Building a platform for growth

Transcription

1 Dragon Oil plc Annual Report for the year ended 31 December 2010 Ticker: DGO Building a platform for growth

2 Welcome to Dragon Oil Our Operations The Dragon Oil Group operates its principal asset offshore in the Caspian Sea from its onshore base in Turkmenistan. The base is near the town of Hazar, which is located on the western coast of Turkmenistan. Page 08 Our Strategy The Board and management team continued to focus on our medium-term strategic objectives during the year. Our primary aim is to develop the oil and gas reserves in the Cheleken Contract Area aggressively in order to maximise returns and we invested heavily in securing new rigs and infrastructure. Page 10 Our Performance We have had a remarkable and successful year at Dragon Oil, having reached a record in terms of revenues generated, exit production rate achieved, the number of wells drilled and completed and major contracts awarded for infrastructure projects. Page 16 Why not go to our website at

3 Dragon Oil plc Annual Report for the year ended 31 December 2010 Meet the Board Dragon Oil places great significance on high standards of corporate governance as a means to emphasise the Group s good business conduct and strong ethical culture. All Board Directors have a responsibility to shareholders to put a robust control structure in place essential for business integrity and performance. Financial Review Revenues for the year were up 25% to US$780 million due to increased gross production as well as stronger realised crude oil prices with Dated Brent averaging around US$80 per barrel during the year offset by a 9% discount achieved under the two marketing routes. CSR Our Mission is to explore and develop oil and gas resources by leveraging technology and a talented workforce as a dependable, ethical and conscientious partner. The centre of our field operations is Hazar where Dragon Oil actively engages with the community. Page 38 Page 28 Page 30 Main picture: Offshore operations. 01 Inserts (from left to right): Offshore platform, reservoir discussion session, offshore operations, Dragon Oil Board of Directors, drilling operations, desalination plant. Financial Financial Statements Statements Governance Governance Responsibility Responsibility Performance Performance Strategic Review Strategic Review Overview

4 02 Contents Overview We enjoyed a record year in terms of revenues generated and the number of wells drilled and completed as well as we awarded a number of major contracts for infrastructure projects. We completed a milestone upgrade to the infrastructure base, thus eliminating the bottlenecks, which constrained production growth last year. Page 04 Page 10 Page 20 Strategic Review We remain focused on three strategic areas: the accelerated development of the Cheleken Contract Area, gas monetisation opportunities and valueenhancing acquisitions. We have a focused and experienced management team as well as a commitment throughout the organisation to deliver on our objectives. Performance A 25% increase in revenue to US$780 million and a 55% increase in operating profit to US$488 million are attributed to increased realised oil prices in 2010, increased production and a movement in the lifting position. Earnings per share were 49% higher than in 2009 and net cash from operations was up 19% over Key Milestones in Our Area of Operation and Marketing Routes 10 Delivering our Strategy 12 Chairman s Statement 16 Message from the Chief Executive Officer 22 Operating and Financial Review view online dragonoil.annualreport2010.com

5 Dragon Oil plc Annual Report for the year ended 31 December 2010 Responsibility The development of the Cheleken Contract Area is a big project for an independent operator, such as Dragon Oil, and entails a significant social responsibility to act accordingly to the laws and in harmony with community s values. Our strategy revolves around a number of undertakings. 30 Corporate Social Responsibility Report Investing in Our People The Community The Environment HSE Supply Chain Management Communication with Investors Accountability Page 30 Governance Page 36 Financial Statements Page 60 The Board is committed to applying the principles of corporate governance contained in the Combined Code on Corporate Governance issued by the Financial Reporting Council. The Directors also follow the related guidance and suggested best practices referred to in the Combined Code. 38 Meet Your Board 40 Senior Management Team 42 Directors' Report 51 Corporate Governance Statement 57 Directors Remuneration Report This section represents the Group s accounts and contains notes to the financial statements Auditors Report 62 Group Balance Sheet 63 Group Income Statement 63 Group Statement of Comprehensive Income 64 Group Cash Flow Statement 65 Company Balance Sheet 66 Company Cash Flow Statement 67 Statement of Changes in Equity 68 Notes to the Financial Statements 94 Supplementary Information 95 Five-Year Financial Summary 96 Glossary/Definitions/Abbreviations 97 Advisors Pictured: Pipe-laying for the trunkline and in-field pipelines. Financial Financial Statements Statements Governance Governance Responsibility Responsibility Performance Performance Strategic Review Strategic Review Overview

6 Pictured: The Dzheitune (Lam) Block 2.

7 Overview Building a platform for growth Strategic Review Industry Backdrop Following the steep rising trend in 2009, oil prices continued to increase in Brent gained around 20% during the year and ended at US$95 per barrel, reflecting the recovering global economy. Dragon Oil s share price performance outpaced the rising oil price during the year, increasing by over 39% to end the year at 538GBp. Importantly, the high crude oil price level provides us with a strong environment for planning and investment in the medium term. Drilling Campaign The well drilling programme yielded a 5.5% increase in average gross daily production to 47,211 barrels of oil per day ( bopd ). Production growth was constrained by infrastructure bottlenecks, which impacted our planned production growth during 2010, but these issues have now been eliminated following the switch over to the new 30-inch trunkline. Contents Key Milestones in Our Area of Operations and Marketing Routes 08 Delivering our Strategy 10 Chairman s Statement 12 Message from the Chief Executive Officer 16

8 06 09 Overview 06 Key Milestones in 2010 Quarter Quarter Contracts awarded for the construction of the Dzhygalybeg (Zhdanov) A and Dzheitune (Lam) C platforms, to be delivered in Q and Q4 2011, respectively Contract for lease and management of a new build Super M2 jack-up rig awarded to Yantai Raffles Offshore Ltd.; expected delivery date is Q Dzheitune (Lam) B/141 well tested at 1,895 bopd Workover of Dzheitune (Lam) A/125 well completed yielding an incremental production of 562 bopd Dzheitune (Lam) B/145 well tested at 1,054 bopd Drilling Infrastructure Material Events Dzheitune (Lam) A/142 and 13/143 wells tested at 2,103 and 2,168 bopd, respectively The Board of Dragon Oil decided not to proceed with a proposed corporate restructuring of the Company after an extensive review of the options for, and implications of, a corporate restructuring months marketing contract signed to export crude oil via Baku, Azerbaijan April 2010 Short-term swap agreement via Neka, Iran, arranged

9 Dragon Oil plc Annual Report for the year ended 31 December 2010 Quarter Dzheitune (Lam) 13/144 and 28/146 wells tested at 1,809 and 2,311 bopd, respectively Sidetrack of Dzheitune (Lam) A/129 well performed yielding incremental production of 1,140 bopd Dzheitune (Lam) 28/147 well tested at 2,451 bopd Quarter Dzheitune (Lam) B/148 and 28/149 wells tested at 2,639 and 4,379 bopd, respectively Inserts (starting from the top left picture): Computer courses at the Centre of Excellence, the Dzheitune (Lam) B platform, offshore operations, storage tankers, CPF, Aladja Jetty terminal, offshore operations Dzheitune (Lam) 28/151 well tested at 2,656 bopd inch 40 km trunkline completed and commissioned Phase 2 expansion of the Central Processing Facility ( CPF ) completed Dzheitune (Lam) B/150 well tested at 1,622 bopd inch in-field pipeline from the Dzheitune (Lam) Platform B to 28 completed and commissioned 07 January 2011 Dragon Oil is bringing a substantial portion of unprocessed gas onshore together with crude oil via the new integrated network Key Milestones Financial Financial Statements Statements Governance Governance Responsibility Responsibility Performance Performance Strategic Review Strategic Review Overview

10 06 09 Overview 08 Our Area of Operations and Marketing Routes Our principal producing asset is located in the Cheleken Contract Area in the Caspian Sea, offshore Turkmenistan The Dragon Oil Group operates its principal asset offshore in the Caspian Sea from its onshore base in Turkmenistan. The base is near the town of Hazar, which is located on the western coast of Turkmenistan. In addition, Dragon Oil has offices in the capital of Turkmenistan, Ashgabat, where both Country Managers are located. Mediterranean Sea Oil Export Routes In the past, 80% 90% of our crude oil was marketed under a swap agreement with Iran. These arrangements expired in July 2010 and Dragon Oil was able to put in place a new contract for the marketing of our crude oil through Baku, Azerbaijan fulfilling the strategy of maintaining two export routes. The contract runs up to December 2011 FOB Aladja Jetty primarily using BP-operated Baku-Tbilisi-Ceyhan pipeline. We continue to monitor alternative marketing routes closely in order to achieve the most competitive terms and maintain flexibility. There are a limited number of export routes from the Caspian Sea. Apart from the currently used route, other options include via rail from Baku to Batumi on the Black Sea, which we have used in the past, the southern route via Neka in Iran and the northern route via Makhachkala in Russia. view online dragonoil.annualreport2010.com

11 Dragon Oil plc Annual Report for the year ended 31 December 2010 Current marketing route Other export routes Pictured: 1 Offshore operations. 2 Aladja Jetty export facilities. Cheleken Field Area 1 2 The Dzheitune (Lam) and Dzhygalybeg (Zhdanov) fields are located in the Cheleken Contract Area, offshore Turkmenistan, west of the coastal town of Hazar. The fields comprise two elongate anticlines situated at the eastern end of the Aspheron Ridge. The Apsheron Ridge is a prolific hydrocarbon play extending from the Apsheron Peninsula in Azerbaijan to the Cheleken Peninsula in Turkmenistan, and divides the South Caspian Basin from the Middle Caspian Basin. The 3-D seismic survey was acquired in 2004/2005; the interpretation was completed, while continuous additional studies and refinement are ongoing. Dzheitune (Lam) The Lam Field is located to the South-West of Zhdanov field. Since the commencement of the Production Sharing Agreement ( PSA ) in 2000, Dragon Oil has drilled 53 new wells on the Lam field as of 29 March 2011, constructed and installed two new platforms with plans to install one more platform in late 2011, refurbished and upgraded existing platforms and performed many successful workovers. First well drilled in 1967 First production in old and 53 new wells in production Nine producing platforms. Dzhygalybeg (Zhdanov) The Zhdanov Field is located to the North-East of the Lam field. The initial exploration and prospecting of the Zhdanov structure began in The first well with commercial oil and gas was drilled in The field has produced oil and gas from a series of numerous, stacked early to middle Pliocene Red Series sandstone reservoirs. Dragon Oil has completed a number of successful workovers in the Zhdanov Field and plans to install its first new platform, Zhdanov A, in early First well drilled in 1966 First production 1972 Three old wells still producing. read more Turkmenbashi Bay about our reserves and resources on page Our Area of Operations and Marketing Routes Financial Financial Statements Statements Governance Governance Responsibility Responsibility Performance Performance Strategic Review Strategic Review Overview

12 10 19 Strategic Review 10 Delivering our Strategy in 2010 What we said in 2010 Progress we have made Our plans for 2011 Plans to complete up to 11 wells We accomplished the 11-well drilling programme, having tested the 11 th well in the first week of January To drill and complete up to 11 wells. Target annual production growth of 15% We achieved a 5.5% growth in the gross average production rate. The growth was below our expectations due to infrastructure bottlenecks, which have since been eliminated with the transition over to the new integrated network completed in December Production growth of 10% 15% to be targeted. US$250 million allocated for capital expenditure in oil infrastructure projects US$250 million spent on infrastructure projects. Estimated capital expenditure for oil infrastructure of US$250 million. Continue progress made in monetisation of gas resources We achieved key milestones, including: The 30-inch 40 km trunkline has been constructed to deliver oil and gas onshore; The Phase 2 expansion of the CPF has been completed with the capacity increased to handle up to 220 million standard cubic feet of gas per day ( mmscfd ); The Front End Engineering Design ( FEED ) study for the Gas Treatment Plant ( GTP ) has been finalised; we are currently looking at optimising design. Continue discussions on gas monetisation opportunities; Proceed with the plan for construction of the GTP subject to market conditions and the conclusion of the gas sales agreement. Pursue diversification of asset base with focus maintained on quality and strategic fit We are yet to conclude an acquisition transaction. Deliver on our diversification objective.

