www.regalpetroleum.co.uk Regal Petroleum plc 11 Berkeley Street plc Regal Petroleum Annual Report and Accounts 2006 London W1J 8DS T +44 (0)20 7408 9500 F +44 (0)20 7408 9501 Annual Report and Accounts 2006 Regal Petroleum plc is an independent Corporate Directory oil and gas exploration and production group Company Secretary and Solicitors Share Registry based in the United Kingdom. The Group is Registered Office Pinsent Masons Computershare Investor Services PLC C Phillips City Point PO Box 82 focused on the exploration, development and 11 Berkeley Street 1 Ropemaker Street The Pavillions London W1J 8DS London EC2Y 9AH Bridgewater Road production of oil and gas assets in Ukraine, United Kingdom United Kingdom Bristol BS99 7NH United Kingdom Company Number Nominated Advisor and Joint Broker Romania, Egypt, Greece and Liberia. 4462555 Evolution Securities Limited Corporate Advisors 100 Wood Street Tristone Capital Limited Auditors London EC2V 7AN 28 Grosvenor Street UHY Hacker Young LLP United Kingdom London W1K 4QR St Alphage House United Kingdom 2 Fore Street Joint Broker London EC2Y 5DH Mirabaud Securities Limited United Kngdom 21 St James’s Square London SW1Y 4JP Bankers United Kingdom HSBC Bank plc 79 Piccadilly London W1J 8EU United Kingdom 01 Highlights 23 Report of the Independent Auditor 02 Chairman’s Statement 24 Consolidated Profit and Loss Account 04 Licence Areas 25 Consolidated Balance Sheet 06 Ukraine 26 Company Balance Sheet Glossary 10 Romania 27 Consolidated Cash Flow Statement 12 Egypt 28 Consolidated Statement of Total Recognised 14 Greece and Liberia Gains and Losses boepd $ Mboe 15 Financial Review 28 Reconciliations of Movements barrels of oil equivalent per day United States Dollars thousand barrels of oil equivalent 16 Board of Directors and Senior Management in Shareholders’ Funds 18 Financial Contents 29 Notes forming part of the Financial Statements km bbls MMboe 19 Corporate Governance Statement ibc Corporate Directory and Glossary kilometres barrels million barrels of oil equivalent 20 Directors’ Report km2 bopd Mcf square kilometres barrels per day thousand cubic feet m3d Mbbls MMcf cubic metres per day thousand barrels million cubic feet Mm3 MMbbls MMscfd thousand cubic metres million barrels million standard cubic feet of gas per day ANNUAL REPORT AND ACCOUNTS 2006 REGal PetroleuM plc 01 Highlights The legal dispute over our licences in Ukraine was successfully resolved by the Supreme Court of Ukraine The Egyptian ERB concession was farmed out to Apache with a work programme of 3D seismic and two wells Over 800km of 2D seismic were acquired in the Barlad concession in Romania and several prospects identified for drilling Realised prices for gas in Ukraine increased by over 40% from January 2006 to January 2007 A Joint Venture was signed with Aurelian to jointly explore the Suceava concession in Romania Dormant Ukrainian production well SV-10 was successfully reinstated and tested at commercial rates 169MMboe Ukraine audited 2P reserves 02 REGal PetroleuM plc ANNUAL REPORT AND ACCOUNTS 2006 Chairman’s Statement The Company continues to focus its resources on assets in Eastern Europe and on value creation through both exploration and field development. Our strategic proposition remains unchanged; however, our ability to achieve our goals has been greatly enhanced in the past year. The last year was a key period for the Company The dispute over the validity of the licences Egypt following the legal challenge to its major assets was finally resolved in December 2006 when Regal acquired a 100% interest in a prospective in Ukraine. Those legal proceedings were the Supreme Court of Ukraine dismissed all onshore concession, East Ras Budran, in the successfully concluded by year end when the claims brought by CNGG. The Court thereby Gulf of Suez in 2004. In 2006 Regal sought a Supreme Court of Ukraine endorsed Regal’s affirmed the validity of the 20 year licences joint venture partner and in October farmed-out title to 20 year production licenses. The granted to Regal. the concession to Apache Khalda Corporation Company has now embarked on a strategy that LDC (Apache) who entered the partnership with we believe will maximise value from its exciting During the year, as a result of the ongoing a 75% working interest and returned to Regal portfolio of production and exploration assets. litigation, the MEX-GOL and SV field pilot back costs totalling $4.85 million. Apache production facilities were shut-in twice. immediately acquired an aeromagnetic survey The year also saw some notable developments Uninterrupted production, however, and have subsequently acquired an extensive including establishing new joint ventures in recommenced in August 2006 and through new 3D seismic survey. Two exploration wells both Egypt and Romania to spread risk whilst to the year end, average daily production from are committed in the concession. Apache, as simultaneously allowing us to deploy our capital