Developing &Delivering. Dragon Oil plc Annual Report for the period ended 31 December 2008 Stock code: DGO

Transcription

1 Developing &Delivering Dragon Oil plc Annual Report for the period ended 31 December 2008 Stock code: DGO

2 Stock code: DGO Welcome to Dragon Oil Dragon Oil is an independent oil development and production company whose shares are traded under a dual primary listing on the Irish and London Stock Exchanges. Dragon Oil operates oilfields located in the Cheleken Contract Area offshore Turkmenistan, in the Caspian Sea. Photograph above left All from left to right: Durdy Yegendurdyev CPF Operator, Berdy Mamedkurbanov Senior Electrician and Allayar Miriev CPF Operator Photograph above right Lam A platform Our Business Highlights 01 Our Governance Corporate Social Responsibility Report 18 Message from the Chief Executive Officer 02 Board of Directors 20 Chairman s Statement 06 Senior Management 22 Year at a Glance 08 Directors Report 24 Operational Overview 10 Corporate Governance Statement 30 Operating & Financial Review 12 Directors Remuneration Report 38 Page 01 Page 18 Our Accounts Independent Auditors Report (the Group) 41 Group Balance Sheet 42 Group Income Statement 43 Group Cash Flow Statement 44 Company Balance Sheet 45 Company Cash Flow Statement 46 Statements of Changes in Equity 47 Notes to the Financial Statements 48 Supplementary Information 79 Glossary/Definitions 80 Advisors IBC Page 41

3 01 Dragon Oil plc Annual Report for the period ended 31 December 2008 Highlights Message from the Chief Executive Officer Chairman s Statement Year at a Glance Operational Overview Operating & Financial Review Highlights Impressive Performance 28% increase in Gross Production 21% increase in Earnings per share 18% increase in Revenue Highlights Our Business Gross Production Million barrels Earnings per share US Cents Revenue US$m Growing Production Average daily rate of production reached 40,992 barrels of oil per day ( bopd ) compared to 31,997 bopd in 2007 (a growth of 28%) Exit production of 45,600 bopd achieved at the end of 2008 (2007: 40,048 bopd) Dragon Oil s Rig 40 spud its first well in January 2009

4 02 Stock code: DGO Message from the Chief Executive Officer Another successful year achieving a number of key operational and financial milestones. Q&a Your Questions Answered... Do you have any intention to grow your activities in the Caspian region? We have a 25-year PSA agreement with the government of Turkmenistan, an established and rapidly growing production, an excellent balance sheet as a result of our long-term strategy to reinvest in business. We are looking to capitalise on this valuable foothold in the Caspian region and as such we are looking at acquiring new opportunities to strengthen our portfolio further. Photograph opposite Dragon Oil offshore employees I am proud to report that Dragon Oil produced a strong set of results in The Group delivered an exceptional performance in spite of challenging economic conditions towards the latter half of Following my appointment as CEO in May 2008, I have enjoyed working with an experienced and diverse group of people who are all as eager as I am to make Dragon Oil an even bigger success in the years to come. I would like to thank our employees for their hard work and drive in often difficult working conditions. Developing and delivering Dragon Oil has had another successful year achieving a number of key operational and financial milestones and its robust financial health places it in a strong position to weather the global economic downturn. In 2008, we achieved 18% growth in revenue resulting in a 30% growth in operating profit. This was generated largely on the back of increased realised prices in 2008, despite a decrease in sales volumes. Net cash generated from operating activities was up 24% over 2007 and earnings per share was 21% higher than In addition, there was an increase of 36% in capital employed represented by higher expenditure in oil and gas interests and an increased cash balance at the year-end. The Group s cash and cash equivalents and term deposits at the end of 2008 were US$876 million. The increase in cash over 2007 level reflects strong realised oil prices, which more than offset a 14% decrease in sales volumes and a 32% increase in investing activities. Our exceptional balance sheet is a result of the management s long-term strategy to reinvest in Dragon Oil s growth and take advantage of favourable market conditions. In times of financial crisis, our unleveraged position and a considerable cash balance allow us to grow organically and seek out attractive targets to diversify our business. One of the key performance indicators set for 2008 had been to raise the average daily rate of production by 25%. We are pleased to report that Dragon Oil exceeded this target with a 28% increase to 40,992 barrels of oil per day at the end of Dragon Oil also achieved an exit rate of 45,600 barrels of oil per day at the end of the year. The reserves certification was completed in early 2009 by an independent energy consultancy specialising in petroleum reservoir evaluation. The results of the certification for the Cheleken Contract Area confirmed proved and probable reserves of 645 million barrels of oil and condensate and 3.2 tcf of gas resources as of 30 June This certification is different from those conducted previously as it incorporates the results of full field remapping for all the reservoir levels based on the 3-D seismic survey conducted from 2004 to This result confirms our previous interpretation and we can now continue to proceed confidently with developing the field. Investing for the future Capital expenditure for 2008 was approximately US$287 million. The expenditure during the year was allocated primarily to drilling and infrastructure projects in Turkmenistan. Of the total capital expenditure to date, 60% was attributable to drilling with the remaining balance spent on infrastructure projects. Dragon Oil awarded contracts and has projects under way to refurbish the Dzheitune (Lam) 28 platform; construct the new Dzheitune (Lam) B platform; build additional tanks at the Central Processing Facility; and construct a new 30-inch, 40-km trunkline to bring all the oil and gas onshore. As of March 2009, the Dzheitune (Lam) 13 platform was refurbished and upgraded, and the Group s own Rig 40 was refurbished.