13 Dragon Oil plc Annual Report for the year ended 31 December 2010 Key risks Limited availability of top international contractors capable of offshore operations; Limited supply of jack-up rigs capable of offshore operations within the Caspian Sea region. Wells may come on production with flow rates below our expectations; Bottlenecks in infrastructure; Rig availability. Limited availability of top international contractors capable of offshore construction; Limited number of construction yards within the Caspian Sea region. Continued weak demand for gas. High expectations from sellers; Competitive market environment. How we address risks A two-year extension of the contract for the use of the Iran Khazar rig has been signed; Rig 40 will be redeployed this year; The contract for the use of the NIS rig will be extended to cover drilling of up to five wells in 2011; Super M2 jack-up rig expected in Q4 2011; Tendering for additional rigs is ongoing. New infrastructure in place allowing us to achieve the 2010 exit rate in excess of 57,000 bopd, also successfully maintained in January-March 2011; Contracts for rigs extended or being extended; Ongoing upgrade and maintenance of platforms and in-field pipelines. Initiated contact with new contractors to widen the contractor base; We allocated land in the harbour area to contractors to allow them to assemble platforms near Dragon Oil s operations. We have an open and positive dialogue with the government; We support the country s initiatives in the area of the development and marketing of the country s gas resources. We expanded regions of interest to comprise North and West Africa, the Middle East, Central and South-East Asia; We consider offshore, shallow water and onshore operations; We screen targets with exploration upside. Pictured: Aladja Jetty terminal. 11 Delivering our Strategy Financial Financial Statements Statements Governance Governance Responsibility Responsibility Performance Performance Strategic Review Strategic Review Overview

14 10 19 Strategic Review 12 Chairman s Statement 2010 has been both a successful and busy year for Dragon Oil. Against the backdrop of a recovering global economy and rising oil prices, we have achieved record results whilst successfully overcoming a number of challenges, and have continued to make progress on our medium-term strategic objectives, laying the groundwork for future success. Mohammed Al Ghurair, Non-executive Chairman Against the backdrop of a recovering global economy and rising oil prices, we have achieved record results whilst successfully overcoming a number of challenges, and have continued to make progress on our mediumterm strategic objectives, laying the groundwork for future success. Revenue Growth US$m , Earnings per Share (basic) US cents Results and Performance Overview Overall, I am extremely pleased to report the strong financial and operating performance of the Group for Record profits for the year of US$386 million have increased Dragon Oil s Earnings per Share ( EPS ) by some 49% over 2009 to 75 US cents per share, while revenues for the year were approximately US$780 million, an increase of 25% over the previous year. In terms of evaluating our performance for the year, the Board has considered three main measures. First, at the outset of 2010 we targeted a reserves replacement ratio of 100% for the year, which we comfortably managed to achieve through organic growth. Following an independent assessment, our oil and condensate reserves in the Cheleken Contract Area in Turkmenistan were upgraded to 639 million barrels as at the end of 2010 from 617 million barrels a year earlier, after taking into account production in In addition, a portion of gas resources were converted into 1.6 trillion cubic feet ( TCF ) of gas reserves, corresponding to a further 260 million barrels of oil equivalent ( boe ). Secondly, our objective was to drill a total of 11 wells in By the year-end we had drilled 10 of those, successfully completing the initial testing of the 11 th well in early January view online dragonoil.annualreport2010.com

15 Dragon Oil plc Annual Report for the year ended 31 December 2010 Finally, we targeted production growth of 10% for the year. This proved more difficult to achieve with average gross production increasing by 5.5% in 2010 as we experienced a number of infrastructure bottlenecks as the year went on. However, by the end of 2010 we successfully completed and commissioned a transformational infrastructure upgrade, which not only completely eliminated these bottlenecks but also nearly doubled our potential processing capacity of liquids. The results speak for themselves with exit production reaching 57,013 bopd after the infrastructure was put in place in December 2010 compared to average production for the year of 47,211 bopd. The infrastructure upgrade therefore leaves us well positioned to achieve our target production growth in Industry Backdrop Following the steep rising trend in 2009, oil prices continued to increase in Brent gained around 20% during the year and ended at US$95 per barrel, reflecting the recovering global economy. Dragon Oil s share price performance outpaced the rising oil price during the year, increasing by over 39% to end the year at 538 GBp. Importantly the high crude oil price level provides us with a strong environment for planning and investment in the medium term. Strategic Overview The Board and management team continued to focus on our medium-term strategic objectives during the year. Our primary aim is to develop the oil and gas reserves in the Cheleken Contract Area aggressively in order to maximise returns and we invested heavily in securing new rigs and infrastructure, awarding some US$200 million worth of infrastructure contracts in We also continued to leverage our technological expertise to drive production growth and achieve our targets. We have a talented and experienced reservoir development team who utilise drilling results combined with 3-D seismic imaging and reservoir simulation models, to further enhance and refine our understanding of the complex structure of the two Cheleken Area fields. In line with our vision to be a diversified independent oil and gas company, we continued to pursue our strategy to acquire new exploration and production assets. The New Ventures Team screened a significant number of new venture proposals during the course of last year and the Board devoted significant time on evaluating suitable acquisition prospects. We were unable to realise our ambition last year mainly due to the high expectations of sellers of potential prospects. Identifying and realising a value-enhancing acquisition remains a strategic priority for the Board going forward, whilst ensuring that we retain a strong balance sheet. Dividend Policy Over the last few years Dragon Oil has generated strong revenues through a combination of substantial production growth and, in certain years, high oil prices. In recognition of the Group s performance, strong financial position and cash generation abilities, the Board of Directors of Dragon Oil has recommended the payment of a fullyear maiden dividend of 14 US cents in respect of The Board expects the Group to continue to finance the development of Cheleken Contract Area from the funds generated by the asset itself. Furthermore, the Board anticipates that potential acquisitions will be funded from existing financial resources and debt facilities although, if appropriate, the Board would consider the broad range of other options available to it. This flexibility will enable the Group to continue to fund the organic and non-organic growth strategy as well as make dividend payments. Why did the Board decide to recommend the payment of dividends? 13 The Board reviews the dividend policy at least annually and has considered introducing a dividend payment for some time. With production in Turkmenistan having reached a significant level and set to grow further, our asset generates stable cash flows; this leaves us in a strong position to pursue the area s accelerated development and continue with our diversification strategy. The Board has decided, given the Group s current production and balance sheet strength, that it is now an appropriate time to start paying a dividend. Over the last few years, Dragon Oil has generated strong revenues through a substantial production growth combined with high oil prices. In recognition of the Group s solid performance, strong financial position and cash generation abilities, the Board of Directors of Dragon Oil has recommended the payment of a fullyear maiden dividend of 14 US cents per share in respect of The Board expects the Group to continue to finance the development of the Cheleken Contract Area from the funds generated by the asset itself. Furthermore, the Board anticipates that potential acquisitions will be funded from existing financial resources and debt facilities although, if appropriate, the Board would consider other options available to the Group. This flexibility will enable the Group to continue to fund the organic and non-organic growth strategy as well as to make dividend payments. Chairman s Statement Financial Financial Statements Statements Governance Governance Responsibility Responsibility Performance Performance Strategic Review Strategic Review Overview

16 Strategic Review Chairman s Statement continued The level of future dividends will be decided by the Board at the appropriate time in light of the Group s then performance, capital requirements and its investment needs and opportunities. Next year the annual dividend will be split between an interim and final dividend, and paid approximately half-yearly. Corporate Developments In April 2010, following the review of a possible change to Dragon Oil s corporate structure, the Board decided that Ireland remains the most attractive jurisdiction for the holding company of the Group and consequently did not proceed with a corporate restructuring. Dragon Oil continues to enjoy a primary listing on the Irish Stock Exchange and, in accordance with 2009 changes to the UK Listing Regime, Dragon Oil s London Stock Exchange listing has been designated as a premium listing since April In January 2011, Nomura International plc ( Nomura ) was appointed as Joint Broker to Dragon Oil alongside Davy following an in-depth selection process last year. The Board felt it was an appropriate time to add a second broker given that Dragon Oil is now one of the largest listed European Exploration and Production companies by market capitalisation and given our desire to broaden the Shareholder base and increase engagement with all our stakeholders. The Board looks forward to working with Nomura, as well as Davy, and welcomes the experience, expertise and advice that both brokers bring to the Company. Investing in Our People In 2010, we continued to invest significantly in the training and recruitment of our local Turkmen employees whose numbers increased by 8% in 2010 to almost 1,000. This is in line with our objective of empowering local employees at all levels to make them an independent and skilled workforce. We launched a substantial staff training and development programme focusing on key skill areas as well as creating a training roadmap for high-potential employees. We also established a new Centre of Excellence, which provides a dedicated facility for local employees training and our vision is to broaden access to this centre to the larger community in Hazar. Board Directors undertook two field visits last year in order to increase our level of direct interaction with local employees. In April 2010, our CEO, two Non-executive Directors, Ahmad Sharaf and Ahmad Al Muhairbi, and I spent two days visiting our Turkmenistan operations in the Cheleken Contract Area while in October last year our CEO, Non-executive Director Ahmad Al Muhairbi and I returned for a follow-up visit. The response to these initiatives was both rewarding and positive, reflecting the importance of direct interaction with our local employees to demonstrate our strong commitment to Turkmenistan and particularly to our Turkmen national employees. We have also pursued our objective to improve health and safety levels for our employees continuously with the recorded Lost Time Incident Frequency Rate falling to 1.46 in 2010 from 1.64 in This was primarily attributable to the continued implementation of the Health and Safety procedures and processes throughout the organisation. Investing in Our Community Dragon Oil remains committed to investing in Corporate Social Responsibility ( CSR ) activities, reflecting our belief that it is our duty and responsibility to take care of the community in which we operate. Key initiatives in 2010 focused on improving education and health in the local Hazar community. We have completed the concept design and scope of work stages for the building of a new US$3 million polyclinic in Hazar and are currently in the process of selecting a contractor. We also began the process of supplying neo-natal equipment, including infant incubators, to the local Hazar hospital while smaller projects included the repair and refurbishment of a local school s sports gym and the refurbishment of the sports ground in Hazar Park. In addition, we have provided boats and equipment to the Hazar Sea Reserve. Relationship with our Hosts, the Government of Turkmenistan The relationship among the Government of Turkmenistan, the State Agency for the Management and Use of Hydrocarbon Resources ( Agency ) and Dragon Oil remains strong with frequent highlevel meetings and positive interaction. Indeed, in October last year I had the pleasure, together with our CEO, of travelling to Turkmenistan to meet personally with government officials in Ashgabat. Earlier in February last year Dragon Oil participated in the Turkmenistan Investment Forum held in Abu Dhabi and then had the pleasure to host Turkmenistan Government officials in Dubai who attended the forum. On behalf of the Board, I would like to take this opportunity to acknowledge the continued support of our Shareholders and to thank the management team and all of our employees for their dedication and hard work throughout this past year. We look forward to 2011 with renewed confidence. MOHAMMED AL GHURAIR Non-executive Chairman

17 Dragon Oil plc Annual Report for the year ended 31 December 2010 Above: Offshore operations. 15 Chairman s Statement Financial Financial Statements Statements Governance Governance Responsibility Responsibility Performance Performance Strategic Review Strategic Review Overview

18 10 19 Strategic Review 16 Message from the Chief Executive Officer We have had a remarkable and successful year at Dragon Oil, having reached a record in terms of revenues generated, exit production rate achieved, the number of wells drilled and completed and major contracts awarded for infrastructure projects. Dr Abdul Jaleel Al Khalifa, Chief Executive Officer With a number of infrastructure contracts awarded and progressed in 2010 and more to come in the next two to three years, we are paving the way for strong production growth in the future. The completion and commissioning in December last year of a major infrastructure upgrade comprising the new 30-inch 40 km trunkline, three interconnecting in-field pipelines and the expanded CPF was a challenging and yet ultimately rewarding undertaking, which touched upon many aspects of the Group s operations. Earlier unexpected delays in the execution of this upgrade led us to experience a number of infrastructure bottlenecks, which constrained production growth for the year. However, the management team mobilised both internal and external resources and relied heavily on Dragon Oil teams in the field to bring this important infrastructure project to a successful conclusion. The experience has prompted us to widen our contractor base for future projects and initiate contacts with new suppliers Objectives and Deliverables Up to 11 wells to be completed Production growth of 10% 15% to be targeted The Dzheitune (Lam) C platform to be delivered in Q The Super M2 jack-up rig expected in December 2011 The Dzheitune (Lam) Block I gathering station to be installed in 2011 The 100-tonne crane vessel to be delivered in Q Medium-Term Outlook, Complete up to 40 new wells, including five appraisal wells Target production growth of 10% 15% on average per annum Aggregate infrastructure spend of approximately US$ million excluding gas capex GTP is constructed and becomes operational as envisaged in 2013 The completion of this new integrated network delivered significant improvements as soon as we commenced the switch over from the two existing 12-inch pipelines. The exit rate for 2010 was 57,013 barrels, which was almost 10,000 bopd ahead of the average rate for the whole of We have begun 2011 with a very robust rate of production, maintaining an average production rate of over 57,000 bopd throughout January. This puts us in a strong position to deliver on the upper end of our production forecast this year. Overview of Operations Revenues for the year were up 25% to US$780 million due to increased gross production and a higher entitlement rate, as well as stronger realised crude oil prices with Dated Brent averaging around US$80 per barrel during the year offset by a 9% discount achieved under the two marketing routes. For 2011, we anticipate being able to increase production by 10% 15%. view online dragonoil.annualreport2010.com

