ANNUAL INFORMATION FORM. For the Year Ended December 31, 2013

Transcription

1 ANNUAL INFORMATION FORM For the Year Ended December 31, 2013 Dated April 15,

2 FORWARD- LOOKING STATEMENTS 4 CORPORATE STRUCTURE 8 STERLING RESOURCES (UK) PLC 8 MIDIA RESOURCES SRL 8 STERLING RESOURCES NETHERLANDS B.V. 8 GENERAL DEVELOPMENT OF THE BUSINESS 9 GENERAL HISTORY 9 BREAGH 9 BREAGH OUTLOOK 10 CLADHAN 12 CLADHAN OUTLOOK 13 ROMANIA OFFSHORE 13 ROMANIAN OFFSHORE OUTLOOK 15 OTHER DEVELOPMENTS 15 DESCRIPTION OF THE BUSINESS 19 GENERAL DESCRIPTION OF THE BUSINESS 19 HEALTH, SAFETY AND ENVIRONMENTAL MANAGEMENT 20 EMPLOYEES 21 RISK FACTORS 21 RISKS RELATING TO STERLING S OPERATIONS 21 OIL AND GAS ACTIVITIES 35 OTHER OFFSHORE UK 37 ONSHORE UK 38 FRANCE 38 NETHERLANDS 39 ONSHORE ROMANIA 39 RESERVE AND RESOURCE EVALUATION OPERATIONAL PLANS 41 DIVIDEND RECORD AND POLICY 42 DESCRIPTION OF THE CAPITAL STRUCTURE 43 MARKET FOR SECURITIES 44 DIRECTORS AND OFFICERS 45 LEGAL PROCEEDINGS 47 2

3 INTERESTS OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS 48 TRANSFER AGENT AND REGISTRAR 48 MATERIAL CONTRACTS 48 INTERESTS OF EXPERTS 48 ADDITIONAL INFORMATION 49 DEFINITIONS, ABBREVIATIONS AND NOTES 50 DEFINITIONS: 50 ABBREVIATIONS: 52 NOTES: 53 SCHEDULES A - Form F1 - Statement of Reserves Data and Other Oil and Gas Information B - Form F2 - Report of Reserves Data by Independent Qualified Reserves Evaluator C - Form F3 - Report of Management and Directors on Oil and Gas Disclosure D - Audit Committee Charter 3

4 FORWARD- LOOKING STATEMENTS Certain statements contained in this AIF are forward- looking statements. These statements relate to future events or the Company s future performance. All statements other than statements of historical fact may be forward- looking statements. In some cases, forward- looking statements can be identified by terminology such as may, will, would, should, expect, plan, anticipate, believe, estimate, predict, potential, continue, intend, or the negative of these terms or other comparable terminology. In addition, statements relating to reserves or resources are deemed to be forward- looking statements as they involve the implied assessment, based on certain estimates and assumptions that the reserves and resources described can be profitably produced in future. These statements are only predictions. Actual events or results may differ materially. In addition, this AIF may contain forward- looking statements attributed to third- party industry sources. These sources are not endorsed or adopted by Sterling explicitly or implicitly. Undue reliance should not be placed on these forward- looking statements, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur. By their nature, forward- looking statements involve numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward- looking statements will prove inaccurate. Forward- looking statements in this AIF include, but are not limited to, statements with respect to: Capital expenditure programs, including without limitation the timing of, the sources of capital and expenses related to, and the nature of, the development of the Breagh, Cladhan and Ana/Doina fields; Development activities in the greater Breagh area, particularly the Phase 2 development of Breagh; Expectations regarding the Company s cost structure; Factors upon which the Company will decide whether to undertake a specific course of action; The quantity and timing of hydrocarbon production from the Company s development projects, including Breagh, Cladhan and Ana/Doina; The sale, partial sale, farming- in or farming- out of certain properties, particularly offshore Romania; The realization of anticipated benefits of acquisitions and dispositions; The possible impact of changes in government policy with respect to onshore and offshore drilling and development requirements; The Company s ability to obtain certain government and regulatory approvals; The Company s cash requirements and funding for the next year; The Company s drilling plans and plans for completion and installation of production platforms or other infrastructure, on any of its licences; The Company s expectations regarding production from Breagh wells; The Company s tax horizon; The Company s strategies, the criteria to be considered in connection therewith and the benefits to be derived therefrom; 4

5 The Company s expectations regarding the timing and phasing of Phase 2 Field Development Plan approval and first gas from Phase 2; The Company s expectations regarding government policies with respect to concerns about climate change and the protection of the environment; and The Company s plans and expectations that are described on page 41 under 2014 Plans. With respect to forward- looking statements in this AIF, management has assumed, among other things, that the Company: Will be able to satisfy the undertakings and conditions under the Bond (as defined herein); Will produce hydrocarbons and receive cash flows in connection therewith which are consistent with management s estimates based on the updated reserves and forecasts report dated May 21, 2013, prepared by RPS Energy, but adjusted by the Company to reflect new information on rates, prices, costs, timing and number of wells; Operates in an environment of political stability; Will be able to obtain all necessary regulatory approvals for its operations on satisfactory terms; Operates in an environment of increasing competition; Is able to obtain additional financing or farm- out, sell or partially sell licence interests on satisfactory terms; Is able to continue to attract and retain qualified personnel either as staff or consultants; Is able to continue to obtain services and equipment in a timely manner; and Is able to obtain necessary approvals from partners for a particular course of action. Although management believes that the expectations reflected in the forward- looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. The Company cannot guarantee future results, levels of activity, performance, or achievements. Certain of these risks and other factors, some of which are beyond the Company s control, which could cause results to differ materially from those expressed in the forward- looking statements contained in this AIF include, but are not limited to: Reserves, resources and production estimates may prove incorrect; The finding, determination, evaluation, assessment and measurement of oil and gas deposits or reserves may vary materially from the estimates, plans and assumptions of the Company; Exploration and development activities are capital- intensive and involve a high degree of risk; future appraisal of potential oil and natural gas properties may involve unprofitable efforts; Oil and natural gas prices fluctuate; Without the addition of reserves through exploration, acquisition or development activities, the Company s reserves and production will decline over time as reserves are exploited; Production and processing operations may prove more difficult, more costly or less efficient than planned; 5

6 All modes of transportation of hydrocarbons include inherent and significant risks; Interruptions in availability of exploration, production or supply infrastructure; Third party contractors and providers of capital equipment can be scarce; Reliance on other operators and stakeholders limits the Company s control over certain activities; Availability of joint venture partners and terms of agreement between them and the Company will depend upon factors beyond the Company s control; Permits, approvals, authorizations, consents and licences may be difficult to obtain, sustain or renew; Regulatory requirements can be onerous and expensive; The Company cannot completely protect itself against title disputes; The Company is substantially dependent on its executive management; Environmental legislation can have an impact on the Company s operations; Additional funding may be required to carry out the Company s business operations and to expand reserves and resources; The Company s operations are subject to the risk of litigation; Negative operating cash flow could increase the need for additional funding; Issuance or arrangement of debt to finance acquisitions would increase the Company s debt levels and further changes in circumstances may lead these debt levels to be beyond the Company s ability to service and repay that debt; Significant competition exists in attracting and retaining skilled personnel; Intense competition in the international oil and gas industry could limit the Company s ability to obtain licences and key supplies, such as drilling rigs; Future acquisitions may involve many common acquisition risks and may not meet expectations; Managing the Company s expected growth and development costs could be challenging; Insurance and indemnities may not be sufficient to cover the full extent of all liabilities; Fluctuations in foreign exchange rates, interest rates and inflation may cause financial harm to the Company; Political or governmental changes in legislation or policy in the countries in which the Company operates may have a negative impact on those operations; Labour unrest could affect the Company s ability to explore for, produce and market its oil and gas production; 6

7 Risks related to the countries in which the Company operates; Uncertainties of legal systems in jurisdictions in which the Company operates; Failure to meet contractual agreements may result in the loss of the Company s interests; and Failure to follow corporate and regulatory formalities may call into question the validity of the Company, its subsidiaries or its assets. These factors should not be considered as exhaustive. Certain of these risks are beyond the Company s control, including: the impact of general economic conditions in the areas in which it operates, civil unrest, industry conditions, changes in laws and regulations including the adoption of new environmental laws and regulations and changes in how they are interpreted and enforced, increased competition, the lack of availability of qualified personnel or management, fluctuations in commodity prices, foreign exchange or interest rates, stock market volatility and obtaining required approvals of regulatory authorities. Actual results and future plans could differ materially from those anticipated in forward- looking statements contained in this AIF as a result of the risks described above. Readers are further cautioned that the forward- looking statements contained in this AIF speak only as of the date of the AIF and the Company does not intend and does not assume any obligation to update the forward- looking statements except as is required by law. The forward- looking statements contained in this AIF are expressly qualified by the foregoing cautionary statement. Subject to applicable securities laws, the Company is under no duty to update any of the forward- looking statements after the date hereof or to confirm such statements to actual results or to changes in the Company s expectations. Financial outlook information contained in this AIF about prospective results of operations, financial position or cash flows is based on assumptions about future events, including economic conditions and proposed courses of action, based on management s assessment of the relevant information currently available. Readers are cautioned that such financial outlook information contained in this AIF should not be used for purposes other than for which it is disclosed herein. 7

8 CORPORATE STRUCTURE Sterling was incorporated under the Companies Act (Alberta) on August 31, 1979 under the name of Peoples Oil Limited. Sterling was continued pursuant to Articles of Continuance under Section 261 of the Business Corporations Act (Alberta) on July 2, The name was changed from Peoples Oil Limited to Sterling Resources Ltd. by Articles of Amendment dated February 10,1997. The registered and head office of Sterling is 1450, 736-6th Avenue S.W. Calgary, Alberta, Canada T2P 3T7. Sterling directly owns the licence interest in the Midia and Pelican blocks offshore Romania. Sterling has three active wholly- owned subsidiaries, Sterling UK, Sterling Romania and Sterling Netherlands. Sterling Resources (UK) plc Sterling UK was incorporated under the laws of England and Wales under the Companies Act 1985 on March 20, 1998 as a private limited Company and subsequently re- registered as Sterling Resources (UK) plc. Sterling s activities in respect of the UK (onshore and offshore) and France are conducted by Sterling UK Midia Resources SRL Sterling Romania was incorporated under the laws of Romania on March 7, Effective September 30, 2008, Sterling s activities in onshore Romania were transferred to Sterling Romania from Sterling UK. Sterling Romania conducts Sterling s activities in Romania including acting as agent for Sterling with respect to its interest in offshore Romania licence in the Midia and Pelican blocks, and as operator of block 27 Luceafarul. Sterling Resources Netherlands B.V. Sterling Netherlands, a wholly- owned subsidiary of Sterling UK, was incorporated under the laws of the Netherlands on November 11, Sterling s activities in respect of the Netherlands are conducted by Sterling Netherlands. The registered office is at Anna van Buerenplein, 2595 DA, The Hague, Netherlands. 8

9 GENERAL DEVELOPMENT OF THE BUSINESS General History Since incorporation, Sterling has been involved in the acquisition of petroleum and natural gas rights and the exploration for, and the development and production of, crude oil and natural gas. The Company was founded in 1979 as Peoples Oil Limited, changing its name to Sterling Resources Ltd. in In its early years the Company focused on onshore activities in Canada and the USA, and gained its first international assets in Romania in 1997 followed by the UK in In the following years the Company withdrew from North America and developed its business in Europe, acquiring assets additionally in the Netherlands and France. A full summary of Sterling s interests and acreage holdings as at December 31, 2013 is provided in the table commencing on page 36. The Company has three key projects: Breagh Sterling acquired block 42/13 in the UK Southern North Sea as operator in Its interest in the block was reduced to 45 percent after a series of farm- out arrangements and in late 2007 the Company and its partners drilled the 42/13-3 well, which tested gas at rates of up to 17.6 MMcf/d. These results confirmed that damage to the formation which had been experienced in earlier Breagh wells drilled by other operators could be overcome by the use of oil- based drilling fluids. In 2008, the Breagh 42/13-4 appraisal well was drilled on the eastern flank of the Breagh structure. This well tested gas at rates of up to 10.2 MMcf/d and confirmed the continuity of the reservoir encountered in the 42/13-3 well. In late 2008 Sterling commenced drilling the Breagh 42/13-5 pilot and 5Z horizontal appraisal wells, which were completed and tested in early The 42/13-5Z well tested natural gas at rates of up to 26 MMcf/d. After the success of the appraisal drilling program in early 2009, Sterling commenced a process to dispose of a partial interest in the greater Breagh area in order to provide sufficient funds to continue development. In August 2009 the Company completed the sale of one- third of its 45 percent interest in Block 42/13 and varying interests in the surrounding blocks comprising the greater Breagh area for total gross proceeds of approximately $103 million. Following the disposition, Sterling retained a 30 percent interest in the entire greater Breagh area. The sale also resulted in the purchaser, RWE Dea becoming operator. Following the transaction, development of the Breagh field was Sterling s primary focus in partnership with RWE Dea. Development progressed through the intervening period to the present date culminating in first production from Breagh Phase 1 facilities in October Following production start- up, stable production from the field has been established during the first quarter of Development focus on Breagh has now moved to exploitation of the eastern half of the field. Study work and early stage engineering work is ongoing to evaluate and finalize the design of a second phase of development with a target for FDP addendum submission and approval at the end of 2014, although this may be extended until

10 Breagh Outlook Since sanction of the Breagh development (July 2011), the operator RWE Dea and the Company have been progressing the first phase of the development of the field. Phase 1 establishes the infrastructure to access the gas reserves of the western area of the Breagh field and ship the produced gas to shore for processing prior to sale. The point of sale is the entry flange to the UK national transmission system at the Teesside Gas Processing Plant ( TGPP ) located on the north side of the Tees estuary at Middlesborough. The significant individual elements that make up the infrastructure of Phase 1 comprise: 1. OFFSHORE PLATFORM. A dedicated 12 well slot Breagh Alpha ( BA ) wellhead platform in 65 metres of water located in the Southern North Sea some 100 kilometres offshore east of Middlesborough was installed in October The platform is designed as a normally unmanned installation capable of remote operation from a control room located onshore at the TGPP gas plant. Routine visits to the platform are conducted for maintenance and operational reasons. Communication and data links to the operations control station at TGPP are up and facilities are fully operational in production mode. 2. DEVELOPMENT DRILLING. Development drilling of 7 deviated wells from the BA platform to an array of locations at approximately 2 kilometres radius from the platform has been completed by year- end The wells are drilled through the platform structure in a radial pattern to access the reserves of the western area of the Breagh field and are completed with dry Christmas trees located in the well bay of the platform. The drilling campaign has been completed using the Ensco 70 jack- up drilling rig.a summary of the status of the Breagh development at this time of this report is as follows: Six wells constructed and in production since October The seventh well (A07) has been drilled and completed awaiting hydraulic stimulation before coming into production in mid The Ensco 70 rig is currently demobilized from the field for statutory maintenance work and is scheduled to return in mid April 2014 to recommence the drilling and completion program. Remaining incremental work program (Phase 1a) is to fracture stimulation of well A07; followed by drill, complete and test well A08. Two further in- fill wells (A09 and A10) are being considered (Phase 1b) from the BA platform during the fourth quarter of 2015 or early 2016, following interpretation of a new 3D survey to be conducted over the Breagh field during the summer of EXPORT PIPELINE. Produced gas is shipped onshore for processing via a new- built, dedicated 110 km long, 20 export pipeline installed from the BA platform to the TGPP. There is a separate 3 pipeline for supply of Mono- Ethylene Glycol ( MEG ) hydrate suppressant to the platform and a fibre- optic cable ( FOC ) for control and communications of the platform laid alongside the main gas pipeline. The pipeline is now fully commissioned and in service. 4. RECEPTION FACILITIES. New, dedicated, reception facilities have been installed at the TGPP terminal to allow processing of Breagh production. Gas is taken off the reception facilities and treated to sales specification through liquid knockout, dew pointing and metering prior to sale. Liquids knocked out at the reception facilities comprise condensate plus water and recovered MEG. Condensate is separated and stabilized before 10

11 being shipped to bulk storage for subsequent seaborne export. Water and MEG is treated to recover and recycle MEG for reuse and wastewater is sent for treatment prior to disposal. These facilities have been largely commissioned and are currently in service. Production from the field commenced on October 12, 2013 and commissioning work continued into early November. In early November the field was shut- in following a significant production incident which occurred during routine sphering of the pipeline to remove liquids. Subsequent investigation revealed that the barred tee- junction at the plant inlet had failed resulting in damage from pigging spheres progressing into areas of plant not designed for this. A detailed investigation into the incident was conducted and remedial actions and recommendations for improvement were implemented leading to production restart at the end of Since this time the facilities have operated steadily. Since returning to service in late December the field has produced at a maximum rate of sales gas of 116 MMscf/d from the six operating wells. Some operational down time has been experienced due to level control issues on the slug catcher vessels caused by solids contamination of instruments. It is expected this operational disruption will be addressed during a planned shutdown in April 2014 when more suitable level control instruments will be installed. Total production of 0.3 Bcf of sales gas and 900 barrels of condensate was achieved during For the first quarter of 2014, average production was 22 MMcf/d of sales gas and 77 bopd of condensate with average production uptime of 84 percent. Forecast total capital expenditure for Phase 1 (10 wells) is 679 million ($1,087 million) for 100 percent of the field or 204 million ($326 million) net to Sterling. As of December 31, 2013 a total of 157 million net to Sterling had been incurred on a cash basis with the balance of 47 million ($75 million) of expenditure remaining in the period from 2014 through to the end of 2017, including remaining drilling and completion costs on wells A07 - A10 and the addition of onshore compression equipment at TGPP. Of this net sum, approximately 19 million ($30 million) is expected to be incurred on a cash basis in Phase 2 of the Breagh development, targeting reserves in the field's eastern area is still being evaluated. The concept being developed has been focused on a heavy duty second platform and fracture stimulation (fracking) of wells, as follows: Installation of a second platform, Breagh Bravo ( BB ), in 65 metres of water situated approximately 6 kilometres east of BA with 12 well slots. The platform would have temporary accommodation for maintenance purposes, facilities for standalone fracking of wells (i.e. without the need for a drilling rig) and possibly facilities to remove proppant flow- back from fracked wells. Installation of a 6 kilometre, 20- inch diameter pipeline from the BB platform to the BA platform. Development drilling of seven to eight deviated wells from the BB platform to locations arrayed approximately 2-3 kilometres from the platform, with a mix of conventionally- completed and fracked wells. Control of the Phase 2 facilities from the onshore TGPP control room. Expected incremental expenditures for this Phase 2 development concept expenditures are expected to be in the range million ($ million) for the whole field or million ($ million) net to Sterling. 11

12 Other alternatives to this Phase 2 development concept are also being considered to improve economics. These include a lighter duty platform installation similar to the BA platform design, i.e. no accommodation and no standalone fracking capability) or a subsea development of the eastern side of the Breagh field. Appraise/Concept stage incremental Phase 2 development expenditures are expected to be in the range million ($ million) for the whole field or million ($ million) net to Sterling. The Company intends to fund estimated incremental Phase 2 expenditures from production revenues. In July 2013 RWE Dea, Sterling and DECC agreed a six month licence extension to mid for approval of the Phase 2 field development plan addendum, and in November 2013 this was further extended to end The need to evaluate alternative Phase 2 development plans and to reflect the results of the Phase 1 development (in particular fracking) may require a further licence extension. Cladhan Sterling acquired its interest in blocks 210/29a and 210/30a in 2003 and reduced its interest to 39.9 percent through a series of farm- out transactions. In late 2008 the Company drilled the Cladhan 210/29-4 discovery well, encountering light oil (34 API) in an Upper Jurassic channel sand structure. In 2010, the well was re- entered and two further sidetrack wells were drilled both of which encountered hydrocarbons in good net- to- gross, high quality reservoir. A DST was performed on the a- 4z well, which flowed at a constrained rate of 6,000 bopd. Some depletion from this DST was noted at the a- 4y well which demonstrates reservoir connectivity between these wells. The structure was further delineated in 2011 by four additional well penetrations which, in combination with a new 3D seismic dataset, helped to define the Core Area for development and identified areas to the North and West as potential upside for later appraisal and development. During 2012 detailed reservoir studies were performed which reviewed the full range of reservoir uncertainties and derived the optimum development plan to maximize oil reserves whilst best managing these uncertainties. This work concluded that the optimum Phase 1 development plan for Cladhan should consist of two high angle producers and one high angle water injector. This outcome has been carried forward into the full development phase using a concept of subsea well completions tied back to the TAQA- operated Tern platform 17km away which provides production processing services and utilities support. Export route for stabilized crude is from Tern via the Brent pipeline system to the Sullom Voe Terminal in the Shetland Islands. Sterling sold 13.5 percent of its equity in 2012 together with the operatorship to TAQA, leaving Sterling with a 26.4 percent equity in the Cladhan Field as a non- operating JV partner. Consideration for this transaction included a non- repayable carry of a certain amount of development costs. The transition of operatorship occurred during 2012 with TAQA taking responsibility for the development project. During 2013, a further transaction with TAQA was agreed. Pursuant to this deal, Sterling received a further, repayable carry on all remaining development expenditure not covered by the first carry and will hold a residual 2 percent equity interest until pay- out of the second carry expected in the third quarter of 2015 at which point Sterling s equity interest will revert to 13.8 percent. 12

