Annual Report 2007 Contents ANNUAL MEETING 2 FINANCIAL INFORMATION 2 TETHYS OIL IN BRIEF 3 2007 IN BRIEF 3 LETTER TO THE SHAREHOLDERS 4 OIL AND NATURAL GAS EXPLORATION 6 THE OIL AND GAS MARKET 8 TETHYS OIL 11 History 12 Oman 14 France 19 Spain 23 Morocco 26 Turkey 29 Sweden 32 CORPORATE RESPONSIBILITY 34 BOARD OF DIRECTORS, MANAGEMENT AND AUDITORS 36 THE TETHYS OIL SHARE 38 KEY FINANCIAL DATA 40 ADMINISTRATION REPORT 42 NOTES 55 AUDITOR’S REPORT 66 DEFINITIONS AND ABBREVIATIONS 67 ADDRESSES 68 Information regarding Annual Meeting Annual General Meeting (AGM) in Tethys Oil is planned to be held Thursday 8 May 2008 in Stockholm. Notice of a general meeting of shareholders shall be made by announcement in Post- och Inrikes Tidningar and in Sven- ska Dagbladet. Tethys will also publish a press release with the invitation to the AGM. Information will also be available at www.tethysoil.com. To be entitled to participate in a general meeting, shareholders must be recorded in a print-out of the complete share register relating to the circumstances as of fi ve business days before the meeting, and give notice to the company no later than the day stipulated in the notice of the meeting. In order to attend and vote as proxy on behalf of a shareholder at the Annual Meeting, a power of attorney must be presented to the company. Financial Information The company plans to publish the following fi nancial reports: Three months report (January–March 2008) will be published on May 8, 2008 Annual general meeting – 8 May 2008 Six months report (January–June 2008) will be published on August 21, 2008 Nine months report (January–September 2008) will be published on November 13, 2008 Year end report 2008 (January–December 2008) on 16 February 2009 Landsten Reklam 2008. Design: Henrik Strömberg. Tethys Oil in Brief Tethys Oil is a Swedish energy company focused on identi- fi cation and development for production of oil and natural gas assets in the Middle East, North Africa and Europe. Tethys’ strategy is to invest in projects in areas with known oil and natural gas discoveries that have not been prop- erly appraised using modern technology. In this way, high returns can be achieved with limited risk. Th e company has interests in licences in Oman, Morocco, France, Spain, Turkey and Sweden. Th e shares are listed on First North (TETY) in Stockholm. Remium AB is Certifi ed Adviser. 2007 in Brief Highlights • Oman – Jebel Aswad re-entry completed fl owed 2,626 BOEPD on test • France – participated in Pierre Maubeuge 2 exploration well – potential gas discovery to be tested in 2008 • Spain – participated in Hontomin 4 well – no hydrocar- bons encountered • Acquisition of 50 per cent interest of Blocks 3&4 onshore Oman • Received exploration permit over northern part of Swed- ish Baltic island Gotland • Proposed directed share issue primarily to investors in Asia and Middle East to be followed by secondary listing in Dubai Cover: Natural gas from the Shuaiba is fl ared during the re-entry of Jebel Aswad, the summer of 2007. Letter to the Shareholders Dear Friends and Investors, It is not easy to choose but among many great stories Where do we begin to tell the story of Tethys Oil from last year the greatest is that which occurred on AB? midsummer’s eve 2007 and is best told in three words and four digits: Shall we start with France, and the potential gas fi eld indicated from the Pierre Maubeuge well drilled in rural Lorraine in October? OMAN Or shall we begin the story with how we farmed out Bouanane and are left with a free option on a poten- JEBEL ASWAD tially gas bearing structure of giant proportions in the stone desert of Morocco? 2,626 Or why not simply with how we plan to resurrect Sweden’s only oil region; located on the island of Gotland? Being a Swedish company, would not this Th e Cretaceous limestone of Jebel Aswad, it’s con- be a good beginning? tent so dramatically depicted through these fl ames of natural gas and associated condensate, fl owing at Or shall we linger on how we became the second larg- a rate of 2,626 barrels of oil equivalent a day, was the est concession holder onshore Oman, after acquiring fi nal reward of a complicated project. On par with a 50 per cent in Blocks 3 and 4? Hollywood manuscript, the product stream from the reservoir at 3,000 metres depth, lit up the night sky and sent the message that Tethys is about to enter the production age! 4 TETHYS OIL Eight months down the road, we have a fi rm view of how to proceed. Preliminary in-house calculationes of reserves stand at more than 50 bcf of gas and some 2.6 million barrels of condensate and fi rst production