19 Dragon Oil plc Annual Report for the year ended 31 December 2010 During 2010, we exported 10.8 million barrels of crude oil via two routes as Dragon Oil transitioned smoothly from existing marketing arrangements via Neka, Iran to new export arrangements via Baku, Azerbaijan. In the past, 80% 90% of our crude oil was marketed under a swap agreement with Iran. Following the expiration of these arrangements in July last year, Dragon Oil was able to put in place quickly a new contract for the marketing of our crude oil through Baku, Azerbaijan fulfilling our strategy of maintaining two export routes. We have extended this contract up to December 2011, ensuring that we have secure and stable marketing arrangements in place for our production in the current year. At the same time we are closely monitoring marketing routes with an eye on commercially attractive options to supplement our current arrangements. Investment in Our Infrastructure Base We continue to plan ahead and invest in new infrastructure as well as upgrade the existing facilities. Thus, in 2010, we awarded two separate contracts for the construction of two new wellhead and production platforms in the Dzheitune (Lam) and Dzhygalybeg (Zhdanov) Fields. The Dzheitune (Lam) C platform, to be delivered in Q4 2011, represents a third new platform to be installed by Dragon Oil since becoming the operator in the Cheleken Contract Area in 2000 and will aid us in the continued development of the Western area of the field. Notably, the Dzhygalybeg (Zhdanov) A platform, due to be delivered in Q1 2012, will be the first new platform to be installed by Dragon Oil in the Dzhygalybeg (Zhdanov) Field since we became an operator. We ordered a new 100-tonne crane vessel, which is now under construction and is scheduled for delivery in Q The addition of this crane vessel to our fleet will enhance the Group s offshore operating capabilities. We are also building a new gathering platform, the Dzheitune (Lam) Block I, in the Western Area of the field. It is currently being launched and is expected to be completed in the first half of this year. With a number of infrastructure contracts awarded and progressed in 2010 and more to come in the next two to three years, we are paving the way for strong production growth in the future. Drilling Campaign The well drilling programme yielded a 5.5% increase in average gross daily production to 47,211 bopd. Production growth was constrained by infrastructure bottlenecks, which impacted our planned production growth during 2010, but these issues have now been eliminated following the switch over to the new 30-inch trunkline. We employed four rigs last year, on the basis of a combination of full-time and shortterm contracts, and will continue to use three of those in The contract for the lease and management of the NIS rig is expected to be extended to cover the drilling of all development wells on the Dzheitune (Lam) 28 platform. A two-year contract extension for the lease and management of the Iran Khazar rig has been signed, bringing the total contract length for this rig with Dragon Oil to eight years. Rig 40 will be re-employed after a successful six-well drilling programme on the Dzheitune (Lam) 13 platform. Moreover, to support our drilling campaign beyond 2011, we ordered a new build Super M2 jack-up rig last year from Yantai Raffles Offshore Ltd with an expected delivery date of December this year. The M2 jack-up rig will be constructed as a self-elevating drilling unit in accordance with international marine construction standards. Our intention is to lease it for five years with an option to extend the lease for another two years. This new build jack-up rig is designed to be a more powerful and efficient rig compared to the rigs currently used allowing us to drill deeper and faster. How confident are you of the production guidance for 2011? 17 Last year, the production growth was below our expectations because we experienced infrastructure bottlenecks that had constrained the production growth but had been eliminated with the transition over last December to the integrated network comprising a new 30-inch 40 km trunkline, associated in-field pipelines and the expanded CPF. The switch over to the new system freed the production flow and is evidenced by the fact that we were able to achieve an exit rate of 57,013 bopd last year, up nearly 15% on the year before. Moreover, production last December was almost 10,000 bopd ahead of the rate for the whole of 2010 and was maintained throughout January and February this year. This puts us in a strong position to deliver on the upper end of our production forecast this year. As any business, we face risks that may impact our operations. One of the most significant risks for us is the availability of rigs. For 2011, we will continue to use three rigs: Rig 40, the NIS rig and the Iran Khazar rig. Rig 40 is our own rig and will be re-employed on the Dzheitune (Lam) 13 platform. We have successfully extended the contract for the use of the Iran Khazar rig for another two years and are in discussions for extension of the contract for the NIS rig to cover drilling of up to five wells this year. To support our drilling operations beyond 2011, we anticipate the delivery of the new build Super M2 jack-up rig in December this year. Message from the Chief Executive Officer Financial Financial Statements Statements Governance Governance Responsibility Responsibility Performance Performance Strategic Review Strategic Review Overview

20 Strategic Review Message from the Chief Executive Officer continued What is your diversification strategy? Why do you not acquire more assets in Turkmenistan? We continue to look actively for assets, which have the potential to offer both near and medium-term production and reserves. The Group has expanded the regions of interest to include North and West Africa, the Middle East, Central Asia (former Soviet Union Republics, especially around the Caspian Sea) and to a lesser degree South-East Asia. While Dragon Oil s expertise lies with developing and operating oil and gas reservoirs offshore, such experience could also be applicable to shallow water offshore and onshore operations. Moreover, we consider targets that besides being development opportunities also bear an exploration upside. We look to do a meaningful size acquisition, which would add in excess of 50 million of barrels in reserves and would offer an opportunity for longer-term growth through exploration. A good example will be a pre-development asset with discoveries already made or an asset in the early stages of production. Most of available assets in Turkmenistan are onshore gas assets and according to recent media reports will not be offered for exploration and production to foreign oil companies. Equally important is the fact that we would like to spread our country risk by diversifying our portfolio geographically. Through partnerships, joint ventures or farm-ins, Dragon Oil can offer its proven technical and operational expertise, supported by over 10 years development of the Cheleken Contract Area, while in areas where we operate, i.e. the Caspian Sea and the Middle East, our experience and links with contractors and strong Host government relationships could be invaluable. Upgrade of Reserves and Monetisation of Gas Following the recent assessment by an independent energy consultant the yearend reserves were upgraded to 639 million barrels of oil and condensate. At the same time a proportion of gas resources was converted based, amongst other factors, on the planned capacity of the Gas Treatment Plant ( GTP ) into 1.6 TCF of gas reserves corresponding to 260 million boe; the remaining gas resources were 1.4 TCF. The increase in oil and condensate reserves comes from both an increase in reserves in the Dzheitune (Lam) West area, as we progressively learn more about the reservoir from drilling results, as well as from the additional condensate, which will be stripped from gas once the GTP is constructed and becomes operational as envisaged in Our current gas production is 120 million standard cubic feet of gas per day ( mmscfd ) and we bring most of this onshore via the new 30-inch trunkline. Virtually all gas is currently flared pending the completion of the Hazar compressor station and the connecting pipeline between the station and our CPF, although a small proportion is delivered to Hazar for domestic use to help the local community. As soon as the facilities at the compressor station are completed by the government we will be in the position to supply unprocessed gas to the Turkmen system and cease gas flaring. In 2010, we engaged with the government on gas monetisation opportunities and in 2011 we expect these discussions to continue. We have an open and positive dialogue with the government and we support the country s initiatives in the area of the development and marketing of the country s gas resources. M&A activity Though we have yet to close an acquisition transaction, the New Ventures Team has been working hard to identify a suitable target. Many options were considered and we continue to work towards the objective of portfolio diversification this work necessarily takes place behind the scenes in order not to undermine our negotiating position with competitors and counterparties. We have broadened the regions we are looking at to comprise North and West Africa, the Middle East and Central and South-East Asia, while expanding our criteria to consider targets which not only offer development opportunities, but also bear an exploration upside. Dividend policy I am delighted to report that the Board of Dragon Oil has recommended the payment of a full-year maiden dividend in respect of This is a testament to the Group s solid performance, strong financial position and signals the confidence of the Board and senior management team in the Group s future growth potential. The Group has significant financial resources and cash generation abilities enabling us to continue the development of the Cheleken Contract Area and pursue the acquisition of new assets whilst also commencing the payment of dividends.

21 Dragon Oil plc Annual Report for the year ended 31 December 2010 Human Resources Initiatives and HSE At Dragon Oil we are proud to be one of the largest independent oil and gas operators in Turkmenistan with the majority of our workforce, not surprisingly, originating from Turkmenistan. Our employer status and importance for the community impose big responsibilities on the Company to be a dependable, ethical and conscientious partner. Our Human Resources Strategy is focused on educating and empowering our Turkmen national employees, both in the field and in our country office in Ashgabat, whilst fully supporting them from our headquarters in Dubai, UAE. We are proud to have local Turkmen holding the Country Manager s post in Ashgabat and certain supervisory positions in the field. We put a strong emphasis on human capital and will continue to empower both the local and expatriate workforce and provide them with open and rewarding career opportunities. The Group puts significant effort into site HSE supervision, safety training and the provision of the necessary protective equipment. Our prime responsibility is to protect our employees and contractors from work-related injuries and illnesses by regularly assessing the health and safety risks associated with our operations and providing extensive training in safety measures. Above: Desalination plant. Engagement with the Community The development of the Cheleken Contract Area is a big project for an independent operator, such as Dragon Oil, and entails a significant social responsibility to act accordingly and in harmony with the country s laws and the community s values. Our CSR strategy revolves around a number of undertakings where we aim to contribute in a meaningful way to the welfare of the community of Hazar to foster economic prosperity and well-being. The desalination unit continues to supply fresh water to the community and we are currently in the process of selecting a contractor to build a US$3 million polyclinic in Hazar to support the local community. A few words for 2011 We remain focused on three strategic areas: the accelerated development of the Cheleken Contract Area, gas development opportunities and valueenhancing acquisitions, which grow our reserves base. I believe we have a focused and experienced management team as well as a commitment throughout the organisation to deliver on our objectives. DR ABDUL JALEEL AL KHALIFA Chief Executive Officer 19 How have you sought to diversify your contractors to avoid the problems experienced with the trunkline last year? Over the past two years, delays, which we have experienced with certain infrastructure projects have prompted us to expand our contractor base and introduce new rigorous standards for hiring suppliers and service providers. Historically the number of contractors operating in the Caspian Sea has been limited and restricted to companies based in the region. However, we have taken steps to initiate contacts with new contractors. As an example, we awarded a contract for a new build Super M2 jack-up rig and the subsequent lease and management of the rig in January last year to a new contractor from the Far East. Following a competitive tender, a contractor from China with a consortium of international service providers was selected as the preferred contractor. Building on this experience, also in 2010 we conducted a number of competitive tenders for infrastructure projects, including the construction of the two new wellhead and production platforms, Dzheitune (Lam) C and Dzhygalybeg (Zhdanov) A. The contracts were awarded to two separate contractors based in the Caspian Sea and a Eurasian country, respectively. The former has extensive experience in working in the Caspian Sea region, while the latter has completed a significant number of projects in Turkmenistan specifically. Message from the Chief Executive Officer Financial Financial Statements Statements Governance Governance Responsibility Responsibility Performance Performance Strategic Review Strategic Review Overview

22 Pictured: Offshore platform.

23 Focusing on results and our human capital Production Human Capital Performance In 2010, average daily production on a working interest basis increased by 5.5% to 47,211 bopd (2009: 44,765 bopd) based on the 11-well drilling programme. Production growth, however, was constrained by infrastructure bottlenecks, which were eliminated once we completed the major infrastructure upgrade at the end of Last year we invested significantly, and will continue to do so in the future, in the training and development of our Turkmen employees, whom we believe to be the key to our future in-country success. In particular, we completed the new Centre of Excellence in Hazar, Turkmenistan, which will offer training courses to our employees as well as a broader curriculum to the local community. Responsibility Contents Operating and Financial Review 22 Corporate Social Responsibility Report 30

24 22 29 Performance 22 Operating and Financial Review Production In 2010, average daily production on a working interest basis increased by 5.5% to 47,211 bopd (2009: 44,765 bopd) based on the 11-well drilling programme. Production growth, however, was constrained by infrastructure bottlenecks, which were eliminated once we completed the major infrastructure upgrade at the end of This consisted of the integrated network of a new 30-inch 40 km trunkline and and 20-inch inter-field pipelines and the expanded CPF. As a consequence, our exit rate at the end of 2010 was up 14.7% to 57,013 bopd compared to the level seen in Above: Aladja Jetty terminal. In 2010, Dragon Oil was able to put in place quickly a new contract for the marketing of our crude oil through Baku, Azerbaijan fulfilling the strategy of maintaining two export routes. There were no interruptions to our operations while we were undergoing this change. We are closely monitoring alternative marketing routes with an eye on commercially attractive options to supplement our current arrangements. In 2010, the entitlement production was approximately 61% of gross production (2009: 58%). Entitlement barrels are dependent, amongst other factors, on the fiscal terms of the Production Sharing Agreement ( PSA ), operating and development expenditure in the period and the realised crude oil price. Marketing Dragon Oil sold 10.8 million barrels of crude oil in 2010 (2009: 10.5 million barrels). This is 3% higher than the volume sold during the previous year due to increased production and changes in lifting position. Production Growth (on a working interest basis) barrels of oil per day , , ,211 50,000 37,500 25,000 12,500 0 Marketing of crude oil million barrels of oil In 2010, approximately 60% (2009: 10%) of crude oil was exported via Baku, Azerbaijan; the balance was marketed under the swap agreement with Iran and a subsequent three-month extension, which expired in July The Group currently exports all of its entitlement barrels through Baku, Azerbaijan. The terms of the contract are FOB the Aladja Jetty, primarily using the BP-operated BTC (Baku-Tbilisi-Ceyhan) pipeline. The marketing contract is valid up to December view online dragonoil.annualreport2010.com

25 Dragon Oil plc Annual Report for the year ended 31 December 2010 Since the commencement of its PSA for the Cheleken Contract Area, Dragon Oil had marketed 80% 90% of its entitlement barrels through a crude oil swap agreement with a subsidiary of the National Iranian Oil Company, Naftiran Company Limited ( NICO ) while maintaining flexibility by exporting the balance via an alternate route. The Iranian swap agreement expired on 31 March 2010 and Dragon Oil subsequently entered into a three-month swap contract with NICO, which expired in July All operations under the swap arrangements with NICO ceased at that time. Concurrently, Dragon Oil was able to put new marketing arrangements in place to secure the exporting of its crude oil without interruptions. To gain further access to international markets and maintain flexibility in operations, Dragon Oil continues to review alternative routes for exporting its crude oil. The Group was in an overlift position of approximately 0.2 million barrels of crude oil at the end of 2010 (31 December 2009: 0.2 million). Drilling and Operations Dragon Oil completed an 11-well drilling programme during 2010 and the first week of January The following table summarises the results of this drilling programme, which took place in the Dzheitune (Lam) field: Completion Depth Type of Initial test Well Rig date (metres) completion rate (bopd) A/142 Iran Khazar March 3,961 Dual 2,103 13/143 Rig 40 March 3,450 Dual 2,168 B/141 Astra April 4,502 Dual 1,895 B/145 Astra June 3,344 Single 1,054 13/144 Rig 40 July 3,434 Single 1,809 28/146 NIS July 3,200 Single 2,311 28/147 NIS September 3,400 Single 2,451 B/148 Iran Khazar October 3,858 Dual 2,639 28/149 NIS October 3,295 Dual 4,379 28/151 NIS December 3,512 Dual 2,656 B/150 Iran Khazar January ,980 Dual 1,622 Above: Drilling operations. 23 Do you expect to be able to renew the current agreement on the same terms? Are there any other routes you could consider? We have secured the marketing arrangements to export our crude oil via Baku, Azerbaijan until the end of As for 2012 and beyond, we continue to negotiate with various parties and monitor alternative marketing routes closely in order to achieve the most competitive terms and maintain flexibility. At the moment, although all of our crude oil is exported via Baku, Azerbaijan, a small volume of our production is not committed to this route and can be re-directed via an alternate route should an opportunity arise or if we want to add flexibility to our current arrangements. In 2010, we achieved average realised oil prices of US$72, which were at a 9% discount to Dated Brent. This reflects a combination of 60% of volumes exported via Baku, Azerbaijan and 40% exported via Neka, Iran under the previous Iranian swap arrangements, which expired in July last year. Since we are currently exporting all of our entitlement barrels through Baku, Azerbaijan under the current contract, we expect the average discount to Brent to widen this year. Given that the Caspian Sea is a land locked sea, we face a limited number of export routes. Currently our crude oil is exported west primarily via the BP-operated Baku-Tbilisi-Ceyhan pipeline all the way to Turkey. Other options include export via rail from Baku to Batumi on the Black Sea, which we have used in the past, the southern route via Neka, Iran and the northern route via Makhachkala in Russia. Operating and Financial Review Financial Financial Statements Statements Governance Governance Responsibility Responsibility Performance Performance Strategic Review Strategic Review Overview