13 The FDP was approved by the UK Secretary of State on April 23, The core area of the field will be developed initially with appraisal drilling being included to determine the potential for later development phases. Specific components of the initial development are as follows: Drilling of two high angle production wells (P1 & P2) and one high angle water injection well. A northern area A2 appraisal target was drilled during 2014 from the water injector wellbore Installation of a 17 km subsea tie- back 10 oil line to the Tern platform, a 4 gas lift line, a 10 water injection line and a controls/chemicals umbilical. Modifications to the Tern platform to manage Cladhan s fluids. Export of oil is planned via the Brent Pipeline System to Sullom Voe in the Shetland Islands. A western updip A1 appraisal target is planned to be drilled as a separate wellbore post production later in Cladhan Outlook The bulk of the Cladhan development project works will be completed during 2014 leading to first production around the end of the first quarter of Topsides modification work at Tern platform is the longest duration activity with completion of the second compressor train modifications scheduled to complete post first oil, in the second quarter of The development drilling campaign is scheduled to recommence in April 2014 when the John Shaw semi- submersible drilling rig returns from a period of shipyard maintenance and is expected to finish in November Subsea facilities construction work is scheduled during the third quarter of Post first oil, production history will be gathered to support optimal reservoir management and also provide input to further investment planning. Romania Offshore Midia and Pelican Blocks In late 2006, Sterling acquired the remaining 80 percent interest providing it with a 100 percent interest and operatorship of the large Pelican and Midia blocks in the Black Sea offshore Romania. Sterling agreed to farm- out a total of 35 percent of its interest to Petro Ventures Europe BV and Gas Plus International BV in return for the payment of certain costs. Sterling remained operator and drilled the Ana- 1 discovery well on the Doina trend in the Midia block in late 2007, with the well flowing gas at rates up to 19.2 MMcf/d under restricted test conditions. In 2008, Sterling tested the north easterly extension of the Doina field with the Doina- 4 well, encountering the same quality of gas- bearing reservoir as the original Doina wells drilled by other operators. This well was followed by the Ana- 2 appraisal well which encountered similar and slightly better reservoir characteristics than the Ana- 1 well. 13

14 From 2009 to 2011 Sterling was unable to further its activities in the Romanian Black Sea due to blockages from the government. After successfully reaching amicable resolution with the Government of Romania at the end of 2011, Sterling and its partners embarked on a program of activity offshore Romania during Midia Resources SRL, Sterling`s wholly owned subsidiary and operator of the Midia and Pelican concession, completed the drilling and logging of the Ioana well and Eugenia exploration wells in Both wells were abandoned following logging. The Ioana- 1 well targeted the Pontian sandstone formation at a location in the updip area of the prospect. Although there were gas saturations in the primary objective the reservoir development was poor. Sterling is of the view that based on the well results and from the existing 2D seismic, better quality gas- bearing sands may exist downdip from Ioana- 1. The Eugenia- 1 well discovered gas in the Eocene limestone and Cretaceous sand sections in this first well to be drilled in the Pelican Block. In addition the drilling results indicate up dip prospectivity in the Oligocene structure. In 2012, ExxonMobil made a material deep water discovery adjacent to Sterling`s Midia Block. The Domino- 1 well was drilled in 930m water depth and was estimated to have discovered between 1.5 and 3Tcf. The discovery, if developed, could provide the opportunity for infrastructure co- operation with Sterling s development of its Ana and Doina discoveries. Also in July 2012, the Government of Romania passed the new gas law which provided a schedule towards liberalization of gas prices. This should lead to gas prices at or close to import parity by around 2018, a multiple increase over the previously regulated gas price and hence a material boost to the economics of developing the Ana and Doina discoveries in the Midia block. However, the government has also indicated that intends to revise the taxation regime applicable to the oil and gas production sector to reflect the higher revenue that should be received. During 2013, Sterling continued to progress the Midia Gas Development. Eleven contiguous plots of land of five kilometres in total length were acquired by the Midia and Pelican joint venture to allow pipeline access from the beach to a proposed onshore gas plant location. Environmental studies over the pipeline route and gas plant location were completed. Sterling also continued to undertake activities such as advancing access rights and terms for connecting to and utilization of the high pressure gas transmission lines, and seeking clarification on the offshore regulatory procedures. Licence extension terms at Sterling s option for the Midia and Pelican blocks have recently been agreed with the National Agency for Mineral Resources. Three extension options to the exploration period currently ending in May 2014 are available, with extensions to May 2015, May 2018 and May Commitments are projected to be satisfied within 2014 for the first extension until May For each of the second and third extension periods the commitments comprise two wells over the two blocks. Subsequent to the end of 2013: In January 2014, the Company completed the sale of its 65 percent interest in a sub- divided deeper- water portion of block 15 Midia in the Romanian Black Sea to ExxonMobil and OMV Petrom, as announced in October 2012 (the Carve- out Transaction ). In February 2014, 800 square kilometres of seismic was acquired over the Doina trend prospects, Bianca, Ioana and Eugenia. 14

15 Luceafarul and Muridava blocks In 2012, Sterling was granted operatorship and a 50 percent interest in the 1,000 square kilometres Luceafarul block adjacent to Sterling s Midia block and a 40 percent interest in the 1,000 square kilometres Petroceltic- operated Muridava block adjacent to Sterling s Pelican block. Seismic acquisition was conducted in 2012 with 320 kilometres of 2D shot on the Luceafarul block and 920 square kilometres of 3D shot on the Muridava block. A further 600 square kilometres of 3D seismic was shot over parts of the Luceafarul block in December The Muridava- 1 exploration well spudded on April 11, Romanian Offshore Outlook Sterling s plans for the development of its Black Sea blocks are to continue to prove up additional reserves through exploration and appraisal drilling activities and to undertake development investigations. In particular, under a staged development program, the Ana and Doina discoveries are being investigated as being part of the 1st stage of a greater Midia Gas Development. For 2014, Sterling will continue to focus on achieving commercial and technical resolution on the relevant onshore issues. A project sanction commencement date in 2015 is anticipated with first gas projected for As well as completing the recently- spudded Muridava- 1 well, two more commitment wells are planned to be drilled on this block in Plans are to drill the Luceafarul commitment well in the first quarter of The Company intends to reduce its equity interest in all of its offshore licences. The process is anticipated to commence at the end of the summer to tie- in with interpreted 3D seismic acquired in late 2013 and early 2014, with final terms to be agreed by the end of 2014 and completion expected in the first quarter of Other Developments Other significant developments over the past three years are as follows: 2013 On January 8, the Company announced it had secured a US$12 million bridging loan agreement (the "Loan") with a subsidiary of Vitol Holding B.V. ("Vitol"). TSX- V approval has been received and other outstanding conditions which were required to close the Loan have now been satisfied. On February 13, the Company announced that it confirms that it was aware of the announcement by Vitol Anker International B.V. ("Vitol") that Vitol intended to make an unsolicited offer for all of the outstanding common shares (the "Shares") of Sterling at a price of $0.85 per Share. Sterling was in ongoing discussions with Vitol regarding a potential transaction that the Board of Directors of Sterling (the "Board") believed could be in the best interests of Sterling shareholders and that would also provide Sterling with additional interim funding. Sterling had also had discussions with third parties on other potential transactions including business combinations, sales of subsidiaries and assets and additional financing opportunities. On March 11, the Company announced the closing of both the offering of 20,000,000 common shares in the capital of the Company ("Common Shares") by way of a short form prospectus (the "Prospectus Offering") and the second tranche (the "Second Tranche") of 3,333,334 Common Shares pursuant to Sterling's 15

16 previously announced private placement, in each case, as part of a previously announced offering (the "Offering") of 73,333,334 Common Shares on a bought deal basis at a price of $0.75 per Common Share (the "Offering Price"). As previously announced, Sterling closed the first tranche of its private placement and issued 50,000,000 Common Shares (the "First Tranche" and, together with the Second Tranche, collectively the "Private Placement") at the Offering Price on March 4, On April 8, Sterling announced a permanent transfer in stages of a 12.6 percent interest in the Cladhan field to TAQA and a repayable carry by TAQA of development expenditures on an 11.8 percent interest in Cladhan (the "Second Carry"), which will be transferred to TAQA for the duration of the carry. The 12.6 percent interest is to be transferred in three stages, such that if the Company provides evidence of its funding ability to DECC and/or TAQA (the "Financing Condition") by different dates a smaller interest is permanently transferred. A 3.0 percent interest will be transferred if the Financing Condition is not satisfied by April 17, a further 3.0 percent interest if not satisfied by May 31, and the remaining 6.6 percent if not satisfied by June 30. The consideration for the transfers is the provision by TAQA of the Second Carry. On May 3, Sterling Resources Ltd announced the settlement of the previously announced USD 225 million senior secured bond issue (the "Bond") issued by its UK subsidiary Sterling Resources (UK) Ltd. (the "Issuer") and full repayment of the 105 million senior secured credit facility held with a group of lending banks (the "Bank Facility"). Pareto Securities acted as Sole Manager and Bookrunner of the Bond issue. On August 29 the Company announced that Mike Azancot, previously Chief Executive Officer and President of the Company, had left the employment of Sterling, and that Mr. Jacob Ulrich, the Chairman of the Board, would serve as Interim Chief Executive Officer until the Company appoints a suitable replacement. On October 14, the Company announced that first production from the Breagh gas field in the UK Southern North Sea commenced on Saturday, October 12th. Initial production was controlled to allow final plant proving and commissioning, before being ramped up to 97 million standard cubic feet per day (MMscf/d) from wells A01, A03 and A04. As wells A02 and A05 are fully brought on- stream, gross production is expected to reach 135 MMscf/d (net to Sterling 40 MMscf/d) during November On December 2, 2013 the Company announced that it has been successful in the award of a licence covering Blocks 42/2(split), 42/3(split), 42/4, 42/5 & 36/30, which are located approximately 25 kilometres north of the Breagh gas field. Sterling Resources will be the operator of the licence with a 100 percent working interest. Work commitments for this traditional licence award include obtaining and reprocessing 2D seismic data and drilling a firm well within the traditional 4- year licence period On February 7, 2012 the Company announced completion and preliminary results of the F17-09 well in Block F17 of the Dutch North Sea. After reaching a depth of 2200 metres below mean sea level, the well encountered hydrocarbons which although having good porosity were found to have water saturations >80%. No testing was performed, and the well was plugged and abandoned. On March 22, 2012 the Company announced that its wholly owned subsidiary in Romania had obtained approval from the National Agency for Mineral Resources for a 40 percent interest in the 1,000- square- kilometre Romanian Black Sea concession Block 27 (Muridava). The shallow water block, adjacent to Sterling s 16

17 Pelican Block, contains multiple exploration plays, has existing 2D seismic coverage and contains a hydrocarbon discovery, Olimpiyskaya, drilled in This well has limited historical data. The licence has an initial three year exploration period with a commitment to undertake seismic acquisition and drill three wells. On April 12, 2012 the Company announced that the Cladhan South exploration well, 210/29c- 5, did not encounter hydrocarbons in the targeted Jurassic reservoir section and was plugged and abandoned. The well was drilled at no cost to the Company pursuant to a farm- out agreement. On April, 20, 2012 the Company announced that it had signed a sale and purchase agreement with TAQA for the sale of a 13.5 percent interest in the North Cladhan area (Blocks 210/29a and 210/30a) for an initial consideration of US$47 million including an allocation to tax allowances. In addition it confirmed that TAQA will earn a 12.5 percent interest in Blocks 210/29c and 210/30b through a farm- in agreement. As a result, TAQA will fund Sterling s remaining equity interest in the recently drilled well 210/29c- 5 on the South Cladhan prospect. On May 18, 2012 the Company announced that subject to regulatory approvals, it had exchanged its 50 percent interest in UK Block 16/3d (Cairngorm) for a 10 percent interest in the Sterling operated Netherlands F and L Quad licences held by Enquest plc. On July 13, 2012 the Company announced that its wholly owned subsidiary in Romania, Midia Resources SRL (Midia), had obtained governmental approval for an interest in the 1,000 square kilometre Romanian Black Sea concession Block 25 (Luceafarul). Midia will obtain a 50 percent interest and will be operator. The current concession owner Petro Ventures Europe BV will then hold the remaining 50 percent interest. This shallow water block, to the west of and adjacent to Sterling's Midia Block, contains an existing gas discovery, multiple exploration plays and has existing 2D seismic coverage. The Concession Agreement has an initial three year exploration period with a commitment to undertake seismic acquisition and drill one well. Seismic work is currently progressing through the permitting process. On October 19, 2012, the Company announced that it had entered into the Sale and Purchase Agreement with EMEPR and OMV Petrom for the sale of its 65 percent interest (the Sale Portion ) in a portion of Block 15 Midia in the Romanian Black Sea. The Sale Portion is on the southeastern margin of the block, in deeper waters and covers 125,000 gross acres, or 11% percent of the total area of the Midia and Pelican Concession. The consideration for the transaction payable to Sterling is US$29.25 million upon closing, a contingent payment of US$29.25 million upon satisfaction of certain conditions relating to any hydrocarbon discovery made on the Sale Portion, and a further contingent payment of US$19.5 million upon first commercial production from the Sale Portion. Closing is subject inter alia to governmental approvals. The sale does not include any of the discoveries of other prospects in the Midia block and will not be affected by the results of the recently drilled Ioana 1 well. The previously announced process for the partial divestment of Sterling s interest in the Luceafarul, Midia and Pelican blocks continues, excluding the Sale Portion. On November 7, 2012 the Company announced the completion and abandonment of the Ioana- 1 well In the Romanian Black Sea after confirming the presence of an active gas system in the up dip area of the large Ioana prospect. On November 13, 2012 the Company announced an offering of common shares in the capital of the Company. Subsequently on November 15th, 2012 the Company announced the termination of the offer. 17

18 On November 19, 2012 the Company announced the signing of an agreement with Shell U.K. Limited to farm out a 40 percent participating interest in UK Licence P1792 covering Blocks 21/30f and 22/26c in the Central North Sea containing the Beverley prospect and the Belinda and Evelyn discoveries. Under the agreement, Shell will cover Sterling's 20 percent remaining participating interest share of 3D seismic costs across the two blocks and Sterling's share of the costs of an exploration well on the Beverley prospect. Sterling will continue as Operator for the exploration well. Subject to the approval of the Department of Energy and Climate Change, the joint venture interests will be Sterling Resources (UK) Ltd. 20 percent, Shell U.K. Limited 40 percent, and Valiant Petroleum Plc 40 percent. On December 14, 2012 the Company announced that they had made a gas discovery following the drilling of the Eugenia- 1 well drilled in the Pelican Block in the Black Sea offshore Romania. During 2012 Sterling Resources attained ISO accreditation for its Environmental Management System as applied in the UK On March 4, 2011, the Company announced the successful drilling of appraisal well 42/13a- 6 in the Breagh Field located in the SNS. On July 5, 2011 the Company announced increased reserves for the Breagh field located in the SNS as a result of the successful drilling of appraisal well 42/13a- 6 earlier this year. The Company interest reserves have been independently prepared in accordance with the standards contained in the COGE Handbook by RPS, Sterling's reserves evaluator, as of May 31, 2011 in a report dated June 12th, Due to the success of the 42/13a- 6 well the partnership commenced conceptual and environmental studies for a second phase of development, most likely involving a second platform on the eastern side of the field. On July 5, 2011 the Company announced that it had signed a loan facility agreement with a group of banks for a senior secured credit facility (the Credit Facility ) to fund the Phase 1 development by its wholly- owned subsidiary, Sterling UK, of the Breagh gas field in the SNS (Sterling 30 percent). The loan amount provided under the Credit Facility comprises a main tranche of GBP 95 million and a cost- overrun tranche of GBP 10 million, and the loan has a life of 6.5 years. On July 25, 2011 the Company announced that the FDP for the Breagh gas field has received the unconditional approval of DECC. On August 16, 2011 the Company announced the closing of its previously announced offering of 32,143,000 common shares at a price of $1.40 per share. The total offering of 32,143,000 shares resulted in Sterling receiving aggregate gross proceeds of approximately $45 million. On September 1, 2011 the Company announced that its wholly- owned subsidiary Sterling Netherlands had signed a farm- out agreement with Petro Ventures Netherlands B.V. covering its licences within the F- Quad and L- Quad offshore Netherlands. Subject to governmental and co- venturer approvals, Sterling Netherlands as operator will now hold a 25 percent working interest, EBN will hold 40 percent, Petro Ventures Netherlands B.V. will hold 25 percent and Grove Energy Limited (a subsidiary of EnQuest PLC) will hold the remaining 10 percent. These assignments were subsequently approved. 18

19 On October 2, 2011 the Company announced that the agreement governing the Credit Facility had achieved financial completion and that the first drawdown had been made. The Facility is being used to fund the remaining costs through to first gas of the Phase 1 development of the Breagh gas field in the SNS (Sterling 30 percent). On October 24, 2011 the Company announced that the Breagh Alpha platform had been successfully installed in the North Sea. The 2,000 tonnes jacket with eight piles weighing a further 2,000 tonnes was installed by Heerema Marine Contractor's heavy lift vessel Thialf, in 62 metres of water some 100 kilometres off Teesside on the east coast of the United Kingdom. This was then followed by the successful lift and setting of the 1,400 tonnes integrated deck topsides. All work was completed safely and without incident. On October 27, 2011 the Company received formal documentation from the Romanian NAMR approving the assignment of equity to partners and confirming the term of the offshore licence. The execution of this documentation follows the announcement made by the Company on October 27th indicating that an amicable agreement has been reached with the Government of Romania in respect of certain issues as detailed in a Notice of Dispute filed with Sterling to the State of Romania on June 20, DESCRIPTION OF THE BUSINESS General Description of the Business Overview Sterling is an international energy company based in Calgary, Canada. The Company is engaged in the exploration for, and development of, crude oil and natural gas in selected areas of the world outside Canada. Sterling currently has interests in four countries, the United Kingdom (offshore and onshore), Romania (offshore and onshore) France (onshore) and the Netherlands (offshore). The major focus areas, the United Kingdom and Romania, both have established hydrocarbon basins, extensive infrastructure and reasonably attractive contractual and fiscal terms. A full summary of Sterling s interests and acreage holdings as at December 31, 2012 is provided in the table commencing on page 36. Corporate strategy The Company s primary strategy for achieving growth is to source and initiate international projects with the potential for large, low- cost reserves. The Company concentrates on accumulating, exploring and exploitation of licences and prospects in selected core areas of the world. This strategy also targets blocks with high initial working interests where possible and financial exposure and technical risk are managed by obtaining partner participation through farm- out arrangements. Under these arrangements, a portion of Sterling s interest is given up in exchange for the partner paying a share of the costs of exploration, appraisal or development of the licence. A secondary strategy is to acquire interests in discoveries where Sterling believes that its technical and operational expertise can accelerate development, especially where there are multiple development candidates or significant exploration prospectivity nearby. 19

20 Competitive conditions The international oil and gas industry is highly competitive. The Company actively competes with a substantial number of other companies, many of whom have significantly greater financial and other resources than Sterling, for reserve acquisitions, exploration leases, licences and concessions and skilled industry personnel. The Company s competitors include various state oil companies, major integrated oil and natural gas companies, numerous other independent oil and natural gas companies and individual producers and operators. Critical success factors The Company s success is dependent on its ability to maintain, develop or otherwise have access to: a strong presence in the areas in which it operates; strong relationships with industry partners and government agencies; an excellent health, safety and environmental record experienced and effective technical and operating expertise; a strong financial structure with access to required capital; and an effective management team with a good understanding of business opportunities local laws and customs, environmental and fiscal legislation and the obligations to which Sterling is subject. Health, Safety and Environmental Management Sterling s operations are subject to laws and regulations pertaining to protection of the environment, and the management of waste products and materials. These laws and regulations require Sterling to obtain environmental permits for its activities and to minimize the effects of its activities on the environment at its operating sites. At present Sterling does not operate any production sites, although it is a partner in RWE Dea s Breagh Gas development, which produced first gas in October 2013, who will be required to dismantle these production facilities and remediate the environmental impact, which may be caused by its activities. Sterling s Board of Directors reviews the Company s Environmental Policy and Health and Safety Policy and oversees compliance with government laws and regulations. Monitoring and reporting programs for Health, Safety, Environment and Quality (HSEQ) performance in day to day operations, as well as inspections and audits designed to provide assurance that health, safety and environmental standards are met. Contingency plans are in place for timely response to emergencies including environmental events such as an Oil Spill through Oil Spill Response Limited of Southampton. Oil Pollution Emergency Plans (OPEPs) are prepared for each offshore activity and tested through Emergency Response exercises. During 2013 Sterling Resources was assessed against and retained its ISO accreditation for its Environmental Management System as applied in the UK and it is intended to extend this to Romanian and Dutch Operations. Sterling expects to incur abandonment and site restoration as oil and gas projects currently under appraisal or development are abandoned or reclaimed in the future. 20