is slated for July 2009. So far only one of three hydro- carbon bearing zones have been properly tested, and these preliminary reserve numbers refer to this one zone only, leaving ample upside for both reserve and production increases, as the project matures. But as stories go, the story of Blocks 3 and 4 is not far behind Block 15. A series of fortunate circumstances and some skill brought an entire smorgasbord of low risk exploration and appraisal opportunities to the Tethys project portfolio. To just mention one, the Farah South discovery, we can tell of a well defi ned structure, delineated by three wells all of which brought oil to surface. Flow rates have been rather small though and we would like to drill it again, employing the horizontal techniques which proved so successful in the Jebel Aswad case. In Jebel Aswad, a 40 barrel well suddenly produced 2,626 boepd. Can we achieve just 600 barrels of oil per day from Farah South, we believe we stand to double Tethys reserves of liquids in one go! So stay with us, the journey continues and we are only Other great stories of blocks 3 and 4 are the heavy just seeing the end on the beginning… oil story of the Saiwan structure and the deeper gas plays. Stockholm in March 2008 As is evident, there is so much to tell that we stop here and invite you to read the great stories later in Vincent Hamilton Magnus Nordin the report. And among all the projects, be sure not to Chairman Managing Director miss the entry about oil prices. Chief Operating Offi cer TETHYS OIL 5 Oil and natural gas exploration Th e oil industry is divided into two main categories, Development of geological models to upstream and downstream. Upstream includes such locate oil and natural gas prospects operations as exploration and production of crude Th e aim of a geological model is to locate potential oil and natural gas. Downstream operations include reserves of oil and natural gas by the development of refi ning and distribution of oil as fuel, heating oil or a model, which aims to explain why an area contains as raw material for the petrochemical industry. Oil an appropriate geological prospect. For oil and natu- companies can operate in both segments, or in parts ral gas to be present, a number of conditions must be of these segments. Tethys Oil operates in the upstream fulfi lled. Th e geological models should explain: side of the business. 1. rocks capable of generating oil and/or natural gas Property rights to oil and natural gas – the source rock; discoveries 2. rocks capable of holding oil and/or natural gas – In general, oil and natural gas resources are the prop- the reservoir; erty of the government of the country in which they 3. rocks capable of keeping oil and/or natural gas in are located. As a consequence, an oil company gen- the reservoir – the seal; and erally does not own the rights to discovered oil and 4. confi guration of rocks in the subsurface that com- gas but instead receives permissions to explore for and bine the above elements – the structure. produce oil from the government of the country in question. Th ese permissions are typically called con- In addition, the model should support a case that these cessions and licences. properties are correlated properly to have formed a trap and that they have occurred in an appropriate A licence is usually divided into two parts – an explo- sequence in time before hydrocarbons have been gen- ration licence and a production licence. A company erated. normally has to undertake certain work within an area during a specifi ed period of time in order to receive an exploration licence. Th ese work commitments are normally geological, geochemical or geophysical stud- ies (seismic studies) and drilling operations. Oil com- panies do not necessarily have to pay money in order to receive exploration licences. Payment is instead the commitment of work. In some cases, a licence fee to seal the host country is statutory. If commercial volumes of oil or natural gas are discov- reservoir ered, the exploration licence converts into a produc- (trap) tion licence, where a royalty and/or a tax is applicable, or a production sharing agreement, where a certain migration paths share of the recovered oil or natural gas goes directly to the country. Th e division of oil and natural gas between the licencee and the country in a production source rock licence varies widely throughout the world. Th e dura- tion of a production licence is usually 20–30 years. Co-operation and partners Exploration Because exploration costs are high, oil companies Oil and natural gas are found in sedimentary rocks often co-operate.