the five Regal wells was 3.85 million standard operator, will drill those in 2007, with the first on the production and field development cubic feet of gas and 447 barrels of condensate. commencing in June. activities underway in Ukraine. We have also Free cash flow was generated from these rebuilt our senior management team to ensure operations and was partially repatriated to the Romania the right skills and relevant experience are UK. Upper limits on gas prices set by the The Company holds two large under-explored available within the Company for the longer term Ukrainian Government rose from $2.37 per licences in Romania where there is considered future. We will continue to employ joint ventures thousand cubic feet in January 2006 to $3.07 to be good potential to find gas accumulations. and have engaged Tristone Capital as advisors per thousand cubic feet by year end. A further In September 2006 we concluded a 50% farm- to assist us in finding a partner for our Ukrainian significant upward revision to $4.03 per out with Aurelian Oil and Gas plc (Aurelian) on assets during 2007. thousand cubic feet occurred in early 2007 the northern, Suceava block, under which as Russia progressively seeks to eliminate the Aurelian agreed to carry Regal on a 2D seismic Ukraine discount paid by Ukraine for imported gas. programme and an exploration well. Their 2D We entered the year with concerns over our This trend of increasing prices appears set to seismic (totalling 160km) has been completed title to the key Mekhediviska/Golotvschinska continue in the coming years and underpins and drilling of a well is planned for July 2007. (MEX-GOL) and Svyrydivske (SV) production value in our field development operations. In the Barlad block, where Regal maintains a licences granted to Regal in July 2004 due 100% working interest, an additional 800km of to a legal dispute which arose in 2005 To accelerate the development of the fields it 2D seismic was acquired and interpreted. Using between our previous joint venture partner was decided to acquire 3D seismic data over the new seismic data drilling locations have Chernihivnaftagasgeologia (CNGG) and the the MEX-GOL field and, if successful, to extend been defined for two wells which are scheduled Ministry of Environmental Protection (MEP). the survey over the SV field in subsequent to commence in late third quarter 2007. To assist us in the process of managing the years. Mobilisation of the Ukrgeofizika crew legal and strategic aspects of our business in was under way at year end and the survey Greece Ukraine we appointed a new legal team and was successfully completed in May 2007. Throughout the year the status quo has been on their recommendation a strategic partner, maintained on the Company’s Greek interests. Alberry Limited (Alberry), was introduced to Additionally, we were able to re-open the SV-10 Kavala Oil S.A. (Kavala Oil) has been operated support Regal on a success fee basis. well and after coiled tubing conveyed nitrogen lift, by local management and the Workers Union we obtained a stable and commercial flow rate and Regal has neither invested nor received any which has been tied in to the existing facilities. dividend on its previous investments. In the We also expect to recommence drilling on the second half of the year active approaches were delayed development plan as soon as the made to potential buyers with a view to Regal required rig can be refurbished and a divesting its holding in Eurotech S.A. (Eurotech), commercial contract agreed. the Kavala holding company. Sales discussions ANNUAL REPORT AND ACCOUNTS 2006 REGal PetroleuM plc 03 were not concluded by year end and are ongoing Ritson, who has a wealth of industry experience in 2007; however, I remain confident that a and have appointed a new COO, David Scott. partner for the Regal position can be found. Early in 2007, we also appointed a new CFO, Gordon Stein. Financial Regal posted a consolidated loss of $109.2 Outlook for 2007 million in 2006 which reflects exceptional The year ahead is set to be a critical one in non-cash charges resulting from the agreement terms of short-term value creation within the with Alberry to assist in securing the validity of the Company. Our focus will be on four key areas: Ukranian licences ($48.9 million) and $43.7 million the ongoing field development operations in reflecting the impairment of the Greek assets Ukraine which we hope will lead to a reserves carried as an investment. update in the fourth quarter; the search for a joint venture partner to work with us to Turnover from sales of gas and condensate in accelerate the Ukrainian development project; Ukraine was $10.9 million (2005: $13.9 million) a significant exploration programme with the down due largely to the shut-ins associated drilling of five wells in Romania and Egypt; and with the legal dispute, although partially offset finally the continued process of strengthening by higher commodity prices.