26 Performance Operating and Financial Review continued The workover programme in 2010 included a workover of the Dzheitune (Lam) A/125 well, yielding an incremental production of 562 bopd and a sidetrack of the Dzheitune (Lam) A/129 well, yielding an incremental production of 1,140 bopd. Both operations were performed by the Iran Khazar rig. Moreover, two wells on the Dzheitune (Lam) 13 platform were perforated using wireline operations yielding a combined incremental production of approximately 700 bopd. Dragon Oil continues to employ drilling rigs on the basis of a combination of full-time and short-term contracts depending on their availability and commercial terms. The 2011 drilling programme is based on the use of three rigs: Rig 40 will drill two wells from the Dzheitune (Lam) 13 platform extending its successful six-well drilling campaign; the slots for these wells have already been added. The platform-based Naftna Industrija Srbije Naftagas ( NIS ) rig is currently drilling on the Dzheitune (Lam) 28 platform with the aim of completing up to five wells in The Group s original plan to drill seven wells using the NIS rig during its contract term has been expanded to include two more wells (nine wells in total) on the Dzheitune (Lam) 28 platform, the slots for which are currently being added. Early in 2011, Dragon Oil agreed in principle a two-year extension for the use of the Iran Khazar rig. The extension of the contract enables the rig to continue drilling from the Dzheitune (Lam) B platform and to complete four wells this year. Since the first contract for the employment of this rig by Dragon Oil in the Cheleken Contract Area was signed in 2005, we have successfully completed 23 wells from the Dzheitune (Lam) platforms 21, 28, 10, A and B, as well as a number of workovers by the Iran Khazar rig. The Astra jack-up rig was used in the first half of 2010 on the newly-installed Dzheitune (Lam) B platform. The use of the Astra rig or its replacement remains an option in the future, pending favourable contractual terms and availability. In January 2010, Dragon Oil awarded a contract to Yantai Raffles Offshore Ltd. for the lease and management of a new build Super M2 jack-up rig ( M2 jack-up rig ) in the Cheleken Contract Area. This jack-up rig is being constructed as a self-elevating drilling unit in accordance with international marine construction standards. We anticipate the completion and mobilisation of the M2 jack-up rig to the Cheleken Contract Area in December Upon delivery, the lease and management contract is expected to commence for an initial duration of five years, with an option to extend it for a further period of up to two years. Infrastructure 2010 was an active year for Dragon Oil in terms of infrastructure projects accomplished and around US$200 million worth of contracts were awarded. We achieved an important landmark with the completion and commissioning of the major infrastructure upgrade, including the new 30-inch trunkline, a number of interconnecting in-field pipelines and the Phase 2 expansion of the CPF. The new 30-inch 40 km trunkline now allows us to bring most of the unprocessed gas onshore together with crude oil as we switch over from the two existing 12-inch pipelines. At the moment, we continue to flare gas pending the completion of the compressor station and a connecting pipeline between the station and our CPF; at the same time we supply a small proportion of gas to Hazar for domestic use. We are awaiting the completion of the facilities, anticipated in 1H 2011, to let us supply unprocessed raw gas to the Turkmen system. The capacity of the CPF has been almost doubled to allow the handling of up to 100,000 barrels of liquids per day with capacity to handle up to 220 mmscfd of gas. The new 30-inch trunkline has a capacity similar to the expanded CPF s and, unlike the existing 12-inch pipelines, has built-in mechanisms to perform pigging operations to clean the trunkline and minimise wax accumulation, especially in winter months. As part of last year s major project to upgrade the infrastructure, three additional inter-field pipelines were constructed in the Dzheitune (Lam) Field: from Platform A to Block II (20- inch), from Platform 28 to Platform A (18-inch) and from Platform B to Platform 28 (14-inch). The use of these new pipelines has allowed us to increase the throughput capacity and will accommodate the future development of the Western area of the Cheleken Contract Area. We are currently putting a new gathering platform into the water, the Dzheitune (Lam) Block I, in the West area of the field. It will replace the existing Block I and act as a gathering station, thus, providing additional throughput capacity for the crude oil flow in this part of the field. The Group is adding a new 100-tonne crane vessel to our fleet, which will enhance our offshore operating capabilities. The vessel will be employed to support drilling and infrastructure projects. It is currently under construction with anticipated delivery in Q In 2010, Dragon Oil awarded contracts for the construction of two new wellhead and production platforms, the Dzheitune (Lam) C and Dzhygalybeg (Zhdanov) A, to contractors with considerable experience in the Caspian Sea region. Both of the drilling platforms are designed to support jack-up rigs, while the Dzhygalybeg (Zhdanov) A platform will also be able to support a land rig and will comprise an accommodation facility with a connecting bridge from the drilling platform. Each platform will have up to eight slots for drilling with an option to extend the drilling programmes depending on the results from the first few wells. The designated locations are the Dzheitune (Lam) Field between the Dzheitune (Lam) B and 28 platforms for the Dzheitune (Lam)

27 Dragon Oil plc Annual Report for the year ended 31 December 2010 C platform and the eastern part of the Dzhygalybeg (Zhdanov) Field for the Dzhygalybeg (Zhdanov) A platform. The platforms are due to be completed in late 2011 and early 2012, respectively. Within the framework of a standardisation process that would enhance the Group s operating capabilities, Dragon Oil is initiating a generic Front End Engineering Design ( FEED ) study to determine a template for the construction of platforms in the Cheleken Contract Based on the results of the recent assessment by an independent energy consultant, the Group has upgraded its reserves to 639 million barrels of oil and condensate at the year-end and 1.6 TCF of gas reserves corresponding to 260 million boe. Recognition of gas reserves is based on a plan for development, a reasonable expectation of a market for the expected sales quantities of gas and the availability of infrastructure either in place or planned to be installed. The increase in oil and condensate reserves is due to increased reserves in the Dzheitune (Lam) West area and the additional condensate, which will be stripped from gas once the GTP is constructed and becomes operational. Area. This template would be utilised to improve an offshore platform design in order to optimise drilling and reduce platform construction costs. Another study is being launched to review the existing throughput capacity of the channel in the harbour area and the Aladja Jetty. Based on the findings of the study, we expect to undertake dredging activities with the aim of enhancing the Group s operational and crude oil loading capacity. Reserves and Resources As at 31 December As at 31 December Proved and Probable Oil and Oil and Remaining condensate condensate Recoverable million Gas million Gas Reserves barrels TCF barrels TCF Gross field reserves to 1 May C Resources Gross gas contingent resources New Business Opportunities and Yemen Participation In 2010, Dragon Oil s New Ventures Team identified a significant number of potential acquisition assets, which to a certain degree matched the criteria set by the Company, and pursued a variety of options, such as joint ventures, corporate acquisitions or project farmins. Although we are yet to deliver on the diversification objective, we continue to look actively for assets, which have the potential to offer both immediate and near-term production and reserves, with the upside of longer-term growth potential through exploration. The Group expanded the regions of interest to comprise North and West Africa, the Middle East, Central Asia (former Oil and Condensate Reserves (Proved and Probable Remaining Recoverable Reserves) million barrels Gas Reserves and Resources TCF Reserves Resources 25 Resources in previous years Operating and Financial Review Financial Financial Statements Statements Governance Governance Responsibility Responsibility Performance Performance Strategic Review Strategic Review Overview

28 Performance Operating and Financial Review continued On what basis did you book gas reserves? Following an assessment by an international independent consultant, we were able to convert 1.6 TCF of gas resources into gas reserves last year. In December 2011, we completed the infrastructure projects necessary to bring the gas onshore, namely the 30-inch 40 km trunkline and Phase 2 expansion of the CPF. In the meantime, the government of Turkmenistan has invested in the compressor station and the pipeline, which runs to our CPF. The completion of these facilities is anticipated in 1H 2011 and would allow us to introduce unprocessed gas into the Turkmen system. Our contractors finalised a FEED study for the construction of the GTP and we are currently looking at optimising the design of the plant and will proceed with the construction subject to market conditions and the conclusion of the gas sales agreement. The amount of the gas resources converted into gas reserves was determined by the planned capacity of the GTP. The monetisation of the gas resources is of strategic importance to the Group and we have reasonable expectations that a gas sales agreement will be forthcoming. At the same time, our belief is supported by the fact that Turkmenistan is keen to develop its natural resources and export of natural gas is a key part of the Country s energy policy. Over the past few years, Turkmenistan has undertaken measures to seek additional marketing routes, which are at various stages of consideration or construction at the moment. Nevertheless, the strategy to access new markets is a positive step forward for both Turkmenistan and its operators, both state-owned and independent, such as Dragon Oil. We support the country s initiatives in the area of the development and marketing of the country s gas resources and will continue to engage with the government on gas monetisation opportunities. Soviet Union Republics) and to a lesser degree South-East Asia. While Dragon Oil s expertise lies with developing and operating oil and gas reservoirs offshore, such experience could also be applicable to shallow water offshore and onshore operations. Moreover, we consider targets that besides being development opportunities also bear an exploration upside. The exploration programme in Yemen since acquiring minor interests in three Blocks (R2, Block 35 and 49) in 2007 has not borne success and, consequently, the interests in Block R2 and Block 49 have both been relinquished. Our participation in Block 35 is currently under review. Monetisation of the Gas Resources The Group is currently producing 120 mmscfd of associated gas, most of which is brought onshore via the new 30-inch trunkline for separation at the CPF; while a small portion is delivered to the neighbouring town of Hazar for local use. Based on the latest certification by an independent energy consultant, the Group s gas reserves are 1.6 TCF with the remaining 1.4 TCF classified as 2C gas contingent resources. The conversion of the portion of gas resources into 1.6 TCF of gas reserves was on the basis of the completion of the infrastructure necessary to bring gas onshore, expansion of the processing capacity and the planned capacity of the GTP. The monetisation of these gas resources is of strategic importance to the Group and during 2010, the Group made significant progress towards this objective with the achievement of the key milestones, including: (i) The 30-inch 40 km trunkline has been constructed to deliver oil and gas onshore; (ii) The Phase 2 expansion of the CPF has been completed with the capacity increased to handle up to 220 mmscfd of gas; and (iii) The FEED study for the GTP has been finalised; we are currently looking at optimising costs and will proceed with the plan for construction of the GTP. We will soon be in the position to deliver unprocessed gas to the Turkmen system upon completion of the compressor station and connecting pipe near the CPF. Once the GTP is operational, we will be able to strip the condensate from gas and blend it with our crude oil, thus achieving a better quality crude blend for marketing. Equally important will be the fact that we will be able to process raw gas to various export specifications. In 2010, we engaged with the government on gas monetisation opportunities and in 2011 we expect these discussions to continue. At the same time, Turkmenistan has actively worked on a number of new marketing routes. Although such routes are at different stages of consideration or construction, the strategy to access new markets is a positive step forward for both Turkmenistan and its operators, both state-owned and independent, such as Dragon Oil. We have an open and positive dialogue with the government to overcome short-term market conditions and we support the country s initiatives in the area of the development and marketing of the country s gas resources. Dividend policy The Board of Directors of Dragon Oil recommends the payment of a full-year maiden dividend of 14 US cents per share in respect of 2010 in recognition of the Group s solid performance, strong financial position and cash generation abilities. Since becoming the operator in the Cheleken Contract Area in 2000, the Group has invested substantially in its infrastructure base and over the last few years has been able to finance the development of the Area from the funds generated by the asset itself. It is our strategy to fund potential