5 03 Dragon Oil plc Annual Report for the period ended 31 December 2008 Highlights Message from the Chief Executive Officer Chairman s Statement Year at a Glance Operational Overview Operating & Financial Review Phase 2 upgrade of export facility completed increasing loading capability Construction of 30-inch, 40-km trunkline to bring oil and gas onshore Message from the Chief Executive Officer Our Business Phase 2 expansion of Central Processing Facility to handle 100,000 barrels of total liquid per day and up to 220 mmscfd of gas per day under construction

6 04 Stock code: DGO Message from the Chief Executive Officer continued Q&a How has the recent fall in the oil price affected your business? Our share price has suffered from oil price volatility similar to other oil players, however, our business remains robust. Dragon Oil s operations continue to be profitable and we benefit from increased competition in materials and services costs. Dragon Oil s strong cash generation from its existing operations enables us to internally fund our development programme over the next few years. We are in exceptional financial health, which allows us to continue with the capital expenditure programme set for 2009 and focus on monetizing gas as well as diversifying geographically. Photograph above left Durdy Yegendurdyev CPF Operator Durdyev Orazdurdy Plant Operator Allayer Miriev CPF Operator Berdy Mamedkurbanov Senior Electrician Serdar Amanov Senior CPF Mechanic Sergey Yemtsov CPF Operator Photograph above right Central processing facility office Photograph opposite Iran Khazar rig contractors The Group has an estimated capital expenditure programme for 2009 of up to US$300 million for infrastructure, which will be internally funded. This includes the construction and refurbishment of platforms, the ongoing construction of the 40-km trunkline, the upgrade of the Central Processing Facility to handle 220 mmscfd of gas per day and 100,000 barrels of liquid per day. For the planning period of , the total spending on infrastructure projects is expected to be around US$ million. The level of capital expenditure is subject to approval of projects under the Product Sharing Agreement ( PSA ) and the availability of contractors in the Caspian Sea region. The amount of capital expenditure for drilling is mainly determined by the number of wells drilled. The progress of the drilling programme is dependent on availability of rigs. Building and retaining a powerful team Strengthening our staff base with skilled and experienced individuals remains a top priority for the Group. We have maintained a continuous recruitment programme throughout 2008, with the average number of staff increasing by 10% to 913. I am pleased to report that we now have 30 different nationalities in our Dubai head office creating a culture of diverse experience and skills to the benefit of the Group. Our Corporate Social Responsibility team is currently assessing the possibility of introducing and implementing new community initiatives in the Cheleken area. I am particularly proud that, as part of our social responsibility programme, we will be building a 1,500 m 3 desalination plant from which a large proportion of the potable water will be supplied to the local community in Hazar, Turkmenistan. As a founder member of the Industry s Humanitarian Support Alliance NGO (IHSAN), I have a keen interest in such humanitarian efforts. Overcoming challenges On 26 February 2009, Dragon Oil announced that the Group s Internal Audit Department ( IAD ) identified possible irregularities within both its Marketing Department and Contracts Department. As a result of these findings, Dragon Oil instructed KPMG (Dubai) ( KPMG ) to conduct an investigation into improper conduct by certain former senior managers. We are greatly reassured by the preliminary findings from the investigation, which confirm that there is no material impact on the Group s financial position. I am also personally pleased that these irregularities were identified internally and that we commissioned the investigation promptly. We have already replaced the managers involved and appropriate steps have been taken following the identification of these irregularities. Turning vision into value Our long-term strategic approach of reinvesting cash into the business, as well as taking advantage of lower input costs, will stand us in good stead in the lower oil price environment that we are currently experiencing. We are now capable of funding from internal resources an expanded capital expenditure programme including the drilling programme, infrastructure and the gas project. We will aim to take advantage of competitive prices for materials and services driven down by the current economic downturn, in order to secure future growth in a more positive market environment. We plan to complete eight wells by the end of For the period, we intend to complete up to 35 development wells in total. In addition, we are committed to achieving an annual production growth of up to 15% on average in the period

