Venture Production plc Venture Production plc Annual and Report Accounts 2007 Kings Close, 62 Huntly Street, Aberdeen AB10 1RS +44 (0)1224 619000

Breathing new life into the North Sea

Venture Production plc www.venture-production.com Annual Report and Accounts 2007 Acquire Develop Shareholder Information, Produce Directors and Advisers

Venture’s share price is quoted on the Registrars Solicitors We acquire, develop and bring into production Operating profit margin London Stock Exchange, symbol VPC, Equiniti Limited Stronachs discovered but undeveloped oil and gas fields in and is a component of the FTSE 250 index. Aspect House 34 Albyn Place the North Sea with proven but untapped potential. 32.6% Spencer Road Aberdeen Lancing AB10 1FW Information on Venture is available online at the Company’s website Then we transform them into profitable assets. West Sussex Growth record (www.venture-production.com). For UK shareholders wishing to buy BN99 6DA Jones Day or sell shares in the Company, arrangements have been made to use As a major independent E&P company we also 21 Tudor Street an internet and telephone dealing service available through Equiniti 11 ye a rs Bankers London target 10–15% of our annual investment into lower Limited (previously Lloyds TSB Registrars). For internet sales, log on to since founding the company we have Barclays Bank plc EC4Y 0DJ risk North Sea exploration. www.shareview.co.uk/dealing. For telephone sales, call 0871 384 2646*. become the 6th largest independent Business Bank Scotland You will need your shareholder reference number shown on your operator in the North Sea Johnstone House Remuneration Consultants Over the past seven years we have grown the value share certificate. 52–54 Rose Street MM & K Limited of our business by more than 23 times and we Aberdeen 1 Bengal Court Market capitalisation Registered in Scotland have positioned ourselves to continue generating AB10 1HA Birchin Lane SC169182 growing cash flow from the North Sea. £1.1bn London Financial Advisers and EC3V 9DD at 31 December 2007 Registered Office Stockbrokers 34 Albyn Place Oriel Securities Limited PR Advisers Aberdeen 125 Wood Street Brunswick Group Limited AB10 1FW London 16 Lincoln’s Inn Fields EC2V 7AN London Highlights of the year Company Secretary and Head Office WC2A 3ED Simon Waite UBS Limited Kings Close 1 Finsbury Avenue Weber Shandwick 62 Huntly Street London 58 Queen’s Road Solid financial performance and strong cash flow generation: Aberdeen EC2M 2PP Aberdeen 1 AB10 1RS • The second half of 2007 delivered the strongest underlying financial performance in the Company’s history – AB15 4ZT EBITDA of £163.2 million (23.0% higher than the second half of 2006) Auditors Contact • Revenue of £358.3 million (2006: £360.3 million) – higher commodity prices offsetting lower production volumes PricewaterhouseCoopers LLP Taxation Advisers +44 (0)1224 619000 (phone) • Operating profit down 35.9% to £116.6 million (2006: £181.9 million) – impacted by non-cash impairment and exploration 32 Albyn Place Deloitte +44 (0)1224 658151 (fax) charges totalling £62.8 million Aberdeen 2 Queen’s Terrace [email protected] (email) • Underlying1 operating profit £179.5 million (2006: £185.8 million) down 3.4% AB10 1YL Aberdeen AB10 1XL • Cash flow from operating activities of £240.2 million (2006: £273.5 million) General Shareholder Helpline • Profit on ordinary activities after tax down 40.9% to £48.2 million (2006: £81.6 million) 0871 384 2646* • 20% increase in ordinary dividend to 12.0 pence per share for the year General Shareholder Fax 1 Underlying excludes the impact of asset impairments and write-off of exploration/development costs 0871 384 2100* Solid underlying progress across the business: Directors • Average production decreased 7.7% to 41,228 boepd (2006: 44,706 boepd): John Morgan, Non-Executive Chairman – Project related timing delays impacted production volumes Mike Wagstaff, Chief Executive – Overall production performance from existing reservoirs ahead of expectations Jon Murphy, Chief Operating Officer • Largest and most complex development programme in Venture’s history successfully completed: Peter Turner, Finance Director – Two new fields on stream Rod Begbie, Corporate Development Director – 11 wells drilled setting up 2008/9 development programme Mark Nicholls, Non-Executive Deputy Chairman The cover and pages 1-32 of this report Tom Blades, Non-Executive Director are printed on 9 Lives Silk, a paper • Year end proven and probable (2P) reserves of 203 MMboe (2006: 221.5 MMboe) produced at a mill that holds ISO 14001 Andrew Carr-Locke, Non-Executive Director – five year reserves’ replacement ratio of 391% certification. Tom Ehret, Non-Executive Director Business positioned for the next phase of growth: Alan Jones, Non-Executive Director Larry Kinch, Non-Executive Director Pages 33-100 of this report are printed • Seven acquisitions since the start of 2007 – including five already in 2008 Graeme Sword, Non-Executive Director on 9 Lives Offset, a paper produced at • Over 20 MMboe of P50 resources in discoveries acquired plus up to 150 MMboe of contingent/prospective resources Robb Turner, Non-Executive Director a mill that holds ISO 14001 certification. • £600 million long term debt financing completed • £151 million convertible bond issued, bringing in two strategic investors – 3i Group plc and ArcLight Capital Partners, LLC

*calls to these numbers are charged at 8 pence per minute from a BT landline. Other telephone providers’ costs may vary. Venture Production plc Annual Report and Accounts 2007 1

Overview of Our Business

Highlights of the year IFC Business of Our Overview What we do, our goals and how we get things done 2 Our broad and diverse portfolio of assets 4 Our proven track record of revenue and production growth 6

Our Performance in 2007

Chairman’s Statement 8 in 2007 Performance Our Chief Executive’s Review 10 Business and Operational Review: 14 > Market Overview 14 > Resources, Skills and Capabilities 14 > Key Suppliers and Contracts 15 > Corporate Development 15 > Strategy 17 > Oil and Gas Reserves 18 > Reserve Movements 19 > Reserves Assessment and Reporting 19 > Review of Assets 20 > Frac Boat Case Study 29 Financial Review 30

“The high prices currently being achieved for both oil Governance and gas mean the Company’s Board of Directors 32 Directors’ Report 34 Corporate Governance Report 37 cash flow generation is stronger Governance > Compliance with the Combined Code 37 than ever and during the second > The Board, its Structure and Directors 37 > Board Committees 39 half of 2007 we delivered the > Board Assessment 41 > Risk Management and Internal Control 41 strongest period of underlying > Communication with Shareholders 44 financial performance in the Directors’ Remuneration Report 45 Corporate and Social Responsibility 54 Company’s history.” Independent Auditor’s Report 56 Mike Wagstaff Chief Executive Accounts & Notes

Group Income Statement 58

Statement of Recognised Income and Expense 58 Accounts & Notes Group Balance Sheet 59 Company Balance Sheet 60 Group Cash Flow Statement 61 Company Cash Flow Statement 62 Notes to the Financial Statements 63 Venture Interests in the North Sea 98 Glossary 100 Shareholder Information, Directors and Advisers IBC 2 Venture Production plc Annual Report and Accounts 2007

What we do, our goals and how we get things done

We turn ‘stranded’ fields into profitable assets by applying Implementation advanced technology, modern operating practices and • Tight geographic focus: concentrated North Sea player. innovative commercial arrangements. •  Operatorship and large working interests: control over our destiny. • Core areas/production hubs: building competitive advantage. Venture is often referred to as a ‘new generation’ oil and gas •  Achieving critical mass and scale with portfolio diversification. company. But what does that mean exactly? • Low risk exploration. Venture is an independent company – part of a new generation of energy companies working collaboratively with governments, ‘Stranded’ fields defined suppliers and larger companies to tap the full potential of fields Producing fields or undeveloped discoveries that: left ‘stranded’ by a changing industry. •  May be too small to be economic for larger companies. • May need investment, modernisation or rehabilitation. In today’s maturing oil industry, Venture is The New Generation. •  May no longer fit with a company’s strategy (e.g. a company decides to sell its North Sea fields in order to shift its focus overseas). Our strategy •  Mature basin ‘acquisition and exploitation’ business model. These fields often have huge potential for the right company with •  Focus on acquiring and developing proved but ‘stranded’ the right strategy. reserves – no ‘wildcat’ exploration. • Focus on assets with development potential. Why are fields ‘stranded’? • 10–15% of annual investment into lower risk exploration. Years of unprecedented mergers have made larger oil companies • Lower absolute reserves potential than ‘wildcat’ frontier even bigger. It makes good economic sense for these larger companies exploration but lower risk and faster project cycle times. to focus on bigger fields, using their vast resources where they will get • Leading to better ‘risked returns’. the greatest return.

This has left many smaller fields ‘stranded’ or dormant. While these fields may be ‘marginal’ to a large company, they can be profitable to a smaller company with an innovative approach. Venture was created to take advantage of this opportunity in the UK market, emulating the successful precedents set in the North American market.

Value creation and corporate structure

The Venture business model is Lower our cost of capital designed to deliver maximum • Efficient balance sheet value to shareholders as follows: • Recycle capital faster Reduce acquisition, finding and development • Maximise return on equity costs Reduce acquisition, finding and development costs Maximise cash margin • ‘Smart’ deals • Maximise unit revenues • Control capital costs • Control lifting costs Value • Sensible innovation • Minimise cash taxes Lower our cost Maximise cash of capital margin Venture Production plc Annual Report and Accounts 2007 3 Overview of Our Business of Our Overview

We achieve our goals by being...

Highly focused Operators and owners Our Performance in 2007 Performance Our Every aspect of our operation is designed As operators and owners of many of our to revitalise ‘stranded’ oil and gas fields. fields, we have far greater control over the This is our core business, allowing us to safety, quality, and development of our focus on precisely the kind of expertise assets. We can apply the right technology, needed to make such fields a success. the best people and the necessary resources to achieve success. Risk aware Because Venture targets fields that have Committed to modern technology already been discovered, or are currently applied intelligently producing, and by only making limited Venture offers a range of innovative investment in lower risk exploration technical solutions, but it’s more than we avoid the huge expenses and technology we bring to a field. We know risks associated with ‘wildcat’ frontier when to use it. To ensure our fields are exploration. We focus on proven oil and economical, Venture carefully chooses gas. We know the potential is there. its technologies, looking at both the We just need to tap into it, quickly and technical and financial needs of a field. economically. Trusted partners Lean and nimble We know that transferring operatorship To thrive in this growing niche market, of a field requires trust. At Venture, we have a company needs to be able to move a highly experienced management team. quickly and decisively. At Venture, we We have a track record of success, have built a highly efficient organisation. dramatically increasing production in Governance Freed of large overheads and bureaucratic field after field. We have sound financial backlogs, we can focus on smaller assets backing. Our commitment to health, and ensure their profitability. safety and the environment is backed by action. We have worked hard to build a world-class organisation – a partner you can trust.

Venture Production plc Accounts & Notes

Venture Production VP Infrastructure VP Services VP Investment Holdings

Oil Gas GKA Pipeline ETS Pipeline (49.9%) (49.9%)

‘Trees’ GMA GKA ‘A’ Fields Other CNS 4 Venture Production plc Annual Report and Accounts 2007

Our broad and diverse portfolio of assets

Asset Overview

Oil/Gas Hub Undrilled Acreage Discovered FDP Approval 2007 On Stream In Production

Oil ‘Trees’ Cedar Oak Birch Holly Larch Sycamore Oil GKA Durward/Dauntless Gadwall Grouse Kittiwake Christian Mallard Bligh Goosander Whinchat/Wagtail Oil Other CNS Appleton/Halley Chestnut Acorn/Beechnut Selkirk Pilot West Wick

Gas GMA Battersea Kew Chiswick Markham Wandsworth Stamford J/3c F3-FA Windermere Gas ‘A’ Fields Adele Amanda Mimas Audrey 48/15b Ensign Annabel Agatha Ann Morpheus Alison Carna Saturn/Rhea Alcyone Andromeda Schooner SE Gas Easington Channon Catchment Barbarossa Area Gas East Irish Sea Marram

Delivering on strategy

Venture has interests in 42 discovered Venture has the business model, track record and liquidity to create and seize new and producing oil and gas fields in the opportunities to expand its asset portfolio and create future growth. North Sea and there are an estimated Eleven years ago Venture laid out its vision for 400 unexploited fields remaining. a new approach to business in the oil and gas sector. That strategy has never wavered and we We also have interests in 38 licence entered 2008 as the UK’s 6th largest independent blocks containing exploration prospects operator with market capitalisation of over £1 billion and interests in 42 discovered and and/or leads. producing oil and gas fields. Venture Production plc Annual Report and Accounts 2007 5

2P reserves status (MMboe) 2P reserves by hub Venture’s 2007 revenue by hydrocarbon Business of Our Overview

Proven – 77.3 (38%) Other CNS – 28% Oil – 46% Probable – 125.7 (62%) ‘Trees’ – 14% Gas – 54% GKA – 11% ‘A’ Fields – 24% GMA – 18% Trinidad – 2% Easington Catchment Area – 3%

Asset Locations ‘Trees’ hub

Oil to Kinneil in 2007 Performance Our Other CNS

GKA hub

Oil to other European markets

East Easington Irish Sea Catchment Area Gas to GMA hub Easington/Dimlington Gas to Theddlethorpe Governance ‘A’ Fields hub

Gas to Continental Europe

Venture has invested £224 million in 2007 and Venture has: In the next two years Venture’s exciting drilled 11 wells. Two new fields were brought • Increased in market capitalisation development programme will: Accounts & Notes on stream during 2007, the most significant from £40 million in 1999 to £1.1 billion • Complete the Chestnut field development being Chiswick, located in the GMA hub, by 31 December 2007. using innovative technology from Sevan which is expected to add over 70 MMscfpd • Boosted revenues from £1 million in 1999 Marine and deliver first oil. to average production in 2008. to £358 million in 2007. • Complete the Ensign development and • Delivered compound annual growth in deliver first gas. production of 69% since 1999. • Complete Christian field development. • Built a diversified North Sea production • Appraise the Barbarossa, Kew and Appleton/ portfolio around four infrastructure hubs. Halley discoveries. • Assembled a rich inventory of near term • Drill the Carna, Battersea, Alcyone, Agatha, development projects. 48/15b and Morpheus exploration wells. 6 Venture Production plc Annual Report and Accounts 2007

Our proven track record of revenue and production growth

Over the past 1999 2000 2001 2002 11 years Venture £1.0m £13.9m £25.2m (+81%) £52.7m (+109%) has grown 884 boepd 2,250 boepd 4,868 boepd 8,681 boepd significantly and (+155%) (+116%) (+78%) we are on track to meet our growth Key Acquisitions Operational Operational objectives for Venture becomes Milestones Milestones UKCS operator through Larch field on stream Sycamore field 2008, making acquisition of ‘Trees’ (May) development us well placed (April) approved (May) Corporate Milestones to continue this Acquisition of ‘A’ Fields IPO Private Placement Corporate Milestones trend and achieve from Phillips (December) raises £24 million Venture floats on the our longer term (September) London Stock Exchange (March) strategic goals. Key Acquisitions Acquisition of North Sea Venture wins award for assets from TotalFinaElf ‘Best Investor Relations (February) for a New Issue’ at the Investor Relations Acquired 15% interest in Magazine Awards (July) Mimas from Provident Resources (May) Key Acquisitions Acquisition of 14.9% of Chestnut from ROC Oil (March) Acquisition of additional interest in and operatorship of Annabel (May)

Pr o d u c t i o n Re v e n u e Venture Production plc Annual Report and Accounts 2007 7 Overview of Our Business of Our Overview

2003 2004 2005 2006 2007 £71.0m (+35%) £81.5m (+15%) £164.1m (+101%) £360.3m (+120%) £358.3m (-0.6%) 13,310 boepd 16,832 boepd 29,864 boepd 44,706 boepd 41,228 boepd (+53%) (+26%) (+77%) (+50%) (-8%) in 2007 Performance Our

Operational Operational Operational Milestones Milestones Milestones First oil from Sycamore FDP approval for First gas from Annabel (March) Annabel (November) and first oil from Gadwall (April) Operatorship of GKA Corporate Milestones (April) Equity placing raises £26 First gas from Saturn million (October) (September) Key Acquisitions Acquisition of 50% of Key Acquisitions GKA from ExxonMobil Acquisition of remaining (April) ‘Trees’ interests making Acquisition of additional Venture 100% owner interest in and (September) operatorship of Audrey (May) Acquisition of remaining interests in ‘A’ Fields making Venture 100% owner (December) Operational Milestones Venture awarded Governance Stamford in 24th Licensing Round (February) First gas from Mimas (June) Successful Channon exploration well (August) First gas from Chiswick (September) Successful Grouse Operational appraisal well Milestones (November) Goosander on stream GKA pipeline completed (August) Corporate Milestones (November) Convertible bond issued GKA pipeline Corporate Milestones raising £29 million (July) construction announced (November) Strategic investment of Accounts & Notes Debt facilities increased c. £200 million by 3i and to £370 million Corporate Milestones ArcLight Capital Partners (November) ‘Best Purchaser-Supplier (July) Partnership’ awarded New debt and private Key Acquisitions by Chartered Institute placement facilities Acquisition of remaining of Purchasing and c. £600 million (August) Annabel interest from Supply for Venture’s ENI (March) relationship with Key Acquisitions Acquisition of CNS Subsea 7 (November) Farm-in to Barbarossa assets from Hess (May) discovery (January) Key Acquisition Acquisition of Ensign Acquisition of CH4 Acquisition of WHAM (November) (August) Energy plc (November) 8 Venture Production plc Annual Report and Accounts 2007

Chairman’s Statement John Morgan

2007 saw strong underlying performance in building the business, The Board believes that such challenging objectives must be properly but a shortfall against our annual production objective. We indicated at incentivised and rewarded and an important new Long Term Share the start of the year that there were project timing risks late in the year Incentive Plan will be proposed at the Annual General Meeting, and in the event there were some significant delays. These, together with designed to align senior management in the delivery of this some operational issues beyond management’s direct control, meant that new challenge. we failed to deliver our production growth objectives. All of this shortfall was delayed, rather than lost and major progress was made in delivering The Board and its Committees have continued to exercise a positive and de-risking important projects including the Kittiwake pipeline, the approach to the governance of the Company. Reports from the Ensign appraisal well, and the Chiswick Gamma well. Strong oil prices Committees are included in this document and I would like to thank and strengthening gas prices meant that our cash generation capacity all my Board colleagues for their very constructive contributions. remained strong despite weak gas prices early in the year. I would like to There have been a number of changes in Board composition during express my thanks to all of Venture’s staff and contractors who worked the year. These are described within the Directors’ Report on pages very hard to deliver real progress and to overcome a number of very 34 to 36. difficult challenges. Following these changes the Board comprised four Executive Directors, Safety and Environmental Management are top priorities for Venture four independent Non-Executives, three non-independent Non-Executives and the year was another one of strong performance and commitment. and myself, the Non-Executive Chairman. This is now quite a large Board, The Board is pleased with the development of the Technical Integrity but does not conform to corporate governance guidance that at least Management System and the Carbon Management Strategy. Enhanced half the Board (excluding the Chairman) should be independent environmental regulation means that this area will remain a major focus Non-Executives. for management and the Board. The Board has carefully considered how to balance the objective of not The Company has maintained a consistent strategy with its focus on becoming unwieldy through size with assurance that the interests of all ‘stranded’ assets in the North Sea. The development of operational, shareholders are being safeguarded. While the Board was satisfied that the technical and commercial capacity has allowed us to build a strong existing independent Directors would achieve this, it decided that it was competitive position which, together with our sound balance sheet appropriate to add a further independent Director to provide additional will allow us to continue to grow the business over the next few years. tangible assurance that, although the Board is not in compliance with During 2007 we reviewed our strategic objectives and concluded that guidelines, the independent Director presence is powerful enough our financial and competitive strength and organisational capability to demonstrably provide a full level of safeguard. A search process was allow us to set new and very ambitious objectives for the next four years, initiated and I am delighted to welcome Andrew Carr-Locke to the Board which would result in a doubling of the scale and value of the business. from 3 March 2008. Andrew brings strong management experience and until recently was Group Finance Director of a major listed company. Venture Production plc Annual Report and Accounts 2007 9

“The significant investment of £200 million Business of Our Overview from 3i Group plc and ArcLight Capital Partners, LLC has created another exciting new stage in the development of Venture and underpins our growth plans for the future.” Our Performance in 2007 Performance Our

I believe that we have an experienced Board with the right mix of skills to steer Venture through its next very challenging phase of growing the value of the business.

During 2007 the Board indicated its intended priorities for the use of free cash flow generated: firstly, acquisitions or other internally generated

business development opportunities which meet Venture’s strict Governance investment criteria; secondly, maintaining debt at a sustainable long term level; and, thirdly, returning capital to shareholders through dividends, share buy-backs or other mechanisms. In 2007 a dividend of 50.0 pence per share was approved, comprising an ordinary dividend of 10.0 pence per share and a special dividend of 40.0 pence per share. This year the Board has proposed an ordinary dividend of 12.0 pence per share subject to shareholder approval at the Annual General Meeting on 14 May 2008.

John Morgan Chairman Accounts & Notes 10 Venture Production plc Annual Report and Accounts 2007

Chief Executive’s Review Mike Wagstaff

Introduction During 2007, Venture continued the development of its North Sea business, participating in the drilling of 11 new wells, bringing two new fields on stream (Chiswick and Mimas), and completing some of the largest and most complex projects in the Company’s history. In addition, we have either completed or reached important milestones in the development of a number of key assets which, in aggregate, have substantially de-risked our business.

Average net daily production for 2007 was 41,228 barrels of oil equivalent per day (boepd), a decrease of 7.7% over 2006. During 2007, the benefit of Venture’s strong underlying reservoir and well performance was impacted by certain exceptional operational events and project delays which included higher than anticipated downtime on GKA, delay in the start-up of production from the Chiswick field, delay in start-up of production from Chestnut and the continued delay in the anticipated gas ‘blow down’ within the Birch reservoir. In contrast to these disappointing timing impacts, elsewhere in the portfolio the ‘A’ Fields and Goosander both outperformed expectations. Particularly encouraging individual field production performances came from both Annabel and Saturn which both continued to exceed expectations.

Our southern North Sea (SNS) gas fields contributed 60% of total 2007 Group production, slightly higher than expectations, with the balance from Venture’s central North Sea (CNS) oil fields.

During 2007, Venture has continued to build its business through continued execution of our proven strategy, summarised as follows:

• The acquisition, development and production of proved but under-exploited oil and gas fields, known as ‘stranded’ reserves. • Geographic focus as a North Sea development and production company. • Continual development of our portfolio of interests in over 40 North Sea oil and gas fields, less than half of which are currently in production. Venture Production plc Annual Report and Accounts 2007 11

“2007 was an exciting year of operational and strategic Business of Our Overview progress for Venture and we successfully completed the largest and most complex engineering and field development projects ever undertaken by the Company.” Our Performance in 2007 Performance Our

• Leveraging of Venture’s substantial operational and development the Chiswick field development. This second well tested at flow rates expertise we believe gives us a real and sustainable competitive of 42 MMscfpd, towards the top end of our pre-drill expectations. advantage as an efficient and focused low cost operator. The results of this well will enable Venture to commit to the development • Continued enhancement of our very valuable long term strategic of the Ensign field during 2008, with a target of first gas during late 2009. relationships with our core contractors which help to ensure the availability of key equipment and services in a tight market. During the first half of 2007, Venture sidetracked the Amanda discovery

well originally drilled in 2003. This appraisal well was completed and Governance At 31 December 2007, net proven and probable reserves were estimated tested at rates below expectations and is not economic on a stand-alone to total 203 million barrels of oil equivalent (MMboe). This represents basis. The well was suspended awaiting the results of the Agatha a modest 8.4% fall from the end of 2006, which is the first time in the exploration well, which is expected to be drilled in 2009. As a result, Company’s history that annual production has not been replaced several Venture decided to take a non-cash write-off of historic development times over. This pause in the growth of Venture’s reserves base is cost of £11.2 million against the cost of the well drilled in 2003. principally the result of the 2007 re-categorisation of probable reserves from the Pilot field to contingent resources, and also reflects the absence In the third quarter of 2007, the Channon exploration well successfully of any significant completed acquisitions during the year. drilled and tested. Stabilised gas flow at rates of up to 55 MMscfpd gross was achieved and the well has been suspended for future completion During the year, Venture has positioned itself strategically and financially as a producer. Estimated net recoverable reserves from the Channon for the next phase of its growth. As planned, we successfully completed reservoir are 30 to 40 billion cubic feet (Bcf), which is at the top end of a major refinancing of the Company ahead of the current difficult capital pre-drill expectations. Discovery of gas at Channon creates the potential markets conditions, including raising £151 million in new capital from for a joint development with the Barbarossa gas discovery located in two new strategic investors, which will better enable Venture to move block 47/9c, a subsea tie-back to nearby infrastructure. Venture will quickly to take advantage of material acquisition opportunities in the earn its 90% interest in Barbarossa once the appraisal/development North Sea. well which was spudded in late February 2008 is drilled. Expected reserves from this well are around 30 Bcf net to Venture. Operational Overview Accounts & Notes ‘A’ Fields Greater Markham Area (GMA) The Noble Julie Robertson (NJR) jack-up drilling rig continued to operate During 2007, production from the GMA hub was in line with for Venture in the SNS under a long term contract. In light of Venture’s expectations and delivery rates benefited from the impact of the active SNS drilling campaign, this contract has recently been extended Markham Compression Tower, which was installed during late 2006. for a further 12 months through to late 2009. On GMA, the highlight of 2007 was the start-up of production from During 2007, two appraisal wells were drilled on the Ensign gas field. the Chiswick field at the end of September. While first gas production The first, completed in January 2007, was drilled and completed and was some six months later than originally planned due to the unexpected tested at rates of 12–15 million standard cubic feet per day (MMscfpd). and unavoidable lack of an available well stimulation vessel in the North Sea, The second well drilled towards the end of the year was subsequently Venture’s ability to recover through the development of an innovative hydraulically fractured, utilising the boat and equipment developed for solution utilising a pumping spread on the back of a large supply boat is 12 Venture Production plc Annual Report and Accounts 2007

Chief Executive’s Review – continued

testament to our operational capability. Initial production was somewhat Other CNS lower than anticipated due to a slower than expected clean-up of the Field development activity on our other oil assets in the CNS during first production well, although this is not expected to impact longer 2007 was focused on the Chestnut field. Installation of the production term production performance. In addition, Venture has now successfully and support facilities on the new Sevan 300 floating production unit, drilled, fractured and tested the second Chiswick production well which, the Hummingbird, was completed in December in Rotterdam. The as recently announced, tested at higher than forecast rates. The well was Hummingbird was installed in the Chestnut field at the end of the year successfully brought on stream in February 2008 and Chiswick will be a and offshore hook-up and commissioning work and subsea tie-in activity major contributor to Group production in 2008 and beyond. is ongoing, although progress on these activities has been slower than anticipated for a variety of reasons, including winter weather related Greater Kittiwake Area (GKA) issues. First oil is currently anticipated during the third quarter. During 2007, production from the GKA hub was adversely affected by poor uptime availability of the tanker loading and export system. Ongoing subsurface studies using new data on the Chestnut reservoir This loss of productive capacity continued into the fourth quarter, have identified the potential to drill an additional production well in the but was partially offset by continued strong reservoir performance, field. This is expected to significantly increase recoverable reserves from particularly from Goosander. Development activity on GKA in 2007 was the field, and it is anticipated that this project will be sanctioned during focused on the construction and installation of the new export pipeline the first half of the year, leading to the well being drilled towards the end between the Kittiwake platform and the Forties Pipeline System. The new of 2008. pipeline was successfully installed and brought on stream in November, and is already contributing to substantially improved operational uptime, During the fourth quarter of 2007, drilling continued on the Selkirk and is expected to lower overall operating costs and allow GKA field life appraisal well. The well was sidetracked into the crest of the reservoir to be extended. structure, but has been suspended due to operational difficulties. The well has, however, proved up commercial reserves and the operator In addition, during the fourth quarter, Venture successfully drilled an has commenced development planning. appraisal well on the Grouse oil field. This was successful and will lead to a fast track development of the field as a subsea tie-back to the Kittiwake An appraisal well on Pilot field in block 21/27a was drilled during the platform. The Grouse production well is expected to come on stream in third quarter. Oil samples recovered from the Pilot well are somewhat the first half of 2009. Looking further forward, the recently announced heavier and more viscous than those from previously drilled Pilot wells, acquisition of an additional interest in, and operatorship of, the Bligh gas/ and this new data is being evaluated to better determine the extent of condensate field will, together with the nearby Christian field, form the the commercially recoverable oil. Based on the well result, the probable core for the next phase of the development of the GKA hub beyond 2010. reserves associated with Pilot have been moved to the contingent resources category, and an impairment charge of £9.0 million against the carrying ‘Trees’ value of the asset has been taken. ‘Trees’ production was stable during 2007. The Birch oil field has produced steadily but the anticipated gas ‘blow-down’ of the reservoir has not To the south of Pilot, the appraisal well drilled adjacent to the Narwhal yet occurred. It is expected that this natural change in production discovery failed to encounter hydrocarbons and the well was plugged characteristics will happen at some point and, when it does, more and abandoned. The appraisal well drilled on Millburn discovery associated gas will start to be produced, thus raising the overall field encountered 12 feet of oil-bearing sandstone which is considered production rate. Whilst reducing reported production volumes, the sub-economic, and the appraisal well was also plugged and abandoned. financial impact of this was limited as the gas produced from ‘Trees’ is sold offshore at a large discount to benchmark market prices. Trinidad Venture retains a 40% shareholding in Ten Degrees North Energy Limited During 2007, Venture commenced a major seismic reprocessing and (TDNEL), an oil and gas production company based and registered in interpretation study on the entire ‘Trees’ production hub, which will be Trinidad. TDNEL produced an average of 1,522 boepd (609 boepd net) completed during 2008. Whilst the analysis of the remaining potential during 2007. in the southern part of the Sycamore development has not yet been completed, preliminary results of this study suggest that in the central Corporate and Business Development part of the Sycamore field, there is limited re-investment opportunity. Over the last three years, Venture has focused on becoming an efficient This has led to the Company taking a non-cash impairment charge acquisition, development and production operator and today, following in 2007 of £24.5 million, against the value of our historic investment a series of almost 50 acquisitions, it ranks as the sixth largest independent in Sycamore. operator in the UK sector of the North Sea by gross operated production. In a mature basin such as the North Sea, Venture believes that its operating capability, size, scale and strategic and geographic focus give it a strong competitive position, and a positioning that Venture believes would be difficult to replicate. Venture Production plc Annual Report and Accounts 2007 13 Overview of Our Business of Our Overview

In terms of completed transactions, 2007 represented a quiet year for Current Trading and Outlook both Venture and the North Sea oil and gas industry. In recent months, Operationally, we have had a good start to 2008 with the majority of driven by the fundamentals in the global energy market, Venture has operational issues, which impacted 2007 production performance now seen a significant increase in levels of asset trading activity in the North behind us. Our 2008 drilling programme has had an excellent start with Our Performance in 2007 Performance Our Sea, although this has yet to be translated into completed transactions. results ahead of expectations seen on both the Ensign and Chiswick This activity is consistent with historical patterns seen in other mature wells. 2008 is also proving to be a much more active year than 2007 producing regions such as the US Gulf of Mexico where, as the basin from a business development perspective, with five acquisitions already matures, ownership of substantial proportions of the basin’s oil and announced to date. gas reserves has migrated from larger international oil companies, to more regionally focused independents. Venture believes that it is In looking forward to the rest of the year, we note that Venture’s 2008/9 well positioned competitively to capitalise on this consolidation trend, development programme consists of a number of projects which are which it believes will create significant opportunities for the Company individually subject to the everyday risks this industry faces; some of to expand its business. which are beyond our direct control, and most of which impact timing of production, rather than the intrinsic value of our assets. We believe To position itself financially for this anticipated phase of consolidation this year’s development programme is somewhat lower risk than 2007, in the short to medium term, in July, Venture announced that it had in that there are fewer new production additions coming on stream entered into agreements with 3i Group plc and its affiliates (3i) and earlier in the year, which contribute to the growth in production in ArcLight Capital Partners, LLC and its co-investors (ArcLight), to make 2008. The two most significant are the second Chiswick gas well, a significant strategic investment in Venture. In aggregate, when their which, as recently announced, has now been successfully brought on subscription for a new convertible bond and shares purchased in the stream, and start-up of production from the Chestnut oil field. open market are taken together, 3i and ArcLight have made a total new investment of over £200 million in Venture. Venture’s production guidance for 2008, set around the end of 2007, assumed a start-up of production from Chestnut during the second 3i’s and ArcLight’s investments consist of a number of elements as follows: quarter, and we now expect first oil production during the third quarter. The impact of each one month delay in the start-up of production from • £151 million in newly issued 3.25% convertible bonds (CBs) due the field represents a reduction in annual average production for 2008 2010 which are convertible into 16.5 million newly issued Venture of approximately 1,000 boepd. Notwithstanding this, we still continue Governance ordinary shares. to expect 2008 production to be within our guidance range of 50,000 • Conversion of ArcLight’s existing North Sea Gas Partners (NSGP) boepd +/- 10%. interest into 6.0 million new Venture ordinary shares. • 3i’s existing investment in Venture of 2.6 million shares. The success of Venture’s business depends on the sustained delivery of • Both 3i and ArcLight made additional market purchases of Venture our acquire, develop and produce strategy, leading to continued growth shares to take their total stakes to approximately 10% on a fully in reserves, production and cash flow over a sustained period. Between diluted basis. now and the end of 2009, Venture anticipates bringing on stream a total of eight significant new projects, which are expected to boost net In addition, during the second half of 2007, Venture completed a £600 production significantly from today’s levels. million refinancing of its debt facilities. This consists of two elements, a £365 million new corporate credit facility and a total of approximately In summary, as a result of the strong operating performance of our £235 million in privately placed institutional loan notes, with final business, combined with favourable commodity prices and increased maturities of 10 and 15 years. Combined with the strategic investment activity in the acquisitions market, the Board remains very confident of from 3i and ArcLight, Venture now has strengthened financing sources the outlook for Venture’s business in 2008 and beyond. from which to deliver its growth strategy. Mike Wagstaff In order to improve Venture’s ability to pursue opportunities through the Chief Executive

UKCS Licensing Rounds, in early 2008 Venture formed two partnerships Accounts & Notes with two small UK exploration focused independents to pursue opportunities in the SNS and CNS, as part of the 25th UK Licensing Round which was recently announced. 14 Venture Production plc Annual Report and Accounts 2007

Business and Operational Review Market Overview Resources, Skills and Capabilities Energy Outlook As a fast-growing organisation in a highly competitive global market, Growing populations and improving living standards across the recruiting and retaining the right mix of skills and capabilities remains a world continue to drive demand for reliable, affordable energy for priority for Venture. We continue to be successful at attracting staff with the power and transportation. The Organisation for Economic Co-operation requisite skill sets who can contribute immediately, as well as developing and Development (OECD) predicts that world energy demand will hit our own expertise. Staff numbers grew by 21 to 142 (2006: 121). 300 MMboe per day by 2030 (2008: 200 MMboe per day), primarily driven by demand from the fast growing, emerging economies – led by China. A good reputation in the market is as essential as offering competitive packages to secure scarce skills such as those of reservoir engineers, Market Dynamics – Oil geologists and geophysicists. To date, Venture has been successful in Whilst demand for oil in developed economies has stabilised over recruiting employees with the key focus on both technical subsurface recent years – stagnating in the US since 2006 – the upward trend in and commercial skills. Project engineering expertise is equally important, consumption in the Middle East and China has accelerated. and our project managers have proved to be both innovative and focused in overcoming any obstacles to delivering to plan. The frac A tight supply/demand balance resulting in a small surplus oil supply boat case study on page 29 is a prime example of the drive and lateral has reduced global inventories, as production by countries who are not thinking within the organisation. members of the Organisation of Petroleum Exporting Countries (OPEC) declines and OPEC membership increases are too small to meet the gap. Venture not only is a highly technical organisation, but also operates in As the gap between demand and non-OPEC supplies is predicted to a distinctive, enterprising environment. We have a flat organisational widen, the market will become more dependent on OPEC oil. structure allowing us to make timely decisions to enable our people to be able to work with a great deal of autonomy and take responsibility The UK is already a net importer of oil to satisfy the demands of its home at every level. We have high expectations of our employees but give market and this is likely to rise in the future. them the support they need to meet the challenges we set. Our recently introduced leadership programme, for example, focuses on raising Coupled with concern about the vulnerability of supply, oil fundamentals standards of performance and developing better working relationships. are likely to keep prices high in the medium term with little spare capacity, tight supply/demand balance, strong economic growth and We have now reached the size where we can nurture our own talent a weak US dollar. and have implemented a targeted graduate recruitment programme. We focus on the leading universities with a reputation in geology, Market Dynamics – Gas geophysics and reservoir engineering and will recruit at MSc level. Following a period of volatility in the first half of 2007, gas prices increased As a smaller player, we are able to offer our graduate recruits much strongly in the second half of the year. This upward price pressure has broader exposure and greater responsibility early in their working career. continued into 2008, reflecting the link with global oil prices and the emergence of a global market for gas. Managing external relationships with our long term suppliers and contractors is a core capability for Venture. Building relationships based Traditionally, gas demand was satisfied by indigenous sources but on partnership and delivering results using both internal and external this is rapidly changing. The UK market is now directly linked to the resources have proved a powerful combination over the last few years, pan-European gas market through major pipelines to mainland Europe. and we continue to invest in strengthening this important attribute Most notably, Norway has the ability to switch supply from the UK to through training. mainland Europe, exposing the UK to the impact of European prices.