21 Based on Sterling s current estimates, the total anticipated undiscounted future cost of abandonment of wells in existence at December 31, 2012 to be incurred over the expected production life of these wells, is approximately $41.38 million USD which will be incurred between 2014 and At December 31, 2013, $17.6 million of this total had been recorded as asset retirement obligation. Employees As at December 31, 2013, Sterling employed a total of 40 persons, three in Canada, twenty five in the UK, ten in Romania and two in the Netherlands. Sterling also has access to a core of key technical experts who provide services on a consulting basis as required. Staff numbers are not expected to increase materially in Risk Factors An investment in Sterling should be considered speculative due to the nature of Sterling s involvement in the exploration for, and the acquisition, development, production and marketing of, oil and natural gas internationally and primarily offshore and its current stage of development. The principal risks which may cause material loss to Sterling or cause future results to differ materially from those anticipated are outlined below. However, it should not be assumed that this list is exhaustive or that material loss could not occur as a result of other factors. Additional risks not currently known to Sterling or that Sterling currently considers immaterial, may also have an adverse effect on Sterling s business, financial condition, results of operations and prospects. Risks Relating to Sterling s Operations 1) Reserves, resources and production estimates may prove incorrect Unless stated otherwise, the estimated reserves, resources and future production contained in this document are taken from the RPS Report, which has been prepared in accordance with NI The estimated reserves, resources and future production and the associated estimated future net cash flow from Sterling s properties contained in this document have been independently evaluated by RPS and, in respect of the reserves data, certified by RPS. There are numerous uncertainties inherent in estimating quantities of reserves and cash flows to be derived therefrom, including many factors that are beyond the control of Sterling. Estimating the amount of reserves, resources and future production is a subjective process and, in addition, results of drilling, testing and production subsequent to the date of an estimate may result in revisions to original estimates. The reserves and production estimates and cash flow evaluations set forth in this document represent estimates only and should not be construed as representing exact quantities. These estimates and evaluations include a number of assumptions relating to factors such as initial production rates, production decline rates, ultimate recovery of reserves, timing and amount of capital expenditures, marketability of production, future prices of oil and gas, inflation, exchange rates, operating costs and royalties and other government levies that may be imposed over the producing life of the reserves. These assumptions were based on price forecasts in use at the date the relevant evaluations were prepared and many of these assumptions are subject to change and are beyond the control of Sterling. The significance of such estimates depends heavily on the accuracy of the assumptions on which they are based, the quality of the information available and the ability to verify such information against industry standards. In addition, if commodities prices fall, some of the reserves may not be commercially viable to 21

22 extract. Actual production and cash flows derived therefrom will vary from these estimates and evaluations, and such variations could be material. It should not be assumed that estimated future cash flows are representative of the fair market value of Sterling s reserves. The foregoing evaluations are based in part on the assumed success of exploitation activities intended to be undertaken in future years. The reserves, production and estimated cash flows to be derived from the reserves contained in such evaluations will be reduced to the extent that such exploitation activities do not achieve the level of success assumed in the evaluations. There is no guarantee Sterling will achieve expected flow rates. Estimates for reserves that may be developed and produced in the future are often based upon volumetric calculations and upon analogy to similar types of reserves rather than actual production history. Estimates based on these methods are generally less reliable than those based on actual production history. Subsequent evaluation of the same reserves based on production history may result in variations, which may be substantial, in the estimated reserves. The resource estimates provided herein include contingent resources that have not been adjusted for risk based on the chance of development. It is not an estimate of volumes that may be discovered. Actual recovery may be less. There is no certainty that it will be commercially viable to produce any portion of the contingent resources. The estimates of resources also include prospective resources that have been risked for chance of discovery but not for chance of development. There is no certainty that any portion of the prospective resources will be discovered or, if discovered, that it will be commercially viable to produce any portion of the prospective resources. If the assumptions upon which the estimates of Sterling s reserves, resources or production have been based prove to be incorrect, Sterling may be unable to recover and produce the estimated levels or quality of oil or gas and Sterling s business, prospects, financial condition or results of operations could be materially and adversely affected. 2) The finding, determination, evaluation, assessment and measurement of oil and gas deposits or reserves may vary materially from the estimates, plans and assumptions of the Company Oil and gas exploration involves a high degree of risk, and there is no assurance that expenditures made on future exploration activities by Sterling will result in new discoveries of hydrocarbons that are commercially viable. Inherent uncertainties in exploration drilling into unknown formations and unforeseen drilling conditions may also result in additional costs and results may be significantly different from those anticipated through seismic interpretation and other analytical techniques. Drilling of oil and gas wells creates additional risks including the encountering of new formations or pressures, premature declines of reservoirs, blow- outs, sour gas releases, fires and spills which may result in additional costs or expose Sterling to liability for pollution, blow- outs or other hazards. 3) Exploration and development activities are capital- intensive and involve a high degree of risk; future appraisal of potential oil and natural gas properties may involve unprofitable efforts Oil and gas exploration activities are capital intensive and involve a high degree of risk. There is no assurance that expenditures made on future exploration by Sterling will result in new discoveries of oil or gas in commercial quantities. It is difficult to estimate the costs of implementing any exploratory drilling program due to the inherent uncertainties of drilling in unknown formations, the costs associated with encountering various drilling conditions 22

23 such as over- pressured zones, tools lost in the hole and changes in drilling plans and locations as a result of prior exploratory wells or additional seismic data and interpretations thereof. The development of hydrocarbon reserves, particularly in the offshore arena where Sterling primarily operates, depends on a number of factors such as the type and size of the reservoir, the proximity to existing infrastructure with adequate capacity for new production, and available markets for any production. In addition, Sterling is exposed to risks that weather and other factors can often result in delays and unanticipated cost overruns. Sterling s plans are subject to many regulatory and other factors which can result in changes, delays and additional cost. Nearly all of Sterling's activity is conducted offshore. Exploration and development of offshore hydrocarbon reserves and the infrastructure required to produce them involves an increased degree of risk relative to onshore activity, and may result in additional costs relating to the technical difficulties of operating offshore. The demand for offshore drilling rigs is competitive in Sterling s areas of interest at present and securing a rig requires long lead times and significant up- front financial commitment by Sterling and its partners. Economic conditions are subject to change between the contracting of a rig and the commencement of drilling operations, and this may affect the underlying viability of Sterling s plans. Offshore development infrastructure may result in significant asset retirement or decommissioning liabilities to Sterling. These factors may result in significant demands for new capital which may or may not be available to Sterling. Access to facilities to process field production can be an important consideration when developing fields in the UK North Sea. Such access is not guaranteed and directly affects the economics of a project. The UK government, with the assistance of DECC, has a policy which has been adopted by the major operators of facilities in the NNS that allows access to facilities to be negotiated at a reasonable rate. These types of initiatives are intended to ensure that reserves that cannot support stand- alone facilities can be developed. 4) Oil and natural gas prices fluctuate Sterling s results of operations and financial condition are significantly affected by prevailing prices of oil and gas. Historically, prices of oil and gas have been subject to wide fluctuations for many reasons, including: global and regional supply and demand, and expectations regarding future supply and demand, for oil and gas; global and regional economic conditions; political, economic and military developments in oil and gas producing regions; weather conditions and natural disasters; prices and availability of alternative sources of energy; geopolitical uncertainty; 23

24 the ability of members of OPEC, and other oil producing nations, to set and maintain specified levels of production and prices; and governmental regulations and actions, including the imposition of export restrictions and taxes. It is impossible to accurately predict future oil and gas price movements. Sterling can give no assurance that existing prices for oil and gas will be maintained in the future. Any material decline in such prices could result in a reduction of Sterling s net production revenue and a decrease in the valuation of Sterling s exploration, appraisal and development properties. The economics of producing from some wells may change as a result of lower prices, which could result in a reduction in the volumes produced by Sterling. Sterling might also elect not to produce from certain wells at lower prices. All of these factors could result in a material decrease in Sterling s net production revenue and the financial resources available to it to make planned capital expenditure. This would have a material adverse effect on Sterling s financial condition, business, prospects and results of operations. Sterling has purchased gas price put options for a portion of its Breagh gas production to provide some protection against low UK gas prices through to the end of the third quarter of From time to time, Sterling may enter into other agreements to receive fixed prices on its oil and gas production to offset the risk of revenue losses if commodity prices decline. However, if commodity prices increase beyond the levels set in such agreements, Sterling will not benefit from such increases and Sterling may nevertheless be obligated to pay royalties on such higher prices, even though they were not received by it, after giving effect to such agreements. If Sterling were to enter into hedging instruments it could also be subject to margin requirements associated with these instruments. To the extent that Sterling does not cover future production by entering into hedging instruments it would be exposed to future fluctuations in oil and gas prices which could materially affect Sterling s financial condition, business, prospects and results of operations. 5) Without the addition of reserves through exploration, acquisition or development activities, the Company s reserves and production will decline over time as reserves are exploited Sterling s future oil and gas reserves, production and cash flows to be derived therefrom are highly dependent on Sterling s success in exploiting its current reserve base and acquiring or discovering additional reserves. Without the addition of reserves through exploration, appraisal, development or acquisition activities, Sterling s reserves and production will decline over time as reserves are exploited. A future increase in Sterling s reserves will depend not only on Sterling s ability to develop its present properties, but also on its ability to select and acquire suitable producing properties or prospects. Sterling s ability to find, acquire and gain access to additional reserves involves certain risks, including: identifying appropriate interests as and when they become available; being able to compete with other interested purchasers; unidentified historical or future liabilities of the operations that Sterling may acquire; the inability to receive accurate and timely information about these operations in order to make informed investment decisions; problems in integrating acquired operations; and problems in hiring and retaining qualified personnel. There is no assurance that Sterling s future exploration and development efforts will result in the discovery and development of additional commercial accumulations of oil and gas. If such efforts are unsuccessful, Sterling s total reserves may not increase or may decline, which could have a material adverse effect on Sterling s business, financial condition, prospects and results of operations. 24

25 6) Production and processing operations may prove more difficult, more costly or less efficient than planned Production operations of Sterling or by operators of assets in which Sterling has an interest involve risks normally inherent in such activities such as premature declines of reservoirs, blow- outs, oil spills, explosions, fires, equipment damage or failure, natural disasters, geological uncertainties, unusual or unexpected rock formations, abnormal pressures, cratering and sulphur gas releases. Offshore operations of Sterling may also be subject to natural disasters as well as to hazards inherent in marine operations and damage to pipelines and subsea facilities from trawlers, anchors and vessels. Hydrocarbon processing operations may occur offshore or onshore and involve risks associated with leaks of hydrocarbons or other chemicals, explosions, fires, equipment damage or failure or natural disasters. The occurrence of any of these events affecting production or processing operations could result in substantial damage to its property and the surrounding environment, biodiversity loss or habitat destruction, injury to persons and loss of life, a failure to produce oil or gas in commercial quantities or an inability to fully produce discovered reserves, and result in liability and reputational damage to Sterling. Consequent production delays and declines from normal field operating conditions or the specification of processed hydrocarbons can be expected to adversely affect revenue and cash flow levels to varying degrees. Oil and gas production operations are also subject to all the risks typically associated with such operations, including premature decline of reservoirs and the invasion of water into producing formations. 7) All modes of transportation of hydrocarbons include inherent and significant risks All modes of transportation of hydrocarbons involve inherent risks. An explosion or fire or loss of containment of hydrocarbons or other hazardous material could occur during transportation by road, rail, sea or pipeline. This is a significant risk due to the potential impact of a release on the environment and people and given the high volumes involved. 8) Interruptions in availability of exploration, production or supply infrastructure Oil and gas exploration and development activities are dependent on the availability of drilling and related equipment in the particular areas where such activities will be conducted. The demand for offshore drilling rigs is competitive in Sterling s areas of interest, and securing a rig requires long lead times and significant up- front financial commitment by Sterling and its partners. Economic conditions are subject to change between entering into a licence or other contractual obligation to drill a well or acquire seismic data and contracting a drilling rig or seismic vessel and this may affect the underlying viability of Sterling s plans. Current high demand for such limited equipment or access restrictions is affecting the availability and cost of such equipment to Sterling and operators or production facilities in which Sterling has an interest and from time to time delays exploration and development activities. Crisis management plans and capability are essential to deal with emergencies at every level of Sterling s operations. If Sterling does not respond, or is perceived not to respond, in an appropriate manner to either an external or internal crisis, Sterling s business and operations could be severely disrupted. Such interruptions or delays in the availability of infrastructure, including drilling rigs in particular and pipelines and storage tanks, on which exploration and production activities are dependent could result in disruptions to Sterling s projects, increased costs, and may have an adverse effect on Sterling s profitability. In the Netherlands, the proximity of Sterling s offshore blocks to shipping lanes may impact operational activities. 25

26 9) Third party contractors and providers of capital equipment can be scarce Sterling carries out the majority of its activities through the use of contractors. While care is taken to ensure contractors are competent and reputable, and contract terms reflect Sterling's expectations, there is no guarantee that the performance of contractors will meet Sterling's standards or expectations. There is a risk that Sterling will have to incur unforeseen costs if contractors do not perform as expected. Sterling contracts or leases services and capital equipment from third party providers. Such equipment and services can be scarce and may not be readily available at times and places required. In addition, costs of third party services and equipment have increased significantly over recent years and may continue to rise. Scarcity of equipment and services and increased prices may in particular result from any significant increase in exploration and development activities on a region by region basis which might be driven by high demand for oil and gas. In the regions in which Sterling operates there is significant demand for capital equipment and services. The unavailability and high costs of such services and equipment could result in a delay or restriction in Sterling s projects and adversely affect the feasibility and profitability of such projects and therefore have an adverse effect on Sterling s business, financial condition, results of operations and prospects. 10) Reliance on other operators and stakeholders limits the Company's control over certain activities To the extent Sterling is not the operator of its oil and gas properties, including in the UK the Breagh gas field where RWE Dea is the operator and the Cladhan oil field where TAQA is the operator, it will be dependent on such operators for the timing of activities related to such properties and will be largely unable to direct or control the activities of the operators or the costs of production and exploration of such operations. In addition, the success of Sterling will be largely dependent upon the performance of the operator s key employees. The planned acquisition of RWE Dea by LetterOne Group (as announced by RWE Dea on March 17, 2014) may lead to a change in personnel or operating practices. Any mismanagement of an oil or gas property by the operator may result in delays or increased costs to Sterling s non- operated exploration, development and production activities, which could materially and adversely affect Sterling s business, financial condition, results of operations and prospects. The terms of any relevant operating agreement generally impose standards and requirements in relation to the operator s activities. While Sterling has deliberately acquired interests in oil and gas properties that are operated by operators it believes to be reputable, there can be no assurance that any such operator will observe such standards or requirements. There is a risk that other parties with interests in Sterling s oil and gas properties may elect not to participate in certain activities relating to those properties and which require that party s consent. In these circumstances, it may not be possible for such activities to be undertaken by Sterling alone or in conjunction with other participants at the desired time or at all. Other participants who have invested in Sterling s oil and gas properties may default in their obligations to fund capital or other funding obligations in relation to such properties. In such circumstances, Sterling may be required under the terms of the relevant operating agreement to contribute all or part of any such funding shortfall. Any such delay or inability to undertake such activities, increased cost or obligation to provide further funding could adversely affect Sterling s business, financial condition, results of operations and prospects. 26

27 11) Availability of joint venture partners and terms of agreement between them and the Company will depend upon factors beyond the Company's control Sterling, like most exploration and production companies, typically holds oil and gas licences on a joint venture basis with other companies in order to mitigate risk and reduce costs. Existing licence interests can be farmed- down to bring in one or more joint venture partners who, in addition to paying for their share of expenditures, may also pay part of Sterling s future costs for a specified licence activity such as drilling a well or seismic acquisition. Availability of joint venture partners, and the terms under which such partners may undertake to pay Sterling's costs, are governed by prevailing market forces which can change and limit the availability of partners as well as result in unanticipated costs to Sterling. Sterling s partners may have economic or business interests or objectives that are inconsistent with, or opposed to, those of Sterling and may exercise veto rights to block certain key decisions or actions that Sterling believes are in its or the joint venture s best interests, or approve such matters without its consent. Additionally, in certain cases Sterling s joint venture partners or contractual counterparties are primarily responsible for risk management, the adequacy of the human or technical competencies and capabilities in relation to the joint project, and having sufficient liquidity or access to funding for operational or contractual requirements. In the event these are inadequate, such joint venture partners or associates may not be able to meet their financial or other obligations to their counterparties or to the relevant project, potentially threatening the viability of such projects and/or result in Sterling incurring liability. Where considered appropriate, Sterling seeks to mitigate credit risk by cash calling its partners prior to incurring expenditures. 12) Permits, approvals, authorizations, consents and licences may be difficult to obtain, sustain or renew The operations of Sterling require licences, approvals, authorizations, consents and permits and in some cases renewals of existing licences, approvals, authorizations, consents and permits from various governmental authorities. Sterling believes that it currently holds or has applied for all necessary licences, approvals, authorizations, consents and permits to carry on the activities which it is currently conducting under applicable laws and regulations in respect of its properties, and also believe that it is complying in all material respects with the terms of such licences, approvals, authorizations, consents and permits or extensions thereof. However, Sterling s ability to obtain, sustain or renew such licences, approvals, authorizations, consents and permits on acceptable terms are subject to changes in regulations and policies and to an extent, on the discretion of the relevant governments. To the extent any such approvals, permits, authorizations, licences and consents are required and not obtained or maintained, Sterling may be curtailed or prohibited from proceeding with planned exploration or development of oil and gas properties. Amendments to current laws, regulations and permits, authorizations, licences, consents and approvals governing operations and activities of oil and gas companies, or more stringent implementation thereof, could result in increases in capital expenditure or production costs or a reduction in levels of production from producing properties or require abandonment or delays in development of new properties, all of which could have a materially adverse effect on Sterling s business, financial condition, prospects and results of operations. 27

28 In France, Sterling s ability to explore for and ultimately develop any discoveries on its onshore licences in the Paris basin has been delayed by lack of ratification of the licence awards. 13) Regulatory requirements can be onerous and expensive The current or future operations of Sterling, including development activities and commencement of production on its properties, require permits, authorizations, licences, consents and approvals from various foreign, federal, state and local governmental authorities and such operations are and will be governed by applicable laws and regulations governing oil and gas exploration and development, exports, taxes, labour standards, occupational health, waste disposal, toxic substances, land use, environmental protection and other matters. Any changes or requirements additional to any such applicable laws, regulations and permitting requirements may require the installation of additional equipment or remedial actions in order to ensure compliance with such amendments, which may be expensive. Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions in local jurisdictions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, remedial actions and/or civil or criminal fines or penalties. Parties engaged in oil and gas operations may be required to compensate those suffering loss or damage by reason of such activities. 14) The Company cannot completely protect itself against title disputes Sterling conducts title reviews with a view to ensuring it has proper title to its interests in its oil and gas properties and licences. Such reviews are conducted in accordance with industry practice but may not always establish title beyond doubt and there is therefore a risk that the actual interests of Sterling may differ from that which is disclosed in this AIF. Although Sterling believes that it has good title to its oil and gas properties, it cannot control or completely protect itself against the risk of title disputes or challenges. There can be no assurance that claims or challenges by third parties against Sterling s properties will not be asserted at a future date. There is a risk that the actual interests of Sterling may differ from those which are disclosed in this document. Sterling holds rights to explore in its various oil and gas properties, but no assurance can be given that relevant governments will not revoke, or significantly alter the conditions of, the applicable exploration and development authorizations, licences, permits, approvals and consents and that such exploration and development authorizations, licences, permits, approvals and consents will not be challenged or impugned by third parties. There is no certainty that existing rights or additional rights applied for will be granted or renewed on terms satisfactory to Sterling. 15) The Company is substantially dependent on its executive management Sterling is substantially dependent on the services of a few key personnel and the loss of the services of these individuals could have a material adverse effect on the business of Sterling. Sterling is not insured against damage that may be incurred in case of loss or dismissal of Sterling s key specialists or managers. In particular, the loss of the services of the CEO (Jake Ulrich), the COO (John Rapach) or the CFO (David Blewden) could be particularly 28

