consolidated subsidiaries are measured using the currency of the primary economic environment in which the subsidiary operates Provisions are measured at the present value of management’s best (the “functional currency”). The Company’s consolidated financial estimate of expenditure required to settle the present obligation at statements are presented in thousand US dollars, which is the the balance sheet date. The discount rate used to determine the Company’s functional and presentation currency. present value reflects current market assessments of the time value of money and the risks specific to the liability. Foreign currency transactions are translated into the respective functional currencies of Group entities using the exchange rates Subsequent to the initial measurement of the asset retirement prevailing at the dates of the transactions. Foreign exchange gains obligation, the obligation is adjusted at the end of each year to reflect and losses resulting from the settlement of such transactions and the passage of time and changes in the estimated future cash flows from the translation at year end exchange rates of monetary assets underlying the obligation. The increase in the provision due to the and liabilities denominated in foreign currencies are recognised in passage of time is recognised as finance costs whereas changes in the the income statement. estimated future cash flows are added to or deducted from the related asset in the current period. Heritage Oil PLC Financial Statements 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

2. SIGNIFICANT ACCOUNTING POLICIES Dividends declared but not paid out before exercise of the option are continued recognised only when the exercise price, reduced for the dividends The results and financial position of all the Company’s consolidated declared, becomes a recognised receivable upon exercise. The subsidiaries (none of which has a functional currency that is the obligation to pay the dividends reduces the unrecognised receivable currency of a hyperinflationary economy) that have a functional due from the option holder. currency different from the presentation currency are translated into the presentation currency as follows: Upon the exercise of the award, consideration received is recognised in equity (notes 19). i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; T) SHARE CAPITAL ii) income and expenses for each year are translated at average Ordinary and Exchangeable Shares are classified as share capital. exchange rates (unless this is not a reasonable approximation of Incremental costs directly attributable to the issue of new shares the cumulative effect of the rates prevailing on the transaction or options are shown in equity as a deduction, net of tax, from dates, in which case income and expenses are translated at the the proceeds. dates of the transactions); and iii) all resulting exchange differences are recognised as either If the Company reacquires its own equity instruments the cost is income or expense in a separate component of equity. deducted from equity and the associated shares are cancelled or held in treasury. Foreign currency loans and overdrafts are designated as, and are considered to be, hedges of the exchange rate exposure inherent in U) EARNINGS PER SHARE foreign currency net investments and, to the extent that the hedge is Basic earnings per share is calculated by dividing the profit effective, exchange differences giving rise to changes in the carrying attributable to equity holders of the Company by the weighted value of foreign currency loans are also recognised as income or average number of Ordinary and Exchangeable Shares outstanding expense directly in equity. All other exchange differences giving rise during the financial period. The rights of different classes of shares to changes in the carrying value of foreign currency loans and are the same and therefore economically equivalent. As such, overdrafts are recognised in the income statement. Ordinary and Exchangeable Shares are treated as one class of shares for the earnings per share calculation. Diluted earnings per share When a foreign operation is sold, a proportionate share of the adjusts the figures used in the determination of basic earnings per cumulative exchange differences previously recognised in equity are share to take into account the after income tax effect of interest and recognised in the income statement, as part of the gain or loss on sale other financing costs associated with dilutive potential Ordinary where applicable. Shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential S) SHARE-BASED COMPENSATION PLANS Ordinary Shares. The Group applies the fair value method of accounting to all equity-classified share-based compensation arrangements for both The if-converted method used in the calculation of diluted earnings employees and non-employees. Compensation costs of equity- per share assumes the conversion of convertible securities at the later classified awards to employees are measured at fair value of the of the beginning of the reported period or issuance date, if dilutive. awards at the grant date and recognised over the periods during which the employees become unconditionally entitled to the options. V) NEW ACCOUNTING STANDARDS AND The compensation cost is charged to the income statement with a INTERPRETATIONS corresponding increase in equity. The amount recognised as an Certain new accounting standards and interpretations have been expense is adjusted to reflect the actual number of share options published that are not mandatory for the year ended 31 December that vest. 2013. The Company’s assessment of the impact of these new standards and interpretations which have not been adopted is set out The compensation cost of equity-classified awards to non-employees below. is initially measured at fair value of the awards at the grant date and periodically remeasured to fair value until the non-employees’ i) IFRS 9 Financial Instruments (not yet endorsed for use in performance is complete, and recognised over the periods during the EU) is effective for accounting periods commencing which the non-employees become unconditionally entitled to the 1 January 2018. The expected impact is still being assessed options. The compensation cost is charged to income with a by management, but is expected to only impact disclosures corresponding increase to share-based payment reserve. of the Group. ii) IFRS 10 Consolidated Financial Statements (endorsed for use in the EU) is effective for accounting periods commencing 1 January 2014. This is not expected to have a significant impact upon the Group’s net results, net assets or disclosures. Financial Statements 2013 Heritage Oil PLC

2. SIGNIFICANT ACCOUNTING POLICIES At 31 December 2013, if the Russian rouble had strengthened/ continued weakened by 10% against the US dollar with all other variables held iii) IFRS 11 Joint Arrangements and IAS 28 Investments in constant, the profit from continuing operations for the year would Associates and Joint Ventures (endorsed for use in the EU) are have been $3,568,000 (31 December 2012 impact on the loss from effective for accounting periods commencing 1 January 2014. continuing operations – $(1,334,000)) higher/(lower), mainly as a The expected impact is still being assessed by management, to result of foreign exchange gains/losses on translation of Russian ascertain the impact upon the Group’s net results, net assets and rouble-denominated cash at bank and monetary assets and liabilities. disclosures. The Group’s business in Nigeria is held through Shoreline, a joint venture in which it has a 97.5% economic At 31 December 2013, if the GB pound sterling had strengthened/ interest. The Group’s accounting policies currently result in 90% weakened by 10% against the US dollar with all other variables held interest in the income, expenses, assets and liabilities of constant, the profit from continuing operations for the year would Shoreline being included in the Group’s consolidated Financial have been $(2,024,000) (31 December 2012 impact on the loss from Statements on a “line by line” basis. It is expected that equity continuing operations – $1,258,000) higher/(lower), mainly as a accounting will be required for Shoreline from 1 January 2014 result of GB pound sterling-denominated general and administrative which will substantially change the presentation of the Group’s expenses and foreign exchange gains/losses on translation of GB Financial Statements but have no impact on its net profit or pound sterling-denominated long-term loan and cash at bank. net assets. iv) IFRS 12 Disclosure of Interest in Other Entities (endorsed for At 31 December 2013, if the Swiss franc had strengthened/weakened use in the EU) is effective for accounting periods commencing by 10% against the US dollar with all other variables held constant, 1 January 2014. This is not expected to have a significant impact the profit from continuing operations for the year would have been upon the Group’s net results, net assets or disclosures. $(819,000) (31 December 2012 impact on the loss from continuing v) Offsetting Financial Assets and Financial Liabilities operations – $(29,000)) higher/(lower), mainly as a result of foreign (Amendments to IAS 32) (endorsed for use in the EU) is effective exchange gains/losses on translation of Swiss franc-denominated for periods commencing 1 January 2014. It is not expected to receivable and monetary liabilities. have a significant impact on the disclosures of the Group. vi) IFRIC 21 (Levies) (not yet endorsed for use in the EU) is effective At 31 December 2013, if the Nigerian Naira had strengthened/ for periods commencing 1 January 2015. It is not expected to weakened by 10% against the US dollar with all other variables held have a significant impact on the disclosures of the Group. constant, the profit from continuing operations for the year would have been $(503,000) (31 December 2012 impact on the loss from 3. RISK MANAGEMENT continuing operations – $626,000) higher/(lower), mainly as a result The Group’s activities expose it to a variety of financial risks that of Nigerian Naira-denominated operating costs, general and arise as a result of its exploration, development, production and administrative expenses and foreign exchange gains/losses on financing activities. The Group’s overall risk management translation of Nigerian Naira-denominated cash at bank. programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s ii) Commodity price risk financial performance. The Company is exposed to commodity price risk to the extent that it sells its entitlement to petroleum on a floating price basis. The A) FINANCIAL RISK MANAGEMENT Company may consider partly mitigating this risk in the future. i) Foreign exchange risk Foreign exchange risk arises when transactions and recognised assets The table below summarises the impact of increases/decreases of and liabilities of the Group entity concerned are denominated in a the relevant oil benchmark on the Company’s net result for the year. currency that is not the Company’s functional currency. The Group The analysis is based on the assumption that commodity prices had operates internationally and is exposed to foreign exchange risk increased/decreased by 5% with all other variables held constant: arising from currency exposures to the US dollar. Year ended 31 December 2013 2012 There are no forward exchange rate contracts in place at, or $’000 $’000 subsequent to, 31 December 2013. Brent light crude 17,141 206