7 05 Dragon Oil plc Annual Report for the period ended 31 December 2008 Highlights Message from the Chief Executive Officer Chairman s Statement Year at a Glance Operational Overview Operating & Financial Review Message from the Chief Executive Officer Our Business In line with our plans to diversify the portfolio, our experienced New Ventures Team continues to assess numerous prospects. There is a steady stream of new and interesting potential opportunities in the current buyer s market. We will continue to take a measured approach to identifying and securing good quality assets within the Middle East, North Africa or Central Asia in line with our diversification strategy. I am pleased to report that the Board is proposing a corporate restructuring of Dragon Oil plc by creating a new holding company incorporated in Bermuda. This decision has been reached following an extensive review of the Group s operating structure. This new structure more closely aligns the Group s corporate interests with its legal and commercial status. Upon completion of the restructuring process, the Company will have a primary listing on the London Stock Exchange, while maintaining a secondary listing in Ireland. We continue to maintain a positive working relationship with the Government of Turkmenistan built on many years of successful partnership. I would like to thank the executive team and all our employees for their achievements during another successful year for Dragon Oil. I would also like to thank our shareholders for their support. We are confident that Dragon Oil s strong cash position, unleveraged balance sheet, low cost operational model, experienced employees and clear strategic vision will enable us to take the Group to a higher level. Dr ABDUL JALEEL AL KHALIFA Chief Executive Officer Q&a You are a single asset company. How confident are you that any acquisition strategy that you follow will add shareholder value? We are interested in companies with existing underdeveloped resources where Dragon Oil s expertise could add most value. Our new ventures and business development team has been reviewing prospects and opportunities with the objective of adding production and reserves to Dragon Oil. Our strategy is not an aggressive acquisitions campaign but a measured approach to identify good quality assets within the MENA and Central Asia region, supported by good managerial and operational capabilities.

8 06 Stock code: DGO Chairman s Statement Dragon Oil is well placed to operate in the current market conditions and continues to fund its ongoing development programme. There have been a number of Board level changes. Have there been any underlying reasons for these changes? Board restructurings reflect the need for the continuous evolution of the Board s make-up, including maturity and expertise linked to our desire to add value to the existing asset and diversify the asset portfolio. The Board and senior level management is at a stable operating point, from where we hope to progress to add value. Q&a Dragon Oil has enjoyed another successful year and I would like to congratulate our employees on their contribution and excellent performance. Standards in Health, Safety and Environment ( HSE ) and Corporate Social Responsibility ( CSR ) have risen across the Group, a great achievement in a challenging business environment. In September 2008, we reported, with regret, that Hussain M. Sultan had resigned as Executive Chairman of Dragon Oil having been instrumental in the development of the Group since the Emirates National Oil Co. Ltd. (ENOC) L.L.C. ( ENOC ) took a majority share in the Group in Following Mr Sultan s resignation, I assumed the position of Non-Executive Chairman and Abdul Jaleel Al Khalifa joined the Board as an Executive Director. I am impressed by the motivation, professionalism and dedication demonstrated by the management team as they continue to take Dragon Oil on to its next level of growth and development. During 2008, the oil and gas industry experienced significant volatility in oil prices with crude reaching close to US$150 per barrel in July 2008 before decreasing to below US$40 per barrel in December Due to its strong balance sheet, Dragon Oil is well placed to operate in the current market conditions and continue to fund its ongoing development programme. Dragon Oil s relations with the Government of Turkmenistan and the State Agency for the Management and Use of Hydrocarbon Resources remain strong, and I was honoured to meet with His Excellency, the President of Turkmenistan, last year. Corporate governance Corporate governance continues to play a crucial part in delivering good results, and the Board remains committed to ensuring maximum transparency within the Group. A whistle-blowing policy was implemented in 2008 to encourage open communication amongst its employees and, in addition, there has been a greater role of the Audit Committee in overseeing Dragon Oil s operations based on inputs from internal and external auditors. The Board also took note of shareholder feedback, regarding its governance disclosures, and incorporated a greater level of clarity into this year s annual Directors Report. The identification of possible irregularities in the Marketing and Contracts Departments following an internal audit review posed a challenge to Dragon Oil in early The Board sought immediate advice from the Group s lawyers and sponsors and has acted, and will continue to act, upon the information available to ensure that the matter is dealt with swiftly and that procurement policies and procedures continue to operate effectively. Safety and training Once again we have improved our general health and safety levels with the recorded Lost Time Incident Frequency Rate decreasing to 1.79 in 2008 from 2.02 in This is primarily attributable to a strengthened Health and Safety team and ongoing improvement of the HSE facilities and processes. We have plans to expand the staff training programme, upgrade the facilities even further and introduce a Centre of Excellence based in Dragon Oil s facility in Turkmenistan. In addition, HSE manpower will be increased with emphasis on training and recruiting local people to these roles. Photograph opposite Iran Khazar rig in the background