29 Dragon Oil plc Annual Report for the year ended 31 December 2010 acquisitions from existing cash financial resources and debt facilities or, where appropriate, through other options available to the Company. Over the last few years Dragon Oil has generated strong revenues through a combination of substantial production growth and, in certain years, high oil prices. The Board believes these factors enable the Group to continue to fund the organic and non-organic growth strategy as well as make dividend payments. The Board s focus will remain on the Group s growth and, as such, the level of future dividend payments will reflect the Group s then performance, capital requirements and its investment needs and opportunities. The full-year maiden dividend proposed is 14 US cents per share for the year The dividend will be paid on 27 May 2011 to Shareholders on the register as of 3 May The Annual General Meeting ( AGM ) will be held on 18 May 2011 at the London Hilton Hotel. The following is the dividend timetable for the Shareholders information: 21 February 2011: Declaration of final dividend 27 April 2011: Ex-Dividend Date 3 May 2011: Record Date 18 May 2011: AGM 27 May 2011: Dividend Payment Date. The 2010 dividend of 14 US cents per share is a final dividend, which will be paid subject to Shareholder approval at the forthcoming AGM to be held on 18 May In subsequent years, the dividend will be split between an interim and final dividend and paid approximately half-yearly. The dividend will be declared in US dollars, the Group s functional currency. The exchange rate for the pound sterling or euro amounts payable will be determined by reference to the exchange rates applicable to the US dollar on the closest practicable date to the dividend payment date. The closing date for the receipt of currency election forms is 3 May 2011, the record date for the dividend. By default Shareholders (other than Shareholders holding their shares within CREST) with registered addresses in the UK will be paid their dividends in pounds sterling. Those with registered addresses in European countries, which have adopted the euro, will be paid in euro. Shareholders with registered addresses in all other countries will be paid in US dollars. Shareholders may, however, elect to be paid their dividends in a currency other than their default currency, and will have a choice of US dollars, euro or pounds sterling provided such election is received by our registrar the record date for the dividend. As the above arrangements can be inflexible for institutional Shareholders, where shares are held in CREST, dividends are automatically paid in US dollars unless a currency election is made. CREST members should use the facility in CREST to make currency elections. Currency elections must be made in respect of entire holdings and partial elections are not permitted. Dividends can be paid directly into a UK bank account to Shareholders who elect for their dividend to be paid in pounds sterling and to an Irish bank account where Shareholders elect to receive their dividend in euro. A dividend reinvestment plan is not available under the policy. Currency election and dividend mandate forms are available on Dragon Oil s website Irish Dividend Withholding Tax ( DWT ) must be deducted from all dividends paid by an Irish resident company, unless a Shareholder is entitled to an exemption and has submitted a properly completed exemption form to the Company s Registrar, (by post) Capita Registrars, PO Box 7117, Dublin 2, Ireland (or by hand) Capita Registrars, Unit 5, Manor Street Business Park, Manor Street, Dublin 7, Ireland by 3 May 2011, the dividend record date. DWT is deducted at the standard rate of Income Tax (currently 20%). Nonresident Shareholders and certain Irish companies, trusts, pension schemes, investment undertakings and charities may be entitled to claim exemption from DWT. Copies of forms applicable to all exemption types may be obtained online from the Irish Revenue Commissioners ( html). Individuals who are resident in Ireland for tax purposes are not generally entitled to an exemption from Irish DWT. 27 Our People In 2010, the Group increased its average headcount to 1,104, a 9% increase over the previous year. The Group continued with its objective of strengthening our expertise, cultural diversity and talent through hiring experienced and competent people. Our guiding principle of People First continues to drive our focus on training, empowering and trusting our talented workforce. It also drives our commitment towards the people in the community. The desalination plant and the planned polyclinic are only examples of such efforts. Outlook for The Iran Khazar jack-up rig and the platform-based NIS rig are drilling two development wells in the Dzheitune (Lam) field, B/153 and 28/152, respectively. These two wells are due to be put into production around the end of Q In 2011, we expect the Iran Khazar rig to drill and complete four wells on the Dzheitune (Lam) B platform. The NIS rig will continue to drill from the Dzheitune (Lam) 28 platform and is anticipated to complete up to five wells under the optimised drilling programme. Rig 40 will be re-deployed on the Dzheitune (Lam) 13 platform with the aim of drilling and completing two wells. In total, Dragon Oil plans to complete 11 development wells in Our medium-term business plan, for the period 2011 to 2013, envisages the completion of up to 40 new wells, including five appraisal wells, to support a target rate of production growth averaging 10% to 15% per annum. The forecast oil infrastructure spend is expected to be approximately US$ million over the period. The level of capital expenditure is subject to approval of projects under the PSA and the availability of contractors in the Caspian Sea region. Operating and Financial Review Financial Financial Statements Statements Governance Governance Responsibility Responsibility Performance Performance Strategic Review Strategic Review Overview

30 Performance Operating and Financial Review continued For gas development, we envisage additional capital expenditure for the period in the range of US$ million for the onshore GTP and associated facilities. Commencement of this project is dependent on market conditions and the conclusion of the gas sales agreement. Key financial data US$ million (unless stated) Change Revenue % Cost of sales (264.7) (282.3) (6%) Gross profit % Operating profit % Profit for the year % Earnings per share, basic (US cents) % Earnings per share, diluted (US cents) % Net assets 2, , % Net cash from operations % Net cash used in investing activities (721.9) (682.3) 6% Debt nil Financial Summary Dragon Oil has strengthened its balance sheet further in the last twelve months with a growth of 23% in net assets to US$2 billion. This increase mainly comprises US$267 million in non-current assets and US$199 million in cash and cash equivalents and term deposits. The Group has no debt and is able to finance its operations with net cash generated from its operations in Turkmenistan. A 25% increase in revenue to US$780 million and a 55% increase in operating profit to US$488 million are attributed largely to increased realised oil prices in 2010, increased production and a movement in the lifting position. Earnings per share were 49% higher than in 2009 and net cash from operations was up 19% over The year 2010 saw an increase of 23% in net assets represented largely by higher expenditure in oil and gas interests and an increased cash balance at the year-end. Income Statement Revenue Gross production levels in 2010 averaged 47,211 bopd (2009: 44,765 bopd) on a working interest basis. The entitlement production was approximately 61% (2009: 58%) of the gross production in The Group s share of entitlement production is determined by reference to cost oil and profit oil in accordance with the terms of the PSA. The entitlement barrels continue to be determined by, amongst other factors, the level of development expenditure and the realised oil prices. Revenue for the year was US$780 million compared with US$623 million in The increase of 25% over the previous year is primarily attributable to a 17% increase in the average realised price and a 3% increase in the volume of crude oil sold over the previous year. The average realised price during the year was US$72.3 per barrel (2009: US$61.6 per barrel). Realised oil prices were at a 9% discount to Brent during the year (2009: at par with Brent). The increase in sales volumes is attributed primarily to increased entitlement and movement in lifting position. The PSA includes provisions such that parties to the agreement may not lift their respective crude oil entitlements in full and as such underlifts or overlifts of crude oil may occur at period-ends. At the year-end, the Group was in an overlift position of approximately 0.2 million barrels that is recognised and measured at market value (31 December 2009: overlift of 0.2 million barrels). Operating profit The Group generated an operating profit of US$488 million (2009: US$314 million), 55% higher than in the previous year. Cost of Sales comprises operating and production costs and the depletion charge. The Group s Cost of Sales was US$265 million in 2010 compared to US$282 million in 2009, a decrease of about 6%. The decrease is primarily due to a movement in the lifting position and lower marketing costs, offset by a lower crude oil inventory at the year-end. Lower marketing costs in 2010 are due to the higher volume, of about 60% (2009: 10%), of crude oil exported on FOB basis ex-aladja Jetty, with the balance marketed under the swap agreement with Iran and its subsequent three-month extension, which expired in July The depletion and depreciation charge during the year was marginally lower by about 1% at US$188 million (2009: US$189 million) primarily due to the conversion of a portion of gas resources into reserves and recognition of additional oil and gas reserves assessed by the independent energy consultant, offset by the incremental upward revision in estimates of field development costs and the increased entitlement barrels during the year. Administrative expenses (net of other income) at US$28 million were higher by about 4% (2009: US$27 million), due primarily to an increase in CSR activities and head office costs during 2010, which were comparable with one-off charges related to the ENOC approach, the investigation into the irregularities and expenses related to proposed corporate re-structuring in 2009.

31 Dragon Oil plc Annual Report for the year ended 31 December 2010 Profit for the year Profit for the year was US$386 million (2009: US$259 million), 49% higher than the previous year s level. The profit includes finance income of US$27 million (2009: US$31 million) and a higher taxation charge of US$129 million (2009: US$86 million). Finance income decreased in 2010 despite the higher cash and cash equivalents and term deposits maintained during the year due to lower interest yields. During 2008, the effective tax rate applicable to the Group s operations in Turkmenistan was increased by 5% to 25% by the Hydrocarbon Resources Law of The Group has continued to apply this rate in determining its tax liabilities as at 31 December The Group is in discussions with the authorities in Turkmenistan about the applicability of this rate to periods prior to 2008, but it does not believe that these prior periods are affected by this increase. A provision has been made in respect of the additional tax that could become payable if the increased tax rate were applied to prior periods based on the expected value approach. Basic EPS of 74.9 US cents for the year were 49% higher than the previous year (2009: 50.3 US cents). Balance Sheet Investments in property, plant and equipment were higher by US$268 million primarily due to capital expenditure of US$460 million (2009: US$317 million) incurred on oil and gas interests, offset mainly by the depletion and depreciation charge during the year. The expenditure during the year was on drilling and infrastructure projects in Turkmenistan. Of the total capital expenditure on oil and gas interests for 2010, 55% was attributable to infrastructure (2009: 50%). The infrastructure spend during the year included the completion of the 30-inch trunkline and associated inter-field pipelines, as well as the Phase 2 expansion of the CPF and the construction of the gathering station and two wellhead platforms. Current Assets and Liabilities Current assets rose by US$244 million primarily due to an increase of US$325 million in term deposits, US$41 million for trade receivables and US$4 million for inventories, which were partly offset by a decrease in cash and cash equivalents. The cash and cash equivalents and term deposits at the year-end were US$1,337 million, including US$174 million held for abandonment and decommissioning activities. Amounts of US$1,195 million are held in term deposits of maturities greater than three months. Current liabilities rose by US$127 million due to increases of US$47 million in trade and other payables, US$47 million for abandonment and decommissioning liability owing to increased production and US$37 million towards current tax liability, offset by the movement of US$4 million in overlift creditors. Cash flows Net cash generated from operations during the year increased by US$94 million to US$595 million (2009: US$500 million). The increase was primarily attributable to the higher sales price realised during the year for the sale of crude oil and the change in the working capital position. Cash used in investing activities was US$722 million (2009: US$682 million), comprising capital expenditure of US$424 million (2009: US$269 million) and placement of term deposits of US$325 million (2009: US$444 million), offset by interest received on cash and cash equivalents and term deposits of US$27 million (2009: US$31 million). Cash generated by financing activities was US$2 million (2009: US$0.05 million) on account of proceeds from the issue of share capital resulting from the exercise of share options. Cash Flow US$m 1,138 opening cash Cash Balance (excluding the abandonment and decommissioning fund) US$m , from operations from investing from financing ,163 (424) 1 1,500 1, ,337 closing cash 29 2,000 1,500 1, Operating and Financial Review Financial Financial Statements Statements Governance Governance Responsibility Responsibility Performance Performance Strategic Review Strategic Review Overview

32 30 35 Responsibility 30 Corporate Social Responsibility Report Human Resources Investing in Our People Our guiding principle People First continues to drive our focus on training, empowering and trusting our talented workforce throughout the organisation. We have seen the high retention rate of 94% maintained in 2010 (2009: 94%); this is a testament to the strong emphasis the Group puts on its human capital. Pictured: Offshore operations.

33 Dragon Oil plc Annual Report for the year ended 31 December 2010 Retention rate: 94% project: US$3m polyclinic in Hazar Lost time incidents: 2 31 Our Mission is to explore and develop oil and gas resources by leveraging technology and a talented workforce as a dependable, ethical and conscientious partner. The development of the Cheleken Contract Area is a big project for an independent operator, such as Dragon Oil, and entails a significant social responsibility to act accordingly and in harmony with the laws and the community s values. The centre of our field operations is near the town of Hazar where Dragon Oil actively engages with the community in our firm belief that it is our duty to take care of the community we operate in. Our CSR strategy revolves around a number of undertakings where we aim to: Develop and empower our Turkmen national human capital; Contribute in a meaningful way to the welfare of the community in Hazar to foster economic prosperity and well-being; Undertake projects, which help to improve the living standards of both our employees and Hazar citizens in general, with a particular focus on health and education; Promote social development and support education; Undertake projects, develop and implement policies to protect the environment in the Cheleken; Prioritise HSE by putting significant efforts into site HSE enforcement; and Strengthen our relationship with suppliers by introducing the Code of Conduct into every contract. Corporate Responsibility Statement Financial Financial Statements Statements Governance Governance Responsibility Responsibility Performance Performance Strategic Review Strategic Review Overview

34 Responsibility Corporate Social Responsibility Report continued Investing in Our People At Dragon Oil we are proud to be one of the largest independent oil and gas operators in Turkmenistan. As a consequence, the majority of our workforce originates from Turkmenistan, making the Group the single biggest employer in Hazar, the town closest to our operations in the Cheleken Contract Area. Our employer status and importance for the community impose big responsibilities on the Group to be a dependable, ethical and conscientious partner. Our Human Resources ( HR ) Strategy is geared towards educating and empowering our Turkmen national employees, both in the field near the town of Hazar and in our country office in Ashgabat, whilst fully supporting them from our headquarters in Dubai, UAE. Dragon Oil s Human Resources strategy focuses on the following primary goals: We are committed to developing our employees skills and abilities through training and development; We aim to empower our Turkmen national employees and make them an independent skilled workforce through the transference of international skills; We aim to fast-track employees whom we identify as having high potential with targeted training programmes and career development plans; We work hard to hire and retain the best possible pool of qualified candidates in Turkmenistan and Dubai, UAE; and We look at ways to extend our educational reach to the local community. Inserts from the top: Computer training courses at the Centre of Excellence, Dragon Oil employee, after work activities at the camp.