At 31 December 2013, if the Canadian dollar had strengthened/ 17,141 206 weakened by 10% against the US dollar with all other variables held constant, the profit from continuing operations for the year would The profit/(loss) from continuing operations for the year would have been $18,000 (31 December 2012 impact on the loss from increase/decrease as a result of commodity revenues received. continuing operations – $43,000) higher/(lower), mainly as a result of foreign exchange gains/losses on translation of Canadian dollar- denominated general and administrative expenses and cash at bank. Heritage Oil PLC Financial Statements 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

3. RISK MANAGEMENT Management monitors rolling forecasts of the Company’s cash continued position on the basis of expected cash flow. iii) Interest rate risk In January 2005, a wholly owned subsidiary of the Company received The Group had available cash of $184 million at 31 December 2013. a sterling denominated loan of £4.5 million to refinance the Based on its current plans and knowledge, its projected capital acquisition of a corporate office. Interest on the loan is variable at a expenditure and operating cash requirements, the Group has rate of Bank of Scotland base rate plus 1.4% (note 17). In October sufficient cash to finance its operations for more than 12 months 2007, a wholly owned subsidiary of the Company received a from the date of this report. long-term loan of $9.45 million with a variable rate of LIBOR plus 1.6% (note 17), the loan was repaid in October 2012. In August 2012, The Company’s financial liabilities consist of trade and other a wholly owned subsidiary of the Company received a long-term loan payables and borrowings. Trade and other payables are due within of $30 million to refinance the acquisition of an aircraft. In December 12 months, and borrowings fall due as outlined in notes 16 and 17. 2013, this financing was replaced by another long-term loan. Interest on the loan is at a fixed rate of 4.69%, therefore the Group is not B) CAPITAL RISK MANAGEMENT exposed to interest rate risk with respect to this fixed rate borrowing. The Company’s objectives when managing capital are to safeguard In June 2013, Shoreline, whose ownership interests are held by the Company’s ability to continue as a going concern in order to Heritage and Shoreline Power, replaced the $500 million secured provide returns for shareholders, benefits for other stakeholders and bridge facility provided by Standard Bank Plc and drew down $500 to maintain an optimal capital structure to reduce the cost of capital. million of the RBL facility. Interest on the RBL facility is at a variable Capital consists of share capital and retained earnings and reserves. rate of LIBOR plus 7.85% (note 17), in November 2013, a further $50 million was drawn down at a fixed rate of 7.85%. An increase/ The Company monitors capital on the basis of the gearing ratio. This decrease of LIBOR by 1% would result in a decrease/increase of the ratio is calculated as net debt divided by total capital. Net debt is Company’s profit from continuing operations for the year by calculated as total borrowings less cash and cash equivalents. Total $4,552,000 (31 December 2012 increase/decrease in the loss from capital is calculated as “equity” as shown in the consolidated balance continuing operations – $784,000). sheet plus net debt.

Year ended 31 December iv) Credit risk 2012 All of the Company’s production and revenue in 2013 was derived 2013 restated from Russia and Nigeria. In 2012 the Company’s production and $’000 $’000 revenue was derived from Russia for the full year, and for November Total borrowings 515,009 521,158 and December 2012 production was also derived from Nigeria. In Less cash and cash equivalents (note 15) (183,825) (86,712) 2013 all sales were to a maximum of six (2012 – four) customers in Net debt 331,184 434,446 Russia, there were no sales of production from Nigeria until 2013, Total equity 838,603 1,197,943 which has one customer which is a subsidiary of a super major oil company. All of Shoreline’s production is contracted to be sold to Total capital 1,169,787 1,632,389 a subsidiary of Royal Dutch Shell Plc until January 2018. Gearing ratio 28% 27%

Trade debtors of the Company are subject to internal credit review to minimise the risk of non-payment. The Company does not anticipate 4. CRITICAL ACCOUNTING ESTIMATES, any default as it transacts with creditworthy counterparties. No ASSUMPTIONS AND JUDGEMENTS credit limits were exceeded during the reporting years and In the process of applying the Company’s accounting policies, management does not expect any losses from non-performance which are described in note 2, management makes estimates and by these counterparties. The Company is also exposed to credit assumptions concerning the future. The resulting accounting risk in relation to regular joint venture billings which are typically estimates will, by definition, seldom equal the related actual results. outstanding for one month and in relation to its cash balances The estimates and assumptions that have a significant risk of causing held with reputable banks. a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. v) Liquidity risk Liquidity risk is the risk that the Group will not have sufficient funds A) CARRYING VALUE OF PROPERTY, PLANT AND to meet liabilities. Cash forecasts identifying liquidity requirements EQUIPMENT of the Group are produced quarterly. These are reviewed regularly Heritage is required to assess the carrying value of its development to ensure sufficient funds exist to finance the Company’s current and production assets reflected in property, plant and equipment in operational and investment cash flow requirements. the balance sheet. The level of estimated commercial reserves is a key determinant in assessing whether the carrying value of any of the Group’s development and production assets has been impaired. Financial Statements 2013 Heritage Oil PLC