In addition, the increasing importance of liquid natural gas (LNG) is contributing to the growth of a truly global gas market. As LNG can be transported safely and economically over long distances, suppliers can divert resources to higher priced markets (in Asia, for example), thereby reducing supply into European markets. This causes a tightening of the supply/demand balance and has a subsequent positive effect on European gas prices.

These factors will tend to drive up gas prices in the UK over the medium term as demand for natural gas to fuel power generation remains high due to its lower C02 emissions compared with other fuels. Venture Production plc Annual Report and Accounts 2007 15 Overview of Our Business of Our Overview

Key Suppliers and Contracts Corporate Development Excellence in supply chain management remains a critical success factor Positioned for Future Opportunities as continued momentum in the oil and gas industry has resulted in The North Sea is a dynamic environment and in 2007 we ensured widespread shortages of materials, services and personnel. This scarcity that Venture is well positioned to take advantage of a range of exciting of resources has contributed to rising development costs and increased opportunities. We secured access to significant additional capital to pave Our Performance in 2007 Performance Our uncertainty due to the pressure on availability of key equipment. the way for continued investment in the current inventory whilst at the same time leaving scope for material future acquisitions. Venture’s core competence in this area is already delivering benefits. Our project execution costs are below industry norms and long term Given the relative scarcity of sensibly priced assets with current supply agreements mean we have access to substantial resources. production and attractive development potential, only a small portion These include drilling rigs and offshore construction related vehicles, of those new capital resources were deployed during this calendar with significant forward contracts signed at substantially below current year. However, as in previous years, a number of important acquisitions market rates. were completed and looking forward to the next two to three years, we anticipate a number of major North Sea asset transfers taking place. Building a Successful Supply Chain Venture has a stable assembly of high performance contractors, and New Assets our strong reputation in the market was reinforced in February 2007 Barbarossa when we achieved the ‘Best Purchaser Profile’ as assessed by First Point Early in the year, we announced a farm-in to the Barbarossa gas discovery Assessment Ltd, who run the industry supply benchmarking scheme. (Venture operated – 90% net). This 30 to 40 Bcf field is located close to the Channon exploration well that was successfully drilled in July 2007. We have a well developed strategy focused on four key areas: Barbarossa is a good example of an opportunity that has been given new life through the UK Government’s Promote licence initiative and • Tactical flexibility and pace it is typical of the kind of small, relatively simple tie-back opportunities Ensuring we can adapt to changing circumstances quickly and that exist across the southern North Sea. As it lies close to the Channon intelligently, supported by the ability to make swift decisions. discovery we have the opportunity to realise economies of scale by • Active contract and relationship management developing the two accumulations together. Building a dedicated, well trained team of contract and relationship managers whose purpose is to create value from the supply chain. Bligh, Carna, Marram and F3-FA Governance • Becoming a great customer Business development activity started strongly in the 2008 financial year Attracting high performing contractors by being a high performance with acquisitions of additional interests in Bligh and Carna within our purchaser combining fair pricing with fair treatment. existing licences and a farm-in to the Marram discovery in the East Irish • Far-sightedness Sea, a new area for Venture’s business development activity. Running an integrated advance project planning approach that includes materials and services. We increased our working interest in block 21/20d which contains the Bligh gas condensate discovery, through an acquisition from Shell EP Managing Key Relationships Offshore Ventures Limited. With estimated reserves of around 30 MMboe Sound, long term relationships with three critical suppliers have enabled gross, Bligh will become a natural follow-on project once the current us to deliver highly complex projects on time and on budget, in tight Kittiwake oil fields reach the end of their productive life. If successful, it market conditions where competition for resources has been high. will extend the life of the platform by several years.

Long term contracts with Noble supported our drilling activities in 2007 The completion of a farm-in agreement with Ithaca Energy (UK) Limited and will provide us with the drilling rig days we require going forward increases our equity in the Carna exploration prospect from 40% to 60%. to 2011. Our four year relationship with Subsea 7 has already secured Carna was one of the near term opportunities identified in the WHAM preferential access to scarce diving vessels, remote operated vehicles and portfolio, with an estimated 85 to 200 Bcf of gross recoverable reserves. pipe laying capacity.

We reached agreement with Hannu Exploration Limited, a wholly owned Accounts & Notes Sevan Marine has provided an essential element of our innovative subsidiary of MPX Limited, to purchase 60% of its equity in blocks 110/4 solution to exploit the potential of the Chestnut field. During 2007, and 110/9b in the East Irish Sea through the drilling of a farm-in well. it completed the construction of the Hummingbird floating storage and Farming into these blocks gives us access to the Marram gas discovery, production vessel which will enable us to develop the field efficiently. which is estimated to contain gross recoverable reserves of 50 to 90 Bcf.

In March 2008, Venture acquired an estimated 58% operated interest in the F3-FA gas discovery for a royalty based consideration. Base case gross recoverable reserves are estimated to be around 60 Bcf. 16 Venture Production plc Annual Report and Accounts 2007

Business and Operational Review continued

Participation in Licensing Rounds Our business development strategy aims to position Venture as one In February 2007, we were awarded two blocks in the 24th Licensing of those larger operators that has the requisite scale and momentum Round, one containing Stamford, a discovery close to our Greater to capture the significant remaining value from North Sea oil and gas Markham Area production hub, and the other containing the reserves. With a strong balance sheet, good cash flow generation and Whinchat and Wagtail appraisal prospects in the Greater Kittiwake Area. an appetite for significant acquisitions, we entered 2008 ideally placed These awards add to Venture’s development inventory around existing to continue our progress towards this medium term objective. producing fields, in line with the hub-focused element of our strategy. As one of the more significant and growing North Sea operators, we Business Development and Strategy intend to participate in future licensing rounds in a more active way than Venture’s strategy is designed around extending field life and maximising in previous years. To this end, we have put in place two new strategic recovery of hydrocarbons, with a focus on targeting the vast array of alliances, with MPX Oil and Gas Limited and Volantis Exploration Limited. ‘stranded’ reserves that remain to be developed. Our strategy consists These alliances will provide us with access to a range of new drilling of a number of distinct elements, each tailored to the particular offshore opportunities and subsurface expertise complementary to that already business opportunities found in the North Sea, the fiscally stable and possessed in-house. well resourced basin we have chosen to operate in.

WHAM Acquisition Since the Company was founded in 1997, we have consistently delivered In November 2007, we made the second corporate acquisition in against each element of a carefully chosen strategic mix: Venture’s history, purchasing WHAM Energy plc, a small publicly listed, SNS focused exploration company with a portfolio of gas prospects close • Multiple acquisitions. to existing Venture owned infrastructure. This portfolio is an exciting • Tight geographic hub focus. addition to Venture’s southern North Sea inventory and plans are being • High working interests and control. made to drill the first two opportunities during 2008. • Operator led field development. • Infill drilling and satellite developments. Kittiwake to Forties Oil Pipeline • Scale efficiency/low costs. Our first major foray into infrastructure development came to fruition • Modern offshore technology/operating practices. towards the end of November with the start-up of production through • Innovative commercial structures. the new Kittiwake oil pipeline. This project is an interesting investment • Lower risk exploration. opportunity in its own right, as well as an enabler of future growth. The tariff income generated will not only service the debt but is also It is important to note that not all elements have equal importance expected to deliver an attractive low-risk return to Venture shareholders during any one fiscal period. However, they are all linked together and through the Company’s 49.9% interest in North Sea Infrastructure collectively over the medium term they will combine to deliver a strong, Partners, the owner of the new pipeline. independent North Sea business, that we believe will become one of the relatively small set of important companies that will take over the mantle Securing a Strong Platform for Growth from the majors in developing the remaining potential in the North Sea. Perhaps the most significant development in Venture’s corporate growth during 2007 was the strategic investment made by 3i Group plc As we look back on 2007 and contemplate the exciting future ahead it and ArcLight Capital Partners, LLC. The additional capital provided is clear that with the scale of the strategic platform we have built, we by these investors through the convertible bond and the purchase are ideally placed to emphasise the acquisitions and exploration drilling of additional shares gives each a fully diluted 9.9% stake in Venture. elements of our strategy in the short to medium term. We believe that This major financial commitment underlines the shared belief that these we can keep operating costs at reasonable levels, despite current tight two energy sector specialist investors have in the medium term prospects market conditions for services, and that the significant cash flows from for the North Sea and, in particular, in Venture’s unique positioning. our high working interests will deliver a strong balance sheet that is able Each investor has known the Company and its senior management for to absorb the occasional negative drilling result or project delay. Smaller, several years and both see Venture as the ideal platform through which to less well established companies may struggle to do the same. invest in the future of the North Sea and capitalise on major opportunities. We will continue to be highly selective in our approach to acquiring Building Scale and Momentum assets, collections of assets or competitor businesses and we will WHAM was a relatively small corporate acquisition, and we are continue to filter new exploration drilling prospects very carefully, continually evaluating similar opportunities where the combination of using our in-house technical resources. However, with the momentum Venture’s scale and access to drilling and development resources will and shareholder backing we have established, we are also confident complement the technical and subsurface work done by smaller but in our ability to take major accretive steps forward to becoming one of less well established companies. the most important operators in the North Sea. It is likely that over the next two years significant consolidation acquisition opportunities will be We believe that the eventual recovery of hydrocarbons from the found and that fresh opportunity sets will emanate from such activity. North Sea will be maximised through a small group of well funded The Company’s proven, value creation led strategy should be effective independent operators with sufficient scale to explore for, develop in monetising these opportunities, and this should provide Venture and produce oil and gas fields through all commodity price and shareholders with an extremely attractive and profitable future. service sector cost cycles. Venture Production plc Annual Report and Accounts 2007 17 Overview of Our Business of Our Overview

Strategy Strategic Objectives Managing our long term supplier relationships will remain a critical Venture has an exciting strategic vision focused around the following success factor and we have already secured the access to drilling rigs key goals: we need to deliver our exploration and development plans out to 2011 at lower than current market rates. Our Performance in 2007 Performance Our • Strong cash flow generation. • Double our value per share. We will continue to invest 10–15% of our capital expenditure budget • Become one of the ‘Big Six’ UKCS independent operators as the in exploration. This will largely be in mature areas of reservoir and industry consolidates. geologies where we have specific expertise, such as the Tertiary and • Deliver 90-125 Mboepd net production by 2010/11. Jurassic sandstones of the CNS and the Permian and Carboniferous • Build 2P reserves of around 500 MMboe, supported by an equal sandstones of the SNS. volume of contingent resources . Produce We start from a position of strength. We have a high quality asset base, Access to infrastructure is key to maximising value from development a strong balance sheet and an experienced team working in a market and exploration, so we will focus primarily around existing production where there remain many attractive opportunities for growth. hubs, with infill drilling and satellite developments. We will continue to identify potential new hubs, and continually upgrade the portfolio as Venture’s strong competitive position has been built through the new projects mature. application of a three stage business model and continuing to apply this will enable us to achieve our longer term strategic goals: As the portfolio of on stream assets keeps growing, increased diversity of production continues to de-risk the business. In addition, as we are predominantly located in the North Sea, our production is relatively high margin with low political risk.

Acquire Develop Produce Governance

Acquire We will retain a tight geographic focus on the North Sea, where we can target our expertise on the undeveloped ‘stranded’ reserves in an estimated 400 unexploited fields.

In 2008 we will be actively participating in the 25th UK Licensing Round, aiming to increase significantly the size of our oil and gas portfolios through strategic alliances formed with MPX Oil and Gas Limited regarding CNS assets and with Volantis Exploration Limited regarding SNS assets.

Acquisitions will be used to accelerate growth to achieve our medium and long term strategic goals and ensure that Venture remains a consolidator as the majors continue to dispose of legacy assets. With a strong track record of almost 50 deals since we were founded and with substantial funding in place, we will be able to move quickly to secure acquisitions that match our criteria. Accounts & Notes Develop We are a low cost, efficient operator with a history of delivering market beating development costs through the 30 major development projects we have undertaken as operator since 2002.

Our development programme is now substantial and able to deliver the economies of scale and standardisation that can be achieved by managing multiple projects. In order to continue to tackle the cost challenge, we must maintain our obsession with eliminating inefficiencies and our back-to-basics approach that focuses attention on essentials, as well as carefully introducing appropriate new technologies. 18 Venture Production plc Annual Report and Accounts 2007

Business and Operational Review continued Oil and Gas Reserves The following table shows estimates of proven and probable reserves prepared by the Company’s engineers in accordance with the UK Statement of Recommended Practice issued by the Oil Industry Accounting Committee (July 2001). For total reserves, natural gas is converted to barrels of oil equivalent using a conversion factor of six thousand cubic feet of natural gas per barrel.

Total Group NW Europe Trinidad* Oil Equivalent Oil Gas Oil Gas Oil Gas 2007 Mboe Mbbls MMscf Mbbls MMscf Mbbls MMscf

Proven Reserves At 1 January 2007 Developed 45,369 15,061 181,848 14,129 181,848 932 – Undeveloped 35,430 11,265 144,994 9,923 144,611 1,342 383 Proven at 1 January 2007 80,799 26,326 326,842 24,052 326,459 2,274 383

Movements Revised Estimates 10,871 6,088 28,694 5,883 29,077 205 (383) Acquisitions 196 196 – – – 196 – Production (14,619) (5,189) (56,580) (4,984) (56,580) (205) –

At 31 December 2007 Developed 58,848 20,009 233,033 18,881 233,033 1,128 – Undeveloped 18,399 7,412 65,923 6,070 65,923 1,342 – Proven at 31 December 2007 77,247 27,421 298,956 24,951 298,956 2,470 –

Probable Reserves At 1 January 2007 140,669 92,855 286,881 90,909 286,881 1,946 –

Movements: Revised Estimates (28,033) (26,654) (8,273) (26,654) (8,273) – – Acquisitions 13,083 536 75,284 261 75,284 275 – Probable at 31 December 2007 125,719 66,737 353,892 64,516 353,892 2,221 –

Total Proven & Probable At 1 January 2007 221,468 119,181 613,723 114,961 613,340 4,220 383

Movements: Revised Estimates (17,162) (20,566) 20,421 (20,771) 20,804 205 (383) Acquisitions 13,279 732 75,284 261 75,284 471 – Production (14,619) (5,189) (56,580) (4,984) (56,580) (205) – Proven and Probable at 31 December 2007 202,966 94,158 652,848 89,467 652,848 4,691 –

* Trinidad is equity accounted at 40%. Venture Production plc Annual Report and Accounts 2007 19 Overview of Our Business of Our Overview

Reserve Movements Reserves Assessment and Reporting On the basis of UK SORP, Venture’s total net proved and probable The Company’s technical staff are highly skilled, with average industry reserves at the end of year 2007 were 203.0 MMboe, a reduction of experience of over 17 years. The Company relies primarily on its 8.4% compared to the end of year 2006. internal technical expertise, augmented by third party engineers, to ensure objective estimates of the Company’s reserves. The Company Our Performance in 2007 Performance Our Venture’s net reserves additions and revisions during 2007 included mitigates the risks associated with reserve estimation by adhering to a 6.9 MMboe related to the discovery of economic gas reserves at Company wide reserves policy and procedure that outlines the process Channon, and to improved performance from the Birch oil field and the transparently from technical staff to senior management. One of the Annabel and Saturn gas fields. The major downward revision during main constituents of the procedure is that 100% of the Company’s total 2007 was the re-categorisation of Pilot reserves from probable reserves reserves are reviewed annually. to contingent resource as a consequence of the heavier than anticipated crude recovered in the appraisal well drilled in 2007. Venture continues In addition to the reserves estimation carried out by the Company’s to report its equity-accounted reserves holding in Ten Degrees North engineers, an independent engineer (DeGoyler and MacNaughton) Energy Limited (Trinidad) which this year accounts for 4.7 MMboe of conducts a report on the proved and probable reserves annually. proven and probable reserves. Venture has separately engaged RPS Energy (2005–2007) to provide In 2007 Venture reacquired 75% of its interest in the Ensign field from an independent third party review of the Company’s procedures and NSGP as a consequence of the conversion of ArcLight’s NSGP interest methods for reserves estimation. The purpose of the review was to verify into Venture ordinary shares. that the reserves estimates prepared by the Company’s technical staff are in accordance with the guidelines and definitions of the 2007 SPE/WPC/ Venture’s total resource base, including possible, contingent and AAPG/SPEE Petroleum Resources Management System (SPE PRMS) using prospective reserves, amounts to 609.0 MMboe. accepted engineering principles. A variety of assets in various stages of development were evaluated, and RPS Energy confirmed that the procedures and methods utilised by the Company’s technical staff were appropriate and met the SPE PRMS guidelines. Governance Accounts & Notes 20 Venture Production plc Annual Report and Accounts 2007

Business and Operational Review continued Review of Assets Our area of production and exploration focus is the North Sea, The anticipated drop in pressure that would signal ‘blow-down’ of the where we have a strong underlying reservoir performance underpinning reservoir did not materialise during the year; this could indicate higher our four production hubs. In terms of hydrocarbon split, our SNS gas volumes of oil in place, with the potential for infill drilling opportunities. fields contributed in the region of 60% of total 2007 production, with the balance coming from our CNS oil fields. Larch Larch (Venture – 100%) continued to produce in line with expectations Central North Sea Oil during the year, with better compression uptime on Brae ‘A’ providing gas lift support. Water injection into the Z7 well has been managed in Our oil activities are focused in the CNS at two main producing hubs order to provide pressure support to the producer while maximising – ‘Trees’ and Greater Kittiwake Area (GKA). Our CNS assets contain recovery from the field. 107 MMboe 2P reserves and 337 MMboe total resources exposure. Sycamore ‘Trees’ At Sycamore (Venture – 100%), through continuous water injection Location Production (Mboepd) into the Central Sycamore SW2 well during 2006, the reservoir pressure recovered to a sufficient level to bring the SP2 production well back on stream. Production from SP2 was intermittent as a result of lower than 6.7 expected water injection rates from Brae. However, the well continues to produce in line with expectations.

Hub contribution to group production Preliminary results of a major seismic reprocessing and interpretation study on the entire ‘Trees’ production hub suggest that there is a limited re-investment opportunity in Central Sycamore. This led to the Company 16.2% taking a non-cash impairment charge in 2007 of £24.5 million against the value of our historic investment in Sycamore.

‘Trees’ production averaged 6,674 boepd in 2007 (2006: 9,595), The South Sycamore production well SP4, drilled and completed in late which represents 16% of total group production. 2005, continued to produce on natural depletion throughout 2007 in line with forecast. The possibility of drilling a further well into South The current producing fields, Birch, Larch and Central Sycamore, are tied Sycamore is under investigation. back to the Marathon operated Brae ‘A’ platform located to the north of the fields, and the South Sycamore field is tied back to the CNR operated Ash Tiffany platform to the south of 16/12a. Production is exported via the Following successful commercial negotiation with CNR, agreement was Forties Pipeline System. reached to drill an exploration well into Ash (Venture – 100%) from the Tiffany platform. The well was spudded in December 2006, and reached In 2007 Venture drilled the Ash exploration well which was dry. TD in the first quarter of 2007. It encountered good quality sands, however, they were found to be water-bearing and the well was suspended Exploration activity at ‘Trees’ in 2008 is focused on the technical work pending possible re-use as a sidetrack candidate into South Sycamore. needed to de-risk the potentially massive Cedar field and evaluate the commercial options. Cedar Technical work commenced on the Cedar prospect which has a very A seismic reprocessing project commenced across the entire ‘Trees’ large hydrocarbon potential (unrisked recoverable resources of 88 MMboe). area in support of identifying further drilling opportunities. This work will be completed in 2008, utilising the new seismic data to de-risk and better define the opportunity. Birch The Birch field (Venture – 100%) continued to produce under natural depletion from the Z3 production well, with some intermittent production from the cycled well Z5. During 2007 no water injection support was provided to Birch in order to allow the reservoir pressure to drop below bubble point. Venture Production plc Annual Report and Accounts 2007 21 Overview of Our Business of Our Overview

A seismic reprocessing project commenced across the entire ‘Trees’ area in support of identifying further drilling opportunities. in 2007 Performance Our Governance Accounts & Notes 22 Venture Production plc Annual Report and Accounts 2007

Business and Operational Review continued Review of Assets (continued) Greater Kittiwake Area Gadwall Location Production (Mboepd) Gadwall (Venture – 50%) was shut-in for most of 2007 as pipeline capacity was allocated to Mallard which continued to produce strongly. Periods of production in 2007 have confirmed that Gadwall continues to 9.1 have a well potential of over 4,000 boepd at low water cut. Subsurface work is in progress to evaluate further reserves potential to the north of the existing production well. Hub contribution to group production Goosander Since production start-up Goosander (Venture – 50%) has delivered 22.1% rates above initial expectations. In addition, there appears to be strong pressure support from the underlying aquifer and this will enable GKA performed strongly during the year, although production was Venture to deplete the reservoir efficiently without the need to drill a adversely affected by poor uptime availability of the tanker loading and water injection well. This means a potential capital expenditure saving export system, prior to a newly installed pipeline coming on stream in of around £29 million. Reservoir studies are ongoing to assess the the fourth quarter to replace it. benefit of an additional production well.

Production averaged 9,115 boepd (2006: 7,756) representing 22% of Group production. Fields currently in production are Kittiwake, Mallard, Gadwall and Goosander which performed particularly strongly during the year – ahead of expectations. Production from the various fields is tied back to the Kittiwake platform which processes and then exports the crude oil.

Export for most of the year was via the Single Anchor Loading system into a shuttle tanker to transport the crude onshore. Adverse weather conditions in the early part of the year, combined with some accidental third party damage to the tanker loading base, resulted in temporary loss of productive capacity until the successful installation of the new 33km export pipeline between the Kittiwake platform and the Forties Pipeline System.

The new pipeline provides a more robust, long term solution for GKA production. It was brought on stream in November 2007 and is expected to substantially improve operational uptime and allow GKA field life to be extended. With reservoirs performing ahead of expectations overall, this is a major step forward.

During the 24th Licensing Round, we were awarded block 21/17 with our GKA partner, Dana Petroleum (E&P) Limited. This contains two discoveries: Whinchat and Wagtail.

Kittiwake The Kittiwake field (Venture – 50%) continued to produce in line with expectations. The principal value of Kittiwake is the manned platform, which is the central processing and export hub for all our GKA production.

Mallard Production from the Mallard field (Venture – 50%) continues to exceed expectations. Water flood from both the north and south of the horizontal production well has been managed to maximise the recovery through 2007. Further simulation work is being undertaken to identify whether an additional production well in the northern area of the field would recover additional reserves. Venture Production plc Annual Report and Accounts 2007 23 Overview of Our Business of Our Overview

Grouse Christian (Venture – 50%) was discovered in 1990 by 21/20b-4st2 and tested Grouse (Venture – 50%) is an undeveloped discovery, east of the at 6,364 boepd from the Fulmar reservoir. The discovery lies 5km east of Kittiwake platform. An appraisal well was successfully drilled and tested Mallard and it is planned to develop the field as a single HPHT well tied back in 2007 at rates of over 10,000 boepd on a restricted choke. The well to Mallard and onwards to the Kittiwake platform. A field development plan Our Performance in 2007 Performance Our was completed and the tree installed. Pipeline and umbilical have will be submitted in 2008 with a well scheduled for 2009. been ordered and a pipe lay slot booked for third quarter of 2008 in order to tie the well back to the Goosander riser base. First production Bligh (Venture – 30.5%) is a gas condensate discovery found in 1993 by is scheduled for the first half of 2009, ahead of original plan. the 21/20a-5 well which tested at rates of 15.4 MMscfpd and 2,750 boepd from Fulmar sands. Venture is currently assessing development options Christian and Bligh for Bligh as a tie-back to Kittiwake. The Christian and Bligh discoveries lie to the east of Mallard in blocks 21/20b and 21/20a respectively and these ‘stranded’ reserves provide mid term development opportunities within Venture’s portfolio.

The new pipeline provides a more robust, long term solution for GKA production. It was brought on stream in November 2007 and is expected to substantially improve operational uptime and allow

GKA field life to be extended. Governance Accounts & Notes 24 Venture Production plc Annual Report and Accounts 2007

Business and Operational Review continued Review of Assets (continued) Other CNS Location

Chestnut Field As a result of field development activity on the Chestnut field (Venture – 69.9%), we anticipate first oil production in the third quarter of 2008. Installation of the production and support facilities on the new Sevan 300 floating production unit, the Hummingbird, was completed in December 2007 in Rotterdam. The Hummingbird was installed in the Chestnut field at the end of the year and offshore hook-up and commissioning work is ongoing. Ongoing subsurface studies using new data on the Chestnut reservoir have identified the potential to drill an additional production well in the field. This is expected to significantly increase recoverable reserves from the field and it is anticipated that this project will be sanctioned during the first half of 2008 leading to the well being drilled towards the end of 2008.

Other Central North Sea Assets The appraisal oil well results in the Pilot field (Venture – 70.4%) produced heavy oil with higher viscosity than anticipated and further work is now being done to determine the extent of the commercially recoverable oil. Based on the well result, the probable reserves associated with Pilot have been moved to the contingent resources category and an impairment charge of £9.0 million against the carrying value of the asset has been taken.

An appraisal well was drilled in the Narwhal field, to the south of Pilot, and this proved to be dry. The appraisal well drilled on the Millburn discovery encountered 12 feet of oil-bearing sandstone which is considered sub-economic and the appraisal well was also plugged and abandoned.

During the fourth quarter of 2007, drilling continued on the Selkirk appraisal well (Venture – 31.5%) but was suspended due to well control problems. However, economic volumes were found and the operator has started development planning.

A provisional field development plan was submitted for West Wick (Venture – 28.46%) based on a tie-back to the Captain platform. 2008 activity will focus on negotiations with Captain owners once Venture assumes operatorship.

Evaluation and appraisal work in 2008 will focus on Acorn and Beechnut (Venture – c. 80%) and Appleton (Venture – 100%) and Halley (Venture – 40%) fields, where we have established significant opportunities. A decision on the requirement for an Acorn appraisal well will be made in the first half of 2008.

An ongoing joint study with Talisman on the Appleton/Halley area will be concluded in 2008, with commitment to a Halley appraisal well likely to be the first phase of activity. Venture Production plc Annual Report and Accounts 2007 25 Overview of Our Business of Our Overview

The Hummingbird was installed in the Chestnut field at the end of the year and offshore hook-up and commissioning work is ongoing. in 2007 Performance Our Governance Accounts & Notes 26 Venture Production plc Annual Report and Accounts 2007

Business and Operational Review continued Review of Assets (continued) Southern North Sea Gas Mimas The production well in the Mimas field (Venture – 15%) was drilled and Our gas activities are situated in the SNS area where we have 42 blocks. completed by ConocoPhillips, the field operator, in June 2006. The well At the end of 2007, we had two production hubs – ‘A’ Fields and GMA. was tied back to the Saturn LOGGS pipeline and came on stream in Our SNS assets contain 91 MMboe 2P reserves and 272 MMboe total June 2007 with performance in line with expectations. resources exposure. Amanda/Agatha ‘A’ Fields The Amanda discovery well (Venture – 100%), originally drilled in 2003, Location Production (Mboepd) was sidetracked in the first half of 2007 and tested at rates uneconomic on a stand-alone basis. However, there is the potential for a joint development with the Agatha prospect (Venture – 100%), to the north of Amanda, which 20.4 is due to be drilled in 2009. Reservoir studies are also in progress to explore options to increase well deliverability. Hub contribution to group production Ensign The Ensign field (Venture – 100%) straddles SNS blocks 48/14 and 48/15a. Discovered in 1986, the gas-in-place volumes represent one of 49.4% the largest proven undeveloped gas fields in the area. The Noble Julie Robertson drilled and completed a vertical appraisal well on Ensign and Venture’s ‘A’ Fields production hub comprises six producing gas fields confirmed gas-in-place volumes of approximately 300 Bcf with rates of – Audrey, Ann, Alison, Annabel, Saturn and Mimas, which together 12-15 MMscfpd achieved during the production test. produced 20,367 boepd (2006: 25,972), and represented 49% of total Group production. ‘A’ Fields will continue to be a core hub for A second appraisal well was drilled in the fourth quarter of 2007 and was at least the next decade. hydraulically fractured using the boat and equipment developed for the Chiswick field. It was tested at stabilised rates of over 42 MMscfpd, at the Production performance in 2007 reflects a natural decline, although high end of expectations, with field development due to commence in production from Annabel and Saturn continued to exceed expectations. 2008 targeting first gas in late 2009.

Annabel Adele Since the start of production in 2005, the Annabel field (Venture – 100%) The Adele prospect (Venture – 100%) is located in block 49/11a has consistently outperformed expectations. We anticipate continued north east of the Audrey field. Subsurface mapping is ongoing to strong performance without the need for further capital expenditure, define the size (c. 30 Bcf unrisked) and risk of the prospect better but an ongoing remapping exercise may identify additional drilling prior to the commencement of well planning. The well is currently opportunities. planned for late 2009/early 2010.

Audrey 48/15b Audrey’s two unmanned platforms support production from the Audrey The 48/15b block (Venture – 100%) was awarded in the 22nd Licensing field (Venture – 100%) and provide a tie-back route for Annabel, as well as Round and, following an extensive seismic reprocessing effort, Venture a control for the Ann and Alison fields. A two year asset integrity project has committed to drill an exploration well on the block. Prospect commenced in 2007 to secure facility life to 2020. mapping is currently being finalised with a view to drilling commencing in late 2008. Ann/Alison The Ann and Alison fields (Venture – 100%) continue to perform in line Easington Catchment Area with expectations. Evaluation of a potential workover of the Ann A4 well Channon is ongoing with a decision due in 2008. Venture operates two blocks in the SNS area 47/3h (Venture – 47.1%) and 47/8c (Venture – 55.8%). These blocks contain the Channon prospect Saturn and Venture’s average equity holding is 54%. An exploration well was The Saturn development (Venture – 22%) is operated by ConocoPhillips successfully drilled and tested in the third quarter of 2007 flowing at and includes the Atlas, Hyperion and Rhea accumulations. The Saturn a rate of 55 MMscfpd of gas, limited by the throughput of the test field is continuing to exceed expectations, and a remapping exercise is equipment. Estimated recoverable reserves are 30–40 Bcf net with underway to identify drilling opportunities. initial production rates of 35 MMscfpd (net to Venture) which is at the top end of expectations. It is planned to develop Channon jointly with Barbarossa which is currently being drilled. Venture Production plc Annual Report and Accounts 2007 27 Overview of Our Business of Our Overview Our Performance in 2007 Performance Our

Following on from our acquisition of WHAM, completed in November 2007, Venture now has access to a number of additional exciting exploration prospects in the SNS.