29 disruptive. Competition for qualified personnel in the oil and gas industry is intense and Sterling may not be able to attract and retain necessary key individuals in the future which could affect its future success. 16) Environmental legislation can have an impact on the Company s operations Sterling s operations are subject to extensive and varying environmental, health, safety and other laws and regulations, including those inherent to oil exploration and production industries. While Sterling maintains high standards of environmental and safety compliance, regulations are always subject to change and can result in unanticipated costs which could affect the commercial viability of its projects. Any failure to comply with these environmental and safety requirements could subject Sterling to, among other things, civil liabilities penalty fees, fines, prosecution, clean- up costs, the possible revocation of permits and possibly temporary or permanent shutdown of Sterling s operations and loss of reputation. In particular, petroleum operations are subject to extensive environmental and safety laws and regulations. These laws and regulations set various standards for health, safety and environmental performance (normally documented in permits and licences) and provide for penalties and other liabilities for the violation of such standards, or permit/licence conditions, and establish, in certain circumstances, obligations to compensate for environmental damage and to restore environmental conditions. In addition, inability to provide safe environments for Sterling s workforce and the public could lead to injuries or loss of life resulting in regulatory action, which could include; prosecution of Sterling s senior managers, legal liability and damage to Sterling s reputation. Sterling s operations are subject to periodic inspection by the authorities responsible for compliance with such environmental and health and safety laws and regulations. While Sterling endeavours to comply with all environmental and health and safety laws and regulations at all times, Sterling may become involved in claims, prosecution, lawsuits and administrative proceedings relating to environmental or health and safety matters in the future. An adverse outcome in any of these would have a significant negative impact on Sterling s business, prospects, financial condition and results of operations and penalties may include the imposition of civil, administrative or criminal liability on Sterling or its officers. Compliance with new or amendments to existing laws, regulations and obligations relating to climate change, or any change in the enforcement thereof, could result in substantial capital expenditure, taxes, reduced profitability from changes in operating costs, and revenue generation and strategic growth opportunities being impacted. Sterling may have to incur significant expenditure to meet increasing permit and licence commitments and for the installation and operation of systems and equipment for remedial measures in the event that environmental regulations become more stringent or governmental authorities choose to enforce them more vigorously. No assurance can be given that environmental laws will not result in a curtailment of production or a material increase in the cost of production, development or exploration activities or otherwise adversely affect Sterling s business, financial condition, results of operations or prospects Sterling incurs, and expects to continue to incur, capital and operating costs in order to comply with increasingly complex health, safety and environmental laws and regulations. In addition, significant liability could be imposed on Sterling for damages, clean- up costs or penalties in the event of certain discharges into the environment, environmental damage caused by previous owners of property purchased by Sterling, acts of sabotage or non- compliance with environmental laws or regulations by Sterling. Although the costs of the measures taken to comply with regulations have not had a material adverse 29

30 effect on Sterling to date, in the future, the costs of such measures and non- compliance related liabilities may increase, and this could have a material adverse effect on Sterling s business, prospects, financial conditions, and results of operations. During 2010 a number of events drove changes to the regulatory environment, the most notable of these being the tragic blow- out and oil spill in the Gulf of Mexico in April 2010, which was not successfully controlled until July. Although this event took place in American waters, it increased the environmental scrutiny to which operators such as Sterling are subject in the UK North Sea, Dutch North Sea and Romanian Black Sea. The tougher scrutiny by DECC, the MEA in the Netherlands and NAMR in Romania should not have a severe impact on the Company s operations, although it has led to delays in permit approval and, in the UK, has resulted in exploration operators being required to make commitments, to meet DECC requirements for access to a capping tool to respond to a blowout, with such access costing 50,000 for the minimum six- month access period. 17) Additional funding may be required to carry out the Company s business operations and to expand reserves and resources Depending on future exploration, development, production or acquisition activities and plans and realized hydrocarbon prices, Sterling may require additional financing in the future. There is no assurance that Sterling will be successful in obtaining required financing on acceptable terms at the relevant time or at all. Sterling s ability to arrange financing and the cost of financing will depend on many factors, including the economic and capital markets conditions generally, investor confidence in the crude oil and gas industry, the business performance of Sterling, regulatory developments, credit available from banks and other lenders; and provisions of tax and securities laws that are conducive to raising capital. The terms and conditions on which future funding or financing may be made available may not be acceptable or funding or financing may not be available at all. If Sterling decides to raise additional funds by incurring debt, Sterling may become more leveraged and subject to additional or more restrictive financial covenants and ratios. Further, failure to obtain additional financing on a timely basis could cause Sterling to forfeit its interest in such properties, reduce or terminate its operations or curtail its operations, exploration or development plans. If Sterling s cash flow from operations is not sufficient to satisfy its capital expenditure requirements, there can be no assurance that additional debt or equity financing will be available to meet these requirements and this will have a materially adverse effect on Sterling s business, prospects, liquidity, financial condition, cash flows and results of operations. 18) The Company s operations are subject to the risk of litigation From time to time, Sterling may be subject to litigation arising out of its operations. Damages claimed under such litigation may be material or may be indeterminate, and the outcome of such litigation may materially impact Sterling s business, results of operations or financial condition. While Sterling assesses the merits of each lawsuit and defends itself accordingly, it may be required to incur significant expenses or devote significant resources to defending itself against such litigation. In addition, the adverse publicity surrounding such claims may have a material adverse effect on Sterling s business. 19) Negative operating cash flow could increase the need for additional funding Although Sterling has sufficient working capital to meet its present requirements, Sterling s ability thereafter to generate sufficient operating cash flow to make scheduled payments on its indebtedness, if any, and meet other 30

31 capital requirements will depend on its future operating and financial performance. Sterling s future performance will be impacted by a range of economic, competitive and business factors that it cannot control, such as general economic and financial conditions in its industry, including fluctuations in prevailing oil and gas prices, or the economy generally. A significant reduction in operating cash flows resulting from changes in economic conditions, increased competition, or other challenges identified as risk factors in this document could increase the need for additional financings or alternative sources of liquidity and could have a material adverse effect on Sterling s business, financial condition, results of operations, prospects and its ability to service its debt and other obligations. If Sterling is unable to service its indebtedness in the future, if any, it will be forced to adopt an alternative strategy that may include actions such as selling assets, restructuring or refinancing its indebtedness, seeking additional equity capital or reducing capital expenditures. Furthermore, Sterling may not be able to affect any of these alternative strategies on satisfactory terms, if at all, or they may not yield sufficient funds to make required payments on its indebtedness, if any. 20) Issuance or arrangement of debt to finance acquisitions would increase the Company s debt levels and further changes in circumstances may lead these debt levels to be beyond the Company s ability to service and repay that debt From time to time, Sterling may enter into transactions to acquire assets or the securities of other entities. These transactions may be financed partially or wholly with debt, which may increase Sterling s debt levels above industry standards. There can be no assurance that Sterling will at any time be able to meet its obligations in respect of such additional debt facilities and any actions taken by counterparties in relation to default may have a material adverse effect on Sterling s business, prospects, liquidity, financial condition, cash flows and results of operations. The level of Sterling s indebtedness from time to time could impair its ability to obtain additional financing on a timely basis to take advantage of business opportunities that may arise and limit Sterling s operational flexibility. 21) Significant competition in attracting and retaining skilled personnel Attracting and retaining additional skilled personnel will be required to ensure expansion of Sterling s business. Sterling faces significant competition for skilled personnel in the oil and gas sector. Skilled personnel are required in the areas of exploration and development, operations, engineering, business development, oil and gas marketing, finance and accounting. There is no assurance that Sterling will successfully attract new personnel or retain existing personnel required to continue to expand its business and to successfully execute and implement its business strategy. 22) Intense competition in the international oil and gas industry could limit the Company s ability to obtain licences and key supplies, such as drilling rigs The international oil and gas industry is highly competitive in all its phases. Competition is particularly intense in the acquisition of prospective oil and gas properties, exploration and production licences, and oil and gas reserves. Sterling s competitive position depends on its geological, geophysical and engineering expertise, its financial resources, and its ability to develop its properties on time and on budget and its ability to select, acquire and develop proved reserves and on its ability to foster and maintain relationships with governments of the countries in which it operates. Sterling competes with numerous other participants in the search for oil and gas, the 31

32 acquisition of oil and gas properties on time and on budget and in the marketing of oil and gas. Sterling s competitors include oil and gas companies which have greater financial resources, more local contacts, staff and facilities than Sterling. Many such competitors not only explore for and produce hydrocarbons, but also carry on refining and marketing of oil and gas and other products on a world- wide basis. Additionally, companies not previously investing in oil and gas or operating in that sector may choose to acquire reserves to establish a firm supply or simply as an investment. Such companies will also provide competition for Sterling. Sterling s ability to increase reserves in the future will depend not only on its ability to develop its present properties, but also on its ability to select and acquire suitable producing properties or prospects for exploratory drilling. Competition for licences depends on the perceived risks and rewards associated with each licence and the process for obtaining licences can be extremely competitive. This competition may preclude Sterling from being awarded certain attractive licences or may result in Sterling being forced to incur costly commitments in order to secure certain desirable licences. Competitive factors in the distribution and marketing of oil and gas include price and methods and reliability of delivery. Sterling competes with major and independent oil and gas companies and other industries supplying energy and fuel in the marketing and sale of oil and gas to transporters, distributors and end- users, including industrial, commercial and individual consumers. 23) Future acquisitions may involve many common acquisition risks and may not meet expectations Risks commonly associated with acquisitions of companies, businesses or properties include the difficulty of integrating operations and personnel in relation to any such business or property, problems with minority shareholders if the transactions are structured as the acquisition of companies, the potential disruption of Sterling s own business, the diversion of management s time and resources from the existing business of Sterling and its subsidiaries, and the possibility that indemnification agreements with sellers may be unenforceable or insufficient to cover potential liabilities and difficulties arising out of integration. Furthermore, the value of any business, company or property that Sterling acquires or invests in may actually be less than the amount it pays for it or its estimated production capacity or potential may be lower than expected, especially given that it is not always possible to conduct a high level of due diligence on the acquisition target. 24) Managing the Company's expected growth and development costs could be challenging Sterling has a strategy to grow through exploration success, development of contingent resources and production increases from its oil and gas reserves. Management of the expected growth requires, among other things, stringent control of financial systems, operations and processes, the continued development of management controls, the training and hiring of new personnel and continued access to funds to finance this growth. Failure to successfully manage Sterling s expected growth and development could have a material adverse effect on Sterling s business, financial condition, results of operations and prospects. 25) Insurance and indemnities may not be sufficient to cover the full extent of all liabilities Sterling s involvement in the exploration for and development of oil and gas properties may result in Sterling becoming subject to liability for claims for matters including pollution, blow- outs, environmental damage, cratering and fires all of which may result in property damage, personal injury or other hazards or for the acts or omissions of sub- contractors, operators and joint venture partners. Although, Sterling may have received indemnities from such sub- contractors, operators and joint venture partners, such indemnities may be difficult to 32

33 enforce given the financial positions of those giving the indemnities or due to the jurisdiction in which Sterling seeks to enforce the indemnities. Sterling believes that the level of insurance cover it maintains is adequate based on various factors such as the cost of the policies, industry standard practice and the risks associated with the exploration and development of oil and gas properties in the countries in which it operates. Such insurance has limitations on liability that may not be sufficient to cover the full extent of such liabilities. In addition, such risks may not, in all circumstances be insurable or, in certain circumstances Sterling may elect not to obtain insurance to deal with specific risks due to the high premiums associated with such insurance or for other reasons. The payment of such uninsured liabilities would reduce the funds available to Sterling. The occurrence of a significant event that Sterling is not fully insured against, or the insolvency of the insurer of such event, could have a material adverse effect on Sterling s financial position, business, and results of operations or prospects. 26) Fluctuations in foreign exchange rates, interest rates and inflation may cause financial harm to the Company Financial risks include the impact of fluctuations in foreign exchange rates, interest rates and inflation over which Sterling has limited control. A significant amount of the Company s expenditures are incurred in US dollars, pounds sterling, euros and Romanian lei. Sterling receives revenues from the Breagh gas field in pounds sterling, and from early 2015 expects to start receiving revenues from the Cladhan oil field in US dollars. On the financing side, the Bond is denominated in US dollars. Hence, fluctuations in exchange rates for those currencies could result in unanticipated fluctuations in the financial results of the Company when they are translated into pounds sterling as the functional currency of the UK subsidiary or into US dollars as the reporting currency for the Company. While the Bond has a fixed interest coupon, Sterling may refinance this to take advantage of lower interest rates or to increase the amount of debt which may lead to an exposure to a floating interest rate. Any material adverse fluctuation in foreign exchange rates or interest rates could significantly affect Sterling's anticipated future cash flows, the fair value of oil and gas reserves and assets, the availability and cost of financing for projects, the economics of developing and producing reserves, and the underlying value of the business on which Sterling s share price is based. Higher inflation rates than assumed in Sterling s planning assumptions may lead to difficulties in funding operational or general and administrative costs. Inflation may have a wide impact on all types of expenditures or may be particularly pronounced for certain costs such as steel prices for construction projects or salaries and consulting rates for staff. Sterling does not yet maintain any currency hedging arrangements but may enter into such arrangements in the future to support debt facilities or otherwise. 27) Political or governmental changes in legislation or policy in the countries in which the Company operates may have a negative impact on those operations Sterling explores for oil and gas in various international jurisdictions with varying degrees of political or governmental risk including: the risk of changes in government, policy, regulation, or fiscal terms; 33

34 the risk of changes in conditions under which exploration licences are awarded, including related work commitments; the risks of required government approvals or permits being delayed or withheld or cancelled; risks associated with the fiscal terms prevailing in the jurisdictions in which Sterling operates; and risks relating to any known or future international border disputes in jurisdictions where Sterling is active. Although currently Sterling mitigates the risk of such changes through focusing on relatively low risk countries, changes in any governmental policy or regulation are beyond Sterling s control and may significantly affect the anticipated risk profile. 28) Labour unrest could affect the Company s ability to explore for, produce and market its oil and gas production Sterling may be required to hire and train local workers in its oil and gas operations. Some of these workers may be organized into labour unions. Any strike activity or labour unrest in any such local jurisdiction or at any oil and gas operation could adversely affect Sterling s ongoing operations and its ability to explore for, produce and market its oil and gas production. 29) Risks related to the countries in which the Company operates Romania and other jurisdictions in which Sterling might operate in the future may have less developed legal systems than more established economies which could result in risks such as (i) effective legal redress in the courts of such jurisdictions, whether in respect of a breach of law or regulation, or in an ownership dispute, being more difficult to obtain; (ii) a higher degree of discretion and corruption on the part of governmental authorities; (iii) the lack of judicial or administrative guidance on interpreting applicable local rules and regulations; (iv) inconsistencies or conflicts between and within various laws, regulations, decrees, orders, resolutions and judgments; or (v) relative inexperience of the judiciary and courts in such matters. In certain jurisdictions, the commitment of local business people, government officials and agencies and the judicial system to abide by legal requirements and negotiated agreements may be more uncertain, creating particular concerns with respect to Sterling s licences and business agreements. Some or all of these may be susceptible to revision or cancellation and legal redress may be uncertain, unavailable or delayed. Equally, there can be no assurance that joint ventures, licences, licence applications, concession agreements or other legal arrangements will not be adversely affected by the actions of government authorities or others and the effectiveness of and enforcement of such arrangements in these jurisdictions cannot be assured. 30) Uncertainties of legal systems in jurisdictions in which the Company operates The Company carries on business in, and has oil and gas properties in, more than one legal jurisdiction and the system of law, rules, regulations and administrative functions and the operation and administration of those differ as between those jurisdictions. There can exist the potential for unforeseen delays and problematical issues arising in connection with seeking necessary permits, consents, extensions and other legal, governmental or administrative decisions, giving rise to uncertainties and delays. In the past the Company has experienced some delays and difficulties in this regard in Romania; and in France certain governmental and administrative decisions have postponed, delayed or suspended the normal processes for granting permits which the Company has sought. Issues of this nature may arise in future and affect the Company and its plans adversely. It is perfectly possible that the lack of development of aspects of the legal system in some jurisdictions may inhibit the achieving of contractual and legal frameworks and as such there is an attendant risk in doing business in such jurisdictions. 34

35 31) Failure to meet contractual agreements may result in the loss of the Company s interests Any change in government or legislation may affect the status of Sterling s licences or contractual arrangements or its ability to meet its contractual obligations and may result in the loss of its interests in its oil and gas properties. 32) Failure to follow corporate and regulatory formalities may call into question the validity of the Company, its subsidiaries or its assets In any country where Sterling has or may obtain interests, the conduct of its operations involves or may involve the need to comply with numerous procedures and formalities including in relation to obtaining exploration and production licences and carrying out operations. In some cases, failure to follow such formalities or obtain relevant evidence of compliance with such formalities may call into question the validity of the entity or the actions taken. In particular, there are various requirements under Sterling s licences which, if not complied with could lead to the licences being terminated or make them difficult to enforce or rely upon in the local courts to assert Sterling s rights and interests, including the minimum activity or expenditure required during the exploration period. Oil and Gas Activities Sterling s oil and gas reserves data and other oil and gas information are disclosed in accordance with NI , Form F1, Form F2 and Form F3 for the year ended December 31, The Form F1 - Statement of Reserves Data and Other Oil and Gas Information, the Form F2 - Report on Reserves Data by an Independent Qualified Reserves Evaluator and the Form F3 - Report of Management and Directors on Oil and Gas Disclosure have been filed with securities commission or similar authorities in Canada. These documents are incorporated by reference in this AIF. Copies of the documents incorporated herein by reference may be obtained on request without charge from the Treasurer and Secretary of the Corporation, at 1450, 736 6th Avenue S.W., Calgary, Alberta, T2P 3T7 (telephone (403) ) and are also available electronically at 35

36 The Corporation s properties as of December 31, 2013 are outlined in the following table, including properties with no attributed reserves: Interest Gross Net Expiry Licence Area Blocks Operator Partners Percent Acres Acres Dates Term United Kingdom Onshore Cleveland Egdon Sterling, Montrose, Yorkshire 47.00% 73, , Nov- 31 Third Sub- total 73, , Offshore NNS - 21st Rd 210/29a & 210/30a (1) Sterling Wintershall, TAQA 13.80% 14, , Apr- 31 Third CNS - 25th Rd (farm- in) 21/27b Wintershall Sterling 25.00% 9, , Feb- 17 Second CNS - 26th Rd 21/30f & 22/26c Sterling Valiant, Shell 20.00% 28, , Jan- 15 Initial 36/30, 42/2a, 42/3a, SNS - 27th Rd 42/4 & 42/5 Sterling % 272, , Dec- 17 Initial SNS - 23rd Rd 42/8a, 42/9a & 42/14a RWE Dea Sterling 30.00% 7, , Dec- 14 Second SNS - 25th Rd 42/10 & 42/15 (2) RWE Dea Sterling 30.00% 23, , Feb- 14 Initial SNS - 23rd Rd 42/12a RWE Dea Sterling 30.00% 6, , Dec- 31 Third SNS - 22nd Rd 42/13a RWE Dea Sterling 30.00% 47, , Nov- 30 Third SNS - 26th Rd 42/13b, 42/17 & 42/18 RWE Dea Sterling 30.00% 130, , Jan- 15 Initial SNS - 26th Rd 43/15a & 43/20a Sterling % 26, , Jan- 16 Initial SNS - 26th Rd 49/18b & 49/19b Sterling % 33, , Jan- 16 Initial Sub- total 602, , UK Total 675, , Romania Offshore Block 27 Petroceltic Petroceltic, Petromar 40.00% 247, , Oct- 14 Offshore Block 25 Midia (Sterling) PetroVentures 50.00% 247, , Oct- 14 Offshore Blocks XIII and XV Midia (Sterling) PetroVentures, GasPlus 65.00% 1,100, , May- 14 Romania Total 1,594, , France Onshore St. Laurent Sterling Nautical, Egdon, Malta Oil Gas 33.42% 125, , Aug- 13 Third Coulommiers (3) Sterling Hess, Toreador, PVI 25.00% 45, , Not Yet Awarded Hautevesnes (3) Sterling PetroVentures 50.00% 81, , Not Yet Awarded Marvilliers (3) Sterling PetroVentures 50.00% 25, , Not Yet Awarded Donzacq (3) Sterling Nautical, Egdon, Malta Oil Gas 33.42% 53, , Not Yet Awarded France Total 331, , Netherlands Offshore Block F17 Sterling EBN, Enquest, PVI 35.00% 95, , Aug- 14 Third Block F18 Sterling EBN, Enquest, PVI 35.00% 99, , Aug- 14 Third Block E03 Wintershall Sterling, EBN 30.00% 97, , Jan- 16 First Block F01 Wintershall Sterling, EBN 30.00% 97, , Jan- 16 First Netherlands Total 391, , TOTAL 2,992, ,631, NOTE: (1) LICENCE EXTENSION APPROVED BY DECC FOR FDP APPROVAL (2) ONE YEAR LICENCE EXTENSION APPROVED BY DECC (3) LICENCE AWARDS AWAITING FINAL SIGNATURE The Company s key projects are discussed under General Development of the Business starting on page 9. Other oil and gas activities are as follows: 36