4. CRITICAL ACCOUNTING ESTIMATES, This assessment involves judgement as to: (i) the likely future ASSUMPTIONS AND JUDGEMENTS commerciality of the asset and when such commerciality should be continued determined; (ii) future revenues and costs pertaining to any wider Estimates of recoverable quantities of proved and probable reserves cost pool with which the asset in question is associated; and (iii) the include assumptions regarding commodity prices, exchange rates, discount rate to be applied to such revenues and costs for the purpose discount rates, production and transportation costs for future cash of deriving a recoverable value. Note 11 discloses the carrying flows. It also requires interpretation of complex and difficult amounts of the Group’s E&E assets. Consequently, major geological and geophysical models in order to make an assessment of uncertainties affect the recoverability of these costs which is the size, shape, depth and quality of reservoirs and their anticipated dependent on the Group achieving commercial production or the sale recoveries. The economic, geological and technical factors used to of the assets. Note 24 discloses contingencies relating to title risks. estimate reserves may change from period to period. Changes in The Company assessed whether these risks are contingencies or reported reserves can impact asset carrying values and the asset indicators of impairment and concluded that they are contingencies. retirement obligation due to changes in expected future cash flows. There are licences that are due for renewal in 2014. The Group is Reserves are integral to the amount of depletion charged to the confident they will be renewed. income statement and the calculation of inventory. C) TAXATION b) RECOVERABILITY OF E&E COSTS The Group is subject to income taxes in certain territories in which Under the modified full cost method of accounting for E&E costs, it owns licences or has taxable operations. As tax filings made by certain costs are capitalised as intangible assets by reference to the Company are subject to review and confirmation by government appropriate cost pools, and are assessed for impairment when regulatory agencies, in deciding the provisions and disclosures circumstances suggest that the carrying amount may exceed its required for taxes Heritage makes judgements using the latest recoverable value. Such circumstances include, but are not limited to: information it has available and advice from external tax advisers to make the best estimate of the amount expected to be paid. The tax i) the period for which the entity has the right to explore in the charge and estimate of tax liabilities is disclosed in note 9. specific area has expired during the period, or will expire in the near future, and is not expected to be renewed; D) FAIR VALUE OF ASSETS AND LIABILITIES ii) substantive expenditure on further exploration for, and ACQUIRED IN A BUSINESS COMBINATION evaluation of, mineral resources in the specific area is neither The Group’s accounting policies and disclosures require the budgeted nor planned; determination of the fair value of assets and liabilities acquired in a iii) exploration for, and evaluation of, mineral resources in the business combination. Fair value of all identifiable assets acquired specific area have not led to the discovery of commercially viable and liabilities assumed is calculated based on the discounted cash quantities of mineral resources and the entity has decided to flows expected to be derived from the use of the asset acquired. discontinue such activities in the specific area; and iv) sufficient data exists to indicate that, although a development in E) PROPORTIONAL CONSOLIDATION OF the specific area is likely to proceed, the carrying amount of the SHORELINE exploration and evaluation asset is unlikely to be recovered in The Directors have applied judgement in the proportional full from successful development or by sale. consolidation of Shoreline. See note 5. Heritage Oil PLC Financial Statements 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

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 Nigeria (entered in 2012), Russia, Tanzania, Papua New Guinea (entered in 2013), Malta, Pakistan, Libya, Kurdistan (discontinued in 2012), Uganda (discontinued in 2010) and Mali (discontinued in 2012). The Group’s reporting segments comprise each separate geographical area in which it operates.

Year ended 31 December 2013 Depreciation, External Segment Total Total Capital depletion and revenue result assets liabilities additions amortisation $’000 $’000 $’000 $’000 $’000 $’000 Nigeria 423,259 142,900 2,959,853 2,365,084 8,282 19,322 Russia 8,665 (1,040) 59,555 1,639 2,042 1,202 Tanzania – (118) 23,386 293 12,260 – Papua New Guinea – new in 2013 – – 25,136 574 25,012 – Malta – – 25,364 63 1,983 – Pakistan – – 4,759 – 101 – Libya – – 23,257 – 1,909 – Kurdistan – discontinued operations – (1,268) – – – – Uganda – discontinued operations – (482,646) – – – – Total for reportable segments 431,924 (342,172) 3,121,310 2,367,653 51,589 20,524 Corporate – (41,363) 148,429 63,483 1,183 1,955 Elimination of discontinued operations – 483,914 – – – – Total from continuing operations 431,924 100,379 3,269,739 2,431,136 52,772 22,479

Year ended 31 December 2012 – restated Depreciation, Segment Total Total Capital depletion and External result assets liabilities additions amortisation revenue restated restated restated restated restated $’000 $’000 $’000 $’000 $’000 $’000 Nigeria – new in 2012 (restated) – 122,750 2,874,416 2,345,285 2,521 4,474 Russia 8,834 (1,158) 61,206 1,618 2,985 1,468 Tanzania – (15,977) 11,347 1,733 11,812 – Malta – – 23,375 79 3,307 – Pakistan – – 5,046 21 55 – Libya – (26) 21,348 – 1,173 – Mali – (18,370) 6 – 499 – Kurdistan – discontinued operations – 216,328 – – 41,766 – Uganda – discontinued operations – (5,407) – – – – Total for reportable segments 8,834 298,140 2,996,744 2,348,736 64,118 5,942 Corporate – (38,134) 630,074 80,139 663 953 Elimination of discontinued operations – (210,921) – – – – Total from continuing operations 8,834 49,085 3,626,818 2,428,875 64,781 6,895

The Group’s 2013 revenue of $431,924,000 was derived from one Nigerian based customer and six Russian based customers. For the Russian customers, three (2012 – one) customers had purchases of more than 10% of revenue. The total revenue relating to these three (2012 – one) customers was $7,712,000 (2012 – $6,623,000). The remaining three customers account for revenue of $953,000 (2012 – $2,211,000).

In 2013, impairment losses relating to corporate of $2,246,000 (2012 – $2,086,000) are included in the segmental result. In 2012, impairment losses relating to Mali of $18,370,000 and Tanzania of $15,907,000 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 2012.

Jointly 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. Financial Statements 2013 Heritage Oil PLC

5. SEGMENT INFORMATION continued The Group currently holds all of Shoreline’s Class A shares, as at 31 December 2013, which entitles it to receive 97.5% of the returns of Shoreline. When Shoreline has repaid all of its indebtedness the economic rights attached to the Class A shares will adjust so that they receive 95% of the returns of Shoreline and when the net cumulative cash flow reaches or exceeds $1 billion the economic rights will further adjust so that they receive 90% of the returns. Shoreline acquired a 45% interest in OML 30 in November 2012.