Barbarossa Alcyone Venture has farmed-in to the SNS block 47/9c (Venture – 90%) to drill an Alcyone is an exploration prospect in block 53/3d to the south east of appraisal well on the Barbarossa field, which was discovered in 1982 by Leman and is 100% owned by Venture. It is a commitment well which is well 47/9b-4. A single well development is planned which targets initial planned to be drilled in the second/third quarter of 2009. A provisional reserves in the range of 30–35 Bcf gross (29–32 Bcf net to Venture), but well location has been identified and well design will commence in the with significant potential upside. The appraisal well is scheduled to be third quarter of 2008. The development is provisionally planned to be drilled in early 2008 with the Noble Julie Robertson rig and if successful a single subsea tie-back to Leman. Governance would be developed jointly with Channon. Blocks 48/3 and 48/4 East Irish Sea Blocks 48/3 and 48/4 have a number of interesting opportunities, Marram although the most promising are the Morpheus and Hypnos prospects Blocks 100/4 and 100/9b (Venture – 60%) contain the Marram discovery to the north of the blocks. Seismic reprocessing work/interpretation is in the Morecambe Bay area of the East Irish Sea, where an appraisal ongoing across the acreage to identify a suitable well to bring forward. well is planned during 2008/9 as part of a multi-operator campaign. There is a contingent well commitment for 2008 on this non-operated The discovery lies within 25km of four potential off-take routes and on (Venture – 16%) licence. Likely development is a subsea tie-back to trend with both the producing Hamilton and Lennox fields. Blocks 100/4 Ravenspurn North. and 100/9b also have exploration prospectivity and contain up to six additional Sherwood sandstone exploration leads. Blocks 43/11 and 43/12 These 100% Venture owned blocks are located to the west of the UK SNS Exploration Acreage Esmond/Forbes area and north of Carna. The main prospect on this Following on from our acquisition of WHAM, completed in November 2007, Promote licence is a Carboniferous target to the south east of the blocks Venture now has access to a number of additional exciting exploration called Andromeda. A 3D seismic survey is planned for 2008 to better prospects in the SNS. The area covers 18 blocks and includes 14 define closure to the north east for Andromeda and the geometry of a prospects (two ready to drill) plus numerous leads. number of leads on the block. A contingent well is planned for 2009. Accounts & Notes Key near term opportunities include: Schooner South East This 100% Venture owned prospect is a possible extension of the Carna Schooner field into the Venture operated block. Subsurface studies are Carna (blocks 43/21b and 43/22c) is planned to spud in September 2008, ongoing in 2008 with a potential well proposal in late 2008 for a well in with Venture as operator, and is a commitment well. Venture recently 2009. Tie-back is likely to be to Schooner. There is the potential for a joint completed a farm-in on a modest promote on this well to increase our development with the Topaz and Garnet fields. total equity to 56% across the two blocks. Following a successful well, the field is likely to be developed via an NUI with one or two wells to the nearby Garrow field and then via Trent into the ETS (Venture – 25%). 28 Venture Production plc Annual Report and Accounts 2007

Business and Operational Review continued Review of Assets (continued) Greater Markham Area currently produces. It is planned to insert two velocity strings into Location Production (Mboepd) these wells in 2008 to improve long term performance, following the improvements seen with the new compression facilities at Markham.

4.5 J3c The J3c field (Venture – 4.025% unitised interest) was discovered in 1995 Hub contribution by well J6-A5 drilled from the Markham J6A platform. The field straddles to group production the boundary between J/3a and J/6 and is unitised, with 23% of reserves deemed to lie within the J/6 block. Venture has 17.5% of the J/6 block and hence holds a 4.025% unitised interest. It is anticipated that the field will 10.9% continue to produce until 2025 without further capital investment. Situated on the median line between the UK and Dutch sectors of the Kew North Sea, GMA contributed 4,506 boepd during 2007 (2006: 1,393), The Kew field (Venture – 100%) is located east of Chiswick in UK waters, representing 11% of total Group production. and the discovery well 49/5-4 drilled in 1988 proved the existence of gas in the Carboniferous sandstone. The highlight of 2007 was the start-up of production from the Chiswick field at the end of September and a second key project was the The development of Kew requires a single horizontal well with multiple commissioning of the Markham Compression Tower, which resulted in hydraulic fractures that can be tied back to the Chiswick platform. increased operational and production performance. Well planning is under-way and we expect to drill Kew in 2008.

Markham Stamford The Markham gas field (Venture – 37.5% unitised interest) straddles the Located in the UKCS 24th Licensing Round, block 49/10c, the Stamford UK and Dutch sectors of the SNS and has been producing since 1992. discovery (Venture – 100%) is ideally situated for a short subsea tie-back The facilities have been developed over several years and comprise to the Markham platform. Drilling is due to commence in 2008, with first the manned central processing and production platform located in gas targeted for winter 2008/9. Dutch block J/6a, an unmanned satellite well and production platform (ST-1) and the installation of the compression tower which collectively F3-FA re-enforce Markham as a major transportation hub for the area. The F3-FA (Venture – 58%) is located 230km north of Den Helder and Markham field itself continues to perform in line with expectations. is estimated to contain gross recoverable reserves of 60 Bcf. The development plan envisages a subsea completion and tie-back Chiswick to nearby host infrastructure. Located in UK block 49/4a, the Chiswick field (Venture – 100%) has been developed via an unmanned platform tied back to Markham. Battersea After drilling and completion of the first development well (Chiswick The Battersea exploration prospect (Venture – 100%) is located north Alpha) early in 2007, it had to be suspended due to the unavailability of of Markham and is a Rotliegend feature with unrisked reserves of a suitable stimulation vessel. Venture was able to develop an innovative approximately 35 Bcf. Subsurface evaluation is ongoing and we expect solution, utilising a pumping spread mounted on the deck of a large to be in a position to drill an exploration well in early 2009. supply boat, and successfully performed a multiple fracture stimulation resulting in a well capable of delivering over 50 MMscfpd. The well Wandsworth was brought into production in September via the unmanned satellite The Wandsworth exploration prospect (Venture – 100%) is a platform tied back to Markham. Carboniferous play, located east of the Chiswick field, and is estimated to contain unrisked reserves of over 100 Bcf. The initial evaluation has The second Chiswick development well (Chiswick Gamma) has now been completed and well design and planning is under-way prior to also been drilled, completed and hydraulically fractured. The estimated drilling in 2009. In the event of a successful well, the development unconstrained production capability of the well was 75 MMscfpd, would be as a tie-back to the Chiswick or Markham platforms. materially in excess of pre-drill expectations. The well has recently been tied into the producing infrastructure and is on stream. Outlook

In March 2008, Venture acquired the remaining 5% interest in block 49/4a The pace and momentum will continue into 2008, and we will be that it did not already own. actively participating in the 25th UK Licensing Round with our strategic partners, MPX Oil and Gas Limited and Volantis Exploration Limited. Windermere The Windermere gas field (Venture – 20%) lies in block 49/9b, about With an unrisked resource potential of 609 MMboe, we have entered 7km west of Markham, and has been in production since 1997. The field 2008 with a strong, well-balanced portfolio and significant near term was developed via an unmanned production platform tied back to the opportunities. Markham ST-1 platform with two production wells, one of which Venture Production plc Annual Report and Accounts 2007 29 Overview of Our Business of Our Overview

Frac Boat Case Study

With an aggressive timetable to meet to bring the Chiswick Alpha field on stream, when Venture found that the vessel it in 2007 Performance Our had planned to use had been withdrawn from the North Sea it had to come up with an alternative solution. These vessels are essential to fracture certain reservoirs to aid the flow of hydrocarbons.

An innovative application of existing technology produced the solution. Working in partnership with Schlumberger, the team converted a traditional offshore supply vessel to a well stimulation vessel in less than two months.

Equipment and personnel from all over the world had to be brought together as pumping equipment was installed onto the Siem Mariner, one of the biggest supply vessels at around 900m2 of deck space.

Drive and determination made sure these logistical and technical challenges were overcome and the newly commissioned frac boat successfully completed its first operations at Chiswick Alpha, before going on to undertake fracture work at the equally successful Chiswick Gamma and the Ensign appraisal wells. Governance Accounts & Notes 30 Venture Production plc Annual Report and Accounts 2007

Financial Review

Selected financial information Increase / and key performance indicators 2007 2006 (Decrease)

Production (boepd) 41,228 44,706 (7.7)% Revenue (£ million) 358.3 360.3 (0.5)% Operating profit (£ million) 116.6 181.9 (35.9)% Profit before taxation (£ million) 101.2 176.7 (42.7)% Profit for the year (£ million) 48.2 81.6 (40.9)% Net cash generated from operating activities (£ million) 240.2 273.5 (12.2)% Fully diluted earnings per share (pence) 33.9 59.0 (42.5)% Effective realised price (£ per boe sold) 25.91 24.18 7.2% Lifting costs excluding dry hole costs (£ per boe produced) 5.82 5.10 14.1% Depreciation, depletion and amortisation (£ per boe produced) 5.56 5.41 2.8% Operating profit excluding impairment charges and exploration/development costs written off (£ per boe sold) 13.16 12.54 4.9%

Income Statement completed, preliminary results of this study suggest that in the central Revenue of £358.3 million for the 12 months ended 31 December 2007 part of the Sycamore field there is limited re-investment opportunity. (2006: £360.3 million) was 0.6% lower than 2006. This reflects a 7.7% Accordingly, an impairment charge of £24.5 million has been made reduction in production to 41,228 boepd (2006: 44,706 boepd) which was reducing the carrying value of the Sycamore field to its projected value largely offset by the impact of higher prices, particularly in the second half in use to the business. of the year. • In aggregate, these charges reduce the reported operating profit and profit before tax for the year by £62.8 million (2006: £3.9 million) and Gas accounted for 65% of production and 52% of revenues at an effective the profit for the year by £31.4 million (2006: £1.9 million). realised price (ERP) of £21.06/boe (2006: £23.60/boe). Oil represented 35% of production and 48% of revenues at an ERP of £34.14/boe Lifting costs, excluding dry hole costs, per boe produced rose by (2006: £25.30/boe). 14.1%. This is in part attributable to higher well workovers of £9.7 million (2006: £7.7 million), the impact of fixed costs spread over lower Charges to the income statement have been made following the results of production volumes and to the underlying cost escalation being seen a number of wells drilled in 2007: across the industry.

• There is a charge of £18.1 million (2006: £3.9 million) relating to On a unit basis, the charge for depreciation, depletion and amortisation exploration activities where hydrocarbons were not encountered is broadly comparable with the prior year. with respect to Ash, Millburn and Narwhal (2006: North Channel and Moonraker). Operating profit fell by 35.9% to £116.6 million (2006: £181.9 million) primarily • There is a charge of £11.2 million (2006: nil) relating to development costs due to the charges relating to unsuccessful exploration and development written off. This reflects the write-off of the original drilling investment in activities and asset impairment described above. Excluding the impact the Amanda field in 2003, in accordance with recommended accounting of these charges, the underlying operating profit margin per unit sold practice for the oil and gas industry. The spend in connection with the improved by 4.9% from £12.54/boe in 2006 to £13.16/boe in 2007. sidetrack completed in 2007, which encountered hydrocarbons but at a rate uneconomic on a stand-alone basis, has been carried forward as an The key performance indicators discussed above measure the unit asset under construction pending assessment of the potential for a joint profitablilty of the Company and aid understanding of the trends in development with the Agatha prospect. profitability of the business. • There is a charge of £33.5 million (2006: nil) relating to the impairment of assets on the Sycamore and Pilot fields. The appraisal well on the Pilot Net finance expense was higher in 2007 compared to 2006. This was field was drilled in 2007 and produced heavy oil with higher viscosity driven by a higher level of borrowings and the unwinding of the equity than anticipated, which has impacted the potential commercial viability component of the convertible bond. Details of the finance income and of the oil. As a result, a £9.0 million impairment charge has been made. expense are shown in Note 7 to the accounts. During 2007, Venture commenced a major seismic reprocessing and interpretation study on the entire ‘Trees’ production hub, which will be completed during 2008. Whilst the analysis of the remaining potential in the southern part of the Sycamore development has not yet been Venture Production plc Annual Report and Accounts 2007 31 Overview of Our Business of Our Overview

“The closing balance sheet reflects the strength of Venture’s business with a cash balance of in 2007 Performance Our £158.4 million and a substantially unutilised borrowing facility.”

The effective tax rate for the year was 52.4% (2006: 53.8%) with the majority In July 2007, the Company paid a dividend totalling £67.6 million (2006: nil), of the Group’s profits being subject to UK Corporation Tax at 30% and a representing a payment of 50.0 pence per share, of which 10.0 pence was Supplementary Charge of a further 20%. Further details on the income an ordinary dividend and 40.0 pence per share was a special dividend. tax expense for the year are shown in Note 8. In August 2007, the Company issued £151.0 million of 3.25% unsecured Balance Sheet convertible bonds due 2010, as part of the strategic investment in the

The Group had fixed tangible assets of £818.6 million (2006: £664.6 million) Company by 3i Group plc and its affiliates and ArcLight Capital Partners, Governance reflecting continuing field development and acquisition activity over the LLC and its co-investors through an affiliate. period, in particular on the Chiswick and Ensign developments. In August 2007, the Company also put in place a new medium term The intangible assets of £53.3 million (2006: £47.9 million) arose on the committed corporate debt facility of £350.0 million. This new facility acquisition of WHAM Energy plc in 2007 and CH4 in 2006. Under IAS 12, replaces Venture’s previous borrowing base facility. In November 2007, the deferred tax attributable to the difference between the fair value of this facility was successfully syndicated to a syndicate of 11 banks. Despite assets and tax written-down value has been recognised, resulting in the difficult credit market conditions, demand for the facility was strong and recognition of a significant deferred tax liability. The goodwill is subject to allowed Venture to increase the size of the facilities to £365.0 million. impairment testing annually. In addition, the Company raised US$424.0 million and £25.0 million in a The investment of £16.3 million (2006: £11.1 million) is made up of the private placement of notes with US and UK institutional investors in August investment in NSIP, the investment in the Sevan Production General 2007. These notes have final maturities of between 10 and 15 years and are Partnership and our interest in TDNEL. at a fixed rate. Further details of these financial instruments are provided in Notes 2 and 25. Derivative financial instruments are included as a liability in 2007 (2006: asset) reflecting the value of the hedges in place at year end compared Taken together, these funds will help finance the ongoing development to commodity prices at that time. Further details are given in Note 25. of Venture’s existing asset base as well as fund potential future acquisitions. The closing balance sheet reflects the strength of Venture’s business Accounts & Notes The deferred tax liability has increased from £193.4 million at 31 December with a cash balance of £158.4 million and a substantially unutilised 2006 to £200.4 million at 31 December 2007, mainly due to the profits made borrowing facility. in the period, the tax on which will be payable in future periods. Peter Turner Cash Flow and Funding Finance Director The net cash generated from operating activities was £240.2 million 17 March 2008 (2006: £273.5 million). This was offset by expenditure on investing activities of £223.6 million (2006: £244.4 million).

Venture elected to pay £16.0 million of cash taxes in January 2007 to take advantage of the ability to offset 2005 Capital Allowances against the higher tax rate for 2006 which reflects the increase in the Supplementary Charge from 10% to 20% for 2006 and later years. 32 Venture Production plc Annual Report and Accounts 2007

Board of Directors

1 2 Executive Directors 1. Michael Wagstaff (46) Chief Executive Member of the Nominations Committee Mike Wagstaff took over as Chief Executive in September 2004, having joined Venture as Finance Director in June 1999 and he was appointed to the Board on 26 October 1999. He began his career with Shell as a Petroleum Engineer based in various locations in Western Europe. From 1988 to 1999, he was employed by Schroders in its Corporate Finance 3 4 department, based in London and New York, where he provided corporate finance advice to a wide range of energy companies including Venture.

2. Jon Murphy (52) Chief Operating Officer Jon Murphy joined Venture in March 1999 and was appointed a Director on 16 August 1999. He is a geologist by profession and, prior to joining Venture, he spent over ten years with LASMO. His positions within LASMO included Chief Geologist in Indonesia and New Business 5 6 Manager in Pakistan. Prior to joining LASMO, he served in several senior technical positions for Conoco, Texas Eastern and Thomson North Sea.

3. Peter Turner (37) Finance Director Peter Turner was appointed to the Board on 6 December 2007 as Finance Director. He was previously at The BOC Group plc, prior to its acquisition by Linde AG, where he held a number of senior financial positions including Director of Taxation and Treasury and Finance Director of the 7 8 group’s largest division, Industrial and Special Products. Peter qualified as a Chartered Accountant whilst working at PricewaterhouseCoopers and has a degree in chemistry from Oxford University.

4. Rod Begbie (41) Corporate Development Director Rod Begbie joined Venture in August 2002 and was appointed a Director on 19 June 2007. He has 16 years’ experience in corporate finance and private equity and spent the early part of his career as a management 9 10 consultant, before moving into a Group Corporate Strategy role at the Royal Bank of Scotland. Latterly he was a Director of ING Barings pan-European private equity business, a position that followed four years of successful investing as an Assistant Director within the private equity arm of RBS. Having spent his early life in Aberdeen, he returned in 2002, after completing an MBA at INSEAD.

Non-Executive Directors 11 12 5. John Morgan (63) Chairman Chairman of the Nominations Committee and member of the Remuneration Committee John Morgan was appointed a Director of Venture on 7 September 1998. He worked for BP for over 30 years and held senior positions in that company including Head of South East Asia Exploration Office, North Sea Commercial Manager, General Manager North Sea Operations and 13 President BP Exploration (Alaska). He is also a Director of John Wood Group PLC. Venture Production plc Annual Report and Accounts 2007 33 Overview of Our Business of Our Overview

6. Mark Nicholls (58) (Independent) 10. Robb Turner (45) Deputy Chairman and Senior Independent Director Robb Turner was appointed a Director of Venture on 12 September 2007. Chairman of the Audit Committee; member of the Remuneration He is a co-founder of ArcLight Capital Partners and has 17 years of energy Committee and member of the Nominations Committee finance, corporate finance, and public and private equity investment Mark Nicholls was appointed a Director of Venture on 15 January 2004. experience. Prior to forming ArcLight in 2000, Robb founded and built Having qualified as a Solicitor, he spent most of his career with SG Berenson Minella & Company’s energy advisory practice. From 1990 to Warburg, becoming Head of Corporate Finance and a main board 1998, he held senior positions at Smith Barney, Schroders, Wasserstein Director of the SG Warburg Group. More recently his broad knowledge Perella and Kidder, and Peabody & Co. where he was responsible of the financial market place was applied at the Royal Bank of Scotland for advising on buyouts, corporate finance structures, and mergers Group where he was Managing Director of the private equity group. and acquisitions. Robb earned a Bachelor of Science in Engineering Currently he is Non-Executive Chairman of EcoSecurities Group plc from the US Military Academy at West Point and a Master of Business in 2007 Performance Our and a Non-Executive Director of Nationwide Building Society, Administration from Harvard Business School. Northern Investors Company plc and Evolution Group plc. 11. Tom Blades (51) (Independent) 7. Larry Kinch (54) Member of the Remuneration Committee Larry Kinch is a founder of Venture and was appointed a Director Tom Blades was appointed a Director of Venture on 16 March 2006. on 1 November 1996. He is a Petroleum Engineer by profession and his A qualified Chartered Electrical Engineer, he spent most of his formative previous experience was with Schlumberger, Shell and BP as an Engineer. years with Schlumberger, the majority of these in managerial positions In 1985, Larry co-founded Petroleum Engineering Services, an Aberdeen worldwide. Since then he has led Numar Corporation through its rapid based oil field equipment and services company, which was acquired post-IPO growth and following its acquisition, briefly became Executive by Halliburton Company in February 2000. He also established Energy Vice-President of Halliburton. As President and Chief Executive Officer of Development Partners, of which he is Chairman. Spectro, a specialised manufacturer in the global analytical instruments industry, he restructured the company and implemented a programme 8. Alan Jones (63) (Independent) of fundamental change. For the past three years Tom has been Chief Chairman of the Remuneration Committee; member of the Executive Officer of Choren Industries, a German technology company, Audit Committee and member of the Nominations Committee which he has transformed to become the world leader in the conversion Alan Jones was appointed a Director of Venture on 28 April 2005. In his 35 of biomass to synthetic transport fuels. He is also a Director of Twister BV. year career with BP he gained extensive experience, both internationally and in the North Sea in major oil field developments and in operational 12. Graeme Sword (39) management. He was responsible for managing the successful $6 billion Graeme Sword was appointed a Director of Venture on 24 October 2007 development of BP’s Cuisiana and Cupiagua fields in Colombia. Alan retired and is a Partner with 3i as well as Head of 3i’s Oil, Gas & Power business from BP in 2000 after three years as regional President of BP in Scotland, unit. He started his career in brand management with Unilever before during which time he was a member of the Government task force joining 3i in 1995. Graeme was appointed a Partner with 3i in 2001 Governance examining the future of the UK oil and gas industry. and took up his current position in 2002. In his career he has led a number of high profile transactions in the exploration and production 9. Tom Ehret (56) (Independent) and oil service sectors including Petrofac, Vetco, Dockwise and Member of the Audit Committee Delta Hydrocarbons. Graeme also serves on the Boards of Energy Tom Ehret was appointed a Director of Venture on 16 March 2006. Development Partners and Delta Hydrocarbons. Graeme holds an He trained as a mechanical engineer and in his 30 year career has held MA from the University of Dundee. a variety of both technical and commercial positions in several leading offshore engineering and construction companies. During this period 13. Andrew Carr-Locke (54) (Independent) he has been instrumental in several industry shaping moves, including Member of the Audit Committee the turnaround of the loss-making Stena Offshore, its acquisition of Andrew Carr-Locke was appointed a Director of Venture on 3 March Santa Fe’s pipelay business and the merger between Stena Offshore 2008. He was Finance Director of George Wimpey PLC for six years until and Coflexip, the leading company at that time in the subsea sector. June 2007 when the Company merged with Taylor Woodrow. A Fellow Following his success as Chief Executive Officer of Stena Offshore of the Chartered Institute of Cost and Management Accountants, (subsequently Coflexip-Stena Offshore, (CSO)), Tom became Group Andrew has extensive experience of working at a senior level in a Vice-Chairman and President of the offshore branch of Technip following number of high profile roles. Before joining George Wimpey he was its acquisition of CSO. He is now Chief Executive Officer of Acergy SA, Group Finance Director of Courtaulds Textiles plc, prior to which he was a leading offshore contractor to the oil and gas industry, and was European Finance Director at United Distillers and Vintners. Andrew was recently appointed as a Director of Dockwise. also a Non-Executive Director of the utility company AWG plc from 2003 Accounts & Notes until it was successfully sold and delisted in 2007. 34 Venture Production plc Annual Report and Accounts 2007

Directors’ Report

The Directors present their report and audited accounts for the year In utilising any free cash flow generated, the Board has determined ended 31 December 2007. the following priorities: first, acquisitions or other internally generated business development opportunities meeting Venture’s strict investment Principal Activities criteria; second, the repayment of part of the Group’s outstanding The principal activity of the Company and its subsidiary undertakings debt to sustainable long term levels; and third, the return of capital to is oil and gas production. Its specific focus is on the exploitation of shareholders through dividends or other mechanisms. discovered but undeveloped fields, known as ‘stranded’ reserves, through the application of modern technology and oil field operating During the course of 2007, Venture spent £13.9 million (£6.3 million practices. cash and £7.6 million equity) on the acquisition of WHAM Energy plc. In addition, a substantial proportion of the shares needed to satisfy Business Review share-based incentive compensation schemes for management and The Companies Act 1985 requires the Directors’ Report to include a employees have been met by purchasing shares in the market, as well as Business Review of the Company, giving a true and fair review of the through the issue of additional new shares. Details of the shares purchased business of the Group and its subsidiary undertakings plus a description by the Company are shown below under the Authority to Purchase of the principal risks and uncertainties. The Business Review should also Shares section. include analysis using financial and other key performance indicators (KPIs), as well as information relating to environmental and employee This flexible policy will continue, allowing Venture to manage the matters. The Business Review must also provide an indication of likely purchase of acquisitions, which are an important but unpredictable part future developments in the Group’s business and an assessment of the of Venture’s growth. Group’s position and prospects. Charitable and Political Donations A review of the Group’s business performance during 2007, position at During the year the Group made charitable donations amounting to the year end and likely future developments are reviewed in the Business £18,162 (2006: £1,270). A Social Investment Policy has been approved and Operational Review (pages 14 to 29), the Chairman’s Statement by the Board and is based around our employees’ links in the local (pages 8 and 9) and the Chief Executive’s Review (pages 10 to 13). communities. The Group operates an informal ‘Employee Matched The Financial Review (pages 30 and 31) covers financial aspects of the Funding Scheme’ within pre-determined social and financial criteria. Group’s performance during the year with risk management and controls being addressed within the Corporate Governance Report (pages 37 No political donations were made and no political expenditure was to 44). A report on Corporate Social Responsibility appears on pages 54 incurred during the year. and 55. Creditor Payment Policy The information in all of these sections, which fulfils the requirements It is the Company’s policy that payments to suppliers are made in of the Business Review, is incorporated into this Directors’ Report accordance with those terms and conditions agreed between the Group by reference. and its suppliers, provided that all trading terms and conditions have been complied with. Results and Dividend The Group’s profit for the year ended 31 December 2007 amounted to At 31 December 2007, the Group had an average of 40 days purchases £48.2 million (2006: £81.6 million), which will be transferred to reserves. outstanding (2006: 25 days).

The Directors have proposed a final ordinary dividend of 12.0 pence Directors per share (2006: 10.0 pence). No special dividend is proposed The current Directors of the Company and their biographical details (2006: 40.0 pence). are contained on pages 32 and 33 and their interests, including share options in the Company’s share capital, are set out in the Directors’ Dividends have been waived on the holdings of Venture Production IOM Remuneration Report on page 50. Employee Benefit Trust. On 16 June 2007, Rod Begbie was appointed as Corporate Development Dividend Policy Director, having joined Venture in 2002 as Corporate Development As an oil and gas production company, Venture is required to maintain Manager. This reflects the importance of this activity to our next stage of high and sustained levels of capital reinvestment into its business. Up development and the Board’s wish for clear Board level accountability. to 2005, Venture had invested far greater levels of capital than it had generated in operating cash flow. This shortfall has been funded by Following the announcement of the strategic partnership with a combination of debt and equity financing. During 2006 and 2007 3i Group plc and its affiliates and ArcLight Capital Partners, LLC in July Venture generated free cash flow expenditures and expects to continue and subsequent approval of the £151 million convertible bond financing doing so. in August, two new Non-Executive Directors were appointed. Robb Turner, co-founder of ArcLight, was appointed on 12 September and Graeme Sword, a partner with 3i’s Oil, Gas and Power business unit, joined the Board on 24 October. Venture Production plc Annual Report and Accounts 2007 35 Overview of Our Business of Our Overview

Marie-Louise Clayton, having indicated her intention to leave the Board Authority to Purchase Shares earlier in the year, was replaced as Finance Director by Peter Turner on The authority given at last year’s AGM held on 6 June 2007 for the 6 December. Company to purchase in the market up to 13,349,629 of its ordinary shares, representing 10% of the issued share capital, expires on 14 May 2008.

On 3 March 2008 Andrew Carr-Locke joined the Board as an additional Shareholders will be asked to give a similar authority at the 2008 AGM. in 2007 Performance Our independent Non-Executive Director. No shares have been purchased under the authority granted at the The Company’s Articles of Association require that one third of the AGM in 2007, however, 2,173,250 ordinary shares of 0.4 pence each were Directors must submit themselves for re-election each year by rotation. purchased in January and February 2007 under the authority granted Additionally, newly appointed Directors will submit themselves for in 2006 for a total consideration of £15.8 million at an average price of election at the next Annual General Meeting following their appointment. £7.26 per share. The shares were purchased in an on-market programme of buying back the Company’s shares, initiated in May 2006. No Director was or is materially interested in any contract which was significant in relation to the Group’s business, other than his service At the date of this report all the shares bought back had been transferred contract, where appropriate, during or at the end of the period. out of treasury into the Company’s Employee Benefit Trust to meet Details of service contracts are set out on pages 49 and 50. During the obligations under employee share plans. year, the Company maintained insurance for its Directors and Officers. No dividends are paid on treasury shares and no voting rights attach An evaluation has been carried out of each Director’s performance to them. during the year and it has been concluded that each Director continues to be effective and demonstrates a strong commitment to the role. Employees and Employment Practices Employees are encouraged to become involved in the Group’s operating Substantial Shareholdings performance and in all matters that affect them. Regular performance At 10 March 2008 the Company’s share register of substantial updates are provided by the Executive team and also on employment shareholdings showed the following interests in 3% or more of the related matters such as appraisal training, stress counselling workshops Company’s issued share capital: and winter driver training. Governance Number of Ordinary Shares % A significant proportion of the employee bonus arrangements are linked to overall Group performance and employee involvement in key targets Schroders Investment Management 15,576,117 10.88 is encouraged through appropriate incentive schemes. Employees are Aberdeen Asset Management PLC 12,671,380 8.85 also actively encouraged to participate in the Company’s Share Incentive LW Kinch 11,049,572 7.72 Plan, which all employees are eligible to join after six months’ service. ArcLight Capital Partners, LLC 10,186,510 7.11 The Group remains committed to improving the skills, knowledge and AXA Investment Managers UK Limited 8,410,804 5.87 competence of all employees and appropriate training is provided in a 3i Group plc 8,108,328 5.66 number of areas. Legal & General Investment Management 6,818,485 4.76 Lloyds TSB Group plc 6,610,756 4.62 The development needs of all employees are reviewed as part of the Barclays Plc 4,580,305 3.20 annual appraisal process and development activity is a key part of this process. Share Capital The share capital and the changes during the year are described in The Group acknowledges the importance of its workforce and its aim is Note 26 on page 93. to attract, retain and motivate high calibre employees.

Annual General Meeting (AGM) The Group gives full and sympathetic consideration to the employment,

The Company’s AGM will be held on 14 May 2008 at the Copthorne training, career development and promotion of disabled employees. Accounts & Notes Hotel, Huntly Street, Aberdeen and the Notice of Meeting has been As far as employees who become disabled during their employment circulated separately to shareholders with this report. are concerned each case is judged on its own specific circumstances.

The Group is opposed to all forms of discrimination and offers equal access to employment, promotion and development regardless of gender, race, ethnic origin, religion, sexual orientation, age and disability. 36 Venture Production plc Annual Report and Accounts 2007

Directors’ Report continued

Going Concern After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts.

Statement of Directors’ Responsibilities Company law requires the Directors to prepare accounts for each financial year, which give a true and fair view of the state of affairs of the Group and of the profit or loss for that year. In preparing these accounts, the Directors are required to: • Select suitable accounting policies and then apply them consistently. • Make judgements and estimates that are reasonable and prudent. • State whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the accounts. • Prepare the accounts on the going concern basis unless it is inappropriate to presume that the Group and Company will continue in business.

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group and Company and for ensuring that the accounts comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the Group and Company and hence for taking reasonable steps to prevent and detect fraud and other irregularities.

Auditors and Disclosure of Information to Auditors So far as the Directors are aware there is no relevant information of which the Company’s auditors are unaware and each Director has taken all the steps that they ought to have taken as a Director in order to be aware of any relevant audit information and to establish that the Company’s auditors are aware of that information.

The Directors will place a resolution before the AGM to re-appoint PricewaterhouseCoopers LLP as auditors of the Group to hold office until the conclusion at the next general meeting, at which the accounts are laid before the Company.