37 Other Offshore UK The 3D seismic survey covering the Crosgan discovery in blocks 42/10a and 42/15a originally acquired in 2010 was reprocessed in 2013 to select an appraisal drilling location on the western flank of the structure. Plans are to drill the appraisal well during the third quarter of 2014 using the Ensco 70 rig once the Breagh development drilling work program is completed. Sterling expects that the Crosgan field development will form part of the second phase of the Breagh development. Following a mandatory relinquishment of the acreage outside Crosgan, DECC approved the licence extension to the end of 2014 to fulfil the firm well commitment. During 2013, the 3D seismic survey over blocks 42/13b, 42/17 & 41/18 was completed. A full assessment of the Carboniferous potential was initiated and evaluation of the Lochran prospect is ongoing. In early March, 2011 the Company executed agreements with Valiant for Sterling to acquire a 25 percent interest and operatorship of blocks 210/29c and 210/30b in the NNS and, in exchange, for Valiant to obtain a 40 percent interest in Sterling's CNS licences in blocks 21/30f and 22/26c. The South Cladhan exploration well, 210/29c- 5, was drilled in April 2012 but the reservoir target was found to be water bearing and the well was subsequently plugged and abandoned. During 2013, the Company s entire interest (12.5 percent) in these blocks was divested as part of the Second Carry transaction with TAQA regarding the Cladhan field. In the 26th UK Offshore Licensing Round, Sterling was awarded 100 percent of blocks 21/30f and 22/26c in the CNS in January Early in 2013, Sterling farmed out a 40 percent interest to Shell. These blocks include the existing Evelyn and Belinda discoveries and the undrilled Beverley salt diapir structure. The acreage lies just to the south of the Shell- operated Gannet fields and infrastructure that could offer an export route for a future development. Negotiations for the sub- let of semi- sub, fell through during 2013 and the partnership agreed to accelerate the transfer of operatorship to Shell so that the Beverley prospect could be drilled using a Shell- contracted rig during the third quarter of Sterling has a 25 percent interest in block 21/27b operated by Wintershall. This block contains the Blakeney and Feugh discoveries. Blakeney is a heavy oil accumulation of API gravity and with a 71- foot net oil column in Eocene Tay Formation sands. Feugh is a small gas discovery at the same stratigraphic level. In early 2014, Wintershall completed the sale of this license and the transfer of operatorship of these discoveries to MOL Energy UK Sterling received notice in December 2013 of the 27 th UK Licensing Round award of blocks 36/30, 42/2a, 42/3a, 42/4 and 42/5 in the Southern North Sea. These blocks are located some 40 kilometres north of the Breagh Field, which will be the host facility for any future discoveries. Based on 3D seismic data, these blocks show a large Zechstein reef (Ossian) overlying a Carboniferous anticlinal structure (Darach). The Company intends to farm- out interest in this licence during 2014 and plan to drill the firm well commitment the third quarter of During 2013, the 3D seismic survey over Blocks 49/18b and 49/19b was reprocessed a significant Rotliegendes gas prospect (Niadar) has been identified, which is situated near to existing infrastructure in the 49/19b block. Sterling plans to farm- out interest in this prospect during 2014 and plan to drill the firm well commitment during

38 The relinquishment of Blocks 43/15a & 43/20a (Gordon Deep prospect) took place during 2013, following further subsurface evaluations that concluded the prospect to be high risk. In addition, it is expected that during 2014 Sterling will abandon the two suspended wells in Block 21/23a following relinquishment of the licence in Onshore UK The Kirkleatham development was completed during the first quarter of 2011 with first production from the field achieved on April 19, Since then the field has produced 317 MMcf (100 percent) of sales gas up to February 2012, at which time it ceased production due to water loading. The well is currently temporarily shut- in and plans are being considered to sidetrack the well up structure. France In the Aquitaine Basin in southwestern France, Sterling has interests in the St. Laurent licence and a pending interest in the Donzacq licence, representing a net position of approximately 60,000 acres. The blocks are located in a proven hydrocarbon province; the Grenade heavy oil discovery lies within the licence acreage and the giant Lacq field lies some 20 km to the southeast of the St Laurent licence. Entry to the Donzacq licence is conditional on licence ratification but it is expected this will be given before year- end The prime opportunity on the St. Laurent licence is the Triassic Audignon prospect, which requires improved seismic definition ahead of any drilling decision. During 2011, as operator- designate, Sterling prepared plans to acquire a 2D seismic program covering the area with the objective of making a drilling decision. The joint venture has applied for a three- year extension from August 2013 to facilitate the acquisition of a seismic program and the drilling of a well within this the next licence period. In the Paris Basin, Sterling is operator- designate of the Marvilliers (50 percent interest), Hautevesnes (50 percent interest) and Coulommiers (25 percent interest) licences, situated in the heart of the Paris Basin some 50 km east of Paris. These permits bracket the Chateau Thierry licence, operated by the Za Za Energy (formerly Toreador) / Hess partnership. The finalized licence awards remain pending. The blocks cover approximately 64,680 acres net and offer a mix of conventional hydrocarbon plays in the Dogger, Lower Jurassic and Triassic intervals. In anticipation of the Paris Basin awards, Sterling has identified several prospects of interest. Among these is an oil prospect identified from the previously drilled Melarchez 1 well. Drilled in 1983, a restricted drill stem test of the Banc du Roc interval flowed 15 barrels of dry oil and condensate over a very short test period. This prospect straddles the northern boundary between the Coulommiers and Chateau Thierry blocks. A well to appraise this prospect and its northern extent in the Chateau Thierry licence was drilled during 2013 by Hess. The results will assist in Sterling s evaluation of the hydrocarbon potential and the creation of a bespoke evaluation program for the acreage during the four- year term of the licences. 38

39 Netherlands Sterling has two licence interests covering the intermediate geological horizons in blocks F17 and F18 and two further licence interests for blocks E03 and F01 awarded in the first quarter of 2012 and which are not geologically restricted. The F17 and F18 licences contain two significant oil discoveries in Jurassic sandstones made between 1970 and 1986 by Shell and Tenneco. Following the assignment of these licences, Sterling as operator acquired a reprocessed 3D dataset covering the blocks during With these new data Sterling performed a complete update of the prospectivity in the blocks, along with reinterpretation of petrophysical and pressure data from previously drilled wells. Much of this work was focused on the discoveries of Fregat (F18), Korvet and Brigantijn (F17) and the surrounding area. The culmination of the 2011 work program was the drilling of Sterling s first well, F17-09, in the Dutch sector, on the Korvet accumulation which spudded in December The well encountered a 10 meter gross oil interval, containing oil shows. This area is believed to be separate from the Korvet West accumulation. During 2012, Wintershall, which is operator for the separately- licensed deeper geological horizons in the F17 and F18 blocks, drilled an oil discovery (F17-10) in the Late Cretaceous chalk formation and reported potential recoverable oil resources of at least 30 MMbbls. Appraisal drilling by Wintershall is anticipated during 2014 to further appraise the discovery structure and potentially drill on an adjacent chalk structure. The F10-10 Chalk discovery, along with a GDF Suez discovery nearby, makes development of the Fregat (F18), Korvet and Brigantijn (F17) discoveries possible via a communal facilities oil hub. Sterling has been granted a two- year extension to the licence until August 2014 by committing to a 3D survey over the F17 and F18 blocks. An extension up to January 2017 is contingent on completing a 500 square kilometre 3D survey during 2014; this is currently planned in the third quarter of Sterling has a 30 percent interest in the E03 and F01 licences (operated by Wintershall). The main play in the block is the Triassic Bunter sandstone. A 600 square kilometre 3D seismic survey was acquired during 2012 which has been processed and is currently being evaluated. Onshore Romania Craiova Onshore Block Sterling (50 percent interest) and partner Trans- Atlantic Worldwide Petroleum relinquished this onshore concession in December 2013, following the expiration of the last exploration period. Reserve and Resource Evaluation An evaluation of the reserves and resources was completed by RPS effective December 31, The table below summarizes the estimated resources attributable to those interests, net to Sterling. The estimates presented are in accordance with the definitions and guidelines in the COGE Handbook and NI

40 Net' Interest Reserves' Net'Present'Value'Before'Tax' (4) Company'Share' (1)(5)' Company'Share (MMboe)' (Millions'of'US'$) Proved'+ Proved'+ Proved'+ Probable'+ Proved'+ Probable'+ Proved Probable Possible Proved Probable Possible UK Breagh) (2) 30.0% UK Cladhan) (3) 13.8% Company)total (5) ,045 Unrisked'Contingent' (6)(8)' Unrisked'Prospective' (7)(8)' Resources Resources Company'Share Company'Share 1C 2C 3C Low Best' Estimate High P(90) (9) P(50) (9) P(10) (9) P(90) (9) P(50) (9) P(10) (9) Gas) bscf ))))))))))) 1,939 ))))))))))) 2,769 ))))))))))) 4,045 Oil MMbbls ))))))))))))))) 24 ))))))))))))))) 52 ))))))))))))) Gross before royalties 2. Gas converted to Boe at 6 Mcf = 1 Boe 3. Oil 4. Discounted at 10% per annum 5. Company Reserve totals are arithmetic aggregations of multiple estimates, which statistical principles indicate may be misleading as to volumes that may actually be recovered. Readers should give particular attention to the estimates of individual classes of Reserves and appreciate the differing probabilities of recovery associated with each class. For Proved (1P) Reserves these totals have a higher than 90% probability of occurring on an unrisked basis. For Proved plus Probable plus Possible (3P) Reserves, these totals have a lower than 10% probability of occurring on an unrisked basis. 6. Contingent Resources are those quantities of petroleum estimated as of a given date to be potentially recoverable from known accumulations using established technology or technology under development, but which are not currently considered to be commercially recoverable due to one or more contingencies. The Resource volumes shown represent probabilistic totals of several entities within each licence or block area. There is no certainty that it will be commercially viable to produce any portion of the Contingent Resources. 7. Prospective Resources are those quantities of petroleum estimated as of a given date to be potentially recoverable from undiscovered accumulations by application of future development projects. There is no certainty that any portion of the Prospective Resources will be discovered or, if discovered, that it will be commercially viable to produce any portion of the Resources. These Prospective Resources are in areas of the field or geological horizons, in which the presence of hydrocarbons requires confirmation by drilling. 8. Company Resource totals shown by Resource category are statistical aggregates of unrisked Resources at a company level. For Contingent Resources the statistical aggregates assume no dependencies between discoveries and for Prospective Resources these statistical totals assume no dependencies between prospects. 40

41 9. The P(50) or 2C is considered to be the best estimate of the quantity that will actually be recovered. If probabilistic methods are used there should be at least a 50 percent probability P(50) that the quantities actually recovered will equal or exceed the estimate. Similarly, the 1C or P(90) and 3C or P(10) represent the low and high estimates respectively. 10. The estimates of Reserves and Resources for individual properties may not reflect the same confidence level as estimates of Reserves and Resources for all properties, due to the effects of aggregation. Additional reserve information and definitions can be obtained from our Form F1 containing the Statement of Reserves and Other Oil and Gas Information which has been incorporated herein by reference and is available at These reserves and future net revenues assume that the development of each property occurs without regard to the certainty of procuring the funding required to proceed with development. The accuracy of resource estimates is in part a function of the quality and quantity of available data and of engineering and geological interpretation and judgment. These resource volumes are classified as a resource rather than a reserve primarily due to the requirement for final development plan approvals. Other factors in the classification as a resource include a requirement for more delineation wells, detailed design estimates and near term development plans. The size of the resource estimate could also be impacted, potentially in a material amount, if additional delineation wells determine that the aerial extent, reservoir quality and/or the thickness of the reservoir is significantly larger or smaller than what is currently estimated based on the interpretation of 3D seismic and well data Operational Plans In 2014 the Company has the following plans: In the UK: Continue to optimize the Phase 1 development of Breagh by drilling well A08, conduct hydraulic stimulation of well A07, and together with the operator RWE Dea assess benefit of additional wells and/or additional hydraulic stimulation; Move forward with Breagh Phase 2 planning ensuring that this is optimized and in particular reflects results of Phase 1 early production and hydraulic stimulation; Proceed with Cladhan development, aiming to have completed bulk of development work by the end of 2014; Drill an appraisal well on the Crosgan gas discovery in the second half of 2014; Drill an exploration well on the Beverley oil prospect in the second half of 2014 (for which nearly all of the costs will be carried under a farm- out arrangement); and Move forward with farm- outs of the UK licences containing the Niadar and Ossian/Darach prospects. 41

42 In Romania: Conduct Ana and Doina pre- FEED work at a low level of activity; Drill an exploration well on the Muridava block offshore Romania in the second quarter of 2014; Drill an exploration well on the Luceafarul block offshore Romania in the second half of 2014; and Move forward with a process to reduce equity interests in all of the Black Sea licences. In the Netherlands: Acquire 3D seismic data over parts of the F17 and F18 blocks in the second half of Corporately: Consider asset and corporate transactions that are not only value accretive for shareholders but also aim to reduce the large valuation discount at which the Company s shares trade; and Continue to consider a graduation to the main board of the Toronto Stock Exchange and a listing on the London Stock Exchange/Alternative Investment Market (AIM) at the appropriate time. These plans are subject to the cautionary statements with respect to Forward Looking Statements commencing on page 4, and are contingent on partner approval and more importantly upon the availability of suitable financing, purchasers of licence interests or farm- out partners. DIVIDEND RECORD AND POLICY Sterling has not declared or paid any dividends on its common shares to date and presently does not intend to declare dividends on its common shares in the foreseeable future. Any decision to pay dividends in the future will be dependent upon the financial condition and requirements of Sterling and other factors which the Board of Directors may consider appropriate in the circumstances. 42

43 DESCRIPTION OF THE CAPITAL STRUCTURE Sterling s capital structure consists of an unlimited number of common shares without nominal or par value. 222,868,500 common shares had been issued as at December 31, 2012 and 309,620,334 common shares were issued and outstanding as at December 31, Between December 31, 2013 and the release of this AIF, there was no change to the number of shares outstanding. Each common share entitles the holder to receive notice of and to attend all meetings of the shareholders of Sterling, to vote at such meetings, to receive such dividends as may be declared by the Board of Directors, and to share ratably with other shareholders in the residual property of Sterling in the event of liquidation, dissolution or winding- up of Sterling. In addition, as at December 31, 2013, there were 7,955,000 outstanding stock options to acquire common shares exercisable at prices ranging from $1.29 to $4.25 per share issued to directors, officers, and employees. Of the total stock options outstanding at December 31, 2013, 6,685,007 were exercisable. As at April 15, 2014 there were 6,554,999 outstanding options. At December 31, 2013 Sterling had US$23,625,000 on the balance sheet as the current portion of long- term debt relating to the bond and a further US$196,882,000 as non- current liabilities relating to the bond. The following table as of December 31, 2013 for the years 2014 through 2018 and thereafter, shows the maturities of financial liabilities: Thereafter Total $000s $000s $000s $000s $000s $000s $000s Coupon payment 20,250 17,213 13,162 9,113 5,062 1,013 65,813 Principal repayment 22,500 45,000 45,000 45,000 45,000 22, ,000 Bonus principal repayment 1,125 2,250 2,250 2,250 2,250 10,125 43,875 64,463 60,412 56,363 52,312 23, ,938 43

44 MARKET FOR SECURITIES The common shares of Sterling are listed for trading on the TSXV under the symbol SLG. The following table sets out the price range for, and the trading volume of, the common shares of Sterling as reported by the TSXV for 2013: Month High Low Close Volume Jan ,776,510 Feb ,318,398 Mar ,799,481 Apr ,498,021 May ,348,578 Jun ,791,907 Jul ,467,430 Aug ,491,577 Sep ,480,461 Oct ,267,087 Nov ,948,511 Dec ,624,414 44

45 DIRECTORS AND OFFICERS The following table sets out the names and municipalities of residence of those individuals who are current directors and officers of Sterling, together with their positions and offices with Sterling and their principal occupations and positions held during the last five years: Name and Municipality of Residence Position(s) with the Company Director or Officer Since Principal Occupation and Positions Held During the Last Five Years Robert Carter Calgary, Alberta, Canada Director Chair of the Audit Committee and Member of Corporate Governance and Compensation Committee June 29, 2004 Independent businessman. From June 2001 to February 2007, Chief Financial Officer of Cirrus Energy Company, a publicly traded junior energy company. James Coleman, Q.C. Calgary, Alberta, Canada Chair of the Board of Directors Member of Audit Committee and the Corporate Governance and Compensation Committee June 11, 2013 Senior partner with the law firm of Norton Rose Fulbright LLP (previously Macleod Dixon LLP). John Collenette London, England Director November 13, 2012 Oil and gas businessman. Senior finance executive and head of credit of Vitol Services Limited from 2002 to Teck Soon Kong London, England Director Member of the Audit Committee, Member of Corporate Governance and Compensation Committee and Chair of the Reserves Committee June 29, 2004 Independent businessman. Executive Chairman of Noble Denton Group Ltd. from October 2006 to January Jacob Ulrich London, England Chief Executive Officer, Director Member of the Reserves Committee June 11, 2013 Chief Executive Officer of the Company since February 13, 2014 and Director of the Company and Sterling UK; formerly Interim Chief Executive Officer from August 29, 2013 to February 13, 2014 and Chair of the Board of Directors from June 11, 2013 to February 13, 2014; Senior Energy Advisor for Och- Ziff Capital Management Group in London from 2008 to 2011; Managing Director of Centrica Energy Group from 1997 to

46 Name and Municipality of Residence Position(s) with the Company Director or Officer Since Principal Occupation and Positions Held During the Last Five Years Gavin Wilson Zurich, Switzerland Director Member of the Reserves Committee June 11, 2013 Investment Manager for Meridian Group of Companies, a private investment company; Founder and Manager of RAB Energy and RAB Octane listed Investment Funds from 2004 until Mark Beacom Bucharest, Romania Vice President and General Manager Romania October 13, 2010 Vice President and General Manager, Romania from October 2010; President of Carthage Energy, a company providing advisory services to the international energy sector, from 2006 to Stephen Birrell Wassenaar, Netherlands Vice President and General Manager Netherlands and France May 28, 2008 Vice- President and General Manager Netherlands and France; Vice President Romanian Operations of the Company from May 2008 to October 2010; Vice President Romanian Operations of Sterling UK from November 2005 to October David Blewden Chorleywood, Hertfordshire, England Chief Financial Officer August 2, 2010 Chief Financial Officer of the Company and Sterling UK since August 2010; Chief Financial Officer of PetroSaudi International from 2008 until earlier in 2010; Chief Financial Officer of African Arabian Petroleum Ltd from 2006 to Sherry Cremer Calgary, Alberta, Canada Treasurer and Corporate Secretary December 19, 1996 Treasurer of the Company since December 1996 and Corporate Secretary of the Company since May David Davies Cobham, Surrey, England Vice President Business Development September 10, 2012 Vice President Business Development of Sterling UK; Director - Head of Commercial and Negotiations of Marathon Oil Corporation based in Houston Texas from mid until David Findlater Banchory, Aberdeenshire, Scotland Vice President Exploration July 19, 2004 Vice President Exploration of Sterling UK since July

47 Name and Municipality of Residence Position(s) with the Company Director or Officer Since Principal Occupation and Positions Held During the Last Five Years John Rapach Netherley, Aberdeenshire, Scotland Chief Operating Officer May 31, 2007 Chief Operating Officer of the Company and Sterling UK; Vice President Operations for the Company from May 2007 to May 2010; Vice President Operations of Sterling UK from September 2005 to June Patrick Whitley Aberdeen, Scotland Vice President Exploration (International) February 25, 2008 Vice President Exploration (International) of Sterling UK; From 2003 to 2008, Head of Exploration Faroe Petroleum Ltd. The term of each director is until the next annual meeting of Sterling or until his or her successor is elected, but not later than the date of the next annual meeting of Sterling. As at April 15, 2014, the directors and officers of Sterling as a group owned beneficially, directly or indirectly, an aggregate of 2,065,009 common shares. This represents approximately 0.67 percent of the issued and outstanding common shares of Sterling at that time. The directors and officers also held, in aggregate, 4,640,332 stock options, which if exercised, would increase the beneficial ownership of the directors and officers, as a group to 2.11 percent of Sterling s common shares on a diluted basis, as at April 15, Certain of the directors and officers of Sterling are also directors and officers of other oil and gas exploration and production companies. Conflicts may arise between their duties as officers and directors of Sterling and such other companies. Such conflicts must be disclosed in accordance with, and are subject to, such other procedures and remedies as apply under the Business Corporations Act (Alberta). LEGAL PROCEEDINGS Sterling is not, and has not been during 2013, involved in, or aware of any (i) current or pending legal proceedings to which Sterling is a party, or any of its property is subject; or (ii) any penalties or sanctions imposed against Sterling by a court relating to securities legislation or a securities regulatory authority; or (iii) any settlement agreements entered into by Sterling before a court relating to securities legislation or with a securities regulatory authority. 47