Prior year adjustments During the period the Group has reviewed the accounting for its acquisition of OML 30 through Shoreline and has concluded that the 2012 comparative figures require adjustment for two reasons:

–– Additional information was obtained about the portion of the purchase consideration that will be available to be claimed as a capital allowance for tax purposes in Nigeria. The tax information, which related to the tax position of OML 30 at the acquisition date, was available at the acquisition date but was only obtained after the end of the 12 month period which IFRS 3 gives to adjust the provisional fair values in a business combination. Had the information been obtained and taken into account at the acquisition date, its effect would have been to increase the fair value of the property, plant and equipment recorded as part of the business combination and to decrease the deferred tax liability recorded at that date.

The Directors have therefore adjusted the acquisition date fair values recognised for property, plant and equipment, and deferred tax liabilities to reflect the increased capital allowances available. As a result, the 31 December 2012 comparative figures have been restated. Due to the increase in the fair value of the assets acquired, the purchase consideration is lower than the aggregate of the fair value of the identifiable assets and liabilities required and therefore a gain arising from acquisition has been identified.

As described in Note 7, Shoreline Power has an option to acquire 30% of the class A shares held by the Group. Following the restatement referred to above, the strike price of the option is lower than 30% of the net assets of Shoreline. The Group has therefore recorded a provision in respect of the option in 2012 (see note 18).

Please see the table below for details of the effect the adjustment on each balance sheet caption. See note 7 for details of the revised fair value accounting.

–– The contractual terms of the agreement between Heritage and Shoreline Power are complex and involve a ratchet mechanism which means that Heritage’s interest in Shoreline varies between 97.5% and 90%, before completion of the Shoreline Power option. The Directors consider that there may be more than one method of proportionately consolidating the results of Shoreline. Upon further consideration, and based on fourteen months of experience of operations, the Group believes that consolidating 90% better reflects the long-term interest that Heritage holds in Shoreline. The Directors have therefore decided to change their policy for accounting for Shoreline from proportionally consolidating 97.5% to 90%. The additional 7.5% initially due has been accounted for separately as a receivable due from Shoreline Power. The effect of the adjustment in approach on the current period was to recognise 90% of the Shoreline results in the Group consolidation. See below for summary financial information which sets out the 90% interest held in Shoreline.

The following table highlights the effect of the two changes to 2012 for each material financial statement line item affected:

Effect of change 2012 in accounting Prior Year policy (97.5% to Effect of change 2012 Signed 90%) in fair values restated $’000 $’000 $’000 $’000 Intangible goodwill assets 351,370 (27,029) (324,341) – Property, plant and equipment 2,589,751 (190,962) 501,477 2,900,266 Total assets 3,643,159 (193,477) 177,136 3,626,818 Deferred tax 1,983,224 (152,553) (170,100) 1,660,571 Provisions – current (note 18) – – 121,641 121,641 Total liabilities 2,676,605 (199,271) (48,459) 2,428,875 Net assets 966,554 5,794 225,595 1,197,943 Net gain on acquisition (note 7) (72,351) 3,003 226,369 157,021 Net profit 28,617 5,794 225,595 260,006 Heritage Oil PLC Financial Statements 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

5. SEGMENT INFORMATION continued Summarised financial information for the Group’s 90% share of Shoreline is shown below:

2012 2013 restated $’000 $’000 Profit before interest and taxation 197,461 306,315 Finance costs (57,581) (28,615) Profit before taxation 139,880 277,700 Taxation 20,791 – Profit for the year1 160,671 277,700 Assets Non-current asset 2,781,696 2,793,019 Current asset 180,997 81,398 Total assets 2,962,693 2,874,417 Liabilities Current liabilities 206,698 539,612 Non-current liabilities 2,036,746 1,681,534 Total liabilities 2,243,444 2,221,146 719,249 653,271 Group share of net assets as above 719,249 653,271 Loans made by Group companies to jointly controlled entities (314,010) (337,989) 405,239 315,282

1 2012 profit includes income of $311,970,000 gain from acquisition

Shoreline does not have any commitments or contingent liabilities.

6. DISCONTINUED OPERATIONS Kurdistan 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 production sharing contract relating to the Miran Block (the “Miran PSC”) in Kurdistan and corresponding interest in the related joint operating agreement (the “Miran JOA”) to Genel in exchange for cash of $156 million (the “Sale”). On the same date, Genel provided a loan of $294 million to the Group (the “Loan”).

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, 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 effect 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 2013 2012 $’000 $’000 (Loss)/gain from discontinued operations (1,268) 216,328 (1,268) 216,328 Financial Statements 2013 Heritage Oil PLC

6. DISCONTINUED 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 staff costs recharged and other costs ($13.6 million).

Uganda On 18 December 2009, Heritage announced that it and its wholly owned subsidiary HOGL, had entered into a Sale and Purchase Agreement with Eni International B.V. for the sale of the Ugandan Assets. On 17 January 2010, Tullow exercised its rights of pre-emption.

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.

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 and HOGL’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 terms of the production sharing agreements with the Ugandan government relating to the Ugandan Assets (the “Ugandan PSAs”), HOGL should be indemnified by the Ugandan government (under the contractual stabilisation clause). Heritage Oil PLC Financial Statements 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

6. DISCONTINUED OPERATIONS continued On closing, HOGL deposited $121,477,500 with the URA, representing 30% of the disputed tax assessment of $404,925,000 and $283,447,000 which had been retained in escrow with Standard Chartered Bank in London (the “Escrow Funds”). 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.

Permission to appeal against the rulings from the Ugandan Tax Appeals Tribunal to the Ugandan High Court in Kampala has been granted and the appeals before the Ugandan High Court are ongoing.

In May 2011, HOGL commenced international arbitration proceedings in London against the Ugandan government in accordance with provisions of the Ugandan PSAs. HOGL is seeking a decision requiring the return of approximately $405 million, plus interest and costs, in aggregate from the URA. 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 ongoing 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 Ugandan PSAs and that as part of the relief sought under the stabilisation clause 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 Ugandan PSAs.

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, in part arising from the URA appointing Tullow as its third party tax collection agent (for HOGL), as a result of HOGL’s and Heritage’s refusal to reimburse Tullow (pursuant to the tax indemnity contained within the Sale and Purchase Agreement) in relation to a payment made by Tullow of $313,447,500 (in relation to the alleged tax owed by HOGL to the URA) on 7 April 2011 to the URA. Heritage and HOGL filed their Defence and Counterclaim against Tullow.

The case was heard in the High Court in March 2013 and judgment received on 14 June 2013 from the first instance judge Mr Justice Burton. The High Court judgment found in favour of Tullow and Heritage’s counterclaim was dismissed. A hearing was held on 29 July 2013 to determine consequential matters arising from the judgment and at that hearing Heritage was ordered to pay to Tullow $313,447,500 plus interest accrued on this amount and legal costs. In this regard, on 1 August 2013, the Escrow Funds of approximately $288 million were released to Tullow to satisfy the majority of the debt and the remaining balance was met from Heritage’s current assets at the time.