By Order of the Board

Simon N Waite Company Secretary 17 March 2008 Venture Production plc Annual Report and Accounts 2007 37 Overview of Our Business of Our Overview

Corporate Governance Report

Introduction The Board, its Structure and Directors Throughout the year, the Board has remained committed to ensuring that The Board formulates its strategy and monitors the operating and high standards of corporate governance are maintained Group wide. financial performance of the Company, whilst recognising its key role as the link in the chain of authority between the shareholders and the

This year saw a number of new Directors appointed, which has further Chief Executive and its responsibility to represent and promote the in 2007 Performance Our strengthened the Board. Two of these appointments were as a result of interests of shareholders. the strategic investment acquired by 3i Group plc and its affiliates and ArcLight Capital Partners, LLC. The Board was also further expanded by The Board is accountable to all shareholders for the performance of the creation of a new Executive role of Corporate Development Director the Company and has a written schedule of matters reserved for its which reflects the importance of corporate and business development decision. These include the approval of interim and financial statements; to the next phase of Venture’s growth. long term objectives and strategy; the annual business plan; operating and capital expenditure budgets; policy on hydrocarbon and currency Compliance with the Combined Code hedging; risk management policy; reserves reporting; and all other The Company complied with the provisions of the Combined Code corporate governance arrangements. during 2007, except in the following areas: All other matters, including implementing the Board’s decisions on A.3.2 reserved matters, are delegated to the Chief Executive. The Chief Combined Code Position Executive is responsible in turn for establishing a clear system of At least half the Board, excluding the Chairman, should comprise delegation and accountability for all aspects of corporate performance. Non-Executive Directors determined by the Board to be independent. Where the Board approves policy, it both sets the standards to be observed by the whole Company and provides a clear framework for Company Position delegation. The schedule of matters reserved for the Board is available At the beginning of the year the Company was compliant with this at www.venture-production.com. provision, but following the appointment of Rod Begbie in June, Robb Turner in September and Graeme Sword in October, it now comprises As at 31 December 2007, the Board comprised the Chairman, four less than half the Board who are independent Non-Executive Directors. Executive Directors, four independent Non-Executive Directors and three non-independent Non-Executive Directors. Details of changes Governance Explanation during the year are set out in the Directors’ Report on pages 34 to 36. An evaluation of the composition of the Board has been undertaken and in order to fully comply with this provision of the Code, the Board The Non-Executive Directors bring a wide range of business, financial would need to comprise at least 15 members. The Board wishes to and international experience to the Board. Biographical details of each avoid becoming unwieldy due to its size, as this may impact upon its Director are set out on pages 32 and 33. current flexibility and effectiveness. It remains satisfied that the existing independent Non-Executive Directors are capable of safeguarding Chairman and Chief Executive shareholders interests. Notwithstanding this, the Nominations Committee The roles of Chairman and Chief Executive are separate and clearly has recently overseen the recruitment of one new independent defined and have been set out in writing and approved by the Board. Non-Executive Director, although it should be noted that even following No individual has unfettered powers of decision making. The Chairman this appointment, the Board is not compliant with this provision. is responsible for the leadership and governance of the Board, and the Chief Executive for the management of the Company and the A.4.1 implementation of the Board strategy and policy on its behalf. Combined Code Position A majority of the members of the Nominations Committee should be The Chief Executive is supported by the Executive Committee and independent Non-Executive Directors. Executive team which are comprised of the senior management from throughout the business. Company Position

Throughout 2007 the Nominations Committee comprised two Senior Independent Director Accounts & Notes independent Non-Executive Directors, the Chairman and the Mark Nicholls, the Deputy Chairman, has been appointed as the Senior Chief Executive. Independent Director (SID) and he is available to speak to shareholders if they have concerns which contact through the normal channels of Explanation Chairman, Chief Executive or Finance Director has failed to resolve or for The Board believes that it is important for the Chief Executive to be a which such contact is inappropriate. No such meetings were requested member of the Nominations Committee and to be formally involved during the year. in the nomination process for new Board members. 38 Venture Production plc Annual Report and Accounts 2007

Corporate Governance Report continued

Re-Election of Directors Independence of Directors The Company’s Memorandum and Articles of Association require that As outlined above, the composition of the Board has changed during one third of the Directors must submit themselves for re-election each the year following the appointment of an additional Executive Director, year by rotation. Additionally, newly appointed Directors will submit Rod Begbie and two new non-independent Non-Executive Directors, themselves for election at the AGM following their appointment. Graeme Sword and Robb Turner. Larry Kinch is also acknowledged as not The Board has decided that all Directors should submit themselves being independent based upon the Code’s definition, as he is a founding for re-election at each AGM. This is consistent with the annual review member of Venture and a major shareholder. This has led to the Board process for individual Board members, which includes the review of not complying with Code provision A.3.2. appointment terms and conditions and confirmation of expected time commitments for Non-Executive Directors.

Meetings Attendance Directors’ attendance at Board and Committee meetings between 1 January and 31 December 2007:

Audit Remuneration Nominations Date of Appointment Board Committee Committee Committee and/or Resignation Attended Possible Attended Possible Attended Possible Attended Possible AGM

RM Begbie 19 June 2007 6 6 – – – – – – – T Blades 16 March 2006 10 11 – – 4 5 – – M-L Clayton 4 February 2005 8 11 – – – – – – 6 December 2007 T Ehret 16 March 2006 8 11 2 3 – – – – AM Jones 28 April 2005 10 11 3 3 5 5 1 1 LW Kinch 1 November 1996 8 11 – – – – – – JC Morgan 7 September 1998 11 11 – – 5 5 1 1 JD Murphy 16 August 1999 11 11 – – – – – – MP Nicholls 15 January 2004 11 11 3 3 5 5 1 1 GD Sword 24 October 2007 3 3 – – – – – – – PA Turner 6 December 2007 – – – – – – – – – RE Turner 12 September 2007 3 4 – – – – – – – MJ Wagstaff 26 October 1999 10 11 – – – – 1 1

During the year the Company also held a number of additional Board and Committee meetings by minuted conference calls. These were often called at short notice between the scheduled meetings.

Board and Committee agendas and supporting papers are distributed Induction and Development of the Non-Executive Directors seven days in advance of each meeting and in the instances where a New Directors are given a tailored induction programme covering Director has not been able to attend Board or Committee meetings, the overall position of Venture; the role of the Board and the matters any comments he or she may have are relayed in advance to the reserved for Board decision; the function and terms of reference of Chairman of the meeting. Board Committees; the Company’s corporate governance practices; key policy areas and the latest financial and operational information All Directors have access to the Company Secretary and, if required, concerning the Company. They also meet all the Executive Directors also to independent professional advice at the Company’s expense. and the Company Secretary and key members of the management team and are briefed on their legal and other duties and obligations as a Director of a listed company. Venture Production plc Annual Report and Accounts 2007 39 Overview of Our Business of Our Overview

As part of the annual appraisal process, Directors are invited to identify identifying and nominating candidates for the approval of the Board, any areas in which they would benefit from training and the Company to fill Board vacancies, as and when they arise. During the year the will seek to identify appropriate programmes to meet their needs. Committee, in conjunction with Spencer Stuart, was responsible for This is supplemented by routine briefings on major developments. recommending the recruitment of Peter Turner as the Company’s

For example, during the year, amongst other briefings, the Directors new Finance Director, in place of Marie-Louise Clayton who left the in 2007 Performance Our were updated on the implications of the Transparency Directive and Company in December. the new Companies Act 2006. In March 2008, the recruitment of Andrew Carr-Locke as a new Role of the Non-Executive Directors independent Non-Executive Director was announced, and this process The roles and responsibilities of the Non-Executive Directors are was overseen by the Committee in conjunction with recruitment set out in their appointment letters and their key responsibilities, consultants, Egon Zhender. which are mainly supervisory, are to recommend, advise and monitor matters relating to: Although the Committee only met formally once during the year, • The strategy of the Company. it held a number of both formal and informal Committee calls in • The Company’s performance. exercise of its duties. • Present and future availability and use of resources. • Standards of conduct, compliance and control on the Board Audit Committee and in the Company generally. The Audit Committee reviews the Interim and Annual Accounts, • The appointment of key employees and officers. internal controls and the results of the audit with the external auditors, maintaining an effective relationship with them. The Committee also A copy of the standard letter of appointment for a Non-Executive Director reviews the scope of the audit and other non-audit services and is available on the Company’s website. The Non-Executive Directors meet recommends the remuneration of the external auditors to the Board. periodically, often just before a Board meeting, without the Executive It makes recommendations on the appointment, re-appointment or Directors present. During 2007 they met three times as a group. removal of the Company’s external auditors and during the year the Board accepted the Audit Committee’s recommendations to re-appoint Directors’ Indemnities and Insurance PricewaterhouseCoopers LLP as the Company’s external auditor. The Companies (Audit Investigations and Community Enterprise) Act 2004 The Committee reports its activities and makes recommendations Governance came into force in April 2005 and amended the provisions of Section to the Board. 310 of the Companies Act 1985 to give companies the power to extend indemnities to Directors against liability to third parties, excluding For details on fees paid to the external auditors, see Note 4 to the criminal and regulatory penalties, and to pay Directors’ legal costs as Accounts on page 74. they are incurred. If judgement is given against a Director, or if the individual is convicted, the Director is liable to reimburse the Company Deloitte & Touche LLP have been appointed as tax advisors to the in relation to the legal costs received. Company to ensure that the provision of such services does not impair the independence or objectivity of the external auditors. In June 2007, the Company obtained shareholder approval at its AGM to amend the Articles of Association to give it authority to provide funding Committee Composition for Directors’ defence costs. Letters of indemnification have been issued to Throughout the year, the Committee comprised Mark Nicholls all Directors and will be issued to new Directors to provide an indemnity (Chairman), Alan Jones and Tom Ehret; details of their attendance to the extent permitted by legislation. at Committee meetings is shown on page 38. Representatives from the external auditors attended three meetings and, in addition, have The Company also maintains Directors’ and Officers’ insurance cover unrestricted access to the Chairman of the Audit Committee. The Audit in respect of any legal action taken against the Directors in connection Committee has the discretion to decide who, other than its members, with their duties. shall attend the meetings and during the year the Finance Director and Chief Accounting Officer attended each meeting.

Board Committees Accounts & Notes The Board has established a number of Committees in order to assist it The Board is of the opinion that the Committee meets the requirement to in fulfilling its role and responsibilities. The terms of reference of each of have at least one member, in Mr Nicholls, possessing recent and relevant the Board Committees are reviewed on a regular basis and are available financial experience. It will be seen from the Directors’ biographical details to view at www.venture-production.com. on pages 32 and 33 that he and the other members of the Committee bring to it a wide range of experience in the financial and oil and gas Nominations Committee sectors in the UK and internationally. As stated above, Andrew A Nominations Committee has been established and comprises John Carr-Locke has recently been recruited as a new independent Morgan, its Chairman, Mark Nicholls, Alan Jones and Mike Wagstaff. Non-Executive Director. Andrew was formerly Finance Director of The terms of reference of the Committee set out its key objectives George Wimpey PLC and also possesses recent and relevant financial which include the regular review of the Board structure, size and experience. He was appointed to the Committee with effect from composition and any recommendations are then submitted to the 3 March 2008 to further strengthen the composition of the Committee. Board for consideration. The Committee is also responsible for 40 Venture Production plc Annual Report and Accounts 2007

Corporate Governance Report continued

Terms of Reference As an operator, Venture is subject to audits by the non-operating The Audit Committee is authorised to investigate any activity within its joint venture parties. These audits cover all charges made to the joint terms of reference, which are reviewed on an annual basis. It has access account and compliance with the administration of the joint operating to the external auditors, who in turn have unrestricted access to the agreement. In its own right, Venture undertakes audits on significant third Committee. If required and at the Company’s expense, the Committee party contracts, utilising the services of specialist independent auditors. can obtain outside legal and or other independent professional advice. None was obtained during the year. Where Venture has a concern over a particular area, a specific review will be instigated using either internal or external resources as required Overview of Activities under the direction of the Audit Committee. This approach of utilising During the year under review, the Audit Committee followed a programme the diverse skill set within the Company, supplemented by external structured around the annual reporting cycle and reports from both individuals, enables Venture to cover the full range of business risks management and the external auditors. Principal activities included: that it faces without having to employ full-time resources focused on • Review of the Preliminary Announcement, the Annual Report and internal control reviews. The results of all audit reviews are reported Accounts and the Interim Report. On all occasions, the Committee to the Audit Committee. receives reports from the external auditors identifying any accounting or judgemental issues requiring its attention. Following input from the Audit Committee, the Board has again • Review of papers prepared and presented by the external auditors in decided against establishing a formal ‘in-house’ internal audit function. relation to the 2006 final audit, the 2007 interim review and the audit This decision is partly a function of scale, but more importantly, it is plans and strategy for the 2007 final audit. believed that an alternative approach to identifying and dealing with • Review of the results and effectiveness of the final audit including risk areas is a better fit for the Company. This involves examining the reporting by the external auditors and review of the independence overall risk review, including the specific areas of financial management and objectivity of the external auditors. and control, and, together with the external auditors, identifying areas • Review and approval of the fee proposals for the final audit and the that require further analysis or benchmarking. This work will then be interim review. undertaken by the appropriate internal or external resources. • Private discussions with the external auditors with no executive management present. The decision on the establishment of an internal audit function will • Review of the risk identification process and its management continue to be reviewed on an annual basis. and control. • Review of the systems of internal control. Performance Evaluation • Completion of a performance evaluation of its own performance. During 2007 the Committee carried out an internal performance • Review of the Committee’s terms of reference. evaluation, designed to produce an objective assessment of the • Review of the Group’s ‘whistle blowing’ policy. Committee’s performance and the effectiveness of the external audit • Consideration of the risk of fraud. function. It was concluded that the Committee and the audit process were effective and that the Committee had appropriate terms of In addition to the principal activities outlined above, the Committee also reference and achieved its remit. received a number of reports and presentations throughout the year. These included presentations on the Company’s information technology One issue raised that has been addressed during the year is the timing developments, an annual tax review and an update on a review of internal and location of meetings to ensure that the Committee has adequate controls carried out by KPMG. KPMG also presented to the Committee opportunity to fully consider all areas within its remit. It was agreed that during the year a review of internal financial controls which concentrated in order to do this, wherever possible, meetings should be de-coupled on five key processes. Progress has been made to address the issues from the formal Board meeting schedule. identified. Briefings and training are provided, where appropriate, to ensure that The Committee acted as an appropriate sounding board for the the Committee remains informed of all material developments in best management on these activities and the wide-ranging experience practice and regulation concerning its remit. of its members ensured thorough and valuable consideration was given to the matters under discussion. An evaluation of the Company’s auditor was also carried out at the same time, with input provided by each member of the Committee as well as Internal Audit Function regular attendees. Feedback was provided to the Audit Partner by the The Committee continually monitors the need for the establishment Committee’s Chairman. of an internal audit function, bearing in mind the growth in size and complexity of the Company, in accordance with provision C.3.5 of the Remuneration Committee Combined Code. Venture currently obtains independent confirmation The Directors’ Remuneration Report is set out on pages 45 to 53 and on the operation of internal controls from a variety of sources. KPMG provides detailed information on the Company’s remuneration policies had been appointed on a continuing basis during the year to provide and practices. an external review of the financial controls within the Group, having particular regard to the efficiency of key financial processes and the implementation of best practice. Venture Production plc Annual Report and Accounts 2007 41 Overview of Our Business of Our Overview

Executive Committee Risk Management and Internal Control Composition of the Executive Committee changed during the year, The Board has conducted a review of the effectiveness of the Company’s with the appointment of Rod Begbie in June, and Peter Turner replacing systems of internal controls and is responsible for the controls including Marie-Louise Clayton in December. At the year end the Committee financial, operational and compliance controls and risk management. In

comprised Mike Wagstaff (Chairman), Jon Murphy, Peter Turner and accordance with the provisions of the Turnbull Report, the Board is also in 2007 Performance Our Rod Begbie. Meetings are held on a regular basis, within clearly defined responsible for reviewing the effectiveness of those controls. delegated powers concerning operational matters. Such a control system can only provide reasonable but not absolute The Board has delegated authority to the Executive Committee in a assurance against material misstatement or loss and is designed not number of areas, including: to eliminate risk, but to enable the Company to achieve its corporate • Approval of individual unbudgeted capital expenditure/commitment objectives within a managed risk portfolio. in excess of £1 million but less than £5 million. • Approval to enter into a contract for goods and/or services in excess The Board receives regular reports from the executive management of £5 million but less than £10 million. that enables it to assess the nature of business risks and allows it to • Issue of shares to satisfy the exercise of share options or the award review the effectiveness of the controls in place to manage them. of shares granted under a share scheme previously approved by the As Venture has increased significantly in scale over the last few years, shareholders. the risk process has also grown in breadth and complexity to support it. • Issue of parent company guarantees, letters of credit or other forms of The Board has fully reviewed the changes in process during the course security that may be required in respect of contracts or agreements of the year and will continue to do so going forward. that have been approved by the Board. Recognising and managing risk is a process that occurs at all levels Board Assessment within the business and is an inherent part of the management In March 2008, the Board carried out a review of its performance during culture. The process recognises not only the downside risks, but also 2007 and discussed opportunities for improvement. A list of issues opportunities that might otherwise be missed. In an environment that is and topics was compiled by the Chairman and circulated ahead of the itself subject to increasing market, legislative and environmental changes, discussion, with a clear opportunity to raise additional issues. Board the dynamic and cultural nature of this risk process is essential to maintain members were free to submit views confidentially in writing, but in its currency. At the operational level, managers are responsible for Governance practice none did so and all participated in the discussion. ensuring that their staff and contractors carry out risk assessments of all projects and activities to identify potential hazards. Following the outcome from the 2006 assessment, the Board agreed to reduce the number of formal Board meetings to five per annum and one Where appropriate, independent third parties with additional specialist Board call, supplemented as necessary by additional calls. The meetings skills contribute to these assessments. When risks cannot be removed, in March and December are now held over two days to allow additional controls are identified and implemented and their effectiveness consideration of year end and budgeting matters, respectively. During monitored throughout the life cycle of the project and activity. 2007, the Board has also received a number of presentations by senior managers from throughout the business, as this was considered to be At the corporate level, the Directors formally review all significant risks an appropriate way for the Directors to receive increased exposure to to the business. The results of the processes described above and, in the Company’s management. particular, of the annual risk assessment review, are brought to the Board in a summarised form. The Board unanimously agreed that the process for Board, Committee and Director assessment was appropriate to the size and structure of This identifies the key risks, the likelihood of occurrence, the potential the Company. impact on the business and the actions being identified and implemented to control or mitigate the risks. The Board reviews this assessment and Individual Director assessments are based on a self-assessment process brings its own ‘top down’ contribution and judgement to bear with which is followed up by a conversation with the Chairman who consults particular reference to risks of a strategic nature. with his colleagues as necessary. This process ties in with the annual Accounts & Notes agreement renewal process for Non-Executive Directors. The resultant findings are fed back to the organisation through management to ensure a common understanding and the Mark Nicholls, the SID, led an assessment of the Chairman’s performance implementation of necessary actions. during 2007, at which the Chairman was not present. A range of tasks were reviewed and the Board unanimously reaffirmed its view that The Board formally reviewed risk as a separate topic twice during 2007 he remained fully independent in both character and judgement and with the objective of providing assurance that changing circumstances continued to allocate sufficient time to fulfil his duties as the Chairman are being monitored, that the process is robust and that necessary of a FTSE 250 company. actions are being implemented. 42 Venture Production plc Annual Report and Accounts 2007

Corporate Governance Report continued

The Directors acknowledge their responsibility, under the Combined Code, process in place, the Board perceives this risk as relatively low, but to establish and maintain the Company’s system of internal control that believes it should continue to be highlighted as a key risk because safeguards its assets and to ensure the reliability of financial information of its fundamental relationship to value. for both internal use and external publication. Relevance of Venture’s Business Model to Deliver Its Strategic Objectives Internal control systems reflect the particular scale of operations, business There has been a very strong focus on strategy during 2007, which risks, cost effectiveness and overall needs of the Company. Controls are has reinforced the view that Venture’s business model remains valid. designed to identify and manage risk rather than eliminate all risks to There is evidence that the market for ‘stranded’ assets in the North Sea which the Company is exposed. is changing, with more and larger blocks of assets becoming available. With this development, the competitive environment is also likely to As a result, any system of internal control can only provide reasonable, change. We continue to believe that Venture has major competitive but not absolute, assurance against material misstatement or loss. advantages in this situation, although maximising the leverage of these strengths is becoming a more sophisticated task, making it difficult to The attention to internal control continued during 2007 and has been predict the precise timing with which growth assets will be added to externally validated by KPMG, demonstrating an increase in controls and the portfolio. This makes it important to express strategic objectives documented processes. with the appropriate balance between growth and value per share.

Key Risks Third Party Infrastructure After Board evaluation of the business risks presented by management, In common with all operators, Venture relies on third parties to deliver the following key risks facing the business are identified. its products to market. The successful development of Chiswick, together with the installation of the Kittiwake pipeline, has provided significant Communication to Investors/Analysts/External Parties elements of infrastructure diversification. The fact remains that we This risk centres on the difficulty of providing accurate and consistent will continue to have a high degree of dependence on third party information about business performance when outcomes are subject performance. Sound relationships and good communication with third to many influences outside direct management control. The Company party management remains a very high priority and we will continue to is committed to an open and timely process of market communication. review further diversification as part of our strategic approach. During 2007, we have enhanced the level of communication with shareholders and analysts. The potential for enhanced volatility of Technical Risk performance during the year was identified and communicated. It is paramount to the Board that Venture has a comprehensive Nonetheless, the combined effects of lower gas prices early in the understanding of both subsurface and topside asset risks. This is an year, weather impacts and uncontrollable operational issues has been area of constant review and analysis within the Company to ensure the higher than anticipated and the challenge of preventing these issues existence of the right technical skills, control processes and relationships from overshadowing real progress remains very real. The Company with third parties. The Technical Integrity Management System has now is committed to maintaining a high level of transparency and been fully implemented and its operation reviewed at Board level. communication, with a strong focus on value creation and will set This system assures sound understanding and management of structural clear strategic objectives to 2010/2011. risks. Enhanced project evaluation procedures have been implemented and an experienced Senior Technical Manager has been recruited. Business Valuation This move is focused on enhancing the consistency of approach to and The risk is that, despite enhanced communication with shareholders, providing quality assurance on technical evaluation and presentation the underlying value of the business is not fully reflected in the share of risk across all assets and projects. price. This creates concerns around cost of capital and the generation of unwelcome approaches geared to taking advantage of commodity Organisational Capability price volatility, rather than returning underlying business value to Venture’s organisational scale and capacity has continued to grow with shareholders. A high level of communication concerning value has been the Group now having over 140 full-time employees. The risk continues maintained with key institutional shareholders. A project to strengthen to be managed, with good progress being made in developing an the group of core strategic shareholders resulted in two new strategic extended management team and strengthening a number of technical shareholders taking a combined holding of around 20% in the Company, and commercial skill areas. The recruitment and retention record each of them now having Board representation. This development has continues to be good at a time of very high competition for people. reduced the risk of a pre-emptive, undervalued take-over approach being successful. We will continue to communicate the underlying Venture has continued to recruit experienced and talented people who business strength and will target continued profitable growth. wish to work in a creative and flexible environment. With continuing growth and high workloads, progress in this area will continue to be Statement of Reserves a key priority for management. There is a robust and externally validated process applied to Venture’s reserves statements. Reserves are reviewed by the Board twice yearly Performance by Contractors/Suppliers and the producing field reserves are subject to an annual third party In current tight markets it is essential that close and value-adding audit. During 2007, the process successfully reflected significant relationships are created with suppliers and contractors. Venture has adjustments to reserves, both positive and negative. With the existing pioneered a partnership approach and this has continued to work well. Venture Production plc Annual Report and Accounts 2007 43 Overview of Our Business of Our Overview

However, market pressures have become much greater over the last Financial Authorities 12 months and the nature of this risk has increased to reflect not just The management structure is supported by a Financial Authorities performance assurance, but also basic access to equipment and services, schedule, which clearly specifies authority by role and type of expenditure as well as the level of cost and its management. Venture’s experience across the organisation. This document is maintained on the Business

over the last three years has contributed to its competitive strength. Management System together with supporting processes and is owned in 2007 Performance Our The issue is now one of heightened strategic significance and building by the Finance Director. on our track record here is a very high priority. Quality and Integrity of Personnel Health, Safety and Environmental Performance High quality personnel are essential to the control environment. HSE has continued to be a top priority and performance has been good. The integrity and competence of personnel is ensured through high Nevertheless, the Board considers that it must continue to be reviewed recruitment standards and the encouragement of personnel to identify as a key concern area at Board level. The challenge of environmental and take responsibility for their own development training. performance, with substantial additional regulatory requirements, has grown and is receiving greater management focus. New KPIs are Identification of Business Risks being developed and implemented across this area. The emphasis on The Board is ultimately responsible for identifying the major business the performance of both Venture and its contractors must remain high risks faced by the Group and for determining the appropriate course and a focus for senior management leadership. of action to manage those risks. However, each employee has an active role in identifying and communicating business risks within the Group. Oil/Gas Balance This involvement in identification and management of risk is encouraged The risk here is that a product imbalance could introduce an undesirable through the annual risk review process. The Board also engages independent skewing of risk in the business. Venture’s attitude to hydrocarbon type professional advice on risk assessment matters as required. has so far been neutral, with the emphasis being on quality of deal in relation to building the portfolio and project quality for developments. Budget and Business Plan The result of the outcomes of various projects now means that, based on Each year the Board approves a budget, by month, plus a business plan the existing portfolio, the Company is heading towards a significant bias for the next four years. to gas production and reserves over the next few years. This details the proposed work programme, production and financial Governance There are some specific risks in relation to gas. Firstly, with gas prices lagging performance indicators and incorporates sensitivity for factors such as oil as costs increase, there is a degree of margin pressure on gas. Secondly, commodity price and exchange rates. Performance is reported to the gas infrastructure developments (including those between mainland Board monthly with significant variances explained, key risks identified and Europe and the UK) together with increasing LNG capacity have created forecasts updated. Executive management has a quarterly performance a degree of short term price uncertainty. It is our view that the market for review meeting at which the business to date is reviewed and a plan going gas – especially for power generation – will continue to grow in the medium forward is assessed, with particular emphasis on delivery of that plan. term and that the major producers will continue to act rationally in their own economic interests. We remain convinced that, with proper care in the Investment Appraisal selection of projects, the gas market will remain profitable. We will, therefore, Capital expenditure commitment is controlled by reference to the continue to evaluate all projects in relation to their value and profitability. approved budget and authorisation levels. Capital or non-routine operating Nevertheless, the potential for greater volatility in gas markets is recognised expenditure above specified levels requires standard documented and will require continued focus with appropriate hedging policies and proposals and evaluations to be submitted to the appropriate financial operational policies clearly geared to maximising profitability and value. authority holder. Venture utilises its in-house expertise to implement rigorous review of all investment proposals at both peer and management The Board is in agreement that appropriate processes and controls are levels. Increasingly this will be supplemented by the use of external in place to manage these risks effectively and will review the actions expertise where this is appropriate. Performance is reported to the Board on a regular basis. monthly with significant variances explained, key risks identified and forecasts updated. Complete technical, commercial, financial and legal

Risk Identification, Evaluation and Management due diligence work is carried out on potential asset and corporate Accounts & Notes The process of identifying, evaluating and managing the risks faced by the acquisitions. Company is continuous. The key procedures the Board have established with a view to providing effective internal control are as follows: Monitoring of the Internal Control Systems The Board has agreed reporting procedures to monitor key risk areas Management Structure on an ongoing basis, including health and safety, legal and financial There is a formal schedule of matters reserved for decision by the Board. matters. An annual risk assessment review is completed and presented Each Executive Director has a defined sphere of overall responsibility to the Board, which identifies key risks, the probability of these risks and can also act as part of the Executive of the Board on certain defined occurring, their impact if they do occur, the strategy for handling the risk, issues. The Executive team, made up of the Executive Directors and an assessment of the controls and procedures in place and actions being senior managers, meet formally on a bi-weekly basis to review current taken to manage risks. The assessment of risk is monitored throughout business matters, take decisions and identify any areas of concern. the year and formally reviewed once every quarter by management. This group is supported by a broader group of lead managers. 44 Venture Production plc Annual Report and Accounts 2007

Corporate Governance Report continued

To supplement this annual risk review, Venture has instituted an annual The Company also maintains a less formal dialogue with shareholders review of fraud/material error across the business. This review covers all through regular two-way communication with a growing number of business areas and provides assurance to the Board that no instances of equity research analysts, fund managers and private client stockbrokers. fraud are known to have occurred during the year and that areas at risk Private investors continue to be encouraged to communicate directly of fraud/material error are assessed and mitigating actions put in place. with the Company and the corporate website has been designed to No material items for 2007 have been notified. provide detailed information on Venture’s assets, as well as including a dedicated investor relations section. Shareholders and other interested There is also a formal ‘whistle blowing’ policy that encourages anyone parties can subscribe to receive Company specific news updates by associated with Venture to bring forward any concerns in relation to its email by registering online on the website, and contact details are also operation or reporting. The policy is widely communicated and provides provided on the website whereby specific queries can be emailed a route of discussion direct to the Non-Executive Chairman of the Audit directly to the Company. Committee. No items for 2007 have been notified. During January 2008 the Company held its annual Analyst Day at The Board considers that, having undertaken the procedures outlined, which senior management gave a series of presentations on various it has monitored the effectiveness of the Group’s internal controls and aspects of the Company’s business. Equity research analysts and major that no significant failings or weaknesses were identified. institutional shareholders were invited to attend and the full Venture senior management team were available for questions. A copy of the Communication with Shareholders presentation materials has been made available to all stakeholders Investor interest in Venture continues to grow as the scale of our operations via the corporate website. It is Venture’s policy to publish all such increases. This increased interest is being successfully addressed by an presentations on the website at the same time as they are given live. increasingly active investor relations programme, fronted mainly by the Company’s Executive Directors, and continued development of a wider The Company’s communication programme, aimed specifically at range of communication channels. private client stockbrokers, regional pension funds and smaller financial institutions, has proved successful and will be maintained. During 2007, The Board continues to believe that effective communication with this programme was extended to target medium-sized institutions not shareholders and other stakeholders is a critical competence for the currently serviced through the Company’s joint brokers. Company and it therefore remains a high priority. Amongst larger institutions, Venture has also seen increased Confidential feedback reports prepared by third parties after each results international interest, particularly from North America and Europe, and ‘roadshow’ and Analyst Day are made available to the Board, as are all efforts to target these institutions have increased. During 2007 and equity analyst research notes. early 2008, management made trips to the United States, Canada and Continental Europe to meet with investors for the second year running, Venture maintains regular dialogue with all stakeholders through the and it is intended that this will become a regular feature in the annual formal channel of results presentations, stock market announcements, investor relations programme going forward. In addition, management Annual Reports and Accounts, Interim Accounts and at the AGM. schedule a conference call for US and European institutions as part of The Company also issues operational and trading updates prior to each results ‘roadshow’. entering into closed periods and seeks to provide timely market guidance on production levels and trading as appropriate throughout Investors are encouraged to attend and participate in the AGM at which, the year. The Company conducts investor ‘roadshows’, during which in addition to the formal business of the meeting, the Chief Executive senior management meet face-to-face with institutional shareholders, provides a review of the most recent results and commentary on current immediately after each results announcement. In addition, a large business development and activity. The Chairmen of each of the Board number of ad hoc shareholder meetings are held during the year, Committees are available at the AGM to answer any shareholder questions. organised either through the Company’s joint brokers or in response to direct requests from institutional fund managers. The SID is also specifically available to meet with shareholders to discuss any concerns either at the AGM or through other channels, and at other times if deemed more appropriate. The full Board of Directors attends the AGM.

John Morgan Chairman 17 March 2008 Venture Production plc Annual Report and Accounts 2007 45 Overview of Our Business of Our Overview

Directors’ Remuneration Report

Part I – Unaudited Information • Remuneration for Executive Directors in broadly similar companies. • The rules of the Annual Deferred Share Bonus Plan and This report was prepared by the Remuneration Committee and has been recommending a number of administrative changes relating thereto. approved by the Board of Directors. • The process for the vesting of shares and the calculation of the

performance awards for the LTIP 2003. in 2007 Performance Our Throughout 2007, the Committee comprised its Chairman Alan Jones, • Review of the LTIP 2006 scheme and its ongoing relevance as John Morgan, Mark Nicholls and Tom Blades. an important element of the reward and retention policy for the Company’s senior management. The Board believes that it is entirely appropriate for the Board Chairman • A consistent policy for selecting participants. to serve on this Committee, so long as he does not chair it. The Committee • The interpretation of the rules of the various share schemes in relation met five times during the year and members attendance is shown to the treatment of leavers. on page 38. These meetings were supplemented by four minuted • The preparation of this report. conference calls. In addition, in January 2007, a trading division of MM & K, The Share Option Although not members of the Committee, Mike Wagstaff and Jon Murphy Centre, was engaged to provide co-ordinated administration services attended some of the Committee meetings during the year, by invitation, for all Venture share schemes. MM & K is not retained to provide advice but were not involved in discussions relating to their own remuneration. to any other part of the Company other than in supporting Executive management from time to time in the formulation of recommendations Terms of Reference concerning policy interpretation for consideration by the Committee. The terms of reference of the Committee are reviewed and amended, as necessary, on an annual basis and at the review carried out in January From January 2008, Global Shares have been engaged to take over the 2008 a minor amendment was made in order to bring them up to date administration of the Company’s share schemes and MM & K have no with best practice. The terms of reference ensure that the Committee is further involvement in this process. focused on developing and managing a remuneration policy which will attract and retain high quality Executive Directors and motivate them Remuneration Policy for Executive Directors, by aligning their interests with those of the shareholders. This is done by Management and General Staff linking a significant proportion of their reward to the achievement The underlying remuneration policy applicable to all employees is to Governance of corporate and individual performance objectives. position base salaries at or around the median level for comparable positions in similar companies within the industry. This policy has been These terms also require the Committee to review and determine the established for a number of years. The Committee continues to believe level and structure of remuneration provided to the senior management that this is the correct strategy going forward, but reviews it on a regular team, as well as the overall remuneration policy for all the employees. basis to ensure that it remains appropriate, especially in changing market conditions. The base salary is supplemented by a number of additional Committee Evaluation mutually consistent non-pensionable schemes which have been designed In January 2008, the Committee carried out an evaluation of its to reward Executive Directors, managers and employees alike for performance during 2007 in accordance with the Combined Code. their performance against challenging objectives, both personal and The evaluation had previously been carried out using questionnaires corporate, which support long term growth of the Company and focus completed by the Committee members. However, it was decided that strongly on long term value creation. for 2007 an evaluation would be carried out at a specially convened meeting and the process was led by the Chairman. All employees are entitled to join a Share Incentive Plan (SIP), after an initial six month qualification period. Additionally, Executive Directors A number of recommendations were made including: and a small number of key senior managers have been invited to • Additional time be allocated at each Board Meeting for the participate in the Long Term Share Incentive Plan (LTIP 2006), which was Committee Chairman to report back to the Board on the main issues introduced in June 2006 to replace the Long Term Share Incentive Plan discussed at the most recent Committee meeting. (LTIP 2003) which matured on 31 December 2006.