48 INTERESTS OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS To the best of the knowledge of Sterling, no director or officer of Sterling, or any person or company that is the direct or indirect beneficial owner of, or who exercises control or direction over more than 10 percent of the common shares of Sterling, or any known associate or affiliate of such persons or companies, has, or has had, a direct or indirect material interest in any transaction within the three most recently completed financial years, or in the current financial year which has materially affected or will materially affect Sterling. TRANSFER AGENT AND REGISTRAR The Registrar and Transfer Agent for Sterling s common shares is: Computershare Investor Services Inc. 9th Floor, 100 University Avenue, Toronto, Ontario M5J 2YI MATERIAL CONTRACTS Except for material contracts entered into in the ordinary course of business and not otherwise required to be disclosed and filed, Sterling has not entered into any material contracts within the most recently completed financial year or prior to the most recently completed year which are still in effect. INTERESTS OF EXPERTS Ernst & Young LLP, Chartered Accountants, are Sterling s auditors and have audited the consolidated financial statements of Sterling for the year ended December 31, Ernst & Young LLP is independent in accordance with the Rules of Professional Conduct as outlined by the Institute of Chartered Accountants of Alberta. RPS is Sterling s independent qualified reserves evaluator and has evaluated Sterling s oil, natural gas and natural gas liquids reserves and the net present values of future net revenue for these reserves using forecast prices and costs for the year ended December 31, As of December 31, 2013 and April 15, 2014, RPS and the designated professionals of RPS owned, directly or indirectly, less than one percent of the outstanding common shares. 48

49 ADDITIONAL INFORMATION Additional information about Sterling Resources Ltd. and its business activities is available via SEDAR at The following additional information regarding Sterling can be found in the specified documents: Directors and officers remuneration and indebtedness, principal holders of Sterling s securities, options to purchase securities and interests of insiders in material transactions, where applicable, are contained in Sterling s Information Circular dated April 15, Additional financial information is provided in Sterling s consolidated financial statements and Management s Discussion and Analysis of Operations and Financial Condition for the year ended December 31,

50 DEFINITIONS, ABBREVIATIONS AND NOTES Definitions: In this AIF the capitalized terms set forth below have the following meanings Bond The US$225 million senior secured bond issued by Sterling Resources (UK) Ltd. subsequently re- registered as Sterling Resources (UK) plc. COGE Handbook The Canadian Oil and Gas Evaluation Handbook Company or Sterling Sterling Resources Ltd. and, unless specified otherwise, its subsidiaries. Company Interest The interest attributable to the Company in the resources being evaluated after the entitlements attributable to other interest holders are excluded. Contingent Resources Those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations using established technology or technology under development, but which are not currently considered to be commercially recoverable due to one or more contingencies. Credit Facility The 105 million senior secured credit facility agreement with a group of banks for the Phase 1 development by its wholly- owned subsidiary, Sterling UK, of the Breagh gas field in the SNS. Form F1 Form F1 Statement of Reserves Data and Other Oil and Gas Information. Form F2 Form F2 Report on Reserves Data by Independent Qualified Reserves Evaluator or Auditor. Form F3 Form F3 Report of Management and Directors on Oil and Gas Disclosure. Gross (a) In relation to reserves or production means Sterling s working interest share before deducting royalties and without including Sterling s royalty interests; and (b) in relation to wells or properties means the total number of wells and the total area of properties in which Sterling has an interest, respectively. 50

51 Petroceltic Petroceltic International plc Net In relation to reserves or production means Sterling s working interest share, after deduction of royalty obligations, plus Sterling s royalty interests; in relation to wells means the number of wells obtained by aggregating Sterling s working interest in each gross well; and in relation to properties means the total area in which Sterling has an interest multiplied by Sterling s working interest. NI National Instrument Standards of Disclosure for Oil and Gas Activities. Prospective Resources Those quantities of petroleum estimated as of a given date to be potentially recoverable from undiscovered accumulations by application of future development projects. There is no certainty that any portion of the Prospective Resources will be discovered or, if discovered, that it will be commercially viable to produce any portion of the Resources. These Prospective Resources are in areas of the field or geological horizons, in which the presence of hydrocarbons require confirmation by drilling. Quad A UK or Netherlands offshore area normally comprising 30 and 18 Blocks respectively. RPS RPS Energy RPS Report Means the evaluation by RPS of Sterling s crude oil, natural gas and natural gas liquids reserves and resources as at December 31, 2013 and dated April 8, RWE Dea RWE Dea UK SNS Limited Sterling Netherlands Sterling Resources Netherlands B.V. Sterling Romania Midia Resources SRL Sterling UK Sterling Resources (UK) Ltd TSXV TSX Venture Exchange Valiant Valiant Petroleum plc, now Ithaca Energy Inc. 51

52 Wintershall In relation to the UK, means Wintershall (E&P) Ltd. and in relation to the Netherlands, means Wintershall Noordzee BV. Abbreviations: In this AIF, including Schedule A hereto, the abbreviations set forth below have the following meanings AIF Sterling s Annual Information Form for the year ended December 31, 2012 Boe Barrels of oil equivalent Bbls Barrels Bopd Barrels of oil per day CNS UK Central North Sea DECC Department of Energy and Climate Change (UK) EBN Energie Beheer Nederland BV EU European Union FDP Field Development Program Mbbls Thousands of barrels MD Measured Depth MEA Ministry of Economic Affairs (Netherlands) MMbbls Millions of barrels MMboe Millions of barrels of oil equivalent Mcf Thousands of cubic feet Mcf/d Thousands of cubic feet per day MMcf/d Millions of cubic feet per day NAMR National Agency for Mineral Resources (Romania) NNS UK Northern North Sea NTS National Transmission System ODT Oil- down- to OIP Oil in Place OWC Oil water contact PEDL Petroleum Exploration and Development Licence SNS UK Southern North Sea TGPP Teesside Gas Processing Plant TVDSS True Vertical Depth Subsea UK United Kingdom 52

53 Notes: Boe figures may be misleading, particularly if used in isolation. A boe conversion ratio of six Mcf to one boe is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Certain other terms used in this AIF but not otherwise defined herein shall have the same meanings as defined in unless the context otherwise requires. In this AIF, references to dollars and $ are to the currency of the United States, unless otherwise indicated. 53

54 SCHEDULE A FORM F1 STATEMENT OF RESERVES DATA AND OTHER OIL AND GAS INFORMATION Date of the statement 8 th April Effective date of the information 31 st December Preparation date of the information 8 th April Sterling Resources Ltd F1 1

55 Table of Contents PART 1: DATE OF STATEMENT... 3 PART 2: DISCLOSURE OF RESERVES DATA... 4 PART 3: PRICING & INFLATION RATE ASSUMPTIONS... 9 PART 4: RECONCILIATIONS OF CHANGES IN RESERVES PART 5: ADDITIONAL INFORMATION RELATING TO RESERVES DATA Item 5.1 Undeveloped Reserves Item 5.2 Significant Factors or Uncertainties Item 5.3 Future Development Costs PART 6: OTHER OIL AND GAS INFORMATION Item 6.1 Oil and Gas Properties and Wells Item 6.2 Properties with No Attributed Reserves Item 6.3 Forward Contracts Item 6.4 Additional Information Concerning Abandonment & Reclamation Costs Item 6.5 Tax Horizon Item 6.6 Costs Incurred Item 6.7 Exploration and Development Activities Item 6.8 Production Estimates Item 6.9 Production History Glossary Sterling Resources Ltd F1 2

56 PART 1: DATE OF STATEMENT Item 1.1 Relevant Dates The relevant dates of Sterling Resources Ltd. s (the Corporation ) statement of reserves data and other oil and gas information are as follows: Date of the statement 8 th April Effective date of the information 31 st December Preparation date of the information 8 th April The reserves data set forth below is based upon an evaluation by the Corporation s independent reserves evaluator, RPS Energy Canada Ltd. ( RPS ), dated April 8, 2014 and effective December 31, 2013 (the RPS Report ). The reserves data summarizes the Corporation s oil, natural gas and natural gas liquids reserves and the net present values of future net revenue for these reserves using forecast prices and costs. Totals may not add due to rounding. All currencies within this report are reported in US dollars ($US) unless reported otherwise Total Corporation reserves and other oil and gas information reflected in the following tables relate exclusively to the UK properties, as no reserves were attributed to the assets in France, Netherlands and Romania. The estimated future net revenue figures contained in the following tables do not necessarily represent the fair market value of the Corporation s reserves. There is no assurance that the forecast price and cost assumptions contained in the RPS Report will be attained and variations could be material. Other assumptions and qualifications relating to costs and other matters are summarized in the notes to, or following, the tables below. The recovery and reserve estimates attributed to the Corporation s properties described herein are estimates only and there is no guarantee that the estimated reserves will be recovered. The actual reserves on the Corporation s properties may be greater or less than those calculated. The estimates of reserves and future net revenue for individual properties may not reflect the same confidence level as estimates of reserves and future net revenue for all properties due to the effects of aggregation. Further, the estimates of reserves and future net revenue have been made assuming that development of each property in respect of which the estimate is made will occur without regard to the likely availability to the Corporation of funding required for that development. For further information as to the risks involved please see Risk Factors. Existing discoveries within the Corporation s acreage holdings are as follows: Licenses/Permits, Blocks UK Onshore Cleveland PEDL 068 Significant Accumulations Kirkleatham Gas Field Existing wells Kirkleatham-4 UK Offshore NNS P1064, Blocks 210/29a & 30a Cladhan Oil Field CNS P1792, Blocks 21/30f & 22/26c P1619, Block 21/27b SNS P1327, Block 42/10 & 42/15 P1914, Blocks 49/18b & 19b NW Indie Gas Discovery P1230 & P1320, Blocks 42/12 & 42/13 Breagh Gas Field Romania Offshore France Onshore Block 13 (XIII) Pelican Block 15 (XV) Midia Block 25 Luceafarul Block 27 Muridava St. Laurent Belinda & Evelyn Oil Discoveries Blakeney Oil Discovery & Feugh Gas Discovery Crosgan Gas Discovery 210/29a-4X, 210/29a-W1 A01 (42/13-3), 42/13-4, A02 (42/13-5z), A03, A04, A05, A06, A07, 42/13a-6 Eugenia Gas Discovery Ana & Doina Gas Discoveries Ana 1, Ana 2, Doina 4 Luceafarul Gas Discovery Olympiyskaya Oil/Gas Discovery Grenade Heavy Oil field Grenade 3 Netherlands Offshore Blocks F17 & F18 Brigantijn, Korvet & Fregat Oil Discoveries Sterling Resources Ltd F1 3

57 PART 2: DISCLOSURE OF RESERVES DATA The following tables set forth a summary of the Corporation s oil, natural gas and natural gas liquids reserves and net present values of future net revenue at December 31, 2013 using RPS December 31, 2013 forecast of prices and costs which are set forth below in Part 3 Pricing & Inflation Rate Assumptions. Table Summary of Oil and Gas Reserves As of December 31, 2013 Forecast Prices and Costs LIGHT AND MEDIUM OIL NATURAL GAS NATURAL GAS LIQUIDS RESERVE CATEGORY Gross (Mbbl) Net (Mbbl) Gross (MMscf) Net (MMscf) Gross (Mbbl) Net (Mbbl) United Kingdom PROVED Developed Producing - - Developed Non Producing - - Undeveloped TOTAL PROVED Probable TOTAL PROVED PLUS PROBABLE 1,805 1,805 Possible TOTAL PROV + PROB + POSS 2,621 2,621 70,032 70, ,887 66, , , ,831 41, , , ,525 55, , , Note: (i) TOTAL COMPANY PROVED Developed Producing - - Developed Non Producing - - Undeveloped TOTAL PROVED Probable TOTAL PROVED PLUS PROBABLE 1,805 1,805 Possible TOTAL PROV + PROB + POSS 2,621 2,621 70,032 70, ,887 66, , , ,831 41, , , ,525 55, , , Possible reserves are those additional reserves that are less certain to be recovered than probable reserves. There is a 10% probability that the quantities actually recovered will equal or exceed the sum of proved plus probable plus possible reserves. Sterling Resources Ltd F1 4

58 Table Summary of Net Present Value of Future Net Revenue As of December 31, 2013 Forecast Prices and Costs (i) (US$ millions) RESERVE CATEGORY BEFORE INCOME TAXES AFTER INCOME TAXES 0% 5% 10% 15% 20% 0% 5% 10% 15% 20% United Kingdom TOTAL COMPANY PROVED Developed Producing Developed Non Producing Undeveloped TOTAL PROVED Probable TOTAL PROVED PLUS PROBABLE 1,427 1, Possible TOTAL PROV + PROB + POSS 1,994 1,400 1, , PROVED Developed Producing Developed Non Producing Undeveloped TOTAL PROVED Probable TOTAL PROVED PLUS PROBABLE 1,427 1, Possible TOTAL PROV + PROB + POSS 1,994 1,400 1, , Notes: (i) (ii) Tax calculations at 30% Corporation Tax and 32% Supplementary Corporation Tax (SCT) as in effect 31st December 2013 from profits arising from UK Oil and Gas ring fence activities. Small field allowance incentives have been applied as appropriate (i.e. relief from SCT). Brown Field Allowances have not been considered in the evaluations. Possible reserves are those additional reserves that are less certain to be recovered than probable reserves. There is a 10% probability that the quantities actually recovered will equal or exceed the sum of proved plus probable plus possible reserves. Sterling Resources Ltd F1 5

59 The following table sets forth the various elements of future net revenue on an undiscounted basis using RPS December 31, 2013 forecast prices and costs. Table 2.1.3a Total Future Net Revenue (Undiscounted) As of December 31, 2013 Forecast Prices and Costs (i) RESERVE CATEGORY REVENUE ROYALTIES OTHER REVENUE OPERATING COSTS DEVELOP- MENT COSTS ABANDON- MENT COSTS FUTURE NET REVENUE BEFORE INCOME TAXES INCOME TAXES FUTURE NET REVENUE AFTER INCOME TAXES United Kingdom (MM$US) (MM$US) (MM$US) (MM$US) (MM$US) (MM$US) (MM$US) (MM$US) (MM$US) PROVED Developed Producing Developed Non Producing Undeveloped TOTAL PROVED 1, PROBABLE TOTAL PROVED + PROBABLE 2, , TOTAL PROV + PROB + POSS 3, , ,002 TOTAL COMPANY PROVED Developed Producing Developed Non Producing Undeveloped TOTAL PROVED 1, PROBABLE TOTAL PROVED + PROBABLE 2, , TOTAL PROV + PROB + POSS 3, , ,002 Notes: (i) (ii) (i) Tax calculations 32% Supplementary Corporation Tax (SCT) as in effect 31st December 2013 from profits arising from UK Oil and Gas ring fence activities. Small Field allowance incentives have been applied as appropriate (i.e. relief from SCT). ). Brown Field Allowances have not been considered in the evaluations. Gemini Entitlement is included in Operating Costs Possible reserves are those additional reserves that are less certain to be recovered than probable reserves. There is a 10% probability that the quantities actually recovered will equal or exceed the sum of proved plus probable plus possible reserves. Sterling Resources Ltd F1 6

60 The following table sets forth estimated future net revenue by production group based on RPS December 31, 2013 forecast prices and costs. TABLE 2.1.3c-i Future Net Revenue by Production Group Before Future Income Tax Expense (Discounted at 10% per year) As of December 31, 2013 Forecast Prices and Costs UNITED KINGDOM RESERVE CATEGORY LIGHT AND MEDIUM OIL (including solution gas and other by-products) (MM$US) PROVED Developed Producing - Developed Non Producing - Undeveloped 52.9 TOTAL PROVED 52.9 PROBABLE 45.6 TOTAL PROVED + PROBABLE 98.5 TOTAL PROV + PROB + POSS NATURAL GAS (including by-products but excluding solution gas from oil wells) (MM$US) TOTAL COMPANY PROVED Developed Producing - Developed Non Producing - Undeveloped 52.9 TOTAL PROVED 52.9 PROBABLE 45.6 TOTAL PROVED + PROBABLE 98.5 TOTAL PROV + PROB + POSS Note: (i) Possible reserves are those additional reserves that are less certain to be recovered than probable reserves. There is a 10% probability that the quantities actually recovered will equal or exceed the sum of proved plus probable plus possible reserves. Sterling Resources Ltd F1 7

61 TABLE 2.1.3c-ii Future Net Revenue by Production Group on a Unit Value Basis Before Future Income Tax Expense, (Discounted at 10% per year) As of December 31, 2013 Forecast Prices and Costs RESERVE CATEGORY LIGHT AND MEDIUM OIL (including solution gas and other by-products) ($US/bbl) NATURAL GAS (including by-products but excluding solution gas from oil wells) ($US/Mscf) United Kingdom TOTAL COMPANY PROVED Developed Producing - Developed Non Producing - Undeveloped TOTAL PROVED PROBABLE TOTAL PROVED + PROBABLE TOTAL PROV + PROB + POSS PROVED Developed Producing - Developed Non Producing - Undeveloped TOTAL PROVED PROBABLE TOTAL PROVED + PROBABLE TOTAL PROV + PROB + POSS Note: (i) Possible reserves are those additional reserves that are less certain to be recovered than probable reserves. There is a 10% probability that the quantities actually recovered will equal or exceed the sum of proved plus probable plus possible reserves. Sterling Resources Ltd F1 8

62 PART 3: PRICING & INFLATION RATE ASSUMPTIONS Item 3.2 Forecast Prices Used in Estimates Forecast benchmark reference product prices, inflation rate and exchange rate assumptions are summarized below. These forecast assumptions were provided by RPS. Year Oil Benchmarks WTI at UK Heren NBP Inflation Rate Currency Exchange Rates Cushing Sollem Voe US$/bbl US$/bbl US$/ MMBTU %/annum US$/ US$/CAD$ % % % % % % % % % % % % % % % % % % % The weighted average gas price received during 2013 for Breagh gas production was $US 10.78/mscf Notes: (i) (ii) RPS Energy Brent North Sea Blend Forecast - Cladhan field economic evaluation has utilized the RPS Sollem Voe price with a quality differential premium of $1.00 per barrel (real 2014$) RPS Energy Heren Gas Price - Breagh gas is expected to trade at National Balancing Point (NBP) index day ahead gas price Sterling Resources Ltd F1 9

63 PART 4: RECONCILIATIONS OF CHANGES IN RESERVES The following table sets forth reconciliations of the Corporation s gross reserves for the year ended December 31, 2013 using RPS forecast prices and costs. Reconciliation of Gross Reserves by Product Type Forecast Prices and Costs FACTORS LIGHT AND MEDIUM OIL NATURAL GAS LIQUIDS ASSOCIATED AND NON- ASSOCIATED GAS Proved + Proved + Proved + Proved Probable Proved Probable Proved Probable Probable Probable Probable (Mbbl) (Mbbl) (Mbbl) (Mbbl) (Mbbl) (Mbbl) (MMscf) (MMscf) (MMscf) UNITED KINGDOM December 31, ,714 1,648 4, ,561 48, ,169 Extensions Improved Recovery Technical Revisions (28) (181) 12,040 (5,623) 6,417 Discoveries Acquisitions Dispositions Economic Factors (1,779) (778) (2,557) (7,547) (1,156) (8,703) Production + Inventory changes (135) - (135) December 31, , ,918 41, ,749 TOTAL COMPANY December 31, ,714 1,648 4, ,561 48, ,169 Extensions Improved Recovery Technical Revisions (28) (181) 12,040 (5,623) 6,417 Discoveries Acquisitions Dispositions Economic Factors (1,779) (778) (2,557) (7,547) (1,156) (8,703) Production + Inventory changes (135) - (135) December 31, , ,919 41, ,748 Sterling Resources Ltd F1 10