35 Dragon Oil plc Annual Report for the year ended 31 December 2010 The commitment to develop Turkmen national employees skills and abilities is the core priority of our HR strategy. To that aim, the Group introduced and implemented a new Training and Development plan for both professional and inexperienced employees. The Group identified people who would most benefit from such training and offered highly focused on-the-job training in the field and our headquarters in Dubai. In 2010, a higher number of employees also completed certified training programmes. Dragon Oil is committed to selecting and offering the best available training to its workforce. Turkmen national employees regularly undertake professional training programmes abroad as well as regular internships at our headquarters in Dubai. The latter also supports operations in the field and aims to promote the sharing of knowledge through extensive training, continuous learning and access to senior management. In early 2010, we worked with an international consultant to build a competency model process to ensure availability of competent staff and provide training based on actual needs of each employee. The focus was on the operations employees, such as onshore and offshore production, drilling, maintenance, marine activities, etc. The Group aims to empower its Turkmen national employees at all levels and make them an independent and skilled workforce. Dragon Oil is pursuing a policy of educating and developing Turkmen national employees with the aim of promoting them to senior positions within the organisation. With that goal in mind, in 2010 the Group identified a number of high-potential local employees who in the course of the next two to three years will undergo highly-focused, external as well as internal training within their respective chosen careers. This will allow the best performers to develop and will enable the Group to complete a succession planning programme. A number of these employees have already been promoted during the past year as part of the first stages of the programme, which aims to develop national talents to hold responsible positions of power and authority to represent the Group in matters of business and full in-charge responsibility. The Employee of the Month programme continued to run for a second year and is proving highly successful. The programme recognizes and rewards employees who perform above and beyond their core duties and show excellent ability in unfamiliar or unexpected situations. The objectives of this programme are manifold: We aim to recognize an employee s achievements and reward them both in a financial way and by announcing the recognition throughout the Group; The recognition and reward, in their turn, create a strong motivational factor for others to follow the example; and Such encouragement fosters talent and career development while creating a healthy competitive work environment. Since the introduction of the scheme in 2009, the Group has seen an effect on improved morale among the employees as shown in the improved results of the 2010 HR feedback survey conducted within the organisation. In 2010, Dragon Oil established a new training centre, the Centre of Excellence, at our site in Hazar to provide training and development to our local employees. Our vision, however, is not only to use it for local training purposes but consider and allow the larger community in Hazar to access the training centre through the provision of a broader and more advanced curriculum in the future, which will help to bring an international level of knowledge and skills to the local community. 33 During the year, the Group also looked at ways to improve our local employees living standards by giving financial awards based on their achievements such as salary adjustments, increments, promotions and bonus, medical insurance coverage to all employees, as well as introducing transportation allowances for the employees living outside Hazar and revised rates of per diem to help facilitate their training journeys outside Turkmenistan. At the end of 2010, the Group engaged with a multinational HR consultancy firm to develop and re-structure a Pay Scale and Structure based on a detailed Job Evaluation exercise and a bespoke survey in the region with peer companies in the oil and gas industry to provide constructive feedback and recommendation. The outcome of this exercise will be the implementation of a dynamic and robust organisational structure, which could respond to challenges in the most efficient manner and would help employees to move up in their career development in a structured manner. The salary survey has also provided us with the information on the current market trends and best options to reward our employees. Our guiding principle People First continues to drive our focus on training, empowering and trusting our talented workforce throughout the organisation. We have seen the high retention rate of 94% maintained in 2010 (2009: 94%); this is a testament to the strong emphasis the Group puts on its human capital. Corporate Responsibility Statement Financial Financial Statements Statements Governance Governance Responsibility Responsibility Performance Performance Strategic Review Strategic Review Overview

36 Responsibility Corporate Social Responsibility Report continued The Community Within the framework of our community engagement strategy, our objective is to undertake projects of various scale that have a tangible positive impact on the community and ultimately help to improve people s living standards. Thus, the construction of the desalination plant in 2009 served a dual purpose of providing water to our operations and improving the community s access to portable water. Our major project for is the construction of a polyclinic with the objective of providing better healthcare to both our employees and Hazar citizens in general. Dragon Oil has completed the concept design and scope of work stages and is currently conducting a tendering process to select the contractor. Another ongoing project is the provision of neo-natal equipment for the Hazar Hospital Maternity department with the remaining outstanding equipment due to be supplied in Q Smaller projects carried out in 2010 included work to repair and refurbish the sports gym at the local School #3 as well as to refurbish the local community s sports ground in Hazar Park. The Environment With the completion of our major infrastructure upgrade last December, we are now in a position to bring most of our 120 mmscf daily gas production onshore via the new 30-inch 40km trunkline. At the moment, virtually all of this gas is flared pending the completion of the Hazar compressor station by the Turkmen authorities and the connecting pipeline between the station and our CPF. We expect these facilities to be operational in 2011 enabling us to put an end to flaring as we will be able to deliver unprocessed gas directly into the Turkmen system. Currently a small proportion of the gas is delivered to Hazar for domestic use, helping the local community. The focus of our environment-related work was the procurement of equipment and boats for the Hazar Sea Reserve, which was successfully completed last year. In 2010, we launched and subcontracted the Environmental Management System and Waste Management Plan to a specialised third party consultant. HSE The Group puts significant effort into site HSE supervision, safety training and the provision of the necessary protective equipment. Dragon Oil recognises and understands the inherent potential risks associated with the production of hydrocarbons, not least in the harsh winter conditions experienced in the Caspian Sea. Our prime responsibility is to protect our employees and contractors from work-related injuries and illnesses. We regularly assess the health and safety risks associated with our operations, review safety policies and procedures, carry out emergency drills and provide extensive training in safety measures. In 2010, we conducted corporate Emergency Response training for Dragon Oil both in Turkmenistan and Dubai Lost time incidents Total hours worked (millions) Lost time incident frequency

37 Dragon Oil plc Annual Report for the year ended 31 December 2010 Supply Chain Management In 2009, we implemented the Code of Conduct throughout Dragon Oil to ensure adherence to best standard practices in our operations. Last year, we started on the process of ensuring that our contractors acknowledge and comply with our Code of Conduct as well. For every project, we conduct a competitive bidding process where we set out specific requirements that focus on quality, timeliness and integrity of implementation. We select suppliers based on the best available offer taking into account reliability, experience and previous track record of working with the contractor. Communication with Investors We place great importance on effective communication with our investors, both institutional and retail, as well as analysts. We maintain a policy of transparency, continuity and timely dissemination of information and we value investors and analysts continuing support and feedback. The senior management team, comprising the CEO, Director of Finance and General Manager of Petroleum Development, conducted both one-on-one and group meetings with institutional investors in London, Edinburgh and Dublin in 2010 meeting over 40 institutions, some of these funds on a number of occasions. Additionally senior management conducts a significant number of conference calls on a regular basis with institutional investors around the world. Our AGM was held in London in May We introduced a new format for the AGM, which featured a management presentation to investors for the first time. This was well received by those retail investors who attended and we plan to repeat this format for the coming year AGM will take place in London on 18 May 2011 at the London Hilton Hotel. Accountability Dragon Oil places great significance on high standards of corporate governance as a means to emphasise the Group s good business conduct and strong ethical culture. The Group looks to ensure that there are adequate and appropriate processes and procedures to protect the value in the Group and create maximum transparency. Key areas come under the responsibility of the following members of the management who report to the CEO as holding the overall responsibility: Human Resources is the responsibility of Hussain Al Alaiwy, Director of Human Resources; HSE is the responsibility of Adel Al Nadhari, HSE Manager who reports to the Chief Operating Officer; Governance is the responsibility of Alex Ridout, Legal Counsel and Company Secretary; Risk management and Investor Relations are the responsibility of Tarun Ohri, Director of Finance; and Supply chain management is the responsibility of Ahmad Assadi, Contracts and Purchasing Manager. 35 Corporate Responsibility Statement Financial Financial Statements Statements Governance Governance Responsibility Responsibility Performance Performance Strategic Review Strategic Review Overview

38 Pictured: Me essi cum et utatur, ctotas aut eosam in sit quate experum aut laceper aecuptatem plam, occupta. Pictured: Offshore rig.

39 Producing Results Contents Meet Your Board 38 Senior Management Team 40 Directors Report 42 Corporate Governance Statement 51 Directors Remuneration Report 57 Independent Group Auditors report 60 Group Accounts 62 to 67 Group Balance Sheet 62 Group Income Statement 63 Group Statement of Comprehensive Income 63 Group Cash Flow Statement 64 Company Balance Sheet 65 Company Cash Flow Statement 66 Statement of Changes in Equity 67 Notes to the Financial Statements 68 to 93 1 General information 68 2 Summary of significant accounting policies 68 3 Financial risk management 76 4 Critical accounting judgements and estimates 78 5 The Company income statement 78 6 Segment information 78 7 Property, plant and equipment 79 8 Intangible assets 79 9 Investments in and loans to subsidiary undertakings Financial instruments by category and Credit quality of financial assets Inventories Trade and other receivables Cash and bank balances Share capital Share premium Capital redemption reserve Other reserve Trade and other payables Revenue Cost of sales and administrative expenses Finance income Profit before income tax Current and deferred income tax Earnings per share Cash generated from/(used in) operating activities Commitments and contingent items Related party transactions Group companies Subsequent event 93 Movement in Oil and Condensate Reserves 94 Five-Year Financial Summary 95 Glossary/Definitions/Abbreviations 96 Advisors 97 Governance Financial Statements

40 38 59 Governance 38 Meet Your Board

41 Dragon Oil plc Annual Report for the year ended 31 December Mohammed Al Ghurair Non-executive Chairman Mr Al Ghurair, born , is presently the Non-executive Chairman for the Group. He was appointed to the Board of Dragon Oil plc on 25 April 2007 and was appointed as Chairman on 26 September He has served on the Board for almost four years. He has a degree in Mechanical Engineering and is a prominent executive Director in a number of leading companies in the Middle East, including Dubai Aluminium, ENOC and the Saudi International Petrochemical Company. Mr Al Ghurair is a member of Dragon Oil s Remuneration and Nominations Committees. 2. Dr Abdul Jaleel Al Khalifa Executive Director Dr Al Khalifa, born , is presently the CEO for the Group. He was appointed to the Board of Dragon Oil plc on 26 September 2008 and has served on the Board for approximately two and a half years. He joined the Company from Saudi Aramco where he managed a wide range of E&P departments, based in Dhahran, Saudi Arabia for 12 years. He has a doctorate in petroleum engineering from Stanford University and is a respected public speaker on the oil and gas industry. He also has a keen interest in humanitarian efforts, being a founder member of the industry s Humanitarian Support Alliance NGO (IHSAN H2O). 3. Ahmad Sharaf Non-executive Director Mr Sharaf, born , is the Non-executive Vice-Chairman for the Group. He has extensive experience in the upstream oil and gas industry, having spent 15 years working with ConocoPhillips in its international operations in the United States and Middle East. He left ConocoPhillips in 2005 and joined Dubai Holding where he held leadership positions in the energy, health care and real estate sectors of the Group. In 2010, Mr Sharaf was appointed Chief Strategy Officer of Dubai Holding. Mr Sharaf is Chairman of Dubai Mercantile Exchange, a member of the Board of the ENOC and a member of the ENOC Audit Committee. He serves as a Member of the Board of Visitors and a Group Member of the Global Partnerships Committee of the Fuqua School of Business, Duke University. Mr Sharaf was appointed to the Board of Dragon Oil plc in April 2007 and became a member of Dragon Oil s Remuneration and Nominations Committees in Mr Sharaf earned a B.Sc and M.Sc in Petroleum Engineering from the Colorado School of Mines and an MBA from Duke University s Fuqua School of Business. 4. Nigel McCue Senior Independent Non-executive Director Mr McCue, born , has over 30 years experience in the petroleum industry. He is a Director and CEO of Lamprell plc, a company that provides construction and specialist services to the offshore and onshore oil and gas industry. He is the Chairman of Jura Energy Corporation, a company listed on the Toronto Stock Exchange, and is a member of its Compensation Committee. Previously, Nigel was a Director and CFO of Lundin Oil AB and prior to that he held various positions with Chevron Overseas Inc. and Gulf Oil Corporation. Mr McCue is Dragon Oil s Senior Independent Non-executive Director. He is a member of the Remuneration and Nominations Committees and is currently the Chairman of the Audit Committee. He was appointed to these committees on 19 June He was appointed to the Board of Dragon Oil plc on 22 April 2002 and in April 2011 will have served nine years on the Board Saeed Al Mazrooei Non-executive Director Mr Al Mazrooei, born , received a Masters degree in gas engineering and management from Salford University in the UK and has focused on various aspects of the gas industry since he joined Arco International in Mr Al Mazrooei currently holds the position of CEO for Emirates Aluminium, as well as a number of Directorships in other Middle Eastern companies. Mr Al Mazrooei is a member of Dragon Oil s Audit Committee and is the Chairman of the Remuneration Committee. He was appointed to these committees on 19 June He was appointed to the Board of Dragon Oil plc on 22 May 2007 and as such has served for almost four years. 6. Ahmad Al Muhairbi Non-executive Director Mr Al Muhairbi, born , has a strong background in upstream oil and gas, with a comprehensive knowledge of well technology having obtained a degree in petroleum engineering. Mr Al Muhairbi has been involved in petroleum field development and production since 1988 previously with Margham Dubai Establishment and now with Dubai Supply Authority. Mr Al Muhairbi is a member of Dragon Oil s Audit Committee and is the Chairman of the Nominations Committee. He has served on the Board for almost four years, having been appointed to the Board of Dragon Oil plc on 22 May Meet Your Board Financial Financial Statements Statements Governance Governance Responsibility Responsibility Performance Performance Strategic Review Strategic Review Overview

42 Governance Senior Management Team Hussain Al Ansari Chief Operating Officer Hussain has 23 years experience in petroleum industry having worked with ARCO International, ENOC, Dolphin energy and Mubadala Petroleum Services Co. He has a Bachelor s Degree in Chemical Engineering from the University of California at Santa Barbara. Alex Ridout Head of Legal and Company Secretary Alex is a qualified solicitor of the Supreme Court of England & Wales and worked in several London law firms before moving to the Middle East to act as Regional Counsel for Baker Hughes and then Dragon Oil in Emad Buhulaigah General Manager of Petroleum Development Emad has 28 years experience working with Gulf Oil, Saudi Aramco, Chevron and Shell. He has a Masters degree in petroleum engineering from the University of Southern California Ahmad Assadi Contracts and Purchasing Manager Ahmad holds a Bachelor of Science degree in Mechanical Engineering and MBA in Finance. He comes to Dragon Oil having worked for over 25 years in commercial and logistics background within the oil and gas industry with Abu Dhabi Gas Liquefaction Limited (ADGAS) Abu Dhabi Tarun Ohri Director of Finance Tarun has over 20 years experience in finance, accounting and audit predominantly in oil-related industries in Qatar and the UAE. He is an associate of the Institute of Chartered Accountants of India with a CISA qualification. 04 Mark Sawyer Business Development and New Ventures Manager Mark has 28 years of broad international experience in the energy industry sector, including responsibility for E&P business development and gas marketing for a large US multi-national energy company. His last role prior to joining Dragon Oil was Vice President, Business Development with Tatweer Investments and Chief Business Development Officer for Dubai Energy. 08 William Mandolidis Corporate Planning Manager William is a chemical engineering graduate from the University of Toronto, with 30 years of oil and gas experience with companies including Shell Canada, Wascana Energy, Nexen Energy and Wood Group ESP, in a variety of senior managerial positions. 09 Jamel Kahoul Projects Manager Jamel comes to Dragon Oil having worked for over 35 years in corporate and project management within the oil and gas industry. His last position prior to joining Dragon Oil was Area Engineering Manager with Abu Dhabi Company for Onshore Oil Operations (ADCO) Hussain Al Alaiwy Director of Human Resources Hussain holds a Bachelor s degree in Mechanical Engineering from the University of Alabama, USA. He comes to us with more than 26 years of experience in operational, engineering and project management from working for Saudi Aramco.