• The canvassing of opinions from all members of the Executive and Accounts & Notes senior management to obtain a broader understanding of their views The annual bonus arrangements for Executive Directors and senior on the Company’s remuneration policies. managers were considered by the Committee in 2004 to establish • The circulation of Committee papers at least one week prior to each a more structured framework for determining bonuses, which Committee meeting. demonstrate clear linkages between short term performance and reward. These considerations led to the introduction, following approval Advice to the Committee at the AGM in 2005, of the Annual Deferred Share Bonus Plan (ADSBP) During 2007, the Committee continued to receive information and for key senior management. advice from the consulting firm MM & K Limited (MM & K). In particular, advice has been received concerning the following: 46 Venture Production plc Annual Report and Accounts 2007

Directors’ Remuneration Report continued

In 2006, the Committee agreed to introduce a similar scheme for the Allocations have been made on an annual basis within the rules of remainder of the organisation. The new scheme was designed to provide the scheme and as referred to later in this report, a proposal is to be substantial benefits by establishing a clear and consistent framework to submitted to shareholders at the 2008 AGM to replace the LTIP 2006. link performance and reward, with a clear balance between personal and corporate objectives. Maximum share award levels as a percentage of base annual salary are:

The Committee further considered that such a scheme could provide Chief Executive 300% a strong recruitment and retention mechanism in a market which Executive Directors 250% was becoming increasingly competitive. These considerations led to Senior Management 200% the introduction of the Employee Annual Bonus Plan (EABP), which extended throughout the organisation an opportunity to take annual The whole of the award is distributable only if Exceptional performance bonuses in shares. The EABP is considered by the Committee to be is achieved in respect of all performance measures. The distribution and another beneficial step in aligning employee interests with those of the weightings applicable to each of the four performance target measures shareholders. are as follows: Threshold Target Exceptional Under the EABP, targets are set for both corporate and personal performance, with employees being able to take up to 35% of base Production (boepd) 12.5% 18.75% 25.0% salary as cash. Any bonus in excess of 35% of salary must be deferred. Reserves (MMboe) 12.5% 18.75% 25.0% Participants may also elect to defer bonus. Deferred bonus is increased Comparative TSR 7.5% 11.25% 15.0% by 50% and converted into shares which are released after two years, Venture’s Annualised TSR 17.5% 26.25% 35.0% subject to continued employment. For the purposes of the EABP, shares Distribution of share award 50.0% 75.0% 100.0% are bought in the market and held by Venture Employee Benefit Trust (EBT) pending release. The LTIP 2006 embraces the following principles: • The plan operates over three year rolling performance cycles, Following a review of the Company’s annual bonus plans, the Committee the first of which commenced 1 January 2006. has decided to consolidate the ADSBP and the EABP. This consolidation, • A new cycle starts each year. which took effect from 1 January 2008, will enable ADSBP participants • Provisional share awards are made at the start of each cycle to to receive a greater proportion of any annual bonus award in cash. selected Executives and senior staff. The consolidation should also simplify the Company’s annual bonus • Restricted shares are released after the end of the three year arrangements. Maximum individual bonus awards are not affected by performance period and vest two years thereafter, subject to these changes, the implementation of which does not require formal continued employment. shareholder approval. • Rewards are aligned with shareholders’ interests and the achievement of strategic business goals. Following the AGM in 2006, the LTIP 2006 was implemented for Executive Directors and senior management as a replacement for the successful When the LTIP 2006 was implemented, the Committee acknowledged LTIP 2003. The LTIP 2006 was designed to retain and motivate key that the comparator group for measurement of TSR performance was Executives in line with the current strategic plan. small. This situation has been kept under review by the Committee, whose view remains that there is only a small number of comparably The LTIP 2006 scheme has the following objectives: sized companies with similar business models operating in the oil and • To implement a follow-on long term scheme to ensure that total gas sector. compensation for Executive Directors and senior managers reflects general industry practice. Summary of Policy Issues • To define a scheme applicable over the longer term. The changes made over the preceding years to the Company’s • To incentivise the Executive Directors and senior staff to deliver the remuneration policies, described above, reflect the Committee’s medium term growth targets determined in the strategic review. desire to take a consistent approach throughout the organisation. • To create a vehicle to support continuity in the current senior The Committee has determined to adhere to the principles of management. median base salaries supplemented by focused incentive awards • To continue to align the interests of the Executives with those of related to annual performance and long term value creation. the shareholders. Venture Production plc Annual Report and Accounts 2007 47 Overview of Our Business of Our Overview

The Committee continues to believe that a long term equity incentive, Threshold, Target and Exceptional performance levels are set for each linked to challenging transparent targets designed to reward value element of the corporate objectives and the maximum award payable creation, is a vital component of Executive Directors’ remuneration. under the ADSBP for Exceptional performance is 150% of base salary for The Committee also believes that the changes introduced in recent Executive Directors and 112.5% for senior management. The relevant

years, together with the proposed new LTIP, provide a comprehensive bonus award is converted into shares and held on behalf of participants in 2007 Performance Our framework for delivery and retention, with excellent alignment between by the EBT for two years from the date of award after which they are staff and shareholder interests. released to participants, subject to continued employment.

The Committee will continue to review all remuneration policies and Participants have an option to receive an award in cash but the award practices to ensure they remain consistent with good industry practice. value is then reduced by one third.

Executive Directors’ Remuneration The corporate objectives and their weightings for 2007, for each of the performance levels, were: Reporting Principles The Committee has decided to continue with the principle of reporting Threshold Target Exceptional Weighting awards made in respect of the reporting year even though these may ^ not be received until the following year or later. Production* (boepd) 47,000 49,000 54,500 1/3 Cash flow** (£m) 220 230 255 1/3 Base Salary Operational*** 2 items 3 items 4 items 1/3 Following advice from MM & K, increases ranging from 2.5% to 21% were ^ recommended by the Remuneration Committee in March 2008 to bring The impact of any exploration wells’ contribution to be excluded Executive Director salaries generally in line with the stated policy of * Production targets represent the average daily levels of production of oil and paying at the median level. gas equivalent that must be achieved on an annualised basis in 2007 ** Operating cash flow, which is defined as earnings before interest, tax, Base salaries will be increased from 1 April 2008 as follows: depreciation and amortisation (EBITDA), plus non-trading non-cash movements MJ Wagstaff Chief Executive £400,000 *** There were five Operational Targets set for the year: Governance JD Murphy Chief Operating Officer £250,000 • Chiswick on stream (Q1/2). PA Turner Finance Director £230,000 • GKA pipeline on stream (Q4). RM Begbie Corporate Development Director £230,000 • Ensign development milestone. • Chestnut on stream (Q4). None of the Executive Directors holds any other directorships in listed • Acquisition of 20 MMboe of P50 reserves. companies. However, the Committee has determined that an Executive Director may receive any fees for acting as a director of another company, The Committee conducted a detailed review of performance in 2007 subject to Board approval. in respect of both corporate and personal objectives. The latter were focused on issues considered by the Board to be important to address, Awards to be Paid in 2008 or Later in Respect of but lay outside the normal business objectives or deemed necessary 2007 Performance for the long term prosperity of the organisation and its ability to grow. The Remuneration Committee also took a subjective view of the way The Annual Deferred Share Bonus Plan management dealt with difficult operational issues which arose during The ADSBP was applied for the full year with the following objectives: the year. • Alignment of the remuneration of Executives and senior managers with, and provision of clarity on, annual performance objectives. It was noted that 2007 had been a challenging year, during which the • Provision of competitive bonus levels. strong underlying performance of the Company’s asset base had been • Provision of a clear retention incentive. overshadowed by the impact of a number of extraneous events which

• Alignment of interests with those of shareholders. resulted in average net daily production for 2007 of 41,228. At the year Accounts & Notes end, net proven and probable reserves were estimated to total 203.0 Bonus awards are made on the achievement of both corporate and million barrels of oil equivalent (including Trinidad) which was 8.4% personal objectives, using an equal weighting for each, with bonus below the 2006 outturn. potential a defined percentage of base salary. 48 Venture Production plc Annual Report and Accounts 2007

Directors’ Remuneration Report continued

The Committee’s assessment of performance related to corporate Long Term Share Incentive Plan (2006) objectives for the year ended 31 December 2007 is as follows: The targets set for the first and second cycles are: • Production – below Threshold (0%) • Cash flow – Exceptional (16.7%) Performance period 2006–2008 Threshold Target Exceptional • Operational – Target (12.5%) Production (boepd) 55,000 65,000 70,000 Awards made to the Executive Directors under this plan were as follows: Reserves (MMboe) 240 260 280 Equivalent Cash available Comparative TSR 3rd 2nd 1st Bonus as % of for share Number of Annualised TSR 18% 20% 24% base salary purchase Deferred Shares

MJ Wagstaff 111.25 433,865 56,284 Performance period JD Murphy 111.25 266,994 34,636 2007–2009 Threshold Target Exceptional PA Turner* 111.25 28,836 3,740 RM Begbie* 111.25 114,082 14,799 Production (boepd) 65,000 72,500 80,000 Reserves (MMboe) 285 300 320 Note: The share price for the equity calculation is the mid-point of the Comparative TSR 3rd 2nd 1st average middle market quotations as shown in the Daily Official List of Annualised TSR 14.3% 19.6% 24.4% the London Stock Exchange for the months of January and December 2007, which was 770.84 pence. Shares awarded under this plan will be The following maximum share allocations, based upon Exceptional released in April 2010. performance targets, were made to the Executive Directors during the year for the second cycle: As at the date of this report no election had been made by the Executive Shares Directors in respect of the choice between cash and shares. MJ Wagstaff 103,063 *Pro-rata from date of appointment to Board. JD Murphy 64,414 M-L Clayton 61,551 Share Incentive Plan (SIP) RM Begbie 45,016 The Committee has decided that corporate performance objectives must be achieved to justify an award of Free Shares, up to a maximum The Committee supports the Board’s recommendation that the LTIP value of £3,000 for each participating employee. 2006 be replaced by a new LTIP linked directly to the Company’s strategic plans for the next three to four financial years. A resolution is The Committee’s view was that the level of corporate performance to be considered at the AGM in May 2008. Details of the proposed new achieved in 2007 represented 66.6% of the target resulting in an allocation LTIP can be found in the Notice of AGM. of SIP Free Shares to the value of £2,000 to each participating employee.

Long Term Share Incentive Plan (2003) As stated above, the LTIP 2003 matured on 31 December 2006 and resulted in an award of 125.8% of Target performance. Accordingly the following share awards were made to the Executive Directors on 30 May 2007:

MJ Wagstaff 1,258,000 JD Murphy 1,006,400 M-L Clayton 503,200 RM Begbie 408,850

Full details of the targets and measurement thereof were provided in the 2006 Annual Report and Accounts. Venture Production plc Annual Report and Accounts 2007 49 Overview of Our Business of Our Overview

The Venture Production Company Limited Unapproved The Board exercised the power conferred by the rules of the Scheme to Share Option Plan increase the limit on the amount of options which may be granted to an It was the Company’s policy to promise to grant share options to new individual from 200% to 400% of base annual salary. The Board’s decision employees on joining the Company and at subsequent specified dates. to increase the limit was made to facilitate the grant of options over

The nature of the promises varied depending upon whether the date of 60,000 shares at 775.0 pence per share to Peter Turner in connection with in 2007 Performance Our joining was before or after 1 April 2001. If the date of joining was before his appointment as Finance Director under Section B. 1 April 2001, the promise was either a Tranche 1 promise (conditional upon remaining in employment at the proposed date of grant) or a Share Acquisitions Tranche 2 promise (conditional upon remaining in employment and on The Company has an ongoing policy whereby it funds the EBT monthly the attainment of corporate performance targets at the proposed date to make market purchases of shares in order to satisfy the requirements of grant). Employees receiving a Tranche 1 promise were granted options of the various share-based incentive schemes. on the date on which they joined the Company and then subsequently on the first, second, third and fourth anniversaries of the joining date. A regular review is carried out to ensure that the EBT has sufficient shares Employees receiving a Tranche 2 promise were due to receive options to cover its contingent liabilities. subject to the attainment of corporate performance targets for the financial years ending 31 December 2001, 2002 and 2003. Grants were Remuneration Policy for Non-Executive Directors then made on 1 April following the end of the financial year and on the Remuneration for the services of Non-Executive Directors is set by relevant anniversaries of that date, subject to the employee continuing reference to practice in comparable companies. Fees payable to in employment. individual Directors reflect the time commitment each Director is expected to make to the Company, bearing in mind any representation Employees joining the Company on or after 1 April 2001 were promised on or chairmanship of Board Committees. a grant of options conditional upon the attainment of corporate performance targets as set by the Committee. In each case, the The annual fees payable to the Non-Executive Directors in office at the employee was granted options on his/her date of joining with a promise year end, were as follows: of further awards on the first, second, third and fourth anniversaries of JC Morgan £75,000 the joining date subject to remaining in employment. Options remain MP Nicholls £50,000 exercisable for ten years from the date of grant, not the date of promise. AM Jones £45,000 Governance Consequently, as the last Tranche 2 promises were granted in 2006, they T Blades £35,000 will remain exercisable until 2016. T Ehret £35,000 LW Kinch £15,000 No options were awarded to the Executive Directors under this plan RE Turner £15,000* in 2007. GD Sword £15,000† * Fees payable to ArcLight Energy Partners The Venture Production plc 2002 Employee Share Option Scheme † Fees payable to 3i plc The scheme has both HMRC approved and unapproved sections (A & B respectively). There were no increases in the fees payable to the Non-Executive Directors during 2007 and the next review will take place in 2008. Awards of options under Section A of the scheme are made at the discretion of the Committee and at market value at the date of grant. Service Contracts and Letters of Appointment The Company’s policy is that service contracts of Executive Directors The targets are established by the Committee and the subsequent level should have notice periods of six months, but it recognises that for future of awards is decided and approved by the Committee following a review external appointments a longer initial period might be required. In that of performance. Options cannot be exercised more than ten years after event, the notice period would reduce to six months after a set period. the date of grant. Grants will be limited to £30,000 worth of ordinary Each Executive Director has a rolling one year service contract and each shares per employee, calculated by reference to the market value of the is subject to six months’ notice at any time. Mike Wagstaff entered into a

Company’s ordinary shares at the time the options are granted. contract on 5 May 2005, Jon Murphy on 11 March 2002, Peter Turner on Accounts & Notes 7 November 2007 and Rod Begbie on 3 July 2007. Awards of options under Section B are subject to rules which are broadly similar to those applying to Section A. However, limits are set such that In the event that an Executive Director’s employment is terminated as no individual shall be awarded options if the aggregate value of all a result of a change in control of the Group, or if he or she is required options or participation in any other employee share scheme operated to take an alternative non-equivalent position within six months of a by the Company in the 12 month period preceding the proposed date change in control, then this will be deemed to be constructive dismissal of grant exceeds 400% of his/her annual remuneration at the time of and the notice period will be treated as having increased to 12 months the proposed grant. immediately prior to such deemed dismissal. 50 Venture Production plc Annual Report and Accounts 2007

Directors’ Remuneration Report continued

Each of the Non-Executive Directors has a letter of appointment entered • A termination payment of £160,000, representing eight months’ into on 7 June 2007 with the exception of Robb Turner (12 September basic salary. 2007), Graeme Sword (24 October 2007) and Andrew Carr-Locke (3 March • £845, representing the premium payable to maintain life cover for 2008). Each of the letters of appointment will expire on 14 May 2008. Ms Clayton for a period of eight months. • £19,200, being equivalent to eight months’ pension contributions, In the event that a Non-Executive Director’s appointment is terminated into Ms Clayton’s personal pension plan. or he or she resigns voluntarily, there may be an entitlement to a severance payment of either £10,000 or the amount that would be In addition, it was agreed that Ms Clayton would receive the deferred payable for the unexpired term under the letter of appointment. share portion of the bonus awarded to her in respect of the year ended 31 December 2006 (amounting to 41,848 shares) together with a cash Marie-Louise Clayton payment of £16,739, representing the special dividend, equivalent to Marie-Louise Clayton resigned as a Director of the Company with 40.0 pence per share, paid in respect of those shares. effect from 6 December 2007 and the service agreement between the Company and Ms Clayton was terminated by mutual agreement on Ms Clayton is also eligible for a cash bonus of £177,996 in respect of her 31 December 2007. performance for the year ended 31 December 2007.

When Ms Clayton first indicated her intention to leave, she agreed to By the beginning of October, the Company had not selected a successor remain with the Company for about eight months until 1 November to Ms Clayton as Group Finance Director and it was agreed that, in return 2007 (Ms Clayton’s service agreement provided for not less than six for an additional payment of £50,000, Ms Clayton would remain with the months’ notice of termination). In return, the Committee agreed to Company until the year end. Ms Clayton has also agreed to be available, make the following payments on or about the termination date, if requested by the Board, to attend meetings after the year end, subject to deductions for income tax and National Insurance including meetings concerning the preparation of the 2007 Annual contributions where applicable: Report and Accounts of the Company.

Statement of Directors’ Interests The Directors who held office during the year and their beneficial interests in the shares of the Company at the end of the year were as follows:

2007 2006

Shares Shares Shares Under Shares Under Under Executive Shares Under Executive Shares Ordinary Option Pay Under LTIP Ordinary Option Pay Under LTIP Shares Plans Scheme ADSBP 2006 Shares Plans Scheme ADSBP 2006

Executive Directors MJ Wagstaff 2,413,649 – – 148,876 251,725 1,023,575 1,126,500 64,909 90,483 148,662 JD Murphy 1,304,881 – – 108,138 163,522 152,750 1,126,500 51,927 64,343 99,108 M-L Clayton (to 06.12.07) 32,419 – – 41,848 145,792 – – – 58,110 84,241 RM Begbie (from 19.06.07) 353,978 – – 52,689 94,570 – – – – – PA Turner (from 06.12.07) – 60,000 – – – – – – – –

Non-Executive Directors LW Kinch 11,049,572 – – – – 11,037,572 – – – – JC Morgan 200,000 – – – – 200,000 – – – – MP Nicholls – – – – – – – – – – AM Jones – – – – – – – – – – T Blades 7,000 – – – – 7,000 – – – – T Ehret – – – – – – – – – – GD Sword (from 24.10.07) – – – – – – – – – – RE Turner (from 12.09.07) – – – – – – – – – – Venture Production plc Annual Report and Accounts 2007 51 Overview of Our Business of Our Overview

The Committee is keen to encourage share ownership throughout the organisation and whilst there is not a formal policy in respect of the Company’s shares, the holdings of the Executive Directors are monitored on a periodic basis. There is no current intention to introduce a formal policy and below is a table showing the value of shares and multiple of in 2007 Performance Our base salary of those Executive Directors holding shares at 31 December 2007, using the share price at that date of 792.0 pence per share:

Value of shares held Value of shares held as at 31.12.07 represented as a multiple of £million base salary at 31.12.07

MJ Wagstaff 19.1 49 JD Murphy 10.3 43 RM Begbie 2.8 15

Performance Graph

Total Shareholder Return indices – Venture Production plc, FTSE All Share Oil & Gas Producers & FTSE 250 800 Venture Production 600 Governance 400 FTSE All Share Oil & Gas Producers

200 FTSE 250

2002 2003 2004 2005 2006 2007

The graph shows the Total Shareholder Return (TSR) for Venture Production plc against the TSR for the Financial Times Stock Exchange (FTSE) 250 index and the TSR for the FTSE All Share Oil and Gas Producers.

The Committee believes the FTSE All Share Oil and Gas Producers to be the most appropriate index with which to compare the Company’s performance, as it includes many of the companies against which the Company directly competes and which are included in the same comparator group when determining median base salary levels. Accounts & Notes 52 Venture Production plc Annual Report and Accounts 2007

Directors’ Remuneration Report continued

Part II – Audited Information Directors’ Emoluments and Pension Contributions

Salaries & Fees £’000 Bonus¹ £’000 Benefits £’000 Total £’000 2007 2006 2007 2006 2007 2006 2007 2006

MJ Wagstaff 367.5 287.5 433.9² 424.1² 0.9 1.0 802.3 712.6 JD Murphy 236.3 218.8 267.0² 318.1² 1.3 1.4 504.6 538.3 M-L Clayton (to 06.12.07) 461.9 203.8 178.0 303.9² – – 639.9 507.7 RM Begbie (from 19.06.07) 108.6 – 114.1² – 0.4 – 223.1 – PA Turner (from 06.12.07) 26.8 – 28.8² – – – 55.6 – JC Morgan 75.0 68.8 – – – – 75.0 68.8 MP Nicholls 50.0 45.8 – – – – 50.0 45.8 LW Kinch 15.0 15.0 – – – – 15.0 15.0 AM Jones 45.0 40.8 – – – – 45.0 40.8 T Blades 35.0 26.3 – – – – 35.0 26.3 T Ehret 35.0 26.3 – – – – 35.0 26.3 GD Sword 1.3 – – – – – 1.3 – RE Turner 2.3 – – – – – 2.3 – DJ Morrison – 13.9 – – – – – 13.9 Aggregate Emoluments 1,459.7 947.0 1,021.8 1,046.1 2.6 2.4 2,484.1 1,995.5

Notes: (1) Annual bonus is shown for the year it was earned. (2) Represents the cash available for share purchase under the ADSBP.

Benefits comprised private medical insurance for each of the Executive The Venture Production Share Incentive Plan (SIP) Directors. In addition, pension contributions made by the Company in The Executive Directors applied to purchase Partnership Shares and respect of Directors were as follows: elected to receive Free Shares, if awarded. As at 31 December 2007, they 2007 2006 had acquired the following shares: £’000 £’000

Partnership Matching Free MJ Wagstaff 44.1 31.9 Shares Shares Shares Total JD Murphy 28.4 25.3 M-L Clayton (to 06.12.07) 47.3 23.6 MJ Wagstaff 1,856 3,712 1,967 7,535 RM Begbie (from 19.06.07) 12.8 – JD Murphy 1,856 3,712 1,967 7,535 PA Turner (from 06.12.07) 5.9 – M-L Clayton (to 06.12.07) 508 1,016 895 2,419 Aggregate contributions to RM Begbie 1,856 3,712 1,967 7,535 defined contribution pension schemes 138.5 80.8 Partnership Shares were purchased, on a monthly basis, at prices ranging The Company has a commitment to make pension contributions of up from 679.5 pence to 799.5 pence. to 12% of annual base salary for each Executive Director. The Company has no further obligations relating to the pension arrangements of the Matching Shares were awarded on a two for one basis, at prices ranging Executive Directors. from 679.5 pence to 799.5 pence. Matching Shares vest after a period of no less than three years up to a maximum of five years.

Free Shares were awarded in April 2007 and purchased at a price of 660.0 pence per share. The shares will vest after a period of no less than three years up to a maximum of five years. Venture Production plc Annual Report and Accounts 2007 53 Overview of Our Business of Our Overview

Directors’ Option Holdings Directors’ options to subscribe for shares in Venture Production plc as at 31 December 2007 are detailed below. No options are held over shares in any other Group company. Earliest Exercise Granted/ Date of Date of Exercise Expiry Price No. as at (Exercised) No. as at

Grant Number Grant Date Date (per share) 1 Jan 07 in 2007 31 Dec 07 in 2007 Performance Our

MJ Wagstaff 01/06/99 02/08/99 01/08/09 62.0p 250,000 (250,000) – 01/06/00 01/06/00 31/05/10 62.0p 218,750 (218,750) – 01/06/01 01/06/01 31/05/11 62.0p 218,750 (218,750) – 19/03/02 19/03/02 28/02/11 84.4p 375,000 (375,000) – 01/04/02 01/04/02 31/03/12 84.4p 10,800 (10,800) – 01/04/03 01/04/03 31/03/13 84.4p 17,350 (17,350) – 01/04/04 01/04/04 31/03/14 84.4p 21,400 (21,400) – 01/04/05 01/04/05 31/03/15 84.4p 10,550 (10,550) – 01/04/06 01/04/06 31/03/16 84.4p 3,900 (3,900) – 1,126,500 (1,126,500) –

JD Murphy 01/03/99 01/03/99 28/02/09 43.6p 100,000 (100,000) – 01/06/99 02/08/99 01/08/09 43.6p 25,000 (25,000) – 01/10/00 01/10/00 30/09/10 84.4p 250,000 (250,000) – 01/03/01 01/03/01 28/02/11 43.6p 25,000 (25,000) – 01/10/01 01/10/01 30/09/11 84.4p 125,000 (125,000) – 01/03/02 01/03/02 28/02/12 43.6p 25,000 (25,000) – 19/03/02 19/03/02 28/02/11 84.4p 375,000 (375,000) – 01/04/02 01/04/02 31/03/12 84.4p 10,800 (10,800) – 01/10/02 01/10/02 30/09/12 84.4p 112,500 (112,500) –

01/03/03 01/03/03 28/02/13 43.6p 25,000 (25,000) – Governance 01/04/03 01/04/03 31/03/13 84.4p 17,350 (17,350) – 01/04/04 01/04/04 31/03/14 84.4p 21,400 (21,400) – 01/04/05 01/04/05 31/03/15 84.4p 10,550 (10,550) – 01/04/06 01/04/06 31/03/16 84.4p 3,900 (3,900) – 1,126,500 (1,126,500) –

PA Turner 19/11/07 60,000 18/11/08 18/11/17 775.0p – 60,000 60,000 Total granted during the year – 60,000 60,000 Total 2,253,000 2,313,000 60,000

The market price of the Company’s shares at 31 December 2007 was 792.0 pence and the range of prices between 1 January 2007 and 31 December 2007 was between 595.64 pence and 849.03 pence.

Alan Jones Chairman of the Remuneration Committee 17 March 2008 Accounts & Notes 54 Venture Production plc Annual Report and Accounts 2007

Corporate and Social Responsibility

“Our aim is to cause no harm to people Although the majority of our employees work in our Aberdeen head or the environment. We consider HSE office or our Dutch office in Hoofddorp, our operations involve many people working offshore on behalf of Venture on our production management as an integral part of our installations and on our contracted drilling rigs. business and our duty as a corporate citizen. We believe that the discipline We include all of our employees and contractors in our measurement needed and the motivation that inevitably of lost time injury frequency rates (LTIFR). In 2007 nearly 1.5 million results from achieving and maintaining man-hours were worked across our licence blocks with a LTIFR of 1.3 (2006: 0.8). The industry average is around 3.5. During 2007 there were high HSE standards will contribute only two minor finger injuries, one on our Markham J6A platform and directly to the commercial success of one on a contracted drilling rig. the Company.” Jon Murphy Managing Our Environmental Impact We work hard to mitigate any negative effects that our operations Our Approach may have on the environment, balancing the challenges of a growing Our approach to corporate social responsibilities reflects our culture business, increasing regulatory pressures and a keen desire to minimise – direct, disciplined and commercially focused. We recognise that we any impact our activities have upon the environment. We constantly have an impact on our environment, on the working lives of our people review the ramifications of meeting regulatory changes. All our projects and on our local communities. Equally important, the way in which we are subjected to a rigorous environmental assessment and all applications conduct our business has a direct impact on our reputation and our to the Regulator made in 2007 were approved. licence to operate. Emissions to air and discharges to sea are all now strictly regulated We believe in working closely with other members of our industry to through detailed permits and allowances. As these levels reduce and build a pragmatic legislative framework. Jon Murphy is a Board member our business expands, we anticipate that to allow compliance with these of Oil and Gas UK, the organisation that represents the UK offshore oil permits we will increasingly be purchasers in the various trading schemes. and gas industry to government and regulatory bodies. Jon is also the Board Director with responsibility for Health, Safety and the Environment. Performance Venture is a leading member of the Southern North Sea Environmental Managing our environmental performance in order to deliver continuous Forum, an informal network that Venture established and which enables improvement is key to the organisation. Communicating our performance its 23 members to share information on environmental studies and to key stakeholders is also an essential component of a fully functioning other issues. Environmental Management System (EMS).

In Holland, Hans Versteeg (Operations Director) represented Venture In the UK the Department for Business, Enterprise and Regulatory Reform Production Nederland BV on, and was Vice-Chairman of the Executive (DBERR) requires that all operators have an EMS that is accredited to Committee of, NOGEPA, the organisation that represents the oil and gas ISO 14001 or registered to the Eco-Management and Audit Scheme (EMAS), companies operating in the Netherlands. or which has been externally verified as meeting the requirements of an international standard. Furthermore, all operators must produce an As a successful oil and gas production business Venture creates jobs, annual statement by 1 June each year which includes a description designs and implements new technology, returns profits to shareholders of the operator’s environmental policy, goals, objectives and targets. and through employment, expenditure in the community and taxation The report, which must be available to the public, will also include a contributes to the economic health of the nation. Venture adapts to summary of performance in relation to the aforementioned policy, change whilst investing for the long term and recognises the need to goals, objectives and targets. Venture’s EMS was externally verified in extract oil and gas in the safest and most environmentally responsible 2006 and the 2007 report to DBERR will be made before the middle of 2008. and efficient way. We recognise that there are a variety of perspectives existing with regard to our industry and we encourage regular The Company’s Dutch operations are subject to agreements made under engagement with a broad range of stakeholders. the Dutch environmental covenant. This lays down specific environmental tasks and aims for the Dutch oil and gas industry as a whole. In response Keeping Our People Safe to the requirements of the covenant, the Company produces an annual Our integrated Health, Safety and Environmental policy is approved at environmental plan which summarises its performance against these Board level and is signed by both Mike Wagstaff, Chief Executive and Jon objectives. This annual plan is published in May. Murphy, Chief Operating Officer. The Board regularly challenge the policy and require performance reports and evidence to demonstrate that we In addition, existing regulations concerning oil in produced water and are keeping people safe and managing environmental issues responsibly. atmospheric emissions requires discharge and emission data for the The policy is the foundation of our HSE management system, underpinning previous calendar year to be verified by an accredited auditor by the our continuous improvement process and driving our targets. end of the first quarter. This exercise ensures that the data submitted to various trading schemes is accurate. Venture Production plc Annual Report and Accounts 2007 55 Overview of Our Business of Our Overview

With these dates in mind, a report of Venture’s corporate environmental Getting Involved performance will therefore be made available in May 2008, when it will be Five teams (some 20 people) entered the gruelling Caledonian posted for viewing on the Company website (www.venture-production.com). Challenge, walking 54 miles within 24 hours from Fort William to Loch Lomond and raising in the region of £40,000 for charity.

Notwithstanding the above, some of the key issues in 2007 are in 2007 Performance Our summarised below: Over a third of our Aberdeen based staff competed against 40 other • We experienced one major oil spill in April following an incident local companies in a Corporate Decathlon – ten events spread over the during a tanker loading process in the Kittiwake field. The incident is year – including a Highland Games finale – raising funds for the Scottish currently under review by the regulator. charity, Children 1st. • We made our first submission to the Carbon Disclosure Project in 2007 and in 2008 we will be implementing our Carbon Management Strategy. We also supported an innovative funding scheme put forward by one of • The HSE management system has been extensively revised during our key contractors for four of its sites. Performance against HSE targets the year to accommodate our new Dutch operation, acquired from gave the opportunity to earn money for local charitable causes chosen CH4 last year. by site staff. Over £12,000 has been awarded so far to nine local schools • A number of internal briefing sessions have been held this year as and clubs and three special causes. part of an ongoing awareness programme to ensure that staff are kept up to date with legislative changes, the latest EU directives, changes in Government policy and best practice initiatives.

People Maintaining a strong Company culture and clear values is particularly important for a fast-growing organisation like Venture that operates in a tight labour market. Open consultations on how our core values – people, communication, action – are operating in practice, take place periodically and help identify any changes required in working conditions. ‘Town Hall’ or open forum meetings, attended by everyone in the Company and hosted by the Chief Executive, are used to Governance communicate progress, discuss issues and talk about future plans.

Community We believe our employees are our strongest link with our local communities. It is through encouraging our employees voluntary efforts that we will support those communities.

In May we put in place a formal social investment policy that promotes employee involvement in community initiatives, backed by an ‘Employee Matched Funding Scheme’ where Venture will match the money raised on approved projects. Accounts & Notes 56 Venture Production plc Annual Report and Accounts 2007

Independent Auditor’s Report to the Members of Venture Production plc

We have audited the Group and Parent Company financial statements We review whether the Corporate Governance Report reflects the (the financial statements) of Venture Production plc for the year ended Company’s compliance with the nine provisions of the Combined Code 31 December 2007 which comprise the Group Income Statement, (2003) specified for our review by the Listing Rules of the Financial the Group and Parent Company Balance Sheets, the Group and Parent Services Authority, and we report if it does not. We are not required to Company Cash Flow Statements, the Group and Parent Company consider whether the Board’s statements on internal control cover all risks Statements of Recognised Income and Expenses and the related notes. and controls, or to form an opinion on the effectiveness of the Group’s These financial statements have been prepared under the accounting corporate governance procedures or its risk and control procedures. policies set out therein. We have also audited the information in the Directors’ Remuneration Report that is described as having been audited. We read other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. The other Respective Responsibilities of Directors and Auditors information comprises only the Directors’ Report, the unaudited part The Directors’ responsibilities for preparing the Annual Report, of the Directors’ Remuneration Report, the Chairman’s Statement, the the Directors’ Remuneration Report and the financial statements in Operating and Financial Review and the Corporate Governance Report. accordance with applicable law and International Financial Reporting We consider the implications for our report if we become aware of any Standards (IFRSs) as adopted by the European Union are set out in the apparent misstatements or material inconsistencies with the financial Statement of Directors’ Responsibilities. statements. Our responsibilities do not extend to any other information.

Our responsibility is to audit the financial statements and the part of Basis of Audit Opinion the Directors’ Remuneration Report to be audited in accordance with We conducted our audit in accordance with International Standards relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. on Auditing (UK and Ireland). This report, including the opinion, has An audit includes examination, on a test basis, of evidence relevant to been prepared for and only for the Company’s members as a body in the amounts and disclosures in the financial statements and the part accordance with Section 235 of the Companies Act 1985 and for no of the Directors’ Remuneration Report to be audited. It also includes an other purpose. We do not, in giving this opinion, accept or assume assessment of the significant estimates and judgements made by the responsibility for any other purpose or to any other person to whom Directors in the preparation of the financial statements, and of whether this report is shown or into whose hands it may come save where the accounting policies are appropriate to the Group’s and Company’s expressly agreed by our prior consent in writing. circumstances, consistently applied and adequately disclosed.