At the hearing on 23 July 2013, Heritage and HOGL sought permission to appeal the judgment which was rejected. On 2 August 2013, Heritage and HOGL made an application to the Court of Appeal for permission to appeal the judgment. Permission to appeal against the judgment of Mr Justice Burton was granted in September 2013. This appeal is expected to be heard in the Court of Appeal in May 2014.

Pursuant to the terms of the order agreed between the parties, Tullow Oil plc has undertaken to the High Court that if Tullow receives any reimbursement from the URA or the Ugandan government of any of the $313,447,500 which Tullow paid to them in respect of Heritage’s disputed tax liability or in the event that Heritage succeeds in its appeal before the Court of Appeal (in whole or in part) then Tullow Oil plc will pay such amount to Heritage if Tullow fails to pay such sum when it falls due.

The results of the Ugandan operations have been classified as discontinued operations. The loss from discontinued operations (which for the sake of prudence comprises a provision against the receivable due from the URA, payment of the Award to Tullow, legal fees and costs relating to the litigation described above) as at 31 December 2013 and 2012 is as follows:

Year ended 31 December 2013 2012 $’000 $’000 Expenses arising in respect of discontinued operations (12,865) (5,407) Award, cost and provision in respect of tax litigation (469,781) – (482,646) (5,407)

As at 31 December 2012 $121,477,500 had been classified as a deposit and Escrow Funds of $283,447,000, classified as reserved cash. All amounts had either been paid during 2013 or provided for in full as at 31 December 2013.

Although disputes of this nature are inherently uncertain, the Directors believe that the actions Heritage and HOGL are undertaking will be successful and that ultimately any funds transferred to Tullow or deposited with the Ugandan government will be recovered by Heritage. Financial Statements 2013 Heritage Oil PLC

7. ACQUISITION OF AN INTEREST IN OML 30 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.

On 29 June 2012, Shoreline entered into the Acquisition Agreement with The Shell Petroleum Development Company of Nigeria Limited, Total E&P Nigeria Limited and Nigerian Agip Oil Company Limited (the “Vendors”) to acquire the Acquisition Assets for cash consideration of $850 million, net of costs.

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, effective 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 a 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 covered 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) and were released back to the Company in 2013.

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.

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 was recognised for the difference 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 offset the future tax liability, calculated using a tax rate of 85%. As stated in note 5, as a result of further information being received about the acquisition date tax base of the assets acquired, management have adjusted the fair value recognised for the property, plant and equipment acquired, and the deferred tax liability recognised at that date. As a result of the change in estimate, the purchase consideration is lower than the aggregate of the fair value of the identifiable assets and liabilities and therefore a gain arising from acquisition has been recognised.

The following table provides additional information with respect to the identifiable assets acquired and liabilities assumed at the rate of 90% of the net assets of Shoreline (as explained in note 5):

1 November 2012 restated $’000 Property, plant and equipment 2,794,544 Deferred tax liabilities (1,660,536) Site restoration provision (20,998) Net assets 1,113,010

The net gain arising from acquisition has been proportionately consolidated into the Heritage Group based on an interest of 90% of the results of Shoreline and has been derived as follows:

Year ended 31 December 2012 restated $’000 Consideration paid (765,000) Fair value of net assets acquired 1,113,010 Less: Shoreline option (note 18) (121,641) Other expenses (69,348) Net gain arising from acquisition 157,021 Heritage Oil PLC Financial Statements 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

7. ACQUISITION OF AN INTEREST IN OML 30 Continued Other expenses incurred on the Acquisition include costs of professional fees ($23.0 million), taxes arising on the Acquisition ($18.8 million), success fee ($10.6 million – see note 23) and other costs ($16.9 million).

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 notified Heritage of its intention to exercise the option in December 2012. On completion this would have the effect of reducing Heritage’s economic interest in Shoreline from 97.5% to 68.25%, with 68.25% representing an effective 30.71% working interest in OML 30.

During 2013, the proposed mechanism of the Shoreline Option changed. In order to fund a portion of the consideration of c.$109 million, which would have been the consideration under the original Option Agreement, Shoreline Power has entered into an agreement with Cedar Oil and Gas Exploration and Production Limited (“Cedar”), a local Nigerian company, to sell half of its option rights. This will be facilitated through a farm-out by Shoreline of a 6.75% working interest in OML 30 to Cedar, reducing Shoreline’s working interest in OML 30 to 38.25%. Following completion of this transaction, Heritage’s effective working interest in OML 30 of 30.71% remains unchanged to that which would be have applicable under the original mechanism of the Option Agreement.

Cedar entered into a farm-out agreement with Shoreline on 22 August 2013 and has placed the initial consideration in an escrow account. Completion of the transaction and release of the initial consideration is subject to Nigerian government approval which is expected shortly. On completion, the initial consideration will be applied as follows:

–– $31.5 million will be transferred to Heritage as partial payment of the call option consideration and the balance of c.$77.5 million will be provided by way of an interest bearing loan from Heritage to Shoreline Power secured on the preferential recovery of 80% of any cash distributions received by Shoreline Power from Shoreline; and –– To reduce the RBL Facility by 15% with a mandatory prepayment in line with the proportional reduction of Shoreline’s working interest in OML 30.

8. OTHER FINANCE COSTS Year ended 31 December 2012 2013 restated $’000 $’000 Interest on long-term debt 19,267 9,417 Interest on short-term debt 23,702 21,130 Accretion of upfront fees for bridge facility 9,408 3,707 Interest on convertible bonds – 1,303 Upfront fees for bridge facility – 5,128 Financing fees for facilities 850 – Accretion of convertible debt – 694 Withholding tax on interest payments 4,633 – Accretion of financing charges 216 79 Accretion of asset retirement obligation 2,124 15 60,200 41,473 Amount capitalised – (4,101) Finance costs expensed (60,200) (37,372)

Finance costs are capitalised in non-current asset categories. Financial Statements 2013 Heritage Oil PLC

9. INCOME TAX EXPENSE Recognised in the income statement:

Year ended 31 December 2013 2012 $’000 $’000 Current tax expense 230 189 Deferred tax credit (20,808) (5) Total tax (credit)/expense (20,578) 184

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 , therefore the standard tax rate in the table below is at 0%. In the UK, the tax rate applicable to the Group’s operations is 23% (2012 – 25%). 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 deferred tax credit predominantly arose on the unwinding of the deferred tax liability relating to property, plant and equipment for Shoreline.

Shoreline successfully demonstrated to the Nigerian tax authorities that it qualified for pioneer status. As a result, Shoreline will benefit from a waiver of Petroleum Profits Tax rate for the period 2013 to 2017. Therefore, in 2013, the Group does not recognise a current tax expense for its Nigerian operations.