64 PART 5: ADDITIONAL INFORMATION RELATING TO RESERVES DATA Item 5.1 Undeveloped Reserves Undeveloped reserves are attributed by RPS in accordance with the standards and procedures contained in the COGE Handbook. Proved undeveloped reserves are those reserves that can be estimated with a high degree of certainty to be recoverable and are expected to be recovered from known accumulations where a significant expenditure is required to render them capable of production. Probable undeveloped reserves are those reserves that are less certain to be recovered than proved reserves and are expected to be recovered from known accumulations where a significant expenditure is required to render them capable of production. Proved Undeveloped Reserves The following table sets forth the gross proved undeveloped reserves for each product type that were first attributed as reserves in each of the most recent three financial years based on RPS forecast prices and costs. Table 5.1 Proved Undeveloped Gross Reserves Most Recent Three Years Forecast Prices and Costs Light and Medium Oil Natural Gas Liquids Natual Gas First Attributed Cumulative First Attributed Cumulative First Attributed Cumulative (Gross Mbbl) (Gross Mbbl) (Gross Mbbl) (Gross Mbbl) (Gross MMscf) (Gross MMscf) Prior to , ,714 2, , , ,250 The Kirkleatham field was brought into production in early 2011 and produced through to February 2012 before watering out and finally ceasing production. Previously considered reserves for the field were reclassified to Contingent Resources in Plans to sidetrack the well to an updip location of the Kirkleatham-4 well to access updip gas in place are currently being progressed. The Breagh field came into production through Phase 1 facilities on October 12, Production through to end of 2013 was sporadic due to facilities commissioning and resolving operational issues following start-up of the facilities. In addition a significant production event occurred while sphering the pipeline to remove liquids, which resulted in shut in of the facilities throughout most of November and December Production was restarted in late December from six wells, and has been in steady production through January, February and March The Breagh Development drilling campaign initiated in March 2012, continued throughout At year-end 2013, six wells were fully available to production and a seventh well (A07) was suspended with an installed completion and production tree. Drilling plans during 2014 are to hydraulically fracture A07 and bring the well into production; followed by drilling of an eighth production well (A08). At year-end 2013, Breagh production rates were approximately 120 mmscf/day (100% Field). Reserves attributed to the 6 wells currently on production have been reclassified from proved undeveloped to proved developed producing. The balance of the previously assigned proved undeveloped reserves are attributed to 1) the remaining expected recovery from the currently installed Breagh Alpha platform (Well A07 post stimulation, well A08 which is planned to be drilled during 2013, and wells A09 and A10 which are planned to be drilled in late 2015/beginning 2016; and 2) proved undeveloped reserves attributed to the second phase of the Breagh development with the installation of a second platform (Breagh Bravo) and the drilling of a further five wells from the Breagh Bravo Sterling Resources Ltd F1 11

65 platform. Installation of the platform is planned for early summer of 2017 with the drilling of wells during the remainder of 2017 and into Development plans for the Proved Undeveloped light oil are progressing with the Cladhan development. In early 2013 the Cladhan field was approved for development by the UK oil and gas regulator, and the project commenced following governmental (DECC) approval. At the end of 2013, the project is progressing in line with FDP schedule. The scope of the development is for a subsea tie back to the TAQA operated Tern platform on the UKCS; with 2-producers and 1-water injection wells. First oil from this development is forecast at end-q No further proved reserves additions were made during Probable Undeveloped Reserves The following table sets forth the gross probable undeveloped reserves for each product type that were first attributed as reserves in each of the most recent three financial years based on RPS forecast prices and costs. Table 5.2 Probable Undeveloped Gross Reserves Most Recent Three Years Forecast Prices and Costs Light and Medium Oil Natural Gas Liquids Development plans for the probable undeveloped reserves discussed within the section above on development of the proved undeveloped reserves. Better well and reservoir performance (P 50 performance vs. the P 90 performance assumed in the proved reserves case) within the development for both Breagh and Cladhan fields, provide the recovery of the probable reserves. For Breagh, one additional well has been included in the second phase development from the planned Breagh Bravo platform to provide recovery of the probable reserves recovery. No further Probable reserves additions were made during Natural Gas First Attributed Cumulative First Attributed Cumulative First Attributed Cumulative (Gross Mbbl) (Gross Mbbl) (Gross Mbbl) (Gross Mbbl) (Gross MMscf) (Gross MMscf) Prior to , , ,649 2, , , ,900 Item 5.2 Significant Factors or Uncertainties The process of estimating reserves is complex. It requires significant judgments and decisions based on available geological, geophysical, engineering and economic data. These estimates may change substantially as additional data from ongoing development activities and production performance becomes available and as economic conditions impacting oil and gas prices and costs change. The reserve estimates contained herein are based on current production forecasts, prices and economic conditions. All of the Corporation s reserves were evaluated by RPS. As circumstances change and additional data becomes available, reserves estimates may change. Estimates made are reviewed and revised, either upward or downward as warranted by the new information. Revisions are often required due to changes in well performance, prices, economic conditions and governmental restrictions. Although every reasonable effort is made to ensure that reserve estimates are accurate, reserve estimation is an inferential science. As a result, subjective decisions, new geological or production information and a changing environment may impact these estimates. Revisions to reserve estimates Sterling Resources Ltd F1 12

66 can arise from changes in oil and gas prices and reservoir production performance. Such revisions can either be negative or positive and could be material. Important economic factors or significant uncertainties pertaining to the Corporation s reserves data are as follows: Breagh Gas Field Reservoir Four development wells have been drilled during Initial production capacity testing of the first 3 of these wells has been completed and results are within the predicted expectations of the Corporation. The last well, A07 has not been tested to date, as a decision was made late in 2013 to suspend this well awaiting return of the drilling rig, for mandatory maintenance, before hydraulic fracture stimulation and completion. The Breagh field came on stream on October 12, 2013 with 5 wells available at that time and a 6 th well added by year-end The longer-term production performance of these wells has been estimated using normal industry practices and the intermittent production data from 2013 but remains an uncertainty. The long-term performance has been estimated using the Corporation s technical model tested against the more continuous production data in the first two months of Consequently, RPS has provided a range of production estimates to account for this uncertainty. Similarly, the remaining development well in the planned Phase 1 drilling program and those in Phase 2 have yet to be drilled and expectations on sand quality and quantity still remain an uncertainty. To date, 6 exploration wells and 7 development wells have been drilled and this uncertainly has been within expectations. Drilling The forecasts on reserves assume the Corporation completes the drilling as scheduled and within the budgeted amount. This is a normal risk in oil and gas field developments. The fracture stimulation within the Breagh field has yet to be performed. Further financial contingencies have been included for fracture wells, specifically well A07, and for the wells in the second phase of development. Facilities The Breagh development was planned for two, 12 slot platforms with 8 initial development wells for Breagh Phase 1 facilities and 7 initial development wells for Breagh Phase 2 facilities. A 20 pipeline interconnects the Phase 1 & Phase 2 platforms with production routed via a 110 km pipeline to the Teesside Gas Processing Plant at Seal Sands Middlesborough for processing to sales gas specifications. The first platform (BA) has been fabricated, installed and commissioned. Full operations in producing hydrocarbons from the platform commenced on October 12, A fracture treatment on the A07 well and a further well additional well (A08) is planned during In addition, a further 2 wells are planned to be drilled during 4 th quarter 2015/1 st quarter The second platform (BB) forms part of Breagh Phase 2 and the project is currently progressing through pre-sanction activities with a target for submission of a FDP in mid Consequently, cost escalation risk and uncertainty remains with respect to operational, fabrication and installation risks for this second phase as a second platform development. These risks have been addressed by RPS through contingency in the economic analysis. The plans for the scope of the platform are currently being reviewed, possibly to revise the size and capability of the platform (accommodation space and rigless fracture treatment capabilities) or to consider a limited subsea development for the eastern extend of the reservoir. Commercial Issues All processing, transportation and sales agreements are in place and the remaining uncertainty is in product prices on the day. The Corporation has hedged a percentage of the production to mitigate against low gas prices on the day ahead of gas deliveries. Condensate price variations are not considered a major risk to the project economics, as revenues from condensate are a small portion of overall project revenues. Sterling Resources Ltd F1 13

67 A further extension of the Second Term licence extension for P1230 and P1328 has been granted until the 31 st December 2014 to complete plans to incorporate Breagh Phase 2 development activities. These plans have been agreed with DECC as follows: submission of a FDP addendum to DECC by July DECC sanction of the FDP addendum would then be expected by December 31, 2014 whereby full production consent (until November 30, 2030) for the field will be modified to reflect the FDP addendum. With the large areal extent of the Breagh field of approximately 80 square kilometres, further offshore facilities will be required to completely develop the field; with the most likely option being a second platform on the eastern side of the field. The size of the platform and well type and degree of stimulation are all key factors to a successful development of this area of the field during the second phase which are all currently being studied. The results of the hydraulic fracture treatment on well A07 will be particularly important in the evaluation of the Phase 2 development. Because of the time required for these studies, it is possible that development approval may slip into Initial production from Breagh Phase 2 is now expected during the third quarter of Cladhan Oil Field The FDP was submitted to DECC in November 2012 with full approval gained in April The plan calls for development of the core area of the field in Phase 1 with appraisal drilling being performed at the same time to determine the potential for later development phases. Reservoir The development plan remains unchanged from submission, in that two high angle production wells and one high angle water injection well will be drilled to deliver forecasted production. A DST was performed for approximately 12 hours on the 210/29-4Z well at 6,000 bbls/d confirming initial productivity of the reservoir. An estimate of the longer-term production performance of the production wells has been estimated using normal industry practices using the Corporation s technical model. Consequently RPS has provided a range of production estimates to account for this uncertainty. Similarly, the development wells have yet to be drilled and expectations on sand quality and quantity have yet to be realized. Drilling Development drilling commenced in October 2013 with the drilling of an appraisal well 210/29a-6 (A2), targeting the Sequence 2 sands to the north of, but outside, the field development area. This well combined the A2 and the W1 (the water injector well) wellbores for the main development, such that W1 would be drilled as a side-track of A2 once the objectives of A2 had been met and the reservoir section abandoned. The results from A2 were disappointing. Although a sand sequence was encountered, it was tight with oil saturations. The A2 appraisal wellbore was plugged and abandoned, and preparations made in upper wellbore available to sidetrack to the water injection well location once the contracting semi-subersible drilling rig (John Shaw) returns from statutory maintenance. In addition to the water injection well, two production wells are planned to be completed during The forecasts on the net present value of the development assume the Corporation completes the drilling as scheduled in 2014 and within the revised budget amount, reflecting the actual cost of drilling the A2 well. This is a normal risk in developments and contingency costs have been incorporated to address this uncertainty in the estimate of projected value. Facilities The development plan of Cladhan Field is for a subsea tie-back to the TAQA Bratani operated Tern platform. The tie-back comprises a 17 km subsea 10 oil line, a 4 gas lift line and a 10 water injection line; and controls/chemicals umbilical and facility modifications to the host facility (Tern) to manage Cladhan s fluids. Some risk and uncertainty on costs and equipment availability has been removed by securing the line pipe. The forecasts on net present value of the development assume the Corporation completes the Sterling Resources Ltd F1 14

68 installation of the pipeline as scheduled and within the budgeted amount. This is a normal risk in developments and contingency costs have been incorporated to address this financial uncertainty in the estimate of projected value. At end of 2013, the development was progressing in line with project execution requirements of budget and schedule. Host platform modifications and costing are a significant risk and uncertainty and higher levels of contingency have been included in the economic analysis to address these risks and uncertainties. Commercial Issues The commercial agreements are well advanced with all key terms agreed. Product pricing is an uncertainty, which directly affects the estimated value of the project. Oil price hedging may be considered to mitigate this risk nearer expected first production dates. The Corporation is carried through the Project Execution stages of the development under the terms of two farm down agreements. The first farm down agreement provides for a non-repayable carry of a portion of the development CAPEX. The second farm down agreement provides for a second, repayable carry covering the remainder of the expected development CAPEX; the Corporation retains a minimum equity of 2% with a further 11.8% returning to it upon pay-out of the second carry out of operating cash flow. The timing of such pay-out is dependent on the actual out turn of development CAPEX, initial production rates and realized oil prices. The Corporation s oil and gas properties and reserves have no other material extraordinary risks beyond those inherent in an international offshore oil and gas exploration and production company. Sterling Resources Ltd F1 15

69 Item 5.3 Future Development Costs The following table sets forth development costs deducted in the estimation of the Corporation s future net revenue attributable to the reserve categories noted below. Table 5.3 Summary of Estimated Development Costs Attributable to Reserves Using Forecast Prices and Costs Undiscounted (MM$US) ESTIMATED DEVELOPMENT COSTS TOTAL PROVED TOTAL PROVED + PROBABLE ($US millions) TOTAL PROVED + PROBABLE + POSSIBLE UNITED KINGDOM Total all years COMPANY TOTAL Total all years Note: (i) (ii) The cumulative development costs disclosed in Table 5.3 include well abandonment and reclamation costs whereas those in Part 2 Disclosure of Reserves Data under the table titled Total Future Net Revenue (Undiscounted) are detailed separately. Possible reserves are those additional reserves that are less certain to be recovered than probable reserves. There is a 10% probability that the quantities actually recovered will equal or exceed the sum of proved plus probable plus possible reserves. The Corporation expects that such development costs will be funded through a combination of existing cash, operating cash flow from Breagh and (from 2015) Cladhan, and debt financing. Sterling Resources Ltd F1 16

70 PART 6: OTHER OIL AND GAS INFORMATION Item 6.1 Oil and Gas Properties and Wells Oil & Gas Wells Producing Wells Non-Producing Wells Gas Oil Gas Oil Gross (1) Net (2) Gross (1) Net (2) Gross (1) Net (2) Gross Net (2) UK Onshore UK Offshore Romania Onshore Romania Offshore France Onshore Company Total Notes: (i) (ii) Gross wells are defined as wells in which the Corporation has an interest. Net wells are defined as wells in which the Corporation has an interest multiplied by the working interest owned by the Corporation. Historically, four Breagh appraisal wells (UK Offshore - gas) were temporarily abandoned for potential re-entry during development. The 42/13-3 and the 42/13-5Z wells were re-entered after the Breagh Alpha platform was installed and sidetracked to more optimal reservoir locations, as the first Breagh development wells, A01 and A02 respectively. A further 4 development wells (A04, 5, 6 & 7) were drilled and completed during The 42/13-4 and 42/13a-6 wells remain temporarily abandoned. The two Sheryl appraisal wells (UK Offshore - oil) were temporarily abandoned after drilling in The licence was relinquished in 2012 and plans are being made to permanently abandon these wells during The Kirkleatham-4 well (UK Onshore gas) was brought on stream in Q and continued to produce through to February 2012, at which time it ceased production due to water loading. The well is currently temporarily shut-in and plans are being considered to sidetrack the well up structure. The two Ana field and one Doina field appraisal wells (Romania Offshore gas) were temporarily abandoned after drilling in 2007 and 2008 and are being considered for re-use during development. Sterling Resources Ltd F1 17

71 Oil & Gas Properties Offshore United Kingdom, Southern North Sea Breagh Gas Field Licenses/ Area Blocks Permits Operator SNS - 23rd Rd 42/12a P1328 RWE Dea SNS - 22nd Rd 42/13a P1230 RWE Dea Interest Gross Gross (1) Net (2) Percent Km 2 Acres Acres 30.00% , , % , , The Breagh field is located in the Southern North Sea, Block 42/13a approximately 100 km offshore the English coast near Teesside. The Corporation holds a 30% interest, with RWE Dea as operator holding the remaining 70% interest. Breagh Phase 1 facilities comprising a 12 slot NUI platform, 20 pipeline to TGPP gas processing terminal and modifications to the TGPP processing systems came into service in October The offshore facilities are fully in service and handed over to production operations. The TGPP terminal equipment is in the late stages of commissioning and acceptance activity. First gas was achieved in October 2013, with 5 wells available at start up and a 6th well available from mid-december Offshore United Kingdom, Central North Sea Sheryl Oil Field The Sheryl appraisal wells (UK Offshore) were temporarily abandoned after drilling in No infrastructure is currently in place at the field. With the relinquishment of this acreage in 2012, there is a requirement to abandon these wells, currently planned for Offshore United Kingdom, Northern North Sea Cladhan Oil Field Licenses/ Area Blocks Permits Operator NNS - 21st Rd 210/29a & 210/30a P1064 Taqa Bratani Interest Gross Gross (1) Net (2) Percent Km 2 Acres Acres 26.40% , , The Cladhan field is located in the Northern North Sea approximately 16 km south of the TAQA Bratani operated Tern platform. The Corporation currently holds a 2.0% working interest, with TAQA Bratani as operator holding a 33.5% interest and Wintershall UK North Sea (now MOL Energy UK Ltd.) holding the remaining 40.1% interest. A maximum of 11.8% working interest can be earnedback post first oil, subject to actual development CAPEX relative to the project sanction CAPEX. During 2012, a subsea tie-back to the Tern platform was selected as the preferred development plan and a FDP and EIS was submitted to DECC. During this time the Corporation sold 13.5% of its interest and transferred operatorship to TAQA Bratani. Approval of the FDP and EIS was forthcoming in April Development drilling commenced in October 2013; installation of the pipeline and controls bundle is expected in the summer of 2014; and Tern platform modifications are expected to commence during 2Q First oil is planned for early Onshore United Kingdom Kirkleatham Gas Field Licenses/ Area Blocks Permits Operator Cleveland NA PEDL 068 Egdon Interest Gross Gross (1) Net (2) Percent Km 2 Acres Acres 47.00% 73, , The Kirkleatham discovery was drilled in 2006 and on production test achieved 5 MMscf/d of gas. Development activities were completed in early 2011 with production startup achieved in April Production continued through to February 2012 before the well loaded up and ceased producing. Production facilities remain in place and a sidetrack of the Kirkleatham-4 well to an up dip location may be considered during Notes: 1) Gross acres are defined as the total area of properties in which the Corporation has an interest. 2) Net acres are defined as the total area in which the Corporation has an interest multiplied by the working Sterling Resources Ltd F1 18

72 Item 6.2 Properties with No Attributed Reserves The Corporation s properties as of December 31, 2013 are outlined in the following table, including Properties with No Attributed Reserves. A description of properties is provided on the following page. United Kingdom Romania France Licenses/ Area Blocks Permits Operator Onshore Cleveland NA PEDL 068 Egdon Sub-total Offshore CNS - 25th Rd 21/27b P1619 Wintershall CNS - 26th Rd 21/30f & 22/26c P1792 Sterling SNS - 23rd Rd 42/8a, 42/9a & 42/14a (iii) P1327 RWE Dea SNS - 25th Rd 42/10 & 42/15 (iii) P1630 RWE Dea SNS - 26th Rd 42/13b, 42/17 & 42/18 P1741 RWE Dea SNS - 26th Rd 49/18b & 49/19b P1914 Sterling SNS - 27th Rd 36/30, 42/2a, 42/3a, 42/4 & 42/5 P2133 Sterling Sub-total UK Total Romania Offshore Blocks XIII and XV Sterling Block 25 Lucaefarul Sterling Block 27 Muridava Petroceltic Romania Total Onshore St. Laurent Sterling Coulommiers (iv) Sterling Hautevesnes (iv) Sterling Marvilliers (iv) Sterling Donzacq (iv) Sterling France Total Interest Gross Gross (i) Net (ii) Percent Km 2 Acres Acres 47.00% 73, , , , % , , % , , % , , % , , % , , % , , % 1, , , , , , , % 1, , , % 1, , , % 4, ,100, , ,594, , % , , % , , % , , % , , % , , , , Netherlands Offshore Block F17 (v) Sterling Block F18 (v) Sterling Block E03 Wintershall Block F01 Wintershall Netherlands Total TOTAL 35.00% , , % , , % , , % , , , , ,898, ,374, Notes: (i) (ii) (iii) (iv) (v) Gross acres are defined as the total area of properties in which the Corporation has an interest. Net acres are defined as the total area in which the Corporation has an interest multiplied by the working interest owned by the Corporation. One year licence extension approved by DECC Licence awards are awaiting the signature of the Energy Director acting on a delegation by the Minister for Mines. Licensing terms comprise the Early Cretaceous and Jurassic Period, Mesozoic Era Formations. Sterling Resources Ltd F1 19