We report to you our opinion as to whether the financial statements We planned and performed our audit so as to obtain all the information give a true and fair view and whether the financial statements and the and explanations which we considered necessary in order to provide us part of the Directors’ Remuneration Report to be audited have been with sufficient evidence to give reasonable assurance that the financial properly prepared in accordance with the Companies Act 1985 and, statements and the part of the Directors’ Remuneration Report to be as regards the Group financial statements, Article 4 of the IAS Regulation. audited are free from material misstatement, whether caused by fraud We also report to you whether in our opinion the information given or other irregularity or error. In forming our opinion we also evaluated in the Directors’ Report is consistent with the financial statements. the overall adequacy of the presentation of information in the financial The information given in the Directors’ Report includes the specific statements and the part of the Directors’ Remuneration Report to information presented in the Business and Operational Review and be audited. Financial Review that is cross-referred from the Business Review section of the Directors’ Report.

In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors’ remuneration and other transactions is not disclosed. Venture Production plc Annual Report and Accounts 2007 57 Overview of Our Business of Our Overview

Opinion In our opinion: • The Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the

Group’s affairs as at 31 December 2007 and of its profit and cash flows in 2007 Performance Our for the year then ended. • The Parent Company financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union as applied in accordance with the provisions of the Companies Act 1985, of the state of the Parent Company’s affairs as at 31 December 2007 and cash flows for the year then ended. • The financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the Group financial statements, Article 4 of the IAS Regulation. • The information given in the Directors’ Report is consistent with the financial statements.

PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors Aberdeen 17 March 2008

Notes: (a) The maintenance and integrity of the Venture Production plc website is the responsibility of the Directors. The work carried out by the Governance auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. (b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Accounts & Notes 58 Venture Production plc Annual Report and Accounts 2007

Group Income Statement For the year ended 31 December 2007

Restated 2007 2006 Notes £’000 £’000

Revenue 2 358,295 360,251 Cost of sales (171,703) (169,673) Development costs written off 4 (11,207) – Impairment of assets 4 (33,463) – Gross profit 141,922 190,578

Exploration costs written off (18,144) (3,872) Administrative expenses (8,815) (5,684) Gain/(loss) on foreign exchange 496 (2,465) Gain on disposal of subsidiary 5 251 – Other operating income 6 929 3,363 Operating profit 4 116,639 181,920

Finance income 7 4,442 2,547 Finance expense 7 (19,122) (10,737) Change in fair value of derivative financial instruments 25 (1,903) 2,401 Share of profit of associates 15 1,151 604 Profit before tax 101,207 176,735

Income tax expense 8 (53,032) (95,142) Profit for the financial year 48,175 81,593

Earnings Per Ordinary Share Basic earnings per share 9 35.6p 64.5p Diluted earnings per share 9 33.9p 59.0p Dividends Paid Per Ordinary Share Special dividend paid per share 10 40.0p – Ordinary dividend paid per share 10 10.0p –

All items dealt with in arriving at the profit for the year relate to continuing activities.

Prior year comparatives have been restated, an explanation of which is included in Note 1.

Statement of Recognised Income and Expense For the year ended 31 December 2007

Group Company 2007 2006 2007 2006 £’000 £’000 £’000 £’000

Profit for the financial year 48,175 81,593 105,527 15,149 Cash flow hedges: – Fair value (losses)/gains net of tax (Note 29) (42,453) 19,862 – – – Reclassified and reported in net profit (Note 29) (3,427) 14,051 – – Total recognised income for the year 2,295 115,506 105,527 15,149 Venture Production plc Annual Report and Accounts 2007 59 Overview of Our Business of Our Overview

Group Balance Sheet As at 31 December 2007

Restated 2007 2006 Notes £’000 £’000

Assets

Non-current assets in 2007 Performance Our Property, plant and equipment 12 818,648 664,634 Intangible assets 13 53,291 47,945 Investments accounted for using the equity method 15 16,341 11,098 Convertible loan notes receivable 18 5,383 5,376 Derivative financial instruments 25 – 6,093 893,663 735,146

Current assets Inventories 17 1,721 3,183 Trade and other receivables 18 107,324 90,427 Derivative financial instruments 25 498 19,916 Cash and cash equivalents 19 158,445 59,167 267,988 172,693

Assets classified as held for sale 14 – 3,391 Total assets 1,161,651 911,230

Liabilities Current liabilities Trade and other payables 20 (118,824) (81,589) Derivative financial instruments 25 (36,992) – Governance Income taxes payable (15,062) (16,848) (170,878) (98,437) Net current assets 97,110 77,647

Non-current liabilities Financial liabilities – borrowings 21 (398,322) (245,921) Derivative financial instruments 25 (30,999) – Deferred income tax liabilities 22 (200,445) (193,415) Other non-current liabilities 23 (9,392) (5,158) Provisions 24 (70,425) (61,831) (709,583) (506,325)

Liabilities of subsidiary held for sale 14 – (1,093) Total liabilities (880,461) (605,855) Net assets 281,190 305,375

Shareholders’ equity 26 Called up share capital 573 534 Accounts & Notes Share premium 27 107,207 105,084 Other reserves 29 105,070 86,622 Retained earnings 28 68,340 113,135 Total shareholders’ equity 281,190 305,375

The financial statements on pages 58 to 97 were approved by the Board of Directors on 17 March 2008 and were signed on its behalf by:

MJ Wagstaff PA Turner Chief Executive Finance Director 60 Venture Production plc Annual Report and Accounts 2007

Company Balance Sheet As at 31 December 2007

2007 2006 Notes £’000 £’000

Assets Non-current assets Property, plant and equipment 12 457 736 Investments in subsidiaries 15 427,269 158,771 Investments accounted for using the equity method 15 – 6,120 Amounts due from subsidiary undertakings 18 153,247 227,995 Convertible loan notes receivable 18 – 5,376 Derivative financial instruments 25 – 725 580,973 399,723

Current assets Trade and other receivables 18 346 2,773 Deferred tax assets 22 1,019 13,365 Cash and cash equivalents 19 104,134 44,100 Derivative financial instruments 25 498 1,676 105,997 61,914

Liabilities Current liabilities Trade and other payables 20 (15,828) (21,943) (15,828) (21,943) Net current assets 90,169 39,971

Non-current liabilities Financial liabilities – borrowings 21 (398,322) (245,921) (398,322) (245,921) Net assets 272,820 193,773

Shareholders’ equity Called up share capital 26 573 534 Share premium 27 107,207 105,084 Other reserves 29 139,146 74,818 Retained earnings 28 25,894 13,337 Total shareholders’ equity 272,820 193,773

The financial statements on pages 58 to 97 were approved by the Board of Directors on 17 March 2008 and were signed on its behalf by:

MJ Wagstaff PA Turner Chief Executive Finance Director Venture Production plc Annual Report and Accounts 2007 61 Overview of Our Business of Our Overview

Group Cash Flow Statement For the year ended 31 December 2007

2007 2006 Notes £’000 £’000

Cash flows from operating activities Operating cash flow 30 263,610 284,410 Our Performance in 2007 Performance Our Interest received 4,174 2,278 Interest paid (11,534) (13,187) Income tax paid (16,006) – Net cash generated from operating activities 240,244 273,501

Cash flows from investing activities Purchase of property, plant and equipment (242,033) (174,027) Acquisition of subsidiaries (net of cash acquired) 3 14,166 (73,952) Sale of subsidiary (net of cash disposed) 5 1,800 – Proceeds from disposal of property, plant and equipment 2,494 9,956 Investments in joint ventures and associates – (6,408) Net cash used in investing activities (223,573) (244,431)

Cash flows from financing activities Shares acquired by Employee Benefit Trust 29 (7,920) (14,100) Purchase of treasury shares 28 (15,817) (12,033) Disposal of treasury shares 348 – Proceeds from borrowings 386,161 83,419 Repayments of borrowings (216,120) (40,000) Dividends paid to shareholders 10 (67,566) – Proceeds from issuance of ordinary shares 2,132 212 Proceeds from exercise of share options 386 449 Governance Net cash from financing activities 81,604 17,947

Net increase in cash and cash equivalents 98,275 47,017 Opening cash and cash equivalents 60,170 13,153 Closing cash and cash equivalents 19 158,445 60,170

The principal non-cash transactions occurring during the year were the issue of shares as consideration for the acquisition of NSGP (£46,582,000) and WHAM (£7,629,000) (Note 3). Accounts & Notes 62 Venture Production plc Annual Report and Accounts 2007

Company Cash Flow Statement For the year ended 31 December 2007

2007 2006 Notes £’000 £’000

Cash flows from operating activities Operating cash (outflow)/inflow 30 (12,796) 17,519 Interest received 4,147 20,215 Interest paid (10,437) (6,756) Net cash (used in)/generated from operating activities (19,086) 30,978

Cash flows from investing activities Purchase of property, plant and equipment (60) (458) Acquisition of subsidiary – (73,952) Disposal of investment in associate 15 11,496 – Investments in subsidiaries 15 (226,019) (4,295) Repayments of loans to subsidiaries 212,099 58,341 Net cash used in investing activities (2,484) (20,364)

Cash flows from financing activities Shares acquired by Employee Benefit Trust 29 (7,920) (14,100) Purchase of treasury shares 28 (15,817) (12,033) Disposal of treasury shares 348 – Proceeds from borrowings 386,161 83,419 Repayments of borrowings (216,120) (40,000) Dividends paid to shareholders 10 (67,566) – Proceeds from issuance of ordinary shares 2,132 212 Proceeds from exercise of share options 386 449 Net cash from financing activities 81,604 17,947

Net increase in cash and cash equivalents 60,034 28,561 Opening cash and cash equivalents 44,100 15,539 Closing cash and cash equivalents 19 104,134 44,100 Venture Production plc Annual Report and Accounts 2007 63 Overview of Our Business of Our Overview

Notes to the Financial Statements

1. Accounting Policies for the year ended 31 December 2007 Basis of Preparation These financial statements have been prepared in accordance with IFRS and IFRIC interpretations endorsed by the European Union (EU) and with those parts of the Companies Act 1985, applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost Our Performance in 2007 Performance Our convention as modified by the revaluation of certain financial assets and liabilities (including derivative instruments). A summary of the more important Group accounting policies is set out below, together with an explanation of where changes have been made to previous policies on the adoption of new accounting standards in the year.

The preparation of financial statements requires the use of estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reporting amount of income and expenses during the year. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates.

During the year, the Group has reclassified all costs relating to unsuccessful exploration activities to a separate line item on the face of the income statement. Comparative figures have been restated as a result of this reclassification. Additionally, the fair values provisionally accounted for on the acquisition of CH4 during 2006 have been finalised in the year and this has resulted in a restatement of prior year comparatives.

Consolidation Subsidiaries Subsidiaries are entities over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date on which control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired, liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded Governance as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement.

Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated as part of the consolidation process. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

Critical Estimates and Judgements The main estimates made by the Group included decommissioning estimates, estimates of future capital expenditures used in the calculation of depreciation, depletion and amortisation (DD&A) and hydrocarbon reserve estimates. See accounting policy on each item for further information.

The main judgements made by the Group included the forecasts and assumptions used in the impairment review of non-financial assets, tax provisioning and deferred tax asset recognition. See accounting policy on these items for further information.

Investments in Associates The Group’s investments in its associates are accounted for under the equity method of accounting. These are entities in which the Group has significant influence and which are neither a subsidiary nor a joint venture. The financial statements of the associates are used by the Group to apply the equity

accounting method. The reporting dates of the associates and the Group are identical and all use consistent accounting policies. Accounts & Notes

The investments in associates are carried in the balance sheet at cost plus post-acquisition changes in the Group’s share of net assets of the associates, less any impairment in value. The income statement reflects the share of the results of operations of the associates.

Joint Ventures The Group is engaged in oil and gas development and production through incorporated and unincorporated joint ventures. The Group accounts for its share of the results and net assets of these joint ventures as jointly controlled assets.

In addition where the Group acts as operator to the joint venture, the gross liabilities and receivables (including amounts due to or from non-operating partners) of the joint venture are included in the Group consolidated balance sheet. 64 Venture Production plc Annual Report and Accounts 2007

Notes to the Financial Statements continued

1. Accounting Policies for the year ended 31 December 2007 (continued) Revenue Recognition Revenue from sales of oil and natural gas is recognised when the significant risks and rewards of ownership have been transferred, which is when title passes to the customer. For oil and natural gas, this generally occurs when product is physically transferred into a vessel, pipe or other delivery mechanism.

Revenue resulting from the production of oil and natural gas properties in which Venture has an interest with other producers is recognised on the basis of Venture’s working interest (entitlement method). Consequently, for sales in respect of oil liftings sold, adjustments for overlift (liftings greater than production entitlement) and underlift (production entitlement greater than liftings) are recorded against cost of sales at market value.

Tariff revenue from the use of the Group’s platform and pipeline facilities is recognised when products are physically transferred into a vessel, pipe or other delivery mechanism.

Segmental Reporting Segmental reporting follows the Group’s internal reporting structure, and accordingly, its primary segment reporting is by business segment. A business segment is engaged in providing products within a particular economic environment that is subject to risks and returns that are different from those segments operating in other economic environments. In the opinion of the Directors, the operations of the Group comprise two classes of business, oil production and gas production.

Foreign Currency Translation (a) Functional and Presentation Currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in pounds sterling, the Company’s functional and presentation currency.

(b) Transactions and Balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign currency gains and losses resulting from the settlement of such transactions, and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies, are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisition of subsidiaries is included in intangible assets. Separately recognised goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

Goodwill is allocated to cash-generating units (CGUs) for the purpose of impairment testing. The allocation is made to those CGUs or groups of CGUs that are expected to benefit from the business combination in which the goodwill arose.

Oil and Gas Exploration and Development Expenditure Oil and gas exploration and development expenditure is accounted for using the successful efforts method of accounting.

Expenditure incurred prior to obtaining the legal rights to explore an area is expensed immediately to the income statement. Venture Production plc Annual Report and Accounts 2007 65 Overview of Our Business of Our Overview

Expenditure directly associated with an exploration well is capitalised on a licence by licence basis. Costs are held, un-depleted, on the balance sheet under exploration assets, until the success or otherwise of the well has been established. Costs will continue to be held as an asset if the results indicate that hydrocarbon reserves exist and there is a reasonable prospect that these reserves are commercial. All such carried costs are subject to technical, commercial and management review at least once a year to confirm the intent to develop or otherwise extract value from the discovery. When this is

no longer the case, the costs are written off. When proved reserves are determined and development is sanctioned, the relevant costs are transferred in 2007 Performance Our to development and producing assets.

Expenditure on the construction, installation or completion of infrastructure facilities such as platforms, pipelines and the drilling of development wells, is capitalised within development and producing assets on a field by field basis.

Upon commencement of production, these costs are amortised on a unit of production basis that is calculated on budgeted capital expenditure and proven and probable reserves.

Property, Plant and Equipment All property, plant and equipment is shown at cost less subsequent depreciation and impairment.

The initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable to bringing the asset into operation, the initial estimate of any decommissioning obligation, if any, and for qualifying assets, borrowing costs. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group, and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred.

Depreciation on other assets is calculated using the straight-line method to allocate their cost less their residual values over their estimated useful lives, as follows: Governance Plant and machinery 10–33% Office equipment 25% Motor vehicles 25% Buildings 5%

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

Impairment of Non-Financial Assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s net realisable value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows. These CGUs are aligned to the business unit and sub-business unit structure that the Group uses to manage its business. Cash flows are discounted in determining the value in use.

Exploration/appraisal assets are reviewed regularly for indicators of impairment and costs are written off where circumstances indicate that the carrying value might not be recoverable. In such circumstances the exploration asset is allocated to development/producing assets within the same field and tested for impairment. Any such impairment arising is recognised in the income statement for the period. Where there are no development/producing Accounts & Notes assets within a business unit, the exploration/appraisal costs are charged immediately to the income statement.

Impairment reviews on development/producing assets are carried out on each CGU identified in accordance with IAS 36 ‘Impairment of Assets’. Venture’s CGUs are those assets which generate largely independent cash flows and are normally, but not always, single development areas. 66 Venture Production plc Annual Report and Accounts 2007

Notes to the Financial Statements continued

1. Accounting Policies for the year ended 31 December 2007 (continued) At each reporting date, where there are indicators of impairment, the net book value of the CGU is compared with the associated expected discounted future post-tax net cash flows. If the net book value is higher, then the difference is written off to the income statement as impairment. Discounted future net cash flows for IAS 36 purposes are calculated using forward curve pricing for the first five years and management’s view of the long term price thereafter. Cash flows are discounted to present value using a discount rate of 8%. Forecasted production profiles are determined on an asset by asset basis, using appropriate petroleum engineering techniques.

Where there has been an impairment charge in an earlier period, that charge will be reversed in a later period where there has been a change in circumstances to the extent that the discounted future net cash flows are higher than the net book value at the time. In reversing impairment losses, the carrying amount of the asset will be increased to the lower of its original carrying value or the carrying value that would have been determined (net of depletion) had no impairment loss been recognised in prior periods.

Deferred Consideration Deferred consideration relates to the future cash consideration payable in respect of acquisitions which is contingent on the outcome of future events. When an acquisition agreement provides for an adjustment to the consideration contingent on future events, provision is made for that amount if the adjustment is probable and can be measured reliably. The amount provided is included in the cost of the acquisition. When the final amount payable is determined, or when revised estimates are made, the acquisition cost and provision are adjusted accordingly. Deferred consideration is recorded at its fair value.

Inventories Inventories are stated at the lower of cost and net realisable value and comprise oil in tanks and pipelines and materials. Cost values for stocks of oil are calculated using a weighted average cost for the year.

Under/Overlift Lifting or offtake arrangements for oil and gas produced in certain of the Group’s jointly owned operations are such that each participant may not receive and sell its precise share of the overall production in each period. The resulting imbalance between cumulative entitlement and cumulative production less stock is ‘underlift’ or ‘overlift’. Underlift and overlift are valued at market value and included within debtors and creditors respectively. Movements during an accounting period are adjusted through cost of sales, such that gross profit is recognised on an entitlement basis. The Group’s share of any physical stock is accounted for at the lower of cost and net realisable value.

Assets Held for Sale Assets held for sale are stated at fair value on the basis that they are available for immediate sale in their present condition, subject only to terms that are usual and customary for sales of such assets and that the sale is highly probable at the balance sheet date.

Trade Receivables Trade receivables are recognised and carried at original invoice amount less any provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables.

Cash and Cash Equivalents Cash and cash equivalents includes cash in hand, bank overdrafts and deposits held at call with banks with maturity dates of less than three months.

Share Capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Incremental costs directly attributable to the issue of new shares or options, for the acquisition of a business, are included in the cost of acquisition as part of the purchase consideration.

Dividends on ordinary shares are not recognised as a liability or charged to equity until they have been declared. Venture Production plc Annual Report and Accounts 2007 67 Overview of Our Business of Our Overview

Where any Group company purchases the Company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from equity attributable to the Company’s equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company’s equity holders. Our Performance in 2007 Performance Our The Group is deemed to have control of the assets, liabilities, income and costs of its Employee Benefit Trust (EBT). They have therefore, been consolidated in the financial statements of the Group. Shares acquired by and disposed of by the EBT are recorded at cost. The cost of shares held by the EBT is deducted from shareholders’ equity.

Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

Convertible Bonds The fair value of the liability component of a convertible bond is determined using a market interest rate for an equivalent non-convertible bond. This amount is recorded as a liability on an amortised cost basis until extinguished on conversion or maturity. The remainder of the proceeds of the convertible bond represents the value of the equity conversion option and this component of the bond is recognised in shareholders’ equity.

Capitalised Interest Interest is capitalised gross of related tax relief during the period of construction, where it relates either to the financing of major projects with long periods of development, or to dedicated financing of other projects. All other interest is charged against income.

Derivative Financial Instruments and Hedging Governance Derivatives are initially recognised at fair value on the date a derivative contract is entered into, and are subsequently re-measured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. The Group designates derivatives as hedges of highly probable forecast transactions (cash flow hedge).

The Group documents at the inception of the transaction, the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. At the point of settlement, any payments or receipts relating to hedge transactions are included in revenue.

Cash Flow Hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges, are recognised in equity net of deferred income tax. The gain or loss relating to the ineffective portion is recognised immediately in the income statement.

Amounts accumulated in equity, including the associated deferred income taxes, are recycled in the income statement in the periods when the hedged item will affect profit or loss (for example, when the forecast sale that is hedged takes place).

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity, and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income Accounts & Notes statement.

Derivatives that Do Not Qualify for Hedge Accounting Certain derivative instruments do not qualify for hedge accounting. Such derivatives are classified as at fair value through profit or loss, and changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the income statement. 68 Venture Production plc Annual Report and Accounts 2007

Notes to the Financial Statements continued

1. Accounting Policies for the year ended 31 December 2007 (continued) Fair Value Estimation Fair value is the amount at which a financial instrument could be exchanged in an arm’s length transaction between informed and willing parties, other than a forced or liquidation sale and excludes accrued interest. Where available, market values are used to determine fair values. Where market values are not available, fair values are calculated by discounting expected cash flows at prevailing interest and exchange rates.

Taxation The tax charge, including UK corporation tax and overseas corporate tax, represents the sum of tax currently payable and deferred tax. Tax currently payable is based on the taxable profit for the year. Taxable profit differs from the profit reported in the income statement due to items that are not taxable or deductible in any period and also due to items that are taxable or deductible in a different period. The Group’s liability for current tax is calculated using tax rates enacted or substantively enacted at the balance sheet date.

Current UK Petroleum Revenue Tax (PRT) is charged as a tax expense on chargeable field profits included in the income statement and is deductible for UK corporation tax. Deferred PRT is provided for in full, using the effective PRT rate method.

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination, that at the time of the transaction effects neither accounting nor taxable profit or loss, it is not accounted for. Deferred income tax is determined using tax rates (and laws) that have been enacted, or substantively enacted, by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group, and it is probable that the temporary difference will not reverse in the foreseeable future.

Operating Leases Rentals payable under operating leases are charged to the income statement on a straight-line basis.

Pension Costs The Group pays contributions to personal pension schemes of employees, which are administered independently of the Group. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as an employee benefit expense when they are due.

Share-Based Payments The Group currently has various share-based payment schemes for its employees and Directors, details of which are given in the Directors’ Remuneration Report.

The fair value of share-based awards is determined at the date of grant of the award allowing for the effect of any market-based performance conditions. This fair value, adjusted by the Group’s estimate of the number of awards that will eventually vest as a result of key performance measures, is expensed uniformly over the vesting period. The corresponding credit is taken to the employee benefit reserve. The proceeds on exercise of share options are credited to share capital and share premium.

The fair values are calculated using a binomial option pricing model with suitable modifications to allow for employee turnover after vesting and early exercise. The inputs to the model include the share price at date of grant, exercise price, expected volatility, expected dividends, risk free rate of interest and patterns of early exercise of the plan participants.

Decommissioning Provision for decommissioning is recognised in full at the commencement of oil and natural gas production. The amount recognised is the present value of the estimated future expenditure determined in accordance with local conditions and requirements. A corresponding tangible fixed asset of an amount equivalent to the provision is also created. This is subsequently depreciated as part of the capital costs of the production and transportation facilities. Any change in the present value of the estimated expenditure is reflected as an adjustment to the provision and the fixed asset. Unwinding of discount is treated as a finance cost. Venture Production plc Annual Report and Accounts 2007 69 Overview of Our Business of Our Overview

Disclosure of Impact of New and Future Accounting Standards The following standards, amendments and interpretations to published standards were mandatory for the year ended 31 December 2007:

• IFRS 7 Financial Instruments Disclosures

The application of IFRS 7 has resulted in additional disclosures in the Group accounts in Notes 18 and 25. The application of IFRS 7 has not had in 2007 Performance Our a material impact on the Group’s income statement, balance sheet or cash flow statement.

• Amendment to IAS 1 The amendment to IAS 1 introduces disclosures about the level of an entity’s capital and how it manages its capital.

• IFRIC 8 Scope of IFRS 2

• IFRIC 9 Reassessment of Embedded Derivatives

• IFRIC 10 Interim Financial Reporting and Impairment The application of IFRIC 8, IFRIC 9 and IFRIC 10 did not have a material impact on the financial statements.

The Group has not yet adopted the following standards, amendments and interpretations which are only effective for periods commencing on or after 1 January 2009:

• IFRS 8 Operating Segments This standard replaces IAS 14 ‘Segment Reporting’ and proposes that entities adopt a ‘management approach’ to reporting financial performance. We do not anticipate that this standard will have any material impact on the Group’s financial statements.

• IFRS 3 (Revised) Business Combinations This standard includes some significant changes to IFRS 3 in respect of business combinations with all payments made to purchase a business recorded at fair value at acquisition date. This standard is effective from 1 July 2009 and will have an impact on any acquisitions the Group makes Governance from that date.

• IAS 1 Presentation of Financial Statements This standard prescribes the basis for presentation of financial statements and aims to ensure comparability both with the entity’s financial statements of previous periods and with the financial statements of other entities.

• IAS 23 (Revised) Borrowing Costs The revised standard removes the option of immediately recognising an expense on borrowing costs that relate to assets that take a substantial period of time to get ready for use.

• IFRIC 11 Group and Treasury Share Transactions This interpretation addresses how to apply IFRS 2 to share-based payment arrangements involving an entity’s own equity instruments or instruments of another entity in the same group.

Other standards, amendments and interpretations were considered but specifically excluded as they were not expected to impact the Group. Accounts & Notes 70 Venture Production plc Annual Report and Accounts 2007

Notes to the Financial Statements continued

2. Segmental Reporting Primary Segment – Business Segments Oil Business Segment The oil segment consists of all activities connected with the Group’s oil assets, currently the ‘Trees’ and GKA hubs.

Gas Business Segment The gas segment consists of all activities connected with the Group’s gas assets, currently the ‘A’ Fields and the GMA hubs.

Segment Results Unallocated Oil Gas Corporate Total £’000 £’000 £’000 £’000

At 31 December 2007 Revenues 172,760 185,535 – 358,295 Exploration costs written off (18,144) – – (18,144) Development costs written off – (11,207) – (11,207) Impairment of assets (33,463) – – (33,463) Other expenses (69,832) (100,728) (8,282) (178,842) Operating profit 51,321 73,600 (8,282) 116,639

At 31 December 2006 Revenues 127,188 233,063 – 360,251 Exploration costs written off (3,872) – – (3,872) Development costs written off – – – – Impairment of assets – – – – Other expenses (55,530) (110,952) (7,977) (174,459) Operating profit 67,786 122,111 (7,977) 181,920

Segment Assets and Liabilities Unallocated Oil Gas Corporate Total £’000 £’000 £’000 £’000

At 31 December 2007 Segment assets 249,138 731,016 181,497 1,161,651 Segment liabilities (106,596) (131,272) (642,593) (880,461) Net assets/(liabilities) 142,542 599,744 (461,096) 281,190

At 31 December 2006 Segment assets 294,640 526,139 90,451 911,230 Segment liabilities (55,202) (73,321) (477,332) (605,855) Net assets/(liabilities) 239,438 452,818 (386,881) 305,375

Segment assets and liabilities are presented before the elimination of inter-segment trading balances. Venture Production plc Annual Report and Accounts 2007 71 Overview of Our Business of Our Overview

Segment assets and liabilities are reconciled to group assets and liabilities as follows: Assets Liabilities £’000 £’000

Segment assets/(liabilities) 980,154 (237,868) Unallocated: in 2007 Performance Our Fixed assets 830 – Cash at bank and in hand 158,445 – Investments 16,341 – Convertible loan notes 5,383 – Deferred income tax – (200,445) Income taxes payable – (15,062) Current liabilities – (28,764) Non-current borrowings – (398,322) Derivative financial instruments 498 – Total 1,161,651 (880,461)

Other Segment Items Unallocated Oil Gas Corporate Total £’000 £’000 £’000 £’000

At 31 December 2007 Capital expenditure – Property, plant and equipment 86,938 168,240 433 255,611 – Acquisitions – 47,944 – 47,944 – Depreciation (25,439) (56,685) (339) (82,463) – Impairment of assets (33,463) – – (33,463) – Development costs written off – (11,207) – (11,207) Governance – Exploration costs written off (18,144) – – (18,144) – Disposals (1,247) (3,017) – (4,264) 8,645 145,275 94 154,014

At 31 December 2006 Capital expenditure – Property, plant and equipment 64,835 102,281 470 167,586 – Acquisitions – 157,715 – 157,715 – Depreciation (26,246) (61,482) (514) (88,242) – Exploration costs written off (3,872) – – (3,872) – Disposals – (9,956) – (9,956) 34,717 188,558 (44) 223,231

Secondary Segment – Geographic Segments All of the Group’s activities are in the UK and Dutch sector of the North Sea, which is considered to be one geographic segment. Accounts & Notes 72 Venture Production plc Annual Report and Accounts 2007

Notes to the Financial Statements continued

3. Business Combinations Acquisitions in 2007 Acquisition of WHAM Energy plc On 12 November 2007, the Group acquired 100% of the voting shares of WHAM Energy plc (WHAM), a listed company based in the United Kingdom.

The total cost of the combination was £15,600,000 and comprised cash and an issue of equity instruments. The Group issued 1,065,464 ordinary shares with a fair value of £7.16 each, being the published price of the shares of Venture Production plc at the date of exchange.

The fair value of the identifiable assets and liabilities of WHAM as at the date of acquisition and the corresponding carrying amounts immediately before the acquisition are shown below. The fair value adjustments relate primarily to the recognition at fair value of the acquired interests in oil and gas assets and the impact of the adoption of Venture accounting policies. The impact of recognising deferred tax on the fair value of the assets and liabilities is to reduce the value of the net assets acquired and thereby increase the goodwill on acquisition.

Acquiree’s Provisional carrying amount Adjustments fair value £’000 £’000 £’000

Property, plant and equipment 2,492 7,928 10,420 Trade receivables 76 – 76 Cash and cash equivalents 5,795 – 5,795 8,363 7,928 16,291 Trade payables (697) – (697) Deferred income tax liabilities – (4,400) (4,400) Net assets 7,666 3,528 11,194

Goodwill arising on acquisition 4,406 Total consideration 15,600

Cost: £’000

Cash paid 6,254 Shares issued, at fair value 7,629 Costs associated with the acquisition 1,717 Total consideration 15,600

Cash outflow on acquisition: £’000

Net cash acquired with subsidiary 5,795 Cash paid (6,254) Costs associated with the acquisition (1,717) Net cash outflow (2,176)

The results of the Group, as if the above acquisition had been made at the beginning of the year, would have been as follows:

£’000

Revenue 358,295 Profit for the year 46,499

The acquired business earned no revenue from the beginning of the year to the acquisition date. From the date of acquisition to 31 December 2007, the business generated no revenues and earned profits of £25,000 in respect of bank interest. Venture Production plc Annual Report and Accounts 2007 73 Overview of Our Business of Our Overview

Acquisition of North Sea Gas Partners Limited During 2006, the Group held a 33.3% shareholding in North Sea Gas Partners Limited (NSGP). On 19 July 2007, the Group acquired the remaining 66.7% of the voting shares of NSGP, an unlisted company based in the United Kingdom and registered in Jersey.

The total cost of the combination was £46,582,000 and wholly comprised an issue of equity instruments. The Group issued 6,033,906 ordinary shares in 2007 Performance Our with a value of £7.72 each, being the published price of the shares of Venture Production plc at the date of exchange.

The fair value of the identifiable assets and liabilities of NSGP as at the date of acquisition and the corresponding carrying amounts immediately before the acquisition are shown below. No fair value adjustments were recorded at the date of acquisition as the book values were assessed as equalling the fair values on this date.

Acquiree’s Provisional carrying amount Adjustments fair value £’000 £’000 £’000

Property, plant and equipment 56,291 – 56,291 Trade receivables 584 – 584 Cash and cash equivalents 24,513 – 24,513 81,388 – 81,388 Trade payables (9,945) – (9,945) Deferred income and consideration (2,974) – (2,974) Net assets 68,469 – 68,469

Less net assets previously consolidated (22,827) Goodwill arising on acquisition 940 Total consideration 46,582

Governance Cost: £’000

Shares issued, at fair value 46,582 Total consideration 46,582

Cash inflow on acquisition: £’000

Net cash acquired with subsidiary 16,342 Net cash inflow 16,342

The results of the Group, as if the above acquisition had been made at the beginning of the year would have been as follows:

£’000

Revenue 358,295 Profit for the year 48,053

The acquired business earned no revenues from the beginning of the year to the acquisition date. From the date of acquisition to 31 December 2007, the business generated no revenues and earned profits of £467,000. Accounts & Notes 74 Venture Production plc Annual Report and Accounts 2007

Notes to the Financial Statements continued

4. Operating Profit The following items have been charged/(credited) in arriving at operating profit:

Restated 2007 2006 £’000 £’000

Over/(Underlift) 2,848 (1,791) Operating expenses 76,269 74,288 Well workover expenses 9,693 7,706 Exploration costs written off 18,144 3,872 Development costs written off 11,207 – Impairment of assets 33,463 – Depreciation, depletion and amortisation 82,463 88,242 Employee expenses (Note 31) 14,275 8,282 Share-based payments (Note 16) 4,981 10,169 Operating lease rentals: – Land and buildings 629 384 Foreign currency (gain)/loss (496) 2,465

Exploration costs written off relate to unsuccessful exploration activities where hydrocarbons were not encountered.

Development costs written off reflects the write-off of the original drilling investment in the Amanda field in 2003.

During 2007, Venture commenced a major seismic reprocessing and interpretation study on the entire ‘Trees’ production hub, which will be completed during 2008. Whilst the analysis of the remaining potential in the southern part of the Sycamore development has not yet been completed, preliminary results of this study suggest that in the central part of the Sycamore field there is limited re-investment opportunity. Accordingly, an impairment charge of £24,500,000 has been made, reducing the carrying value of the Sycamore field to its value in use. Analysis will be finalised upon completion of further technical work on this development during 2008. Impairment of assets also includes a write-down of £8,963,000 of the appraisal oil well on the Pilot field, which was drilled in 2007 and produced heavy oil with higher viscosity than expected.