The Group has available tax deductions of $1,012,214,000 (31 December 2012 – $72,115,000) and tax losses of $115,445,000 (31 December 2012 – $191,353,000), of which $115,445,000 expires from 2014 to 2033, and the remaining nil (31 December 2012 – nil) does not have an expiry period. Except for the tax deductions relating to the Nigerian operations, 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 sufficiently likely. The tax deductions for the Nigerian operations have been included within the calculation of the deferred tax liability.

Factors affecting the current tax charge for the year:

Year ended 31 December 2012 2013 restated $’000 $’000 (Loss)/profit for the year before tax (404,113) 260,190 Standard tax rate 0% 0% Tax on (loss)/profit at standard rate – – Effect of higher tax rates in foreign jurisdiction (207) (49,253) Expenses not deductible for tax purposes 47,994 1,543 Change in recognised deductible temporary differences (20,808) (5) Effect of tax losses not recognised (47,557) 47,899 Tax (credit)/charge (20,578) 184

2013 $’000 The balance comprises temporary differences attributable to: Available tax losses and deductions 25,423 Deferred tax asset (unrecognised) 25,423

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

Recognised deferred tax liability Deferred tax liabilities attributable to the following:

Year ended 31 December 2012 2013 restated $’000 $’000 Property, plant and equipment 1,639,707 1,656,660 Inventory 56 3,911 Deferred tax liability 1,639,763 1,660,571 Heritage Oil PLC Financial Statements 2013

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 2013 2012 Jersey 5 5 Canada 4 4 Europe 31 28 Russia 45 43 Nigeria 23 4 Tanzania 14 15 Pakistan 9 7 Papua New Guinea 8 – Libya 2 2 United States of America 1 1 South Africa 1 1 Uganda – 1 Kurdistan – 28 Mali – 1 Total 143 140

The aggregate payroll expenses of those employees (including Executive Directors) and consultants were as follows:

Year ended 31 December 2013 2012 $’000 $’000 Salaries and other short-term benefits 21,462 30,004 Share-based compensation 7,133 2,156 Total employee remuneration 28,595 32,160 Capitalised portion of total remuneration 10,175 16,245

In 2013, $10,175,000 (2012 – $16,245,000) of the costs for employee remuneration were capitalised into either property, plant and equipment or intangible exploration and evaluation assets dependent 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 dependent on time spent on capital projects.

Key management compensation was:

Year ended 31 December 2013 2012 $’000 $’000 Salaries and other short-term benefits 7,161 7,817 Share-based compensation 4,253 1,430 11,414 9,247

See note 23 “Related Party Transactions” for disclosures relating to an arbitration settlement with a former director of HOC. Financial Statements 2013 Heritage Oil PLC

11. INTANGIBLE EXPLORATION AND EVALUATION ASSETS AND GOODWILL 31 December 2012 2013 restated $’000 $’000 At 1 January 71,420 271,859 Effect of movement in exchange differences (416) 327 Additions 41,263 58,612 Disposal of Kurdistan assets – (225,101) Impairment loss – (34,277) At 31 December 112,267 71,420

No intangible exploration and evaluation assets have been pledged as security.

The balances at the end of the years are as follows:

31 December 2012 2013 restated $’000 $’000 Russia 10,755 11,171 Tanzania 23,361 11,102 Papua New Guinea 25,012 – Malta 25,277 23,295 Pakistan 4,604 4,503 Libya 23,258 21,349 Balance – end of year 112,267 71,420

In 2013, Heritage farmed-in to four licences in PNG.

In April 2013, Heritage entered into an agreement with Esrey Energy to farm-in to two licences onshore PNG. Heritage has acquired up to an 80% working interest in two licences, PPL 319 and PRL 13 from subsidiary companies of Esrey Energy. In return for obtaining the 80% working interests and operatorship Heritage has paid Esrey Energy $4.0 million in contribution to its back costs on the licence and repaid the costs Esrey Energy incurred for the seismic acquisition it carried out in 2013.

In October 2013, Heritage entered into an agreement with Kina to farm-in to PPL 337. In return for obtaining a 70% working interest and operatorship, Heritage has paid Kina $0.5 million in contribution to its back costs on the licence.

In October 2013, Heritage entered into an agreement with Kina to farm-in to PPL 437. In return for obtaining a 30% working interest, Heritage has paid Kina $0.3 million in contribution to its back costs on the licence.

In 2012, the Group recognised an impairment of intangible exploration and evaluation assets of $34,277,000. 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-off expenditure of $18,370,000. Secondly, after a technical review management decided to write-off expenditure of $15,907,000 incurred with respect to the Latham licence area in Tanzania. In 2013 no impairment has been recognised.

In 2012, the Group disposed of its assets in Kurdistan. The impact of this disposal is described in note 6. Heritage Oil PLC Financial Statements 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

12. PROPERTY, PLANT AND EQUIPMENT Petroleum and natural gas Drilling interests and barge Land and Other Total restated equipment buildings Aircraft restated restated $’000 $’000 $’000 $’000 $’000 $’000 Cost At 1 January 2012 54,924 3,545 11,985 55,489 3,470 129,413 Additions 5,540 – – – 629 6,169 Acquisition (note 7) 2,794,544 – – – – 2,794,544 Effect of movements in exchange rates 1,677 – – – – 1,677 At 31 December 2012 2,856,685 3,545 11,985 55,489 4,099 2,931,803 Additions 9,732 – – – 1,777 11,509 Disposals – – – – (3) (3) Effect of movements in exchange rates (2,280) – – – – (2,280) At 31 December 2013 2,864,137 3,545 11,985 55,489 5,873 2,941,029 Depletion, depreciation, amortisation and impairment losses At 1 January 2012 (8,569) (2,898) (868) (7,445) (2,781) (22,561) Charge for the year (5,943) – (103) (554) (295) (6,895) Disposals – – – – 5 5 Impairment losses – – – (2,086) – (2,086) At 31 December 2012 (14,512) (2,898) (971) (10,085) (3,071) (31,537) Charge for the year (20,534) – (147) (1,358) (440) (22,479) Disposals – – – – 19 19 Impairment losses – – – (2,246) – (2,246) At 31 December 2013 (35,046) (2,898) (1,118) (13,689) (3,492) (56,243) Net book value: At 31 December 2012 2,842,173 647 11,014 45,404 1,028 2,900,266 At 31 December 2013 2,829,091 647 10,867 41,800 2,381 2,884,786

The corporate office, which represents the land and building category, an aircraft and the petroleum and natural gas interests in Nigeria serve as security for long-term loans (note 17).

In 2013, the carrying value of an aircraft was written down to the fair value less cost to sale of $37.8 million because of a reduction in fair value of an aircraft. This resulted in an impairment write down of $2,246,000 (2012 – $2,086,000) recognised in the income statement in 2013.

13. OTHER FINANCIAL ASSETS 31 December 2013 2012 $’000 $’000 Investment in listed securities 6,707 8,749 6,707 8,749

The Company holds 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 2013 resulted in a gain of $941,000 (2012 – $1,095,000) which was recognised in equity.