43 Dragon Oil plc Annual Report for the year ended 31 December Faisal Al Ansari Reservoir Development Manager Faisal has over 25 years of experience in Reservoir Engineering and Development as well as Logistics and Marine Operations. Prior to joining Dragon Oil, he worked for Zakum Development Company (ZADCO) Abu Dhabi, UAE. Faisal holds a Bachelor of Science degree in Physics and Mathematics from the University of Lewis and Clark, Portland, USA. 11 Ali Al Matar Engineering Manager Ali worked for over 28 years in Gas Processing, Engineering and Project Management with Saudi Aramco. Ali holds a Master Degree in Construction Engineering Management and a Bachelor Degree in Chemical Engineering from the King Fahd University of Petroleum and Minerals. His last role prior to joining Dragon Oil was in Saudi Aramco leading the design, construction and commissioning of a mega gas processing project. 12 Ridha Rouatbi Drilling Manager Ridha holds a PhD in Hydrology from the University of Montpellier, France and a Degree in Drilling and Production Engineering from Ecole du Petrole, France. He has more than 35 years of experience in the oil industry and came to Dragon Oil after having spent 24 years in Abu Dhabi Marine Operating Company (ADMA- OPCO) in various senior positions. 13 Adel Al Nadhari HSE Manager Adel has substantial proven expertise in upstream oil and gas operations, mainly in the fields of maintenance and HSE. His last position prior to joining Dragon Oil was HSE&Q Manager at TOTAL ABK-Abu Dhabi. 14 Marwan Al Mazrooqi Head of IT Marwan holds a Bachelor of Science degree in Computer Science and a Master s degree in Quality Management from the University of Wollongong, UAE. He has over 10 years of experience in IT operations and Project Management. Prior to joining Dragon Oil, Marwan was Manager Information Technology Operations with Thuraya Telecommunications Company. 15 Rashid Redjepov Country Manager Rashid trained as an economist and worked for over 12 years in various aspects of the upstream oil and gas industry of Turkmenistan, both in the public and the private sectors, before being appointed as Country Manager in November Eldar Kazimov Country Manager Eldar graduated from the Polytechnic Institute of Turkmenistan with an Honours Degree in Petroleum Engineering and had 8 years experience in field operations before being appointed as Country Manager in November Kheder Mekha Field Manager Kheder worked as the Head of the Technical Services Department in the Alfourat Petroleum Company in Syria from , when he joined Dragon Oil as a Field Manager. 18 Magdy El Ashry Field Manager Magdy joined Dragon Oil with extensive experience in managing oil and gas operations with many major companies such as Amoco, Gupco, Adma-Opco and finally Apetco where he was working as General Manager and Managing Director Senior Management Team Financial Financial Statements Statements Governance Governance Responsibility Responsibility Performance Performance Strategic Review Strategic Review Overview

44 38 59 Governance 42 Directors Report Evaluating and Addressing Risk within the Business Dragon Oil s business is subject to many different risks and it is critical that those inherent risks are identified and analysed on an ongoing basis with a view to evaluating their impact on the business. Only then can the Group take appropriate action to manage or mitigate them in a manner, which is in the best interests of the Group. Dragon Oil carries out a detailed annual business planning and budget process, as is standard in best business practices; this includes setting annual objectives and targets covering key performance objectives. These objectives are set at the Group level as well as at all operational levels with identification and mitigation of the key risks to the delivery of these targets. Operations will be expected to monitor and report on actual performance to senior management including variances to targets; reviews will include an assessment of the risks and measures being implemented to manage these potential risks. Risk Management Review Process The Board in conjunction with the management commenced a detailed review of the risks in 2010 to further integrate the risk management strategy into the business planning process. This will continue in 2011 with a view to further refining this integration process. The Board along with the senior management team has developed mitigating strategies in relation to the various risks and they are committed to implementing the same. Dragon Oil has internal controls and company procedures, which form part of its risk management strategy. Detailed procedures support the risk management process across the Group and the application and consistency of these procedures are regularly reviewed by the Group s Internal Audit function. Ultimately, the Audit Committee is responsible for overseeing and ensuring compliance with these internal controls and regularly reports to the Board. Individual managers are responsible for ensuring compliance by them and their departments with internal controls and identifying the various risks within their areas of responsibility. Key Risks for the Business In accordance with the Companies (Amendment) Act 1986 (as amended by Statutory Instrument 116 of 2005 European Communities (IFRS and Miscellaneous Amendments) Regulations 2005), the Company is required to give a description of the principal risks and uncertainties facing the Group. The principal risks and uncertainties, together with the actions in mitigation, are set out in the table below. Headline risk Description and potential impact Mitigation Primary risks Oil price volatility Oil prices have been strong in 2010 but may be highly volatile. Wide fluctuations in oil price can impact Group s cash flows and profitability. The Group actively monitors its exposure to oil prices and may use appropriate hedging instruments from time to time to mitigate such price risks. Oil export routes limited from the Caspian Sea region Long-term swap agreement with Iran and its subsequent three-month extension ceased in mid All of the Group s entitlement volumes are currently exported out of the Caspian Sea region to international markets via Baku, Azerbaijan. Disruption in the export routes will impact the Group s revenue and cash flows. The Group continues to seek alternative marketing opportunities that would be deployed should the current arrangements experience interruption. Sole producing asset in Turkmenistan The Group s revenues are dependent on the continued performance of its operating facilities at its single producing asset, offshore Turkmenistan. Constant review of acquisitions and other investment opportunities is continuing by the dedicated New Ventures Team. Skilled and talented human capital Performance and future success dependent on the Group s ability to attract, retain and motivate highly skilled and qualified personnel. Competitive compensation packages for key staff, including long-term incentives. Training and development of all staff is a key focus for the Group.

45 Dragon Oil plc Annual Report for the year ended 31 December 2010 Headline risk Description and potential impact Mitigation Operational risks Uncertain, estimated resources/reserves and future net revenues Gas development Limited number of drilling rigs Restricted choice of contractors HSE hazards and impact assessment Asset integrity The Group s inherent risks include continued discovery, production and processing of hydrocarbons in economically viable quantities in the areas in which the Group is interested. Reservoirs within the Cheleken Contract Area are technically challenging and complex, meaning that future production may vary significantly from projections. Gas development is dependent upon many factors including demand for gas, execution of a gas sales agreement, accessibility to gas transportation network, construction of the GTP and overall economic conditions. They affect Dragon Oil s ability to develop its gas reserves. Limited supply of rigs capable of offshore operations within the Caspian Sea region. This could impact the Group s development programmes and impose higher drilling costs. Limited availability of top international contractors capable of offshore operations and construction yards within the Caspian Sea region. Most drilling services performed by a single drilling services contractor. Infrastructure projects contracted to regional contractors, rather than large international companies. Typical environmental risk associated with oil extraction and recovery, such as the risk of an oil spill. Group has also to meet specific Turkmenistan environmental standards. An oil spill in the Caspian Sea could adversely impact our infrastructure, production capability and profitability. A significant element of the Group s production, processing and export infrastructure has been in place for many years and could be subject to increased risk of breakdown or failure. Breakdown can impair the production capability. 43 Use of specialist consultants and advisors, as well as a talented and experienced reservoir development team. Collection and review of extensive historical data on which to base future production projections. The Group has infrastructure in place to deliver unprocessed gas into the Turkmen network. There are specific plans to construct the GTP and finalise discussions for the gas sales agreement with the authorities. Super M2 jack-up rig planned to be delivered in Q Also, process of securing additional jack-up and platform-based rigs is under way. Programme to actively diversify away from limited number of contractors has been successful over the last two years, with many new companies now working for the Group, and this programme will continue. Extensive monitoring and review of HSE policies and procedures as well as contracts with specialist service providers for the cleanup of oil spills. Regular HSE training for operational staff together with annual HSE exercises across the Group. The Group has adequate resources in place and expertise to upgrade or renew the infrastructure in use as per ambitious capital expenditure programme. Directors Report Financial Financial Statements Statements Governance Governance Responsibility Responsibility Performance Performance Strategic Review Strategic Review Overview

46 Governance Directors Report continued Headline risk Description and potential impact Mitigation Political and legal risks Political Changes in legal systems may occur, which might have a significant, adverse impact on the ownership and/or operation of the PSA. Considerable experience in operating in Turkmenistan. Fiscal and legal systems are stable and predictable. Strong and wellestablished government relationships. Sanctions Licences European Union passed Regulation 961/2010 of 25 October 2010, imposing sanctions against Iranian entities. Also, the US Iran Sanctions Act of 1996 may impose sanctions, which may impact on non-us firms engaged in business with Iranian counterparties. Both have potential impact on Dragon Oil arising from its use of a jack-up rig owned by an Iranian counter-party; additional impact if the Group re-commenced the swap agreement for export of crude oil through Iran. Activities are dependent upon the grant and maintenance of appropriate licences, permits and regulatory consents (e.g. PSA) may be withdrawn arbitrarily or made subject to limitations. The withdrawal, non-renewal or a change in the economic and other terms of such licences could materially adversely affect the Group s business, prospects and financial condition. Application of EU sanctions discussed and reviewed with specialist lawyers, resulting in few changes to the Group s business. Considerable experience in operating in Turkmenistan. Strong and well-established government relationships, both at central and local levels. Financial and control risks Financial and exchange rates The principal financial risks facing the Group (as well as the financial policies and controls) are addressed in the Group s consolidated financial statements on pages 76 to 77. Strong balance sheet with no debt. Financial polices and controls are in place to ensure that exposures are adequately managed. Insurance cover The insurance programme of the Group may not provide adequate cover for claims in certain circumstances. Moreover, there can be no assurance that the Group will be able to maintain adequate insurance in the future at rates that it considers reasonable. Strategic review of insurance strategy is undertaken on an annual basis to improve insurance cover with respect to its operations, in accordance with international oil and gas practices. Internal controls Risk of fraud and/or breaches of internal controls by employees may be difficult to recognise or detect or trace, particularly if collusion is involved. This may result in material reputation, financial, legal, commercial or regulatory exposures to the Group. System of risk management and internal controls as detailed under Internal Control in the Corporate Governance section of this Report, on page 56. On behalf of the Board Mohammed Al Ghurair and Abdul Jaleel Al Khalifa Directors of Dragon Oil plc 21 February 2011

47 Dragon Oil plc Annual Report for the year ended 31 December 2010 Other Regulatory Information The Directors present their report and the audited consolidated financial statements for the Group and audited financial statements for the Company for the year ended 31 December These will be laid before the Shareholders at the Annual General Meeting ( AGM ) of the Company, which is scheduled to be held on 18 May Principal Activity The Group s principal activity is the exploration, development and production of oil and gas in Turkmenistan and Yemen. The Group holds 100% interest in the Cheleken Contract Area, offshore Turkmenistan. The Turkmenistan PSA was signed with a state agency of the Government of Turkmenistan in November 1999 and became effective in May The PSA has a 25-year term, which expires in May 2025 with an exclusive right on the part of Dragon Oil to negotiate an extension for a further period of not less than 10 years. In relation to the Group s minority interests in the Republic of Yemen (which it acquired in December 2007), the interests in Blocks 49 and R2 have been relinquished due to lack of commerciality. The Group retains its interest in Block 35 and its interest has increased slightly to 11.7% in light of the withdrawal of other partners from the Block in Information on the Group s various subsidiaries is set out on page 92. Business Review A full review of the Group s activities during the year, recent events and future developments is contained in the Chairman s Statement on pages 12 to 15, the Message from the Chief Executive Officer ( CEO ) on pages 16 to 19 and the Operating and Financial Review on pages 22 to Results and Dividends The results of the Group for the year ended 31 December 2010 are set out in the Group s income statement on page 63. Profit attributable to equity holders of the Company was US$386 million (2009: US$259 million). The Board of Directors of the Company has recommended a payment of a fullyear maiden dividend for 2010 of 14.0 US cents per share (2009: nil) subject to Shareholder approval at the AGM to be held on 18 May 2011 at the London Hilton Hotel. Election of Directors The following individuals served as Directors during the period from 1 January 2010 up to 31 December 2010: Director details Events during 2010 Mohammed Al Ghurair (Non-executive Director and Chairman, member of the Nominations and Remuneration Committees) (UAE) Ahmad Sharaf (Non-executive Director and Vice-Chairman, member Re-elected on 5 May 2010 of the Nominations and Remuneration Committees) (UAE) Abdul Jaleel Al Khalifa (Executive Director and CEO) (Saudi Arabia) Nigel McCue (Senior Independent Non-executive Director, Chairman of the Audit Committee, member of the Remuneration and Nominations Committees) (UK) Ahmad Al Muhairbi (Independent Non-executive Director, Chairman of the Nominations Committee, member of the Audit Committee) (UAE) Saeed Al Mazrooei (Independent Non-executive Director, Chairman Re-elected on 5 May 2010 of the Remuneration Committee, member of the Audit Committee) (UAE) Directors Report Financial Financial Statements Statements Governance Governance Responsibility Responsibility Performance Performance Strategic Review Strategic Review Overview