Services Provided by the Group’s Auditor and Network Firms During the year the Group obtained the following services from the Group’s auditor at costs as detailed below:

2007 2006 £’000 £’000

Audit services: – fees payable to the Company auditor for the audit of parent company and consolidated accounts 196 182 Non-audit services: – fees payable to the Company auditor for the audit of Company subsidiaries pursuant to legislation 82 63 – other services pursuant to legislation 25 15 – tax services 18 74 321 334 Venture Production plc Annual Report and Accounts 2007 75 Overview of Our Business of Our Overview

5. Gain on Disposal of Subsidiary The sale of NSIP (ETS) Limited was completed on 22 January 2007. Details of the book values of the major classes of assets and liabilities of the company measured at the date of disposal and of the consideration were as follows:

2007 in 2007 Performance Our £’000

Property, plant and equipment 1,891 Trade and other receivables 440 Cash and cash equivalents 582 Provisions (782) Net assets disposed of 2,131

Consideration Cash 2,382 Total consideration 2,382 Gain on disposal of NSIP (ETS) Limited 251

The total consideration of £2,382,000 was satisfied by North Sea Infrastructure Partners Limited (NSIP) by way of cash.

Reconciliation of Net Proceeds to Cash Inflow from Disposal of Subsidiary 2007 £’000

Net cash consideration 2,382 Cash disposed of (582)

Cash inflow from disposal of subsidiary 1,800 Governance

6. Other Operating Income Other operating income of £929,000 (2006: £3,363,000) consists of £186,000 proceeds from an insurance claim (2006: £2,316,000) relating to lost revenue on the Mallard field (2006: Mallard field) and the remainder relates to the disposal of excess equipment.

7. Finance Income and Expense 2007 2006 Finance income £’000 £’000

Bank interest 4,174 2,277 Interest receivable on convertible loan notes 268 270 4,442 2,547

2007 2006

Finance expense £’000 £’000 Accounts & Notes

Capitalised interest (9,955) (6,192) Interest payable on loans 12,593 10,668 Interest payable and unwinding of discount on convertible bonds 5,690 531 Unwinding charge for decommissioning provision (Note 24) 4,636 3,991 Amortisation of loan facility expenses 4,521 1,638 Other interest 1,637 101 19,122 10,737 76 Venture Production plc Annual Report and Accounts 2007

Notes to the Financial Statements continued

8. Income Tax Expense Analysis of charge for the year 2007 2006 £’000 £’000

Current tax – current tax charge – UK 10,520 45 Current tax – adjustments in respect of prior years 151 15,914 Current tax – current tax charge – Overseas 2,442 711 13,113 16,670 Deferred tax – relating to origination and reversal of timing differences 39,961 86,289 Deferred tax – adjustments in respect of prior years (42) (7,817) 39,919 78,472 Tax charge for the year 53,032 95,142

The deferred tax movement includes amounts relating to the restatement of the closing deferred tax balances for Group companies not engaged in oil and gas activities from 30% to 28% in line with the substantively enacted tax rate applicable from April 2008.

The tax rate for the period is higher (2006: higher) than the standard rate of corporation tax in the UK (30%). The differences are explained below:

2007 2006 £’000 £’000

Profit on ordinary activities before tax 101,207 176,735 Tax @ 30% 30,362 53,021 Effects of: Supplementary tax charge 24,058 37,122 Adjustments to tax in respect of prior periods 109 8,097 Unrecognised deferred tax asset 982 – Expenses not deductible for tax purposes 545 1,315 Share options exercised (5,098) (1,328) Prior year losses not recognised utilised in period – (3,085) Effects of changes in tax rates 1,377 – Other 697 – Total taxation 53,032 95,142

Disallowable items mainly represent capital acquisition costs that are depreciated but are not eligible for capital allowances.

9. Earnings Per Ordinary Share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares purchased by the EBT and treasury shares.

2007 2006

Profit attributable to equity holders of the Company (£’000) 48,175 81,593 Weighted average number of ordinary shares in issue (thousands) 135,479 126,565 Basic earnings per share (pence per share) 35.6 64.5

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Company has two categories of dilutive potential ordinary shares: convertible debt and share options.

The convertible debt is assumed to have been converted into ordinary shares and the net profit is adjusted to eliminate the interest expense and the unwinding of discount on convertible debt less the tax effect. For the share options, a calculation is performed to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company’s shares) based on the monetary value of the subscription rights attached to outstanding share options. Venture Production plc Annual Report and Accounts 2007 77 Overview of Our Business of Our Overview

The number of shares calculated as above is deducted from the number of outstanding share options to give the number of share options with dilutive effect.

2007 2006

Profit attributable to equity holders of the Company (£’000) 48,175 81,593 Interest expense and unwinding of discount on convertible debt (net of tax) (£’000) 2,616 265 in 2007 Performance Our Profit used to determine diluted earnings per share (£’000) 50,791 81,858 Weighted average number of ordinary shares in issue (thousands) 135,479 126,565 Adjustments for: – assumed conversion of convertible debt (thousands) 12,994 6,118 – share options (thousands) 1,181 5,971 Weighted average number of ordinary shares for diluted earnings per share (thousands) 149,654 138,654 Diluted earnings per share (pence per share) 33.9 59.0

10. Dividends Dividends paid relate to an ordinary dividend of £0.10 per share and a special dividend of £0.40 per share that were approved at the Company’s AGM on 6 June 2007.

A total dividend of £67,566,000 was paid on 24 July 2007 (2006: nil).

A further dividend of £0.12 per share has been proposed for approval at the Company’s AGM.

11. Profit for the Financial Year Governance As permitted by section 230 of the Companies Act 1985, the Company’s income statement has not been included in these financial statements. The Company’s profit after tax for the financial year was £105,527,000 (2006: profit – £15,149,000), and included £110,000,000 of dividends received from subsidiary undertakings (2006: nil).

12. Property, Plant and Equipment Development & Exploration producing Office assets assets Buildings equipment Total Group £’000 £’000 £’000 £’000 £’000

Cost At 1 January 2007 7,998 830,769 373 2,250 841,390 Additions 38,829 216,294 – 488 255,611 Acquisitions 10,420 37,524 – – 47,944 Transfers to development & producing assets (12,098) 12,098 – – – Costs written off (18,144) (11,207) – – (29,351) Disposals – (6,049) – – (6,049) Accounts & Notes At 31 December 2007 27,005 1,079,429 373 2,738 1,109,545

Depreciation At 1 January 2007 – 174,869 80 1,807 176,756 Impairment of assets – 33,463 – – 33,463 Charge for the year – 82,065 19 379 82,463 Disposals – (1,785) – – (1,785) At 31 December 2007 – 288,612 99 2,186 290,897 Net book amount at 31 December 2007 27,005 790,817 274 552 818,648 78 Venture Production plc Annual Report and Accounts 2007

Notes to the Financial Statements continued

12. Property, Plant and Equipment (continued) Development & Exploration producing Office assets assets Buildings equipment Total Group £’000 £’000 £’000 £’000 £’000

Cost At 1 January 2006 2,718 525,046 324 1,829 529,917 Additions 5,280 157,964 49 421 163,714 Acquisitions – 157,715 – – 157,715 Disposals – (9,956) – – (9,956) At 31 December 2006 7,998 830,769 373 2,250 841,390

Depreciation At 1 January 2006 – 87,141 62 1,311 88,514 Charge for the year – 87,728 18 496 88,242 At 31 December 2006 – 174,869 80 1,807 176,756 Net book amount at 31 December 2006 7,998 655,900 293 443 664,634

Included in property, plant and equipment at 31 December 2007 is an amount of £257,723,000 (2006: £199,817,000) relating to expenditure for assets under construction.

Additions within producing assets include capitalised interest of £9,955,000 (2006: £6,192,000). Interest for the year has been charged at a weighted average of 6.16% (2006: 5.77%) on that proportion of Group loan balances drawn down to finance assets during their development phase.

Office Buildings equipment Total Company £’000 £’000 £’000

Cost At 1 January 2007 373 2,250 2,623 Additions – 60 60 At 31 December 2007 373 2,310 2,683

Depreciation At 1 January 2007 80 1,807 1,887 Charge for the year 19 320 339 At 31 December 2007 99 2,127 2,226 Net book amount at 31 December 2007 274 183 457

Office Buildings equipment Total Company £’000 £’000 £’000

Cost At 1 January 2006 324 1,829 2,153 Additions 49 421 470 At 31 December 2006 373 2,250 2,623

Depreciation At 1 January 2006 62 1,311 1,373 Charge for the year 18 496 514 At 31 December 2006 80 1,807 1,887 Net book amount at 31 December 2006 293 443 736 Venture Production plc Annual Report and Accounts 2007 79 Overview of Our Business of Our Overview

13. Intangible Assets

Group Company Restated 2007 2006 2007 2006 Goodwill £’000 £’000 £’000 £’000 Our Performance in 2007 Performance Our

Cost At 1 January 47,945 – – – Additions 5,346 47,945 – – At 31 December 53,291 47,945 – –

Aggregate impairment At 1 January – – – – Impairment for the year – – – – At 31 December – – – –

Net carrying amount At 31 December 53,291 47,945 – –

Additions during the year relate to goodwill arising on the acquisition of WHAM (£4,406,000), and on the acquisition of NSGP (£940,000).

During the year, the fair values of the assets and liabilities acquired as part of the CH4 acquisition were finalised. This has resulted in the recognition of a deferred PRT liability of £1,141,000 and an additional deferred income tax liability of £3,589,000. The impact of the above was to increase goodwill arising on the acquisition by £4,730,000 to £46,517,000. The 2006 comparatives have been restated to reflect this.

The Group tests goodwill annually for impairment, or more frequently, if there are any indications that goodwill may be impaired. Goodwill acquired

through business combinations is allocated, at acquisition, to CGUs, that are expected to benefit from that business combination. Governance

As noted above, the main element of goodwill relates to the acquisition in 2006 of CH4. Impairment tests for CH4 are carried out based on future cash flows of GMA.

The recoverable amounts of the CGUs are determined from value in use calculations. These calculations are based on the life of field models for the CGU. The key assumptions for the value in use calculations are those regarding future production, oil and gas prices and operating costs. The discount rate used for the calculation was 8%.

14. Assets Classified as Held for Sale and Disposal Groups On completion of the acquisition of CH4, the Group decided to dispose of its interest in NSIP (ETS) Limited to its associate company, North Sea Infrastructure Partners Limited. The disposal of the Group’s interest in the company occurred on 22 January 2007 (Note 5).

The net assets of NSIP (ETS) Limited classified as held for sale as at 31 December 2006 totalled £2,928,000 consisting of assets of £3,391,000 (including cash of £1,003,000) and liabilities of £1,093,000. Accounts & Notes 80 Venture Production plc Annual Report and Accounts 2007

Notes to the Financial Statements continued

15. Investments Associates Group Company 2007 2006 2007 2006 £’000 £’000 £’000 £’000

At 1 January 11,098 5,516 6,120 5,516 Inter-company loan reclassified as investment 4,092 – – – Acquisition of associate – 4,978 – – Transfer of investment in associated undertaking – – (6,120) – Share of profit of associate 1,151 604 – 604 At 31 December 16,341 11,098 – 6,120

The inter-company loan reclassified as investments in associates during the year relates to an investment in Sevan Production General Partnership (£4,092,000).

During the year, the Company transferred its investment in Ten Degrees North Energy Limited to a subsidiary undertaking.

Subsidiaries and Joint Ventures Group Company 2007 2006 2007 2006 £’000 £’000 £’000 £’000

At 1 January – – 158,771 15 Investment reclassified as inter-company loan – – (4,069) – Additional investment in subsidiaries – – 272,567 158,756 At 31 December – – 427,269 158,771

Additional investment in subsidiaries during the year relates to further capitalisations of Venture North Sea Gas Limited (£191,185,000) and Venture Investment Holdings (£34,800,000) and the acquisition of North Sea Gas Partners Limited (£46,582,000). Additionally, part of the investment in Hummingbird Oil PTE Limited was reclassified to an inter-company loan (£4,069,000).

The Company’s principal subsidiaries and joint venture undertakings at 31 December 2007 were as follows: Percentage of Country of nominal registration/ share capital & Name Nature of business incorporation voting rights

Venture North Sea Oil Limited Oil and natural gas production Scotland 100% Venture North Sea Gas Limited Oil and natural gas production Scotland 100% Venture Production (Services) Limited Services Scotland 100% Venture Infrastructure Limited Investment Scotland 100% Venture Investment Holdings Limited Investment Scotland 100% North Sea Gas Partners Limited Natural gas production Jersey 100% Venture Production (GMA) Limited Oil and natural gas production England 100% Hummingbird Oil PTE Limited Investment Singapore 100% Venture North Sea Gas Exploration Limited Oil and natural gas exploration England 100%

All subsidiary undertakings are consolidated in the Group financial statements. In the financial statements of the Company, shares in subsidiary undertakings are stated at cost. Venture Production plc Annual Report and Accounts 2007 81 Overview of Our Business of Our Overview

The gross result of the Group’s associates, all of which are unlisted, and their gross assets (including liabilities) are as follows:

Country of Assets Liabilities Revenues Profit/(loss) Interest Name incorporation £’000 £’000 £’000 £’000 £’000

2007 in 2007 Performance Our Ten Degrees North Energy Limited Trinidad 32,762 (18,734) 15,653 2,021 40.0% North Sea Infrastructure Partners Limited Scotland 89,791 (78,273) 4,114 1,138 49.9% Sevan Production General Partnership Singapore 176,341 (157,947) – (1,127) 20.0%

2006 Ten Degrees North Energy Limited Trinidad 22,874 (9,577) 11,833 1,510 40.0% North Sea Infrastructure Partners Limited Scotland 19,076 (9,088) – – 49.9% Sevan Production General Partnership Singapore 35,951 (15,840) – (296) 20.0% North Sea Gas Partners Limited Jersey 37,261 (11,081) – (407) 33.3%

16. Share-Based Payments The Group currently has various share-based payment schemes for its employees, details of which are given in the Directors’ Remuneration Report.

The charge in the Group and Company income statement for these schemes is £4,981,000 (2006: £10,169,000) of which £373,000 (2006: £5,612,000) related to the 2003 Long Term Share Incentive Plan, £535,000 (2006: £679,000) related to the Long Term Share Incentive Plan 2006, £430,000 (2006: nil) related to the Long Term Share Incentive Plan 2007, £2,452,000 (2006: £1,718,000) related to the Annual Deferred Share Bonus Plan, £692,000 (2006: £614,000) related to the Employee Annual Bonus Plan and £499,000 (2006: £1,546,000) related to other schemes.

2003 Long Term Share Incentive Plan

5,303,771 shares were distributed to participants under this scheme on 30 May 2007. Governance

2006 Long Term Share Incentive Plan There are currently 14 employees participating in this scheme.

The weighted average of the Group’s estimate of the proportion of awards that will vest under the three performance targets in 2007 is 75% (2006: 75%). This does not allow for failure to satisfy market-based performance conditions, as these are built into the fair value. Awards are provisional because they are dependent on the performance targets being met and also on continuing employment of the participants. All outstanding awards under the LTIP will vest after 31 December 2010, subject to all performance targets being met and the individuals remaining in employment.

In 2006, 828,323 shares were awarded under the 2006 LTIP with an average fair value of £5.03.

2007 Long Term Share Incentive Plan There are currently 14 employees participating in this scheme. For the purposes of calculating the fair value of the awards subject to market-based performance conditions, a Monte Carlo pricing model has been used. The share price volatility of 34% is based on the historical data of the Group. All outstanding awards under the LTIP will vest after 31 December 2011, subject to all performance targets being met and the individuals remaining in employment.

The risk free rate of return of 5.4% is based on the implied yield available on zero coupon gilts, with a term remaining equal to the expected lifetime Accounts & Notes of the awards. A dividend yield of 0% is used in the calculation.

In 2007, 627,624 shares were awarded under the 2007 LTIP, with an average fair value of £5.06. 82 Venture Production plc Annual Report and Accounts 2007

Notes to the Financial Statements continued

16. Share-Based Payments (continued) Annual Deferred Share Bonus Plan Sixteen Executive Directors and senior managers are members of the 2007 ADSBP (2006: 14) which was first introduced in 2005. The scheme comprises both share and cash awards as individuals awarded bonuses under the ADSBP can elect to take a proportion of the bonus in cash and the remaining bonus as deferred shares.

Shares in respect of the 2007 award will be released on 6 April 2010 (2006: 6 April 2009). If the individual leaves before 6 April 2010 then the shares are forfeited. The estimated proportion of awards to be taken as shares and cash are 70% and 30% respectively (2006: 70% shares and 30% cash).

For the purposes of calculating the fair value of the share-based awards, a binomial pricing model has been used. The share price volatility used of 34% (2006: 31%), the risk free rate of return of 5.6% (2006: 4.4%) and the dividend yield of 0% (2006: 0%) are derived in a consistent manner to those used for the 2007 LTIP. The charge for awards to be taken in shares is calculated using a fair value of £103 per £100 of bonus to be taken as shares (2006: £105 per £100 of bonus).

Employee Annual Bonus Plan All staff excluded from participation in the ADSBP are eligible to participate in the EABP. The scheme comprises both share and cash awards, as individuals awarded bonuses under the EABP can elect to take a proportion of the bonus in cash and the remaining bonus as deferred shares.

Shares in respect of the 2007 award will be released on 1 January 2010 (2006: 1 January 2009). The estimated proportion of awards to be taken as shares and cash are 50% and 50% respectively (2006: 30% shares and 70% cash).

For the purposes of calculating the fair value of the share-based awards a binomial pricing model has been used. The share price volatility used of 34% (2006: 31%), the risk free rate of return of 5.6% (2006: 4.4%) and the dividend yield of 0% (2006: 0%) are derived in a consistent manner to those used for the 2007 LTIP. The charge for awards to be taken in shares is calculated using a fair value of £103 per £100 of bonus to be taken as shares (2006: £105 per £100 of bonus).

Other Schemes Details of the Group’s other share-based plans are included in the Directors’ Remuneration Report.

In respect of these plans, 61,110 shares were granted during the year with a weighted average fair value of £6.92.

2,696,220 options were exercised during the year (2006: 630,342) and 4,250 options lapsed during the year (2006: 450). The weighted average price of options exercised during the year was £0.74 (2006: £1.70). The number of options to subscribe for shares outstanding at 31 December was 202,130 (2006: 2,821,300). The range of exercise prices for options outstanding at 31 December was £0.44 to £5.88 (2006: £0.44 to £5.88). The weighted average remaining contractual life of outstanding share options is 4.5 years (2006: 5.5 years).

The charge in the Group income statement for these schemes is £280,000 (2006: £520,000). National Insurance credits relating to these schemes totalled £9,000 (2006: £1,025,000 charge).

17. Inventories

Group Company 2007 2006 2007 2006 £’000 £’000 £’000 £’000

Crude oil – 1,385 – – Materials and supplies 1,721 1,798 – – 1,721 3,183 – – Venture Production plc Annual Report and Accounts 2007 83 Overview of Our Business of Our Overview

18. Trade and Other Receivables The fair value of trade and other receivables are as follows: Group Company 2007 2006 2007 2006

£’000 £’000 £’000 £’000 in 2007 Performance Our

Amounts falling due within one year: Trade receivables – net 49,690 25,822 – – Other debtors and accrued income 48,636 53,108 346 2,724 Prepayments 8,998 11,497 – 49 107,324 90,427 346 2,773

Falling due after one year: Amounts due from subsidiary undertakings – – 153,247 227,995 Convertible loan notes receivable 5,383 5,376 – 5,376 5,383 5,376 153,247 233,371

The Company has confirmed that amounts due from subsidiary undertakings will not be repayable within one year.

During the year the convertible loan notes held by the Company were transferred to Venture Investment Holdings Limited.

The convertible loan notes receivable of $10,000,000 were issued by Ten Degrees North Energy Limited (TDNEL) on 19 December 2005 as part consideration in respect of the disposal of Venture Production Trinidad Limited (VPTL). The notes are denominated in US dollar and are redeemable by TDNEL in $500,000 tranches in each year from 2010 to the final redemption date in 2014. TDNEL may redeem $5,000,000 of the notes at par value at any time in the first 24 months after issue. The notes accrue interest at rates of 2% in the period to 31 December 2006, 3% from 1 January 2007 to 31 December 2009 and 9% from 1 January 2010 to the final redemption date. During the year, the Group’s interest in TDNEL transferred from Venture

Production plc to Venture Investment Holdings Limited. Governance

A conversion event is a sale or qualifying Initial Public Offering or private placement of TDNEL. Upon a conversion event and subject to the valuation of TDNEL meeting certain criteria at that time, the Company can convert up to $5,000,000 of the notes into ordinary share capital of TDNEL at a conversion price of $1,500 per share. The loan notes are valued at the year end at £5,383,000 using year end exchange rates.

Trade and other receivables are made up of 99% (2006: 88%) of balances that are not overdue as the payment terms established with the Group’s customers have not been exceeded. The remaining overdue balance is not considered to be impaired.

Included within trade and other receivables are balances due from the following related parties, none of which were overdue:

Group Company 2007 2006 2007 2006 £’000 £’000 £’000 £’000

NSGP (Ensign) Limited – 1,218 – – NSIP (GKA) Limited 3,498 1,876 – – 3,498 3,094 – –

Trade receivables and other receivables include amounts denominated in the following major currencies: Accounts & Notes

Group Company 2007 2006 2007 2006 £’000 £’000 £’000 £’000

USD 31,844 26,577 – – GBP 59,896 56,254 346 2,773 Euro 15,584 7,596 – – Total trade and other receivables 107,324 90,427 346 2,773

The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable mentioned above. The Group does not hold any collateral as security. 84 Venture Production plc Annual Report and Accounts 2007

Notes to the Financial Statements continued

19. Cash and Cash Equivalents

Group Company 2007 2006 2007 2006 £’000 £’000 £’000 £’000

Cash in hand and at bank 3,825 19,342 – 7,608 Short term deposits 154,620 39,825 154,620 36,492 Overdraft – – (50,486) – 158,445 59,167 104,134 44,100

The effective interest rate on short term deposits was 4.4% and these deposits have an average maturity of 10 days.

For the purposes of the cash flow statements, cash and cash equivalents comprise the following at 31 December:

Group Company 2007 2006 2007 2006 £’000 £’000 £’000 £’000

Cash in hand and at bank 3,825 19,342 (50,486) 7,608 Short term deposits 154,620 39,825 154,620 36,492 Net cash in hand and at bank of disposal group held for sale – 1,003 – – 158,445 60,170 104,134 44,100

20. Trade and Other Payables

Group Company 2007 2006 2007 2006 £’000 £’000 £’000 £’000

Amounts falling due within one year: Trade payables 16,779 7,015 693 265 Accruals and deferred income 69,497 42,981 10,441 11,831 Other payables 28,651 25,491 4,692 9,571 Social security and other taxes 797 384 2 276 Deferred acquisition liability 3,100 5,718 – – 118,824 81,589 15,828 21,943

21. Financial Liabilities – Borrowings

Group Company 2007 2006 2007 2006 £’000 £’000 £’000 £’000

Bank loan (secured) – 216,120 – 216,120 Convertible bond 167,612 29,801 167,612 29,801 USD and GBP loan notes 230,710 – 230,710 – 398,322 245,921 398,322 245,921 Venture Production plc Annual Report and Accounts 2007 85 Overview of Our Business of Our Overview

Bank Loan During the year, the Group entered into new debt financing arrangements and the existing bank loan was repaid and replaced with a £365,000,000 corporate debt facility. There was no cash drawn down on this facility at 31 December 2007.

Borrowing Facilities in 2007 Performance Our The Group has the following undrawn borrowing facilities available at the balance sheet date in respect of which all conditions precedent had been met at that date:

2007 2006 £’000 £’000

Expiring in more than two years 350,000 128,880

This is stated after the issue of a letter of credit guarantee of $30,000,000 issued in the ordinary course of business.

The main purpose of the facilities is to finance the acquisition of new assets and the development of new and existing assets.

Convertible Bonds The Company issued £29,000,000 4.25% convertible bonds at a nominal value of £29,000,000 on 19 July 2005. The bonds mature on 26 October 2010 at 110% of par or can be converted into shares at the holder’s option at the rate of 1 share per 446 pence.

A further £151,000,000 3.25% convertible bonds were issued at a nominal value of £151,000,000 on 16 August 2007. The bonds mature on 16 August 2010 at par and can be converted into shares at the rate of 1 share per 915 pence. The equity component of the bond of £14,463,000 has been reclassified to equity.

The convertible bond recognised in the balance sheet is calculated as follows:

Group Company 2007 2006 2007 2006

£’000 £’000 £’000 £’000 Governance

At 1 January 29,801 29,122 29,801 29,122 Net proceeds from convertible bond issue 151,000 – 151,000 – Accrued redemption premium 581 148 581 148 Unwinding of discount on liability component 2,138 – 2,138 – Reclassified as equity (Note 29) (14,463) – (14,463) – Convertible loan expenses (1,445) – (1,445) – Interest expense – 531 – 531 Liability component at 31 December 2007 167,612 29,801 167,612 29,801

USD and GBP Loan Notes On 29 August 2007, Venture issued $414,000,000 of 6.41%, $10,000,000 of 6.64% and £25,000,000 of 6.71% secured loan notes through a private placing with UK and US institutional investors. These notes have maturities of between 10 and 15 years and are at fixed rates.

Group Company 2007 2006 2007 2006 £’000 £’000 £’000 £’000

USD $414,000,000 6.41% notes with a final maturity 205,022 – 205,022 – Accounts & Notes of 29 August 2017

USD $10,000,000 6.64% notes with a final maturity 4,952 – 4,952 – of 29 August 2022

GBP £25,000,000 6.71% notes with a final maturity 25,000 – 25,000 – of 29 August 2017

Loan notes expenses (4,264) – (4,264) – Total USD and GBP loan notes 230,710 – 230,710 – 86 Venture Production plc Annual Report and Accounts 2007

Notes to the Financial Statements continued

21. Financial Liabilities – Borrowings (continued)

Group Company 2007 2006 2007 2006 Breakdown by currency £’000 £’000 £’000 £’000

GBP 188,348 245,921 188,348 245,921 USD 209,974 – 209,974 – 398,322 245,921 398,322 245,921

Group Company 2007 2006 2007 2006 Breakdown by maturity £’000 £’000 £’000 £’000

2007 – – – – 2008 – – – – 2009 – – – – 2010 169,057 245,921 169,057 245,921 2011 – – – – 2012 – – – – Thereafter 234,974 – 234,974 – Loan expenses (5,709) – (5,709) – 398,322 245,921 398,322 245,921

22. Deferred Tax Liability/(Asset)

Group Company Restated 2007 2006 2007 2006 £’000 £’000 £’000 £’000

At 1 January 193,435 46,953 (13,365) (6,520) Profit and loss charge (Note 8) 39,919 78,472 1,510 308 Taken to equity: – Employee share benefits 10,836 (8,398) 10,836 (8,398) – Derivative financial liabilities (45,800) 26,160 – – Deferred tax liability arising on licence acquisitions – 1,516 – – Deferred tax on business combination 4,400 48,016 – – Deferred PRT 530 – – – Other (2,875) 1,311 – 1,245 Liability classified as held for sale – (615) – – At 31 December 200,445 193,415 (1,019) (13,365)

The total deferred tax liability at 31 December 2007 comprised accelerated capital allowances of £323,418,000 (2006: £211,715,000), other deferred tax liability of £71,355,000 (2006: £62,039,000), partially offset by tax losses of £121,270,000 (2006: £63,451,000) and other deferred tax assets of £73,058,000 (2006: £18,029,000). The deferred tax assets have been recognised as the Group is expected to have sufficient taxable profits in future years against which the assets can be relieved.

Deferred tax arising on the acquisition of CH4 has been revisited during 2007, resulting in an additional liability recognised of £3,589,000 and deferred PRT of £1,141,000.

Deferred tax assets of £5,267,000 (2006: £1,164,000) have not been recognised.

Deferred tax assets and liabilities are only offset where there is a legally enforceable right of offset and there is an intention to settle the balances net. Venture Production plc Annual Report and Accounts 2007 87 Overview of Our Business of Our Overview

23. Other Non-Current Liabilities

Group Company 2007 2006 2007 2006 £’000 £’000 £’000 £’000 Our Performance in 2007 Performance Our Deferred acquisition liability 9,392 5,158 – –

Deferred consideration relates to amounts payable in respect of the purchase of various interests in oil and gas assets, the timing of which is dependent upon the attainment of certain field development and production milestones. These amounts are expected to be settled over the next six years.

24. Provisions

Group Company 2007 2006 2007 2006 Provisions for decommissioning £’000 £’000 £’000 £’000

At 1 January 61,831 52,505 – – Liability on acquisition of subsidiary – 4,860 – – Increased provision on existing assets 3,958 614 – – Liability classified as held for sale (Note 14) – (139) – – Unwinding charge for the year (Note 7) 4,636 3,991 – – At 31 December 70,425 61,831 – –

These decommissioning costs are expected to be incurred in the period from 2008 to 2023. The provision has been based upon existing technology, current legislation requirements and discounted using a rate of 7.5% (2006: 7.5%). The estimated decommissioning costs and the pre-tax discount rate applied take into account the effects of inflation and risks and uncertainties concerning amounts to be settled in the future. Governance

25. Financial Instruments The main risks arising from the Group’s financial instruments are market risk, liquidity risk and credit risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below.

Market Risk Venture is exposed to market risk, primarily related to foreign exchange and commodity prices. The Group actively monitors these exposures. To manage the volatility relating to these exposures, the Group enters into a variety of derivative financial instruments.

The Group’s objective is to reduce, where it deems appropriate to do so, fluctuations in earnings and cash flows associated with changes in interest rates, foreign currency rates and commodity prices. It is the Group’s policy and practice to use derivative financial instruments to manage exposures. The Group expects that any loss in value for these instruments generally would be offset by increases in the value of the underlying transactions.

Foreign Exchange Rate Risk The Group uses the pound sterling as its reporting currency. As a result, the Group is exposed to foreign exchange movements, primarily in the US dollar and euro. Consequently, it enters into various contracts that reflect the changes in the value of foreign exchange rates to preserve the

value of assets and commitments. In general, the Group’s revenues in crude oil sales are denominated in US dollars, while its gas sales revenues are Accounts & Notes denominated in pounds sterling. Where possible, the Group’s policy is to reduce significant exposures to movements in foreign currency exchange rates through hedging foreign currency exposure for up to 50% of forecast net US dollar revenues. Venture also uses forward contracts to hedge certain anticipated net revenues in foreign currencies. The Group marks to market these forward contracts and thus changes in the forward contract fair values are booked to the income statement and reverse in the income statement over the term of the contracts. 88 Venture Production plc Annual Report and Accounts 2007

Notes to the Financial Statements continued

25. Financial Instruments (continued) Net investments in foreign countries are long term investments. Their fair value changes through movements of currency exchange rates. In the very long term, however, the difference in the inflation rate should match the currency exchange rate movement, so that the market value of the foreign non-monetary assets will compensate for the change due to currency movements. For this reason, the Group does not hedge the net investments in foreign subsidiaries.

If the average sterling/US dollar rate had been 10% higher during 2007, post-tax profit for the year and equity would have been £9,450,000 higher (2006: £6,954,000 higher). If the average sterling/US dollar rate had been 10% lower during 2007, post-tax profit for the year and equity would have been £7,732,000 lower (2006: £5,690,000 lower).

If the closing sterling/US dollar rate was 10% higher at 31 December 2007, the post-tax profit for the year and equity would have been £6,296,000 higher (2006: £8,530,000 higher). If the closing sterling/US dollar rate was 10% lower at 31 December 2007, the post-tax profit for the year and equity would have been £5,151,000 lower (2006: £6,979,000 lower).

Commodity Price Risk The Group has exposure to price risk related to anticipated revenues from crude oil and natural gas. A change in those prices may alter the gross margin of the Group. Accordingly, it enters into commodity futures, forward and option contracts to manage fluctuations in prices of anticipated revenues.

To manage commodity price risk and deliver stability to the investment programme, the Group’s policy is to allow hedging of commodity price exposure up to 50% of its oil and gas production. In exceptional circumstances and only with the prior approval of the Board, up to 75% of such production may be hedged. Hedges have been put in place with a variety of providers.

If the average gas price had been 10% higher or lower during 2007, post-tax profit for the year and equity would have been £4,365,000 higher or lower (2006: £5,670,000 higher or lower).

If the average oil price had been 10% higher or lower during 2007, post-tax profit for the year and equity would have been £4,253,000 higher or lower (2006: £3,130,000 higher or lower).

Interest Rate Risk The Group manages its net exposure to interest rate risk through negotiating fixed rate financial debt in its financial debt portfolio. The Group has no exposure to variability in its cash flows due to interest rate risk as it borrows at rates of interest which are fixed in advance. At 31 December 2007, all of the Group’s borrowings were at fixed rates (2006: 12%).

Credit Risk Credit risks arise from the possibility that customers may not be able to settle their obligations as agreed. To manage this risk the Group periodically assesses the financial reliability of customers. The Group’s major customers are typically large companies which have strong credit ratings assigned by international credit rating agencies. The nominal value less impairment provision of trade accounts receivables and payables are assumed to approximate their fair value. The Group’s policy is to deal with customers with an ‘A’ rating or better where possible. At 31 December 2007, 100% (2006: 100%) of trade receivables were such customers.

The Group also has credit risk relating to cash held on deposit. The Group’s policy is to deposit cash at institutions with an ‘A’ rating or better where possible. 100% of the cash held on deposit at 31 December 2007 (2006: 100%) was held with such institutions.