As at 31 December 2013, 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 2013. The loss of $2,706,000 (2012 – $7,746,000) recognised in the available-for-sale reserve for this investment has been reclassified to the income statement. Financial Statements 2013 Heritage Oil PLC

14. TRADE AND OTHER RECEIVABLES 31 December 2012 2013 restated $’000 $’000 Trade receivables 818 105 Other receivables 31,762 39,861 32,580 39,966

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 2013, trade and other receivables of $32,580,000 (31 December 2012 – $39,966,000) 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. Included in trade and other receivables is $30.8 million (31 December 2012 - $37.6 million) relating to Shoreline Power’s 10.0 % proportionate share of the intercompany loan provided by Heritage to Shoreline as at 31 December 2013.

The ageing analysis of these trade and other receivables is as follows: 31 December 2012 2013 restated $’000 $’000 Up to 3 months 1,863 36,291 3 to 6 months 280 3,015 6 to 12 months 34 82 Over 12 months 30,403 578 32,580 39,966

Trade and other receivables analysed by currency are as follows: 31 December 2012 2013 restated $’000 $’000 US dollars 31,758 39,408 Russian roubles 22 24 Swiss francs 115 296 Canadian dollars 17 15 GB pounds sterling 597 192 Nigerian naira – 3 Papua New Guinea kina 33 – Euros 38 28 32,580 39,966

15. CASH AND CASH EQUIVALENTS 31 December 2012 2013 restated $’000 $’000 Cash at bank and in hand 183,825 86,712

Cash at bank and in hand includes cash held in interest-bearing accounts. Heritage Oil PLC Financial Statements 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

16. TRADE AND OTHER PAYABLES DUE WITHIN ONE YEAR 31 December 2012 2013 restated $’000 $’000 Trade payables 13,558 12,304 Other payables and accrued liabilities 117,685 91,747 131,243 104,051

Trade and other payables and accrued liabilities comprise current amounts outstanding for trade purchases and ongoing costs. The carrying amount of trade and other payables approximates to their fair value.

17. BORROWINGS 31 December 2012 2013 restated $’000 $’000 Non-current borrowings Non-current portion of long-term debt – secured 402,302 30,757 402,302 30,757 Current borrowings Short-term debt – secured – 486,799 Current portion of long-term debt – secured 112,707 3,602 112,707 490,401

Current 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 was at a rate of LIBOR plus 8%. 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 was replaced in June 2013 by a five-year reserves based loan, secured at the Shoreline level.

Long-term debt In June 2013, Shoreline drew down $500 million on a secured reserves based lending facility to refinance the bridge facility that was in place. Interest on the loan is at a rate of LIBOR plus 7.85%. In November 2013, the loan was increased by $50 million to secure the letter of credit raised by Shoreline in relation to OML 30, interest on that portion of the loan is at a rate of 7.85%. In January 2014, Shoreline made a payment of $61,111,000 to Standard Bank Plc as a prepayment against the principal amount due.

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 office. 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 2013 was $5.0 million (£3.0 million) (31 December 2012 – $5.4 million (£3.3 million)).

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 that loan was at a rate of 5.5%. In December 2013, this financing was replaced by another long-term loan. Interest on the new loan is at 4.69%. The loan, which is secured on the aircraft, is scheduled to be repaid by 60 consecutive quarterly instalments of principal and interest. Each instalment equals $288,000 with the final instalment being $14,000,000.

Fair values At 31 December 2013, the fair values of borrowings were approximately $515.0 million (31 December 2012 – $34.4 million) for the long-term debt and nil (31 December 2012 – $486.8 million) for the short-term debt. The borrowings fair value is calculated based on Level 2 fair value measurements. Level 2 fair value measurements are those derived from inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Financial Statements 2013 Heritage Oil PLC

18. PROVISIONS Asset Retirement Shoreline Obligation Option Total $’000 $’000 $’000 At 1 January 2013 - restated 21,260 121,641 142,901 Accretion expense (note 8) 2,124 – 2,124 At 31 December 2013 23,384 121,641 145,025 Non-current 23,384 – 23,384 Current – 121,641 121,641 At 31 December 2013 23,384 121,641 145,025

ASSET RETIREMENT OBLIGATION 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 $207,444,000, which is expected to be incurred in the period to 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 (2012 – 9%), 10% was used in Nigeria in 2013 (2012 – 10%) and 10% was used in Kurdistan in 2012. In 2013, the Group no longer held a provision for Kurdistan as the operations were disposed of in 2012. sHORELINE OPTION A provision has been recognised for the impact of the completion of the Shoreline option, which due to fair value accounting will result in a book loss. The consideration for the option is based upon cash consideration paid, however, the interest in OML 30 acquired is recorded in the balance sheet at fair value. The purchase consideration for the acquisition of the interest in OML 30 was lower than the aggregate of the fair value of the identifiable assets and liabilities, therefore on acquisition a gain arising from acquisition has been recognised (see note 5). On completion of the option, the consideration received will be lower than aggregate of the fair value of the identifiable assets and liabilities disposed, resulting in a book loss.

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 different 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.

Ordinary Shares Year ended 31 December 2013 Year ended 31 December 2012 Amount Amount Number $’000 Number $’000 At 1 January 255,585,078 340,333 256,519,296 343,280 Exchange of Exchangeable Shares for Ordinary Shares 10,900 9 439,490 376 Issued on exercise of share options (note 22) 18,904,510 64,066 – – Issued on exercise of long-term incentive plan (note 22) 1,064,372 4,321 – – Shares bought back and held in treasury – – (1,373,708) (3,323) At 31 December 275,564,860 408,729 255,585,078 340,333

Special Voting Share Year ended 31 December 2013 Year ended 31 December 2012 Amount Amount Number $’000 Number $’000 At 1 January 1 – 1 – Issued during the year – – – – At 31 December 1 – 1 – Heritage Oil PLC Financial Statements 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

19. SHARE CAPITAL Continued Exchangeable Shares of HOC each carrying one voting right in the Company

Year ended 31 December 2013 Year ended 31 December 2012 Amount Amount Number $’000 Number $’000 At 1 January 2,371,918 2,026 2,811,408 2,402 Exchange of Exchangeable Shares for Ordinary Shares (10,900) (9) (439,490) (376) At 31 December 2,361,018 2,017 2,371,918 2,026 Balance of Ordinary Shares of the Company, excluding treasury shares, and Exchangeable Shares of HOC at 31 December 277,925,878 410,746 257,956,996 342,359

At the Annual General Meetings (“AGMs”) held on 20 June 2011 and 20 June 2013, special resolutions were 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 2013, the Company held 34,602,442 Ordinary Shares in treasury.

20. RESERVES a) Available-for-sale investments revaluation reserve Changes in the fair value and exchange differences 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 differences 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. This reserve is a legacy of the convertible debt that was repaid in 2012.