48 Governance Directors Report continued Since their original appointment, Mohammed Al Ghurair and Ahmad Sharaf have been and continue to be nominee Directors of the majority Shareholder, ENOC. In accordance with the Articles of Association, Mohammed Al Ghurair and Abdul Jaleel Al Khalifa will retire and, being eligible, will offer themselves for re-election at the 2011 AGM. As Nigel McCue will have been a Director for more than nine years as from 22 April 2011, he will retire annually and a resolution for his re-election will be proposed at the 2011 AGM. The Board regularly reviews its own performance and, if deemed necessary, may look to strengthen its membership by appointing additional Directors with additional expertise or experience, which can be of value to the Company. However, as at 21 February 2011, there are no future plans for appointing any new Directors to the Company. Directors Interests The interests of the Directors in the share capital of the Company, all of which are beneficial, are as set out in the table on pages 58 to 59. Statement of Directors Responsibilities The Directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations. Irish Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group and Parent Company Financial Statements in accordance with IFRS as adopted by the European Union. The financial statements are required by law to give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss of the Group for that period. In preparing these financial statements the Directors are required to: Select suitable accounting policies and then apply them consistently; Make judgements and estimates that are reasonable and prudent; State that the financial statements comply with IFRS as adopted by the European Union; and Prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the Group will continue in business, in which case there should be supporting assumptions or qualifications as necessary. The Directors confirm that they have complied with the above requirements in preparing the financial statements. The Directors are also required by applicable law and the Listing Rules issued by the Irish Stock Exchange to prepare a Directors report and reports relating to Directors remuneration and corporate governance. In accordance with the Transparency (Directive 2004/109/EC) Regulations 2007 (the Transparency Regulations ), the Directors are required to include a management report containing a fair review of the business and a description of the principal risks and uncertainties facing the Group. The Directors are responsible for keeping proper books of account that disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements comply with the Companies Acts 1963 to 2009 and, as regards the Group Financial Statements, Article 4 of the International Accounting Standards ( IAS ) Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The measures taken by the Directors to secure compliance with the Group s obligation to keep proper books of account are the use of appropriate systems, controls, processes and the employment of competent persons. The books of account are maintained at the Group s head office in Dubai, UAE. The Directors are responsible for the maintenance and integrity of the Company s web site. Legislation in the Republic of Ireland concerning the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

49 Dragon Oil plc Annual Report for the year ended 31 December 2010 Directors Statement pursuant to the Transparency Regulations Each of the Directors, whose names and functions are listed on page 39, confirms that, to the best of each of their respective knowledge: the financial statements, prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities and financial position of the Company and the Group and of the profit of the Group; and the Directors report contained in the annual report includes a fair review of the development and performance of the business and the position of the Company and Group, together with a description of the principal risks and uncertainties that they face. Going Concern Statement and Future Funding After reviewing the Group s plans for 2011 and future years, the Directors are confident that the Group will have adequate financial resources to continue in operational existence for the foreseeable future. They have therefore continued to adopt the going concern basis in preparing the accounts. Auditors PricewaterhouseCoopers have expressed their willingness to continue in office and are eligible for reappointment. They will continue in office in accordance with Section 160(2) of the Companies Act, 1963 and would be deemed to be reappointed as the Group s Auditors in the absence of a resolution for their removal. A resolution to authorise the Directors to determine the auditors remuneration will be proposed at the 2011 AGM. 47 Charitable and/or Political Donations During the year ended 31 December 2010, the Group made charitable donations in the amount of US$2,723 to Al Noor Centre (2009: US$33,360 to Al Noor Centre and Al Ain Centre for Care and Rehabilitation) and no political donations were made (2009: nil). Share Capital Details of the Company s share capital are set out in Note 14 to the consolidated financial statements on pages 83 to 85. Major Shareholdings in the Company As at 21 February 2011, Dragon Oil plc had been notified of the following significant shareholdings, which are in excess of 3%: No. of % of Ordinary Shares Share Issued Capital ENOC 265,265, % JP Morgan Chase & Co 36,124, % Artio Global Management L.L.C. 31,556, % Baillie Gifford & Co 30,973, % Above: Offshore operations. Directors Report Financial Financial Statements Statements Governance Governance Responsibility Responsibility Performance Performance Strategic Review Strategic Review Overview

50 Governance Directors Report continued Close Company Provisions The Directors are of the opinion that Dragon Oil plc is not a close Company as defined by the Taxes Consolidation Act Directors Report: Disclosures Required by the European Communities (Takeover Bids (Directive 2004/25/EC)) Regulations 2006 Shares and rights Particulars of the authorised and issued share capital of the Company are set out in Note 14 to the financial statements on pages 83 to 85. Holders of Ordinary Shares are entitled: to receive notice of, to attend, to speak and to vote (in person or by proxy), at general meetings having, on a show of hands, one vote, and, on a poll, a vote for each Ordinary Share held, and to appoint a proxy so to attend, speak and vote. The Articles of Association and the Irish Companies Acts permit the Directors to seek information from Shareholders as to the beneficial ownership of Ordinary Shares. Where a Shareholder does not comply with such a notice, the right to vote the shares of that Shareholder may be restricted; to receive, 21 days at least before an AGM, a copy of the annual report and financial statements presented at that general meeting, which will be made up to a date no earlier than nine months before the date of that general meeting; where dividends are paid by the Directors or recommended by the Directors and declared by a resolution at a general meeting, to receive those dividends in cash or by distribution of special assets, including new shares in the Company; and in a winding-up of the Company, and subject to payments of amounts due to creditors and to any holders of shares ranking in priority to the Ordinary Shares, repayment of the capital paid up on the Ordinary Shares by and a proportionate part of any surplus of the Company. Rights attaching to transferred Ordinary Shares remain with the transferor until transferee s name is entered on the Register of Members of the Company. The instrument of appointment of a proxy must be received by the Company not less than 48 hours before the meeting or adjourned meeting, or, in the case of a poll, not less than 48 hours before the taking of the poll. All shares allotted pursuant to any employees share scheme are Ordinary Shares carrying the same rights as other Ordinary Shares and have no special rights or rights not exercisable directly by the employees. Transfer of shares There are no restrictions on the transfer of shares in the Company and no requirements to obtain approval of the Company, or of other holders of securities in the Company, for a transfer of shares in the Company, save that: the Directors may decline to register a transfer of Ordinary Shares on which the Company has a lien or in the case of a single transfer of Ordinary Shares in favour of more than four persons jointly; transfers of Ordinary Shares in certificated form are transferable subject to production of the original share certificate and the usual form of stock transfer duly executed by the holder of the Ordinary Shares and stamped with the requisite stamp duty; Ordinary Shares in uncertificated form are transferable in accordance with the rules or conditions imposed by the operator of the relevant system, which enables title to be evidenced and transferred without a written instrument and in accordance with the Companies Act, 1990 (Uncertificated Securities) Regulations, 1996; and the Articles of Association and the Irish Companies Acts permit the Directors to seek information from Shareholders as to the beneficial ownership of Ordinary Shares. Where a Shareholder does not comply with such a notice, the transfer of the shares of that Shareholder may be restricted. There are no limitations on the holding of securities. Share options are personal and not assignable. The Company is not aware of any arrangements between Shareholders, which may result in restrictions on the transfer of securities or on voting rights. Significant Shareholders Shareholders known or disclosed (as at the date of this Report) to the Company as holding 3% or more of the Ordinary Shares or voting rights therein are set out above on page 47. No person holds securities carrying special rights with regard to control of the Company. Appointment and replacement of Directors Directors may be appointed by the Directors or by the Shareholders. No person, other than a Director retiring at a general meeting is eligible for appointment by the Shareholders unless either recommended by the Directors or, not less than seven nor more than 42 days before the date of the general meeting, written notice by a Shareholder of the intention to propose the person for election and notice in writing signed by the person of his willingness to act are received by the Company. Directors appointed by the Directors automatically retire at the next AGM and are eligible for election by the Shareholders at that meeting. Nonexecutive Directors in office for nine years or more automatically retire at each AGM and are eligible for re-election. Directors (other than Directors in office for nine years or more) elected (or re-elected) by the Shareholders retire automatically on the basis that one-third of such Directors retire at each AGM.

51 Dragon Oil plc Annual Report for the year ended 31 December 2010 Any Director may be removed by ordinary resolution (50%+1 majority) of the Shareholders passed at a general meeting. No person aged 75 may be appointed a Director and any Director aged 75 must retire at the AGM following his 75 th birthday. There are no agreements between the Company and its Directors or employees providing for compensation for loss of office or employment (whether through resignation, purported redundancy or otherwise) that occurs because of a takeover bid. Amendment of Articles of Association The Articles of Association may be amended by special resolution of the Shareholders, being a resolution proposed on not fewer than 21days notice as a special resolution and passed by more than 75% majority of those voting on the resolution. Powers of the Board of Directors The Directors are responsible for the management of the business of the Company and may exercise all the power of the Company subject to the provisions of the Company s Memorandum and Articles of Association. The Directors powers to allot, issue, repurchase and reissue Ordinary Shares are dependent on the terms of the resolutions from time to time in force so empowering the Directors. Share Capital Authorities By Resolution 7 passed at the Company s 2010 AGM, the Directors were granted authority to allot shares equivalent to 5% of the total issued share capital of Dragon Oil plc, which could be issued for cash other than pre-emptively. As at 21 February 2011, this authority had not been exercised. The allotment-for-cash authority is due to expire on 18 May 2011 and a resolution in the same terms is being proposed at the 2011 AGM. Purchase of Company s Own Shares By Resolution 7, passed at the Company s 2010 AGM, the Directors were granted authority to make market purchases of the Company s Ordinary Shares up to 10% of the number of issued Ordinary Shares in Dragon Oil plc, at market price. This authority is due to expire on 18 May As at 21 February 2011, this authority had not been exercised by Dragon Oil plc but the Directors are proposing a resolution in the same terms at the 2011 AGM and will take advantage of the flexibility afforded by the resolution, if passed, as they deem appropriate. As at 21 February 2011, Dragon Oil plc held no shares in treasury. Important Events since 31 December 2010 Details of the important events that have occurred since 31 December 2010 can be found in the Operating and Financial Review on pages 22 to 29. General Meetings Matters of ordinary business General meetings of the Company are convened in accordance with and governed by the Articles of Association and the Companies Acts 1963 to The AGM has the power to consider the following matters, which are deemed to be items of ordinary business: (a) declaring a dividend; (b) the consideration of the accounts, balance sheets and the reports of the Directors and Auditors; (c) the election of Directors in the place of those retiring by a rotation or otherwise or ceasing to hold office; (d) the reappointment and fixing of the remuneration of the Auditors; (e) generally authorising the Directors, for a period to expire no later than the conclusion of the next AGM of the Company, to allot relevant securities, within the meaning of the 1983 Act, with a nominal value not exceeding the authorised but unissued share capital of the Company; 49 (f) generally authorising the Directors, for a period to expire no later than the conclusion of the next AGM of the Company, to allot equity securities within the meaning of section 23 of the 1983 Act: (i) pre-emptively; and/or (ii) other than pre-emptively, of a character and/or with a nominal value not exceeding such percentage as is chosen by the Directors; (g) generally authorising the Directors, for a period to expire no later than the conclusion of the next AGM of the Company, to exercise the power of the Company to make market purchases of the Company s shares with a nominal value not exceeding 10% of the nominal value of the shares in issue. Special business All other business transacted at an AGM and all business transacted at an Extraordinary General Meeting are deemed to be special business. Matters, which must be done by the Company in general meeting pursuant to the Companies Acts 1963 to 2009 include the following matters: (a) amending the Memorandum and Articles of Association; (b) changing the name of the Company; (c) increasing the authorised share capital, consolidating or dividing share capital into shares of larger or smaller amounts or cancelling shares, which have not been taken by any person; (d) reducing the issued share capital; (e) approving the holding of the AGM outside the State; (f) commencing the voluntary winding up of the Company; (g) re-registering the Company as a company of another type; (h) approving a substantial property transaction between the Company and a Director; Directors Report Financial Financial Statements Statements Governance Governance Responsibility Responsibility Performance Performance Strategic Review Strategic Review Overview

52 Governance Directors Report continued (i) approving a guarantee or security for a loan or similar transaction made by the Company to a Director or connected person of a Director; and (j) approving the draft terms of a crossborder merger. Other matters, such as the consideration of reports and the approval of share option schemes, may also be done at a general meeting as items of special business Annual General Meeting The Board uses the AGM of Dragon Oil plc for the purpose of communicating with all its investors alike and welcomes their participation. It is the Company s policy that all Directors should attend if possible, subject to business or personal reasons. It is also the Company s policy to involve Shareholders fully in the affairs of the Group at the AGM and to give them an opportunity to ask questions about the Group s activities and prospects. The Senior Independent Non-executive Director will also be available at the AGM to meet with the Shareholders. Details of the resolutions to be proposed at the AGM are given in a letter attached to the Notice of AGM, which is published separately and sent to Shareholders with this report. As more particularly detailed in the Notice of AGM, the Board is recommending the payment of a fullyear maiden dividend in respect of 2010 and adoption of new long-term incentive plans for the employees of the Group. The Directors consider that all of the resolutions set out in the Notice of AGM are in the best interests of the Company and its Shareholders as a whole and recommend that Shareholders vote in favour of each of them. On behalf of the Board Mohammed Al Ghurair and Abdul Jaleel Al Khalifa Directors of Dragon Oil plc 21 February 2011 Above: Offshore operations.