73 The previous table provides all gross/net acreage of the Corporation including acreage with discoveries as indicated in the following: 1. UK NNS Blocks 210/29a & 210/30a Cladhan oil discovery (well 210/29a-4, 4Y and 4Z) The Corporation has Contingent 1C, 2C and 3C Oil Resource 1 volumes of 0.0, 0.3 and 0.6 MMbbls respectively assigned to this asset in addition to Reserves. The Corporation has Prospective Low, Best and High Oil Resource 2 volumes of 0.48, 0.8 and 1.45 MMbbls respectively assigned to this asset in addition to Reserves. 2. UK CNS Block 21/27b Blakeney Oil & Feugh Gas Discoveries (wells 21/27b-7 and 21/28-1). The Corporation has Contingent 1C, 2C and 3C Oil Resource 1 volumes of 2.9, 5.8 and 10.1 MMbbls respectively assigned to this asset. The Corporation has Contingent 1C, 2C and 3C Gas Resource 1 volumes of 1.1, 1.6 and 2.3 Bcf respectively assigned to this asset. 3. UK CNS Blocks 21/30f & 21/26c Evelyn and Belinda Oil Discoveries (21/30-12, 21/30-16, 21/30-17 and 21/30-18) and the Beverley Oil prospect The Corporation has Contingent 1C, 2C and 3C Oil Resource 1 volumes of 2.6, 3.8 and 5.3 MMbbls respectively assigned to this asset The Corporation has Contingent 1C, 2C and 3C Gas Resource 1 volumes of 1.1, 1.6 and 2.3 Bcf respectively assigned to this asset. The Corporation has Prospective Low, Best and High Oil Resource 2 volumes of and 7.5 MMbbls respectively assigned to this asset. 4. UK SNS Blocks 42/12a and 42/13a Breagh Gas field (42/13-2, 42/13a-3, 42/13a-4, 42/13a- 5, 42/13a-5Z). The Corporation has Contingent 1C, 2C and 3C Gas Resource 1 volumes of 7.9, 12.8 and 20.3 Bcf respectively assigned to this asset in addition to Reserves. 5. UK SNS Blocks 42/10 and 42/15 Crosgan discovery (42/15a-1, 42/10b-2 and 42/10b-2Z), excluding the Breagh Gas field The Corporation has Contingent 1C, 2C and 3C Gas Resource 1 volumes of 29, 41.0 and 56.0 Bcf respectively assigned to this asset. The Corporation has Prospective Low, Best and High Gas Resource 2 volumes of 16.7, 25.0 and 35.7 Bcf respectively assigned to this asset. 6. UK SNS Blocks 42/17 and 42/18 Lochran prospect The Corporation has Prospective Low, Best and High Gas Resource 2 volumes of 9.0, 35 and 92 Bcf respectively assigned to this asset. 7. UK SNS Blocks Quad 48 Northwest Indefatigable (Nia) Discovery and Prospect A (Niadar) Prospect The Corporation has Contingent 1C, 2C and 3C Gas Resource 1 volumes of 3.9, 8.5 and 18.5 Bcf respectively assigned to this asset. The Corporation has Prospective Low, Best and High Gas Resource 2 volumes of 27.8, 59.1 and 118 Bcf respectively assigned to this asset. 8. UK SNS Blocks 36/30, 42/2a, 42/3a, 42/4 & 42/5 Ossian and Darrach Prospects The Corporation has Prospective Low, Best and High Gas Resource 2 volumes of 41.6, and Bcf respectively assigned to this asset. 9. UK Onshore Kirkleatham Up dip prospect The Corporation has Contingent 1C, 2C and 3C Gas Resource 1 volumes of 0.0, 0.2 and 0.7 Bcf respectively assigned to this asset. 10. Netherlands Offshore, F17, F18 Brigantijn, Barkentijn, Korvet & Fregat Oil Discoveries The Corporation has Contingent 1C, 2C and 3C Oil Resource 1 volumes of 9.0, 12.0 and 15.0 MMbbls respectively assigned to this asset. The Corporation has Prospective Low, Best and High Oil Resource 2 volumes of 15.0, 19.0 and 23.0 MMbbls respectively assigned to this asset. The Corporation has Prospective Low, Best and High Gas Resource 2 volumes of 18.0, 28.0 and 45.0 Bcf respectively assigned to this asset. Sterling Resources Ltd F1 20

74 11. Netherlands Offshore, Blocks E03/F01 - Alcea Prospect The Corporation has Prospective Low, Best and High Gas Resource 2 volumes of 40.0, and 354 Bcf respectively assigned to this asset. 12. Romania Offshore Blocks XIII, XV, XXV & XXVII Doina, Ana and Eugenia Gas fields (Doina 1, 2, 3; 4 and Ana 1 and 2; Eugenia 1), Block 25 (Luceafarul) & Block 27 (Olympiyskaya). The Corporation has Contingent 1C, 2C and 3C Gas Resource 1 volumes of 225.0, and Bcf respectively assigned to these assets. The Corporation has Prospective Low, Best and High Oil Resource 2 volumes of and MMbbls respectively assigned to these assets. The Corporation has Prospective Low, Best and High Gas Resource 2 volumes of 1257, 1989 and 3209 Bcf respectively assigned to these assets. 13. France onshore St Laurent Permit Grenade heavy oil discovery (Wells Grenade Sur Adour - 1 and Grenade 3) The Corporation has Contingent 1C, 2C and 3C Oil Resource 1 volumes of 0.8, 2.7 and 9.1 MMbbls respectively assigned to this asset. The Corporation has Prospective Low, Best and High Gas Resource 2 volumes of 38, 144 and 457 Bcf respectively assigned to this asset. 1 Contingent Resources are those quantities of petroleum estimated as of a given date to be potentially recoverable from known accumulations using established technology or technology under development, but which are not currently considered to be commercially recoverable due to one or more contingencies. The contingencies that result in the categorization as Contingent Resources of the Corporation's resources are either technical, requiring further appraisal work (Breagh, Cladhan and Crosgan), or commercial, requiring final definition of gas markets and development plans (Ana and Doina). The Resource volumes shown represent probabilistic totals of several entities within each licence or block area. There is no certainty that it will be commercially viable to produce any portion of the Contingent Resources. The P (50) or 2C is considered to be the best estimate of the quantity that will actually be recovered. It is equally likely that the actual remaining quantities recovered will be greater or less than the best estimates. If probabilistic methods are used there should be at least a 50 percent probability P (50) that the quantities actually recovered will equal or exceed the estimate. Similarly, the 1C or P (90) and 3C or P (10) represent the low and high estimates respectively. 2 Prospective Resources are those quantities of petroleum estimated as of a given date to be potentially recoverable from undiscovered accumulations by application of future development projects. There is no certainty that any portion of the Prospective Resources will be discovered or, if discovered, that it will be commercially viable to produce any portion of the Resources. These Prospective Resources are in areas of the field or geological horizons, in which the presence of hydrocarbons require confirmation by drilling. The Best case is considered to be the best estimate of the quantity that will actually be recovered. If probabilistic methods are used there should be at least a 50 percent probability P (50) that the quantities actually recovered will equal or exceed the estimate. Similarly, the Low case and High case represent the P (90) and P (10) estimates respectively. An evaluation of the Corporation's Contingent and Prospective Resources for the undeveloped acreage in which the Corporation has an interest has been completed by RPS with an effective date of December 31, The estimates of Contingent and Prospective Gas and Oil Resources indicated above reflect the Corporation's interest in those resources. Estimated resource volumes are presented before the application of geological risk. In each case resource volumes are subject to risks that may result in the volumes being substantially different or non-existent. For the Contingent Resource Estimates, appraisal drilling programs and ultimate development plans could significantly increase or decrease the estimates of the in place and recoverable volumes. The size of the resources relative to the costs of development and production may preclude commercial development. For the Prospective Resources, inherent geologic risks include the risks that reservoir quality material may not be present, the risk that a trapping mechanism to contain the potential hydrocarbons may not be present, the risk that a hydrocarbon source may not be present and the risk that a migration path from the hydrocarbon source to the prospective reservoir may not be present. Due to these risks, there is significant uncertainty in the presence and size of the resource volumes. Actual resource values could be substantially less or zero. Sterling Resources Ltd F1 21

75 Summary of Conventional Oil and Gas Contingent and Prospective Resources As of December 31, 2013 Raw Gas Oil Area Blocks Licenses Discoveries Prospects Licence Contingent Resources Prospective Resources Contingent Resources Prospective Resources 1C 2C 3C Low Best High 1C 2C 3C Low Best High Bcf Bcf Bcf Bcf Bcf Bcf MMbbls MMbbls MMbbls MMbbls MMbbls MMbbls UK Onshore PEDL068 Kirkleatham % UK Offshore 210/29a & 210/30a P1064 Cladhan Updip Terrace % UK Offshore 42/12a & 42/13a P1230, P1328 Breagh % UK Offshore 42/8, 9a, 10, 13b, 14a & 15 P1327, P1630 Crosgan % UK Offshore 21/27b P1619 Blakeney, Feugh % UK Offshore 42/17 & 18 P1741 Lochran % UK Offshore 21/30f & 22/26c P1792 Belinda, Evelyn Beverley % UK Offshore 49/18b, 19b P1914 Nia Niadar % UK Offshore 36/30, 42/2a, 42/3a, 42/4 & 42/5 P2133 Ossian, Darrach % France Onshore St. Laurent Grenade Audignon % Netherlands Offshore F17, F18 Korvet, Fregat Barkentijn, Brigantijn % Netherlands Offshore E03, F01 Alcea % Romania Offshore Block 13 Pelican Eugenia - Mihaela % , Romania Offshore Block 15 Midia Ana, Doina - Ioana, Clara, Gina % , , Romania Offshore Block 25 Luceafarul Luceafarul Lucaefarul updip % Romania Offshore Block 27 Muridava Olympiskaya Muridava, Medias, Oradea % United Kingdom Consolidated France Consolidated Netherlands Consolidated Romania Consolidated , , , Corporation Total , , , Note: (i) (ii) (iii) For the corporation and country prospective resources shown, consolidations shown are statistical aggregates of unrisked Resources at a country and prospect level respectively, and assume that all prospects are successful. The probability of all prospects being successful is very small.. For Contingent Resources the statistical aggregates assume no dependencies between discoveries and for Prospective Resources these statistical totals assume no dependencies between prospects. For Contingent Resources the aggregations are unrisked,, ie. before the application of Chance of Development. Sterling Resources Ltd F1 22

76 Details of work commitments are detailed as follows by country. United Kingdom P1064 Blocks 210/29a and 210/30a. All licence commitments have been fulfilled. Agreement to move to third phase of the Licence is being progressed following approval of FDP in April P1327 Blocks 42/8a, 42/9a and 42/14a. All outstanding well and other commitments on the licence have been fulfilled. The licence has been extended to end Q P1619 Block 21/27b. The Licence commitments have been fulfilled and DECC has approved the continuation of the licence period. The licence expires in Q P1630 Blocks 42/10 & 42/15. The seismic commitment has been fulfilled and the commitment well is planned to be drilled Q A further licence extension was approved by DECC which now expires Q P1680 Blocks 210/29c and 210/30b. All licence commitments have been fulfilled and DECC has approved the continuation of the licence period. Sterling Resources sold their remaining interest to TAQA in P1741 Blocks 42/13b, 42/17 and 42/18. The seismic commitment has been fulfilled, but a contingent well commitment remains outstanding. It is the intent of the partnership to seek a waiver on the contingent well commitment and relinquish these Blocks during The licence expires Q P Blocks 21/30f and 22/26c. The 3D seismic was fulfilled in 2013 and firm well commitment will be fulfilled Q The licence expires Q A farm-in for drilling the well has been secured which covers the Corporations financial obligations for the well. P1897 Blocks 43/15a and 43/20a. This Licence will be relinquished in early P1914 Blocks 49/18b and 49/19b. The commitment to re-process 300 sq. km of 3D seismic to a PSDM volume was completed in 2013 and the firm well commitment is planned for The licence expires Q The estimated cost for the firm well commitment is MM$ 22 (currently at 100%) the Corporations financial interest for the well is expected to be covered by plans to farm-out an interest in the well prior to drilling. P Blocks 36/30, 42/2a, 42/3a, 42/4 & 42/5. The commitment to acquire 2,000km of 2D seismic data has been completed and the firm well commitment is planned for The estimated cost for the firm well commitment is MM$ 21 (currently at 100%) the Corporations financial interest for the well is expected to be covered by plans to farm-out an interest in the well prior to drilling. Work commitments on all other licences have been fulfilled. No further relinquishments are anticipated during Romania Offshore Block 13 - Pelican and Block 15 - Midia. All previous concession work obligations have been fulfilled. Three extension options to the exploration period currently ending in May 2014 are available, with extensions to May 2015, May 2018 and May 2020 (at Sterling s election). Commitments are projected to be satisfied for the first extension period with the 800 km 2 3D seismic acquisition acquired during 1st quarter For each of the second and third Sterling Resources Ltd F1 23

77 extension periods the commitments comprise two wells (in aggregate, over the two blocks) at Sterling s election. Offshore Block 25 Luceafarul. The licence work obligations are; Acquire 300 km of 2D seismic (completed 2012) Acquire 250km 2 of 3D, which was fulfilled during Q1 of Drill 1 exploration well by end 2014, now planned for Q3. The estimated cost for the firm well commitment is currently MM$ 12 (50% working interest). The Corporations financial interest for the well may be further covered by plans to farm-out an interest in the well prior to drilling. Offshore Block 27 Muridava. The licence work obligations are; Commitment to obtain 1,000 km 2 3D seismic program. This commitment was satisfied in Commitment to drill 3 exploration wells. The Corporation has plans to drill the first of these wells during 1 st half of 2014 and the remaining two wells during The estimated cost for the firm well commitment in 2014 is MM$ 11 (40% working interest The estimated cost for the two 2015 firm well commitments is MM$ 10.5 each (currently at 40%). The Corporations financial interest for the well may be further covered by plans to farm-out an interest in the well prior to drilling. Onshore Sud Craiova The Corporation has considered various options for fulfilling outstanding commitments, which has resulted in the decision to relinquish the acreage at the end of No relinquishments are anticipated during 2014 The Netherlands F17a and F18 Work commitments have been fulfilled for Phase 1. No relinquishments are anticipated during Extensions have been granted on the F17 and F18 licences until August 2014, with a further three-year extension available if the joint venture commits before then to 3D seismic in the licences. The anticipated cost for the 3D seismic survey are MM$ 3 net to the Corporation E03/F01 was awarded in 1Q Licence commitments were for a 3D seismic work commitment of 300km 2 (completed in 2012) and one drill-or-drop contingent commitment well to be drilled by initial period licence expiry of November A 1-year extension has been granted by MEA during which time the partnership will be required make a drill decision (December 2014) or relinquish the licence. No relinquishments are anticipated during France Work commitments have been fulfilled. No relinquishments are anticipated during Item 6.3 Forward Contracts The Corporation has no forward contracts in place. Sterling Resources Ltd F1 24

78 Item 6.4 Additional Information Concerning Abandonment & Reclamation Costs The Corporation recognizes the fair value of an asset retirement obligation (ARO) in the period in which it is incurred when a reasonable estimate of the fair value can be made. The fair value is determined through a review of engineering studies, industry guidelines and management s estimate on a site-by-site basis. The fair value is recorded as a liability with a corresponding increase in the carrying amount of the related asset. The capitalized amount is depleted on the unit-of-production method based on proved reserves. The liability amount is increased each reporting period due to the passage of time and the amount is expensed during the period. Actual costs incurred upon the settlement of the ARO are charged against the liability. Well abandonment obligations of the Corporation are as follows: Total Wells Gross (1) Net (2) UK Onshore UK Offshore Romania Onshore Romania Offshore France Onshore Company Total Notes: (i) (ii) Gross wells are defined as wells in which the Corporation has an interest. Net wells are defined as wells in which the Corporation has an interest multiplied by the working interest owned by the Corporation. Expected net costs (MM$USD) associated with the aforementioned abandonment obligations are as follows (net of salvage value): Undiscounted Discounted at 10% The Corporation is expecting to abandon two wells on Block 21/23a, Sheryl in the UK North Sea in 2014 following the 2013 relinquishment of the licence. The estimated cost of the two wells in Block 21/23a is MM$ 1.0 net to Sterling (35% interest). The Corporation is not expecting any further abandonment expense within the next 3 years. The estimated cost of abandonment of the Breagh facilities installed is MM$USD 13.8 undiscounted. Item 6.5 Tax Horizon The Corporation does not expect to pay income taxes in the near future. Item 6.6 Costs Incurred The following table sets forth amounts of the Corporation s cumulative net property acquisition costs, exploration costs and development costs for the year ended December 31, United Kingdom Romania France Netherlands ($USD '000) ($USD '000) ($USD '000) ($USD '000) Unproved property acquisition costs Exploration costs 4,638 6, Development costs 68, ,495 6, Total ($USD '000) - 12,042 68,857 80,899 No proved property acquisition costs were incurred in Sterling Resources Ltd F1 25

79 Item 6.7 Exploration and Development Activities Sterling Resources 2013 exploration activities are listed below: Offshore Romania Block 25 (XXV). A 3D seismic survey was completed over this Block in December. Sterling Resources 2013 development activities are listed below: Offshore United Kingdom Breagh development drilling, Block 42/13a. Four development wells were drilled of which three were completed during 2013, with the 4 th well being suspended awaiting the rig s return following a mandatory safety inspection, before continuing with a well stimulation program and subsequent completion. Offshore United Kingdom Cladhan development drilling, Block 210/29a. The development drilling commenced in October 2013 with the spudding of the A2 appraisal well, intended to evaluate the Sequence 2 potential to the north of the defined field area before being sidetracked to the W1, injection location down dip and to the east of the field. The results from A2 were disappointing, with the development of relatively tight silty sand sequences. The well was subsequently plugged and abandoned, and the sidetrack to the W1 location initiated. The rig has had to come off location however and will return mid-2014 to complete the development drilling campaign. During 2013, all exploration and development, which the Corporation participated in, were drilled in the United Kingdom as detailed in the following table. Exploration Wells Development Wells Gross (1) Net (2) Gross (1) Net (2) Oil Wells Gas Wells Service Wells Dry Wells Total Notes: (i) (ii) Gross wells are defined as wells in which the Corporation has an interest. Net wells are defined as wells in which the Corporation has an interest multiplied by the working interest owned by the Corporation. Sterling Resources 2014 intended exploration activities are listed below. The inclusion of these activities does not necessarily imply rig commitments have been made for each project at this time. Offshore United Kingdom Block 22/26c. An exploration well is planned on the Beverley prospect in Q (Operated by Shell (UK) Ltd). Offshore United Kingdom Block 42/15. An appraisal well is planned on the Crosgan prospect in Q after completing the development drilling on Breagh Alpha platform (Operated by RWE Dea). Offshore Romania Block 27 Muridava. A well is planned to be drilled during the first half of 2014 (Operated by Petroceltic International). Offshore Romania Block 13 (XIII) Pelican, Block 15 (XV) Midia. An extensive 3D seismic program was planned across the three Sterling operator blocks offshore Romania during 4 th quarter. (NB: The planned program was completed in during January/February 2014). Sterling Resources Ltd F1 26

80 Sterling Resources 2014 intended development activities are listed below. UK Offshore SNS - Block 42/12a &13a Breagh Field Development. The Breagh field came on stream in October Development Drilling will continue during 2014 with the re-entering of A07 and performing fracture stimulation prior to completion and the drilling of A08 commencing in May with first gas expected by end August. UK Offshore NNS - Block 210/29a Cladhan Field Development. Development drilling commenced in October 2013 and following the return of the drilling rig will recommence in Q Host platform modifications and installation of the pipeline and subsea infrastructure is expected during Item 6.8 Production Estimates The following table sets forth the production estimate for the first year from fields where first gas is expected to occur before December 31, 2014 and based on the gross proved reserves and gross probable reserves as reported in the RPS Report. UK LIGHT AND MEDIUM OIL Estimated Production NATURAL GAS NATURAL GAS LIQUIDS (Mstb) (MMscf) (Mbbl) Total Company - 13, Significant Fields (1) Breagh - 13, Cladhan Note: (i) Significant fields represent greater than 20% of Corporation total (by country) of production in first year of forecast. Sterling Resources Ltd F1 27

81 Item 6.9 Production History RESERVE CATEGORY LIGHT AND MEDIUM OIL NATURAL GAS NATURAL GAS LIQUIDS Total Total Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Year Year Total Year United Kingdom Company share of daily production (Bbl/d or Mscf/d before deduction of royalties) , Average ($/bbl, or $/Mcf)) Price received Royalties paid Production costs Netback Total Annual Production (Mbl or mmscf before deduction of royalties) Important fields (greater than 20% of Total) Breagh (mmscf) Sterling Resources Ltd F1 28

82 Glossary Capitalized items utilized in this Statement of Reserves Data and Other Oil and Gas Information not otherwise defined herein or below have the meaning ascribed thereto in National Instrument Standards of Disclosures for Oil and Gas Activities of the Canadian Securities Administrators (the CSA ) and CSA Staff Notice Glossary to NI Standards of Disclosure for Oil and Gas Activities. 1Q 2Q 3Q 4Q API B BA BB bbls bbls/d Bcf BVS CNS DECC EIA FDP FEED LLI MDT M MM MM$CDN MM$US Mbbls MMbbls Mscf MMscf NAMR NGL NNS NUI SNS TD TGPP UKCS 1 st Yearly Quarter 2 nd Yearly Quarter 3rd Yearly Quarter 4th Yearly Quarter American Petroleum Institute billion Breagh Alpha platform Breagh Bravo platform barrels barrels of oil per day billion standard cubic feet Beach Valve Station UK Central North Sea Department of Energy and Climate Change Environmental Impact Assessment Field Development Program Front-end Engineering and Design Long-lead items Modular (Formation) Dynamics Tester thousand million million Canadian dollars million US dollars thousand barrels million barrels thousand standard cubic feet million standard cubic feet National Agency for Mineral Resources (Romania) natural gas liquid UK Northern North Sea Normally Unmanned Platform UK Southern North Sea Total Depth (drilled) Teesside Gas Processing Plant United Kingdom Continental Shelf Sterling Resources Ltd F1 29

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