Liquidity Risk Liquidity risk is defined as the risk that the Group will not be able to settle or meet its obligations on time or at a reasonable price. Liquidity, funding risks and related processes and policies are overseen by management. Venture manages its liquidity risk on a consolidated basis based on business needs and through numerous sources of finance in order to maintain flexibility.

Capital Risk The Group seeks to maintain an optimal capital structure with a diversified range of funding including equity, convertible bonds, bank debt and privately placed loan notes. The Group continually monitors its capital structure, to ensure this is in line with business needs, ongoing asset development and to fund potential future acquisitions. During the year, its borrowing base banking facility was replaced with a medium term committed corporate debt facility of £365,000,000, £151,000,000 was raised through the issue of 3.25% unsecured convertible bonds and a further $424,000,000 and £25,000,000 in a private placement of notes was secured with US and UK institutional investors. As a result, there are externally imposed covenant requirements with which the Group is fully compliant. These covenants include the ratio of borrowings to EBITDA and interest cover. Venture Production plc Annual Report and Accounts 2007 89 Overview of Our Business of Our Overview

The following tables show the fair values of derivative financial instruments analysed by type of contract at 31 December 2007 and 2006. The fair values are determined by reference to market prices at 31 December 2007 and 2006. Positive fair values Negative fair values 2007 2006 2007 2006 Group £’000 £’000 £’000 £’000 Our Performance in 2007 Performance Our Currency related instruments Forward foreign exchange rate contracts 498 772 – –

Interest rate related instruments Interest rate swaps – 1,629 – –

Oil price related instruments Collars – – (1,813) – Commodity swaps – 9,676 (40,685) – Total of oil price related instruments – 9,676 (42,498) –

Gas price related instruments Commodity swaps – 13,932 (25,493) – Total derivative financial instruments 498 26,009 (67,991) –

Positive fair values Negative fair values 2007 2006 2007 2006 Company £’000 £’000 £’000 £’000

Currency related instruments Forward foreign exchange rate contracts 498 772 – –

Interest rate related instruments Governance Interest rate swaps – 1,629 – – Total derivative financial instruments 498 2,401 – –

Derivative financial instruments include amounts denominated in the following major currencies: Group Company 2007 2006 2007 2006 Currency £’000 £’000 £’000 £’000

USD (42,498) 9,676 – – GBP (24,995) 16,333 498 2,401 Total derivative financial instruments (67,493) 26,009 498 2,401

Included in current assets 498 19,916 498 1,676 Included in current liabilities (36,992) – – – Included in non-current assets – 6,093 – 725 Included in non-current liabilities (30,999) – – – Total (67,493) 26,009 498 2,401 Accounts & Notes All of the derivative instruments used for the purposes of hedging the oil and gas prices are effective for hedge accounting purposes.

All of the hedging instruments used for anticipated transactions mature during 2008 and 2009, and were contracted with the intention of hedging anticipated transactions which are expected to occur in 2008 and 2009. The instruments are intended to hedge the commodity price risk arising from the highly probable forecast transactions with commodity price risk.

The gain or loss relating to the effective portion of the derivative instruments, previously deferred in equity, is recognised in the income statement within revenue when the hedged item affects profit or loss.

There has been no charge recognised in the year relating to ineffectiveness of derivates that are hedge accounted (2006: nil).

The maximum exposure to credit risk at the reporting date is the fair value of derivative financial instruments. 90 Venture Production plc Annual Report and Accounts 2007

Notes to the Financial Statements continued

25. Financial Instruments (continued) Forward Oil Price Contracts At 31 December 2007, the Group had a number of forward oil price contracts in place to hedge cash flows from oil production in accordance with the Group’s hedging strategy. These contracts comprised forward swaps, put and call options and forward sales.

The fair value liabilities of £42,498,000 relating to the forward oil price contracts, which are deferred in the cash flow reserve at 31 December 2007, will reverse in the income statement over the term of the contracts. At 31 December 2007, the forward oil price contracts covered the period January 2008 to December 2009.

Forward Gas Price Contracts At 31 December 2007, the Group had a number of forward gas price contracts in place. These contracts comprised forward swaps and forward sales.

The fair value liabilities of £25,493,000 relating to the forward gas price contracts, which are deferred in the cash flow reserve at 31 December 2007, will reverse in the income statement over the term of the contracts. At 31 December 2007, the forward gas price contracts covered the period January 2008 to December 2009.

Market values have been used to determine the fair value of derivative financial instruments based on estimated amounts the Group would receive or pay to terminate the agreements, taking into account the forward commodity prices and forward foreign exchange rates at 31 December 2007.

Forward Foreign Currency Contracts The notional principal amount of the Group’s outstanding forward foreign currency contracts at 31 December 2007 was $228,000,000 (2006: $108,000,000). These contracts hedge foreign exchange exposure of forecast net US dollar income by fixing the forward exchange rate on a monthly basis.

At 31 December 2007, the forward contracts covered the period January 2008 to December 2008 at an exchange rate varying between $1.9475 and $2.0025 to £1.

The fair value assets of £498,000 relating to the forward foreign currency contracts and which are marked to market in the income statement at 31 December 2007, will reverse in the income statement over the term of the forward currency contracts.

Changes in the fair value of derivative financial instruments that do not qualify for, or are not designated in hedging relationships, are recognised immediately in the current period income statement when they occur as shown below:

2007 2006 £’000 £’000

(Loss)/gain in the income statement (1,903) 2,401

Fair Value of Non-Derivative Financial Assets and Financial Liabilities The following table provides a comparison by category of the book values and the fair values of the Group’s financial assets and financial liabilities at the balance sheet date. Book value Fair value Book value Fair value 2007 2007 2006 2006 Group £’000 £’000 £’000 £’000

Fair value of non-current financial assets and financial liabilities held or issued to finance the Group’s operations: Bank loan (Note 21) – – (216,120) (216,120) Convertible bonds (Note 21) (167,612) (170,150) (29,801) (29,801) USD and GBP loan notes (Note 21) (230,710) (254,046) – – Loan notes receivable (Note 18) 5,383 5,383 5,376 5,376 Deferred acquisition liability (Note 23) (9,392) (9,392) (5,158) (5,158) Fair value of other financial assets and financial liabilities held or issued to finance the Group’s operations: Trade and other payables (Note 20) (115,724) (115,724) (75,871) (75,871) Deferred consideration (Note 20) (3,100) (3,100) (5,718) (5,718) Trade and other receivables (Note 18) 107,324 107,324 90,427 90,427 Cash at bank and in hand (Note 19) 3,825 3,825 19,342 19,342 Cash on short term deposit (Note 19) 154,620 154,620 39,825 39,825 Venture Production plc Annual Report and Accounts 2007 91 Overview of Our Business of Our Overview

Book value Fair value Book value Fair value 2007 2007 2006 2006 Company £’000 £’000 £’000 £’000

Fair value of non-current financial assets and financial liabilities held or issued to finance the Company’s operations: in 2007 Performance Our Bank loan (Note 21) – – (216,120) (216,120) Convertible bonds (Note 21) (167,612) (170,150) (29,801) (29,801) USD and GBP loan notes (Note 21) (230,710) (254,046) – – Trade and other receivables (Note 18) 153,247 153,247 227,995 227,995 Loan notes receivable (Note 18) – – 5,376 5,376 Fair value of other financial assets and financial liabilities held or issued to finance the Company’s operations: Trade and other payables (Note 20) (15,828) (15,828) (21,943) (21,943) Trade and other receivables (Note 18) 346 346 2,773 2,773 Cash at bank and in hand (Note 19) (50,486) (50,486) 7,608 7,608 Cash on short term deposit (Note 19) 154,620 154,620 36,492 36,492

Maturity of Financial Liabilities The following table sets forth details of the financial liabilities which will be settled on a net basis into relevant maturity groupings as at 31 December 2007 and 2006. The amounts disclosed in the table are the contractual undiscounted cash flows including interest payments at the applicable fixed rate. Non-GBP denominated balances have been translated at the year end closing rates. The amounts payable in respect of derivative financial instruments have been calculated based on price differentials at 31 December 2007.

Due in less Due in 1 Due in 2 Due after than 1 year to 2 years to 5 years 5 years Total As at 31 December 2007: Group £’000 £’000 £’000 £’000 £’000

Current liabilities Governance Trade and other payables (115,724) – – – (115,724) Deferred acquisition liability (3,100) – – – (3,100) Derivative financial instruments (36,992) – – – (36,992) Total current liabilities (155,816) – – – (155,816)

Non-current liabilities Convertible bond (4,908) (4,908) (184,908) – (194,724) USD and GBP loan notes (14,966) (14,966) (44,899) (306,547) (381,378) Derivative financial instruments – (30,999) – – (30,999) Deferred acquisition liability – (500) (8,892) – (9,392) Total non-current liabilities (19,874) (51,373) (238,699) (306,547) (616,493) Total financial liabilities (175,690) (51,373) (238,699) (306,547) (772,309)

Due in less Due in 1 Due in 2 Due after than 1 year to 2 years to 5 years 5 years Total As at 31 December 2007: Company £’000 £’000 £’000 £’000 £’000

Current liabilities Accounts & Notes Trade and other payables (15,828) – – – (15,828) Total current liabilities (15,828) – – – (15,828)

Non-current liabilities Convertible bond (4,908) (4,908) (184,908) – (194,724) USD and GBP loan notes (14,966) (14,966) (44,899) (306,547) (381,378) Total non-current liabilities (19,874) (19,874) (229,807) (306,547) (576,102) Total financial liabilities (35,702) (19,874) (229,807) (306,547) (591,930) 92 Venture Production plc Annual Report and Accounts 2007

Notes to the Financial Statements continued

25. Financial Instruments (continued) Due in less Due in 1 Due in 2 Due after than 1 year to 2 years to 5 years 5 years Total As at 31 December 2006: Group £’000 £’000 £’000 £’000 £’000

Current liabilities Trade and other payables (75,871) – – – (75,871) Deferred acquisition liability (5,718) – – – (5,718) Total current liabilities (81,589) – – – (81,589)

Non-current liabilities Deferred acquisition liability – (1,750) (3,408) – (5,158) Bank loan (12,961) (12,961) (235,562) – (261,484) Convertible bond (1,233) (1,233) (30,233) – (32,699) Total non-current liabilities (14,194) (15,944) (269,203) – (299,341) Total financial liabilities (95,783) (15,944) (269,203) – (380,930)

Due in less Due in 1 Due in 2 Due after than 1 year to 2 years to 5 years 5 years Total As at 31 December 2006: Company £’000 £’000 £’000 £’000 £’000

Current liabilities Trade and other payables (21,943) – – – (21,943) Total current liabilities (21,943) – – – (21,943)

Non-current liabilities Bank loan (12,961) (12,961) (235,562) – (261,484) Convertible bond (1,233) (1,233) (30,233) – (32,699) Total non-current liabilities (14,194) (14,194) (265,795) – (294,183) Total financial liabilities (36,137) (14,194) (265,795) – (316,126)

The table below analyses the Group’s derivative financial instruments which will be settled on a gross basis into relevant maturity groupings, based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.

Less Between 1 Between 2 Over than 1 year and 2 years and 5 years 5 years As at 31 December 2007: £’000 £’000 £’000 £’000

Forward foreign exchange contracts – marked to market Outflow 115,524 – – – Inflow 116,022 – – –

As at 31 December 2006:

Forward foreign exchange contracts – marked to market Outflow 57,959 – – – Inflow 58,732 – – – Venture Production plc Annual Report and Accounts 2007 93 Overview of Our Business of Our Overview

26. Called Up Share Capital 2007 2006 Number 000 000

Authorised: in 2007 Performance Our Ordinary shares of 0.4p each 165,000 165,000 Allotted, called up and fully paid: Ordinary shares of 0.4p each 143,216 133,496

2007 2006 Value £’000 £’000

Authorised: Ordinary shares of 0.4p each 660 660 Allotted, called up and fully paid: Ordinary shares of 0.4p each 573 534

During the year, the Company issued 1,065,464 shares as part consideration for the acquisition of WHAM, 6,033,906 shares as consideration for the remaining 66.7% of NSGP and 2,620,120 shares to honour share options exercised by employees.

27. Share Premium Account Group Company £’000 £’000

At 1 January 2006 104,906 104,906 Governance On exercise of share options 178 178 At 1 January 2007 105,084 105,084 On exercise of share options 2,123 2,123 At 31 December 2007 107,207 107,207

28. Retained Earnings Group Company £’000 £’000

At 1 January 2006 43,170 9,816 Transfer of treasury shares to EBT 405 405 Purchase of treasury shares (12,033) (12,033) Profit for the year 81,593 15,149 At 1 January 2007 113,135 13,337 Transfer of treasury shares to EBT 25,106 25,106 Purchase of treasury shares (15,817) (15,817) Loss on disposal of shares to satisfy share schemes (34,693) (34,693) Accounts & Notes Profit for the year 48,175 105,527 Dividends paid (67,566) (67,566) At 31 December 2007 68,340 25,894

The Company acquired 2,173,250 of its own shares during the year for a consideration of £15,817,000. As the shares are held as treasury shares, the amount shown has been deducted from retained earnings.

The Company transferred 3,501,096 shares to the EBT and reissued 64,000 treasury shares in respect of share options exercised for total consideration of £25,106,000. There were no treasury shares held at 31 December 2007.

The Company issued 5,303,771 shares in respect of the LTIP 2003 share scheme from the EBT at a loss of £33,389,000. 94 Venture Production plc Annual Report and Accounts 2007

Notes to the Financial Statements continued

29. Other Reserves Convertible Employee Loan Merger Cash flow benefit EBT Equity reserve reserve reserve reserve Total Group £’000 £’000 £’000 £’000 £’000 £’000

At 1 January 2007 – 69,905 11,804 20,141 (15,228) 86,622 Cash flow hedges: – Fair value gains net of tax – – (42,453) – – (42,453) – Reclassified and reported in net profit – – (3,427) – – (3,427) Credit relating to share-based charges – – – (6,700) – (6,700) Shares issued to satisfy share schemes – – – (5,647) 39,036 33,389 Shares disposed of by EBT – – – – 1,673 1,673 Shares acquired by EBT – – – – (32,678) (32,678) Convertible loan classified as equity 14,463 – – – – 14,463 Shares issued on acquisition – 54,181 – – – 54,181 At 31 December 2007 14,463 124,086 (34,076) 7,794 (7,197) 105,070

The cash flow reserve relates to the accounting for derivative financial instruments under IAS 39. Fair value gains and losses in respect of effective cash flow hedges are recognised in the cash flow reserve.

The employee benefit reserve comprises the credit entry relating to share-based charges included in the income statement and calculated in accordance with IFRS 2.

The Company funds its Offshore Employee Benefit Trust (EBT) with funds being used to acquire shares which will be granted to certain employees under the share option scheme. The cost of shares acquired by the EBT is recorded in the EBT reserve. Gains from the disposal of such shares on exercising of the options are credited to the share premium account when such options are exercised. Shares acquired by the EBT can either be allocated to the EBT by the Company or purchased in the open market by the EBT. The costs of administering the schemes are charged to the income statement in the period to which they relate. The EBT has waived its rights to the receipt of dividends.

During the year, 5,538,587 (2006: 157,003) ordinary shares were disposed of by the EBT to satisfy the exercise of share options. During the year, the Company transferred £7,920,000 to the EBT (2006: £14,100,000), which was used to purchase 1,108,557 (2006: 1,844,739) ordinary shares in the market. Additionally, a further 3,501,096 ordinary shares were transferred from treasury for £24,758,000.

At 31 December 2007, the EBT held 1,125,119 ordinary shares (2006: 2,054,053), which represented a market value of £8,911,000 (2006: £18,137,000) based on the closing share price of £7.92 (2006: £8.83).

The merger reserve comprises the premium on shares issued as part of a business combination. In 2006, this balance wholly related to the acquisition of CH4, where 9,050,000 shares were issued at £7.78 a share, as part consideration for the acquisition. During the year, the Company issued a further 6,033,906 shares as consideration for the acquisition of NSGP at £7.72 a share (Note 3) and 1,065,464 shares as part consideration for the acquisition of WHAM at £7.16 a share (Note 3).

The convertible loan balance of £14,463,000 represents the value placed on the conversion option of the convertible bonds issued for £151,000,000 during the year (Note 21).

Convertible Employee Loan Merger benefit EBT Equity reserve reserve reserve Total Company £’000 £’000 £’000 £’000 £’000

At 1 January 2007 – 69,905 20,141 (15,228) 74,818 Credit relating to share-based charges – – (6,700) – (6,700) Shares disposed of by EBT – – – 1,673 1,673 Shares acquired by EBT – – – (32,678) (32,678) Shares issued to satisfy share schemes – – (5,647) 39,036 33,389 Convertible loan classified as equity 14,463 – – – 14,463 Shares issued on acquisition – 54,181 – – 54,181 At 31 December 2007 14,463 124,086 7,794 (7,197) 139,146 Venture Production plc Annual Report and Accounts 2007 95 Overview of Our Business of Our Overview

30. Cash Flow from Operating Activities Reconciliation of operating profit to net cash inflow from operating activities: 2007 2006 Group £’000 £’000 Our Performance in 2007 Performance Our

Operating profit 116,639 181,920 Depreciation charge 82,463 88,242 Share-based transactions 4,981 10,072 Exploration costs written off 18,144 – Development costs written off 11,207 – Impairment of assets 33,463 – Gain on disposal of subsidiary (251) – Changes in working capital: – Inventories 1,462 (1,063) – Trade and other receivables (20,820) 3,778 – Trade and other payables 16,322 1,461 Operating cash flow 263,610 284,410

2007 2006 Company £’000 £’000

Operating loss (8,663) (598) Depreciation charge 339 514 Fair value losses on other financial assets – 698 Share-based transactions 4,981 10,072 Changes in working capital: – Trade and other receivables 6,499 1,970 Governance – Trade and other payables (15,952) 4,863 Operating cash (outflow)/inflow (12,796) 17,519

31. Employees and Directors Employee benefit expenses during the year: 2007 2006 Group £’000 £’000

Wages and salaries 11,767 6,402 Social security costs 1,539 1,263 Retirement benefit liabilities (Note 32) 969 617 14,275 8,282

The average number of employees during the year was: Restated Group 2007 2006 Accounts & Notes

UK 108 76 Netherlands 35 14 143 90

2006 employee numbers for the Netherlands have been restated to show the average for the year. Post acquisition of CH4, the average number of employees in the Netherlands in 2006 was 33. 96 Venture Production plc Annual Report and Accounts 2007

Notes to the Financial Statements continued

31. Employees and Directors (continued) Key Management Compensation: 2007 2006 Group £’000 £’000

Salaries and short term employee benefits 2,667 1,761 Share-based payments 36 13 2,703 1,774

The LTIP 2003 matured at the end of the period 1 January 2003 to 31 December 2006 and resulted in an award of shares with a value of £32,730,000 to key management. In addition, key management exercised share options of £16,771,000 (2006: £825,000).

In addition, £2,452,000 (2006: £1,718,000) relating to the ADSBP (Note 16) has been charged to the income statement.

The key management compensation figures above include Executive Directors.

Directors’ Emoluments: 2007 2006 Group £’000 £’000

Aggregate emoluments 2,484 1,996 Company contributions to defined contribution pension schemes 138 81 2,622 2,077

Included in aggregate emoluments is £1,022,000 (2006: £1,046,000) relating to the ADSBP, which is being charged to the income statement over the vesting period.

Further details of Directors’ emoluments are provided in the Directors’ Remuneration Report.

32. Retirement Benefit Liabilities The Group contributes to personal pension schemes on behalf of certain employees. These schemes are administered independently of the Group. The total pension cost which is charged against profit represents contributions payable by the Group and amounted to £969,000 (2006: £617,000).

33. Operating Lease Commitments – Minimum Lease Payments

The Group has commitments under operating leases to make payments as set out below: 2007 2006 £’000 £’000

Plant and machinery and motor vehicles within 1 year 145 137 Land and buildings within 1 year 733 729 within 2–5 years 2,227 1,864 in more than 5 years 3,603 –

34. Capital Commitments At 31 December 2007, the Group has commitments of £173,000,000 (2006: £355,900,000) relating to capital expenditure. 2006 has been restated to be consistent with the commitments reported in 2007. Venture Production plc Annual Report and Accounts 2007 97 Overview of Our Business of Our Overview

35. Guarantees The Company has provided credit guarantees totalling £31,200,000 and €5,200,000 (2006: £21,400,000) for decommissioning security for assets in the North Sea. Our Performance in 2007 Performance Our

36. Related Party Transactions Group Intra-group related party transactions, which are eliminated on consolidation, are not required to be disclosed in accordance with IAS 24.

The financial statements include the financial statements of Venture Production plc and the subsidiaries listed in Note 15.

The following table provides the total amount of transactions, which have been entered into with related parties for the relevant financial year.

Purchases Amounts Amounts Sales to from owed by owed to related related related related parties parties parties parties Sales/purchases from related party £’000 £’000 £’000 £’000

Joint Venture: North Sea Gas Partners Limited 2007 – – – – 2006 17,701 – 3,843 (945) Associates: North Sea Infrastructure Partners Limited 2007 68,130 – 3,498 – 2006 4,602 – 1,876 – Sevan Production General Partnership 2007 – – – –

2006 4,282 – 4,282 – Governance

Amounts Interest owed by received related parties Loans from/to related party £’000 £’000

Associate: Ten Degrees North Energy Limited 2007 281 281 2006 269 269

Joint Venture North Sea Gas Partners Limited As shown in Note 3, the Company acquired the remaining 66.7% of NSGP during 2007. In 2007, this investment has been classified as a subsidiary and therefore, no disclosure of related party transactions in respect of 2007 is required.

Associate North Sea Infrastructure Partners Limited Venture Infrastructure Limited has a 49.9% interest in North Sea Infrastructure Partners Limited (2006: 49.9%). Accounts & Notes Sevan Production General Partnership Hummingbird Oil PTE Limited owns 20% of the ordinary shares of Sevan Production General Partnership (2006: 20%). Ten Degrees North Energy Limited Venture Production plc owns 40% of the ordinary shares of Ten Degrees North Energy Limited (2006: 40%).

Company During the year, the Company received income of £19,735,000 (2006: £18,597,000) from wholly owned subsidiary undertakings in respect of interest receivable. Amounts due to the Company by subsidiary undertakings are shown in Note 18. 98 Venture Production plc Annual Report and Accounts 2007

Venture Interests in the North Sea as at 31 December 2007

Block Field Venture Interest (%) Operator Status

13/21a West Wick 28.46 Shell Undeveloped oil discovery 14/28b west Exploration 20.0 BG Exploration 16/12a Birch 100.0 Venture Producing oil field 16/12a Larch 100.0 Venture Producing oil field 16/12a Sycamore 100.0 Venture Producing oil field 21/11a Dauntless 50.0 Venture Abandoned field 21/12 Goosander 50.0 Venture Producing oil field 21/16a Durward 50.0 Venture Abandoned oil field 21/17a Whinchat and Wagtail 50.0 Dana Undeveloped oil discovery 21/18a Kittiwake 50.0 Venture Producing oil field 21/19 Mallard 50.0 Venture Producing oil field 21/19 Gadwall 50.0 Venture Producing oil field 21/19 Grouse 50.0 Venture Undeveloped oil discovery 21/20b Christian 50.0 Venture Undeveloped oil discovery 21/20d Bligh 30.4965 Shell Undeveloped oil discovery 21/27a Pilot 70.37 Venture Undeveloped oil discovery 21/27c Exploration 100.0 Venture Exploration 22/2a Chestnut 69.88 Venture Oil field in development 22/2a non-field area Chestnut non-field area 10.0 Premier Exploration 22/22b Selkirk 31.5 Nexen Undeveloped oil discovery 22/22c Exploration 70.0 Venture Exploration 28/2a Pilot South 100.0 Venture Undeveloped oil discovery 28/5a Exploration 13.04 Noble Exploration 29/8a (S) Acorn 78.9 Venture Undeveloped oil discovery 29/8b Acorn 77.6 Venture Undeveloped oil discovery 29/9a (S) Beechnut 79.8 Venture Undeveloped oil discovery 29/9b Beechnut 68.7 Venture Undeveloped oil discovery 30/11b (N) and 30/12b (N) Appleton (Alpha and Beta) 100.0 Venture Undeveloped gas condensate discovery 30/11b (S) and 30/12b (S) Halley 40.0 Talisman Undeveloped oil discovery 38/20, 38/25, 39/16, 39/21 Exploration 100.0 Venture Exploration 38/29, 38/30, 39/26, 44/5 Exploration 100.0 Venture Exploration 42/25b Exploration 40.0 Venture Exploration 43/11 Exploration 100.0 Venture Exploration 43/12 Exploration 100.0 Venture Exploration 43/16 Exploration 40.0 Venture Exploration 43/21b Exploration 40.0 Venture Exploration 44/27c Exploration 100.0 Venture Exploration 44/29a Exploration 100.0 Venture Exploration Venture Production plc Annual Report and Accounts 2007 99

Block Field Venture Interest (%) Operator Status

47/3h Exploration 47.1 Venture Exploration 47/6 Exploration 90.0 Venture Exploration 47/8c Channon 55.77 Venture Undeveloped gas discovery 47/9c Barbarossa 90.0 Venture Undeveloped gas discovery 48/3a Exploration 16.0 Tullow Exploration 48/4 Exploration 16.0 Tullow Exploration 48/9a Mimas 15.0 ConocoPhillips Producing gas field 48/10a Annabel 100.0 Venture Producing gas field 48/10b Saturn and Rhea 22.0 ConocoPhillips Producing gas fields 48/14a and 48/15a Ensign 100.0 Venture Undeveloped gas discovery 48/15b Exploration 100.0 Venture Exploration 49/4a Chiswick 95.0 Venture Producing gas field 49/4b Exploration 100.0 Venture Exploration 49/4c Exploration 100.0 Venture Exploration 49/5a Exploration 100.0 Venture Exploration 49/5a and 49/10b Markham 37.5 Venture Producing gas field 49/5b Exploration 100.0 Venture Exploration 49/6a 48/10a Ann 100.0 Venture Producing gas field 49/9b Kew 100.0 Venture Undeveloped gas discovery 49/9b Windermere 20.0 RWE Producing gas field 49/10c Stamford 100.0 Venture Undeveloped gas discovery 49/11a Amanda 100.0 Venture Undeveloped gas discovery 49/11a Alison 100.0 Venture Producing gas field 49/11a and 48/15a (D1) Audrey 100.0 Venture Producing gas field 49/11a rest Exploration 100.0 Venture Exploration 49/22b Exploration 100.0 Venture Exploration 53/3d Exploration 100.0 Venture Exploration J3C J3C 4.025 Venture Producing gas field J3b and J6 Markham 37.5 Venture Producing gas field J3b and J6 Exploration 17.5 Venture Exploration K1b Exploration 20.0 Wintershall Exploration 100 Venture Production plc Annual Report and Accounts 2007

Glossary

ADSBP EBT km NUI annual deferred share bonus plan Employee Benefit Trust kilometres normally unmanned installation

AGM EMS KPI OPEC Annual General Meeting Environmental Management key performance indicator Organisation of Petroleum System Exporting Countries Bcf LNG billions of cubic feet EPS liquid natural gas PRT Earnings Per Share Petroleum Revenue Tax boe LTIFR barrels of oil equivalent ERP lost time injury frequency rate SID effective realised price Senior Independent Director boepd LTIP barrels of oil equivalent per day ETS long term incentive plan SIP Esmond Transportation System Share Incentive Plan bopd Mboe barrels of oil per day EU thousands of barrels of oil SNS European Union equivalent southern North Sea bwpd barrels of water per day FDP Mboepd TD field development plan thousands of barrels of oil total depth CGU equivalent per day cash-generating units FTSE TDNEL Financial Times Stock Exchange MMbo Ten Degrees North Energy Limited CH4 millions of barrels of oil CH4 Energy Limited GKA TSR Greater Kittiwake Area MMboe total shareholder return CNS millions of barrels of oil equivalent central North Sea GMA UKCS Greater Markham Area MMscfpd United Kingdom Continental Shelf DBERR millions of standard cubic feet Department for Business, HPHT per day WHAM Enterprise and Regulatory Reform High Pressure High Temperature WHAM Energy plc NSGP EABP IAS North Sea Gas Partners Limited Employee Annual Bonus Plan International Accounting Standard NSIP EBITDA IFRS North Sea Infrastructure Partners Earnings Before Interest, Tax, International Financial Reporting Limited Depreciation and Amortisation Standard

Lifting costs Lifting costs are defined as: Royalty costs, Production Expense, Workover and Projects, Transport and Process costs and General Lease expenses.

Effective Realised Price Effective Realised Price is defined as: Revenue divided by Sales Volume.

Reserve replacement ratio The reserve replacement ratio for any given period is calculated by dividing the sum of reserve additions by the production for the corresponding period and is expressed as a percentage.

Note: 6 Bcf = 1 MMboe Acquire Develop Shareholder Information, Produce Directors and Advisers

Venture’s share price is quoted on the Registrars Solicitors We acquire, develop and bring into production Operating profit margin London Stock Exchange, symbol VPC, Equiniti Limited Stronachs discovered but undeveloped oil and gas fields in and is a component of the FTSE 250 index. Aspect House 34 Albyn Place the North Sea with proven but untapped potential. 32.6% Spencer Road Aberdeen Lancing AB10 1FW Information on Venture is available online at the Company’s website Then we transform them into profitable assets. West Sussex Growth record (www.venture-production.com). For UK shareholders wishing to buy BN99 6DA Jones Day or sell shares in the Company, arrangements have been made to use As a major independent E&P company we also 21 Tudor Street an internet and telephone dealing service available through Equiniti 11 ye a rs Bankers London target 10–15% of our annual investment into lower Limited (previously Lloyds TSB Registrars). For internet sales, log on to since founding the company we have Barclays Bank plc EC4Y 0DJ risk North Sea exploration. www.shareview.co.uk/dealing. For telephone sales, call 0871 384 2646*. become the 6th largest independent Business Bank Scotland You will need your shareholder reference number shown on your operator in the North Sea Johnstone House Remuneration Consultants Over the past seven years we have grown the value share certificate. 52–54 Rose Street MM & K Limited of our business by more than 23 times and we Aberdeen 1 Bengal Court Market capitalisation Registered in Scotland have positioned ourselves to continue generating AB10 1HA Birchin Lane SC169182 growing cash flow from the North Sea. £1.1bn London Financial Advisers and EC3V 9DD at 31 December 2007 Registered Office Stockbrokers 34 Albyn Place Oriel Securities Limited PR Advisers Aberdeen 125 Wood Street Brunswick Group Limited AB10 1FW London 16 Lincoln’s Inn Fields EC2V 7AN London Highlights of the year Company Secretary and Head Office WC2A 3ED Simon Waite UBS Limited Kings Close 1 Finsbury Avenue Weber Shandwick 62 Huntly Street London 58 Queen’s Road Solid financial performance and strong cash flow generation: Aberdeen EC2M 2PP Aberdeen 1 AB10 1RS • The second half of 2007 delivered the strongest underlying financial performance in the Company’s history – AB15 4ZT EBITDA of £163.2 million (23.0% higher than the second half of 2006) Auditors Contact • Revenue of £358.3 million (2006: £360.3 million) – higher commodity prices offsetting lower production volumes PricewaterhouseCoopers LLP Taxation Advisers +44 (0)1224 619000 (phone) • Operating profit down 35.9% to £116.6 million (2006: £181.9 million) – impacted by non-cash impairment and exploration 32 Albyn Place Deloitte +44 (0)1224 658151 (fax) charges totalling £62.8 million Aberdeen 2 Queen’s Terrace [email protected] (email) • Underlying1 operating profit £179.5 million (2006: £185.8 million) down 3.4% AB10 1YL Aberdeen AB10 1XL • Cash flow from operating activities of £240.2 million (2006: £273.5 million) General Shareholder Helpline • Profit on ordinary activities after tax down 40.9% to £48.2 million (2006: £81.6 million) 0871 384 2646* • 20% increase in ordinary dividend to 12.0 pence per share for the year General Shareholder Fax 1 Underlying excludes the impact of asset impairments and write-off of exploration/development costs 0871 384 2100* Solid underlying progress across the business: Directors • Average production decreased 7.7% to 41,228 boepd (2006: 44,706 boepd): John Morgan, Non-Executive Chairman – Project related timing delays impacted production volumes Mike Wagstaff, Chief Executive – Overall production performance from existing reservoirs ahead of expectations Jon Murphy, Chief Operating Officer • Largest and most complex development programme in Venture’s history successfully completed: Peter Turner, Finance Director – Two new fields on stream Rod Begbie, Corporate Development Director – 11 wells drilled setting up 2008/9 development programme Mark Nicholls, Non-Executive Deputy Chairman The cover and pages 1-32 of this report Tom Blades, Non-Executive Director are printed on 9 Lives Silk, a paper • Year end proven and probable (2P) reserves of 203 MMboe (2006: 221.5 MMboe) produced at a mill that holds ISO 14001 Andrew Carr-Locke, Non-Executive Director – five year reserves’ replacement ratio of 391% certification. Tom Ehret, Non-Executive Director Business positioned for the next phase of growth: Alan Jones, Non-Executive Director Larry Kinch, Non-Executive Director Pages 33-100 of this report are printed • Seven acquisitions since the start of 2007 – including five already in 2008 Graeme Sword, Non-Executive Director on 9 Lives Offset, a paper produced at • Over 20 MMboe of P50 resources in discoveries acquired plus up to 150 MMboe of contingent/prospective resources Robb Turner, Non-Executive Director a mill that holds ISO 14001 certification. • £600 million long term debt financing completed • £151 million convertible bond issued, bringing in two strategic investors – 3i Group plc and ArcLight Capital Partners, LLC

*calls to these numbers are charged at 8 pence per minute from a BT landline. Other telephone providers’ costs may vary. Venture Production plc Venture Production plc Annual and Report Accounts 2007 Kings Close, 62 Huntly Street, Aberdeen AB10 1RS +44 (0)1224 619000

Breathing new life into the North Sea

Venture Production plc www.venture-production.com Annual Report and Accounts 2007