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 2013 2012 Weighted average Ordinary and Exchangeable Shares Basic 263,263,795 258,315,902 Diluted 274,082,872 270,229,757

The reconciling item between basic and diluted weighted average number of Ordinary Shares is the dilutive effect of share options, LTIP awards and convertible bonds. A total of nil options (31 December 2012 – nil) and nil shares relating to the LTIP (31 December 2012 – 3,898,754) were excluded from the above calculation, as they were anti-dilutive. However, since the Company has made a loss in 2013 for the purposes of calculating diluted loss per share, all potential Ordinary Shares have been treated as anti-dilutive in that year. Financial Statements 2013 Heritage Oil PLC

22. SHARE-BASED PAYMENTS Share options The Company had a share option plan whereby certain Directors, officers, 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 2013 Year ended 31 December 2012 Average exercise Average exercise Number price Number price of options (GBP) £ of options (GBP) £ At 1 January 18,904,510 1.62 18,904,510 1.62 Exercised (note 19) (18,904,510) 1.62 – – Balance – end of year – – 18,904,510 1.62 Exercisable – at 31 December – – 18,904,510 1.62

In 2013, all remaining share options were exercised. Following the payment of a special dividend of 100 pence per share in August 2010 (see note 19), share options holders were entitled to receive £1 per share when the option was exercised.

Long-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 made on an annual basis 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 effectively 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

In 2012 the Remuneration Committee approved the 2012 LTIP and in 2013 the Remuneration Committee approved the 2013 LTIP, under which further awards have been granted under the 2011 LTIP rules. Heritage Oil PLC Financial Statements 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued

22. SHARE-BASED PAYMENTS continued The table below summarises the main assumptions used to fair value the awards made under the above 2012 LTIP and the fair values of the shares granted.

Award date 19 June 2012 Vesting period 3 years Exercise price Nil Share price at date of grant £1.293 Expected volatility 49.1% Risk free interest 0.33% Fair value as at grant date £0.8976 Number of shares granted 4,535,184

The table below summarises the main assumptions used to fair value the awards made under the above 2013 LTIP and the fair values of the shares granted.

Award date 22 June 2013 Vesting period 3 years Exercise price Nil Share price at date of grant £1.334 Expected volatility 41.7% Risk free interest 0.74% Fair value as at grant date £0.8207 Number of shares granted 3,449,526

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 staff 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 staff 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 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, in 2013, awards over a total of only 1,064,372 shares vested. 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 2013 was $7,663,000 (31 December 2012 – $1,909,000) out of which $1,796,000 (31 December 2011 – $1,082,000) was capitalised.

23. RELATED PARTY TRANSACTIONS During the year ended 31 December 2013, the Company incurred transportation costs of $54,000 (31 December 2012 – $116,000) 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 2013 for personal trips. The cost of these trips was reimbursed at independently assessed commercial rates of $521,000 (31 December 2012 – $525,000).

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 in 2012, 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 $30.8 million (31 December 2012 – $37.6 million) relating to Shoreline Power’s 10% proportionate share of the intercompany loan provided by Heritage to Shoreline as at 31 December 2013. Financial Statements 2013 Heritage Oil PLC

24. COMMITMENTS AND CONTINGENCIES Heritage’s net share of outstanding contractual commitments at 31 December 2013 was estimated at:

Less than After Total 1 year 1–3 years 4–5 years 5 years $’000 $’000 $’000 $’000 $’000 Long-term debt, including interest 630,578 150,102 277,310 200,262 2,904 Effect of interest (104,146) (37,394) (51,565) (15,032) (155) Total repayments of borrowings 526,432 112,708 225,745 185,230 2,749 Operating leases 7,729 337 683 119 6,590 Work programme obligations1 131,545 54,900 76,645 – – Total contractual obligations 139,274 55,237 77,328 119 6,590

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 $139,274,000 (2012 – $44,190,000), $131,545,000 (2012 – $13,317,000) 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 officers’ and former officers’ 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.

25. NON-CASH INVESTING AND FINANCING ACTIVITIES SUPPLEMENTARY INFORMATION

Year ended 31 December 2013 2012 $’000 $’000 Capitalised portion of share-based compensation (1,796) (1,082) Capitalised portion of interest – (1,547) Non-cash property, plant and equipment additions relating to the capitalised portion of share-based compensation 1,796 2,629 Heritage Oil PLC Financial Statements 2013

FINANCIAL STATEMENTS GLOSSARY

$ US dollars unless otherwise stated ACQUISITION ASSETS acquisition of a 45% interest in a producing oil mining licence in Nigeria, OML 30, together with a 45% interest in other assets owned under a joint operating agreement for OML 30 AFREN Afren plc AGM Annual General Meeting BBL/BBLS barrel/barrels BBLS/D OR BOPD barrels per day or barrels of oil per day CEDAR Cedar Oil and Gas Exploration and Production Limited 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 ESREY ENERGY Esrey Energy Limited 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 HOGL Heritage Oil & Gas Limited IFRS International Financial Reporting Standards JERSEY COMPANIES LAW Companies (Jersey) Law 1991 (as amended) KINA Kina Petroleum Limited 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 NPDC Nigerian Petroleum Development Company OML 30 Oil Mining Licence in Nigeria PETROFRONTIER PetroFrontier Corp. PNG Papua New Guinea PPL Petroleum Prospecting Licence PRL Petroleum Retention Licence RBL FACILITY Five year $550 million Senior Secured Revolving Reserves Based Lending facility SALE the disposal of a 26% interest in the Miran PSC and corresponding interest in the Miran JOA SHORELINE Shoreline Natural Resources Limited SHORELINE POWER Shoreline Power Company 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 UGANDAN PSAS the production sharing agreements with the Ugandan government relating to the Ugandan Assets URA Uganda Revenue Authority VENDORS Shell, Total and Agip 2008 LTIP 2008 Long-Term Incentive Plan Financial Statements 2013 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 ENGINEERING UK OFFICE OF THE COMPANY CONSULTANTS TO THE COMPANY 34 Park Street RPS Energy Consultants Limited London W1K 2JD 309 Reading Road United Kingdom Henley-on-Thames Oxfordshire RG9 1EL BROKER AND FINANCIAL ADVISERS United Kingdom J.P. Morgan Securities Limited 25 Bank Street PRESS AGENTS Canary Wharf FTI Consulting London E14 5JP 200 Aldersgate United Kingdom Aldersgate Street London EC1A 4HD ENGLISH LEGAL ADVISERS 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 TO THE COMPANY between ten weeks after the beginning and six weeks before the end Mourant Ozannes of each half year period. 22 Grenville Street St Helier JE4 8PX Jersey W E B S I T E Channel Islands www.heritageoilplc.com

CANADIAN LEGAL ADVISERS TO THE COMPANY McCarthy Tétrault LLP Suite 4000 421–7th Avenue SW Calgary Alberta T2P 4K9 Canada HERITAGEOILPLC.COM

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