9 07 Dragon Oil plc Annual Report for the period ended 31 December 2008 Highlights Message from the Chief Executive Officer Chairman s Statement Year at a Glance Operational Overview Operating & Financial Review Chairman s Statement Our Business Taking care of our community I am proud to report that in 2008 we formed a CSR team, whose responsibilities included planning, managing and monitoring all of Dragon Oil s ongoing and future CSR activities. As a result, the Group was involved, during the year, in a number of socially responsible initiatives, which reflect Dragon Oil s belief that it is our duty and responsibility to take care of the community in which we operate. Key projects included the upgrade and refurbishment of the Hazar Town Hospital s Intensive Care Unit ( ICU ) in Turkmenistan. Work commenced in 2008 and is expected to continue into Furthermore, we are committed to providing the necessary medical equipment to the new ICU once it has been completed. In addition to a number of smaller environmental and educational projects that we are undertaking, we have recently awarded a contract to build a desalination plant in Hazar, which we hope to complete by the end of Environmental surveys and an impact assessment for the project have been completed. Looking to the future I am, therefore, delighted that, as well as improving its performance financially and operationally, Dragon Oil has also raised the standards of its HSE, CSR and Corporate Governance practices. Dragon Oil does not plan to declare a dividend presently; however, the Board will continue to review the dividend policy alongside other capital requirements of the Group. Our overall objective is to create long-term shareholder value. I believe that, with a debtfree balance sheet and strong cash flow from our Turkmenistan asset, we are well placed to achieve our objectives. We also have excellent opportunities to grow organically and we will continue our search for attractive diversification investments. I, therefore, look forward to working with Dragon Oil as it seeks a new level of success in MOHAMMED AL GHURAIR Non-Executive Chairman 60% increase in Cash Balance Cash Balance US$m

10 08 Stock code: DGO Year at a Glance In 2008, Dragon Oil continued its programme to renew its infrastructure by adding additional capacity, removing production bottlenecks and expanding export capability. 29 April March 2008 Dzheitune (Lam) A/125B well completed yielding a combined rate of 4,082 bopd with a depth of 4,080 metres using the Iran Khazar Rig from the Dzheitune (Lam) A platform. 22 April 2008 Announced initial noncommercial findings from Blocks 49 in Dragon Oil s non-operated acreage in the Republic of Yemen, with geological and geophysical analysis ongoing. Dzheitune (Lam) 22/126 completed yielding a combined rate of 2,795 bopd with a depth of 4,307 metres using the CIS 1 Rig from the Dzheitune (Lam) 22 platform. Restored production flow from well Dzheitune (Lam) 28/120, which was shut in due to technical problems arising from the extreme weather conditions in Turkmenistan. February April June January March May 9 January 2008 The Dzheitune (Lam) 22/124 well completed yielding a combined rate of 2,414 bopd with a depth of 3,841 metres using the CIS 1 Rig from the Dzheitune (LaM) 22 platform. 23 April 2008 Unprecedented cold weather in Turkmenistan momentarily slowed production from the Dzheitune (Lam) 28/120 requiring the well to be shut in and for a new coflex alternative pipeline to be installed. 1 May 2008 Appointment of Abdul Jaleel Al Khalifa to the role of Chief Executive Officer, with Hussain M. Sultan continuing in the role of Executive Chairman.

11 09 Dragon Oil plc Annual Report for the period ended 31 December 2008 Highlights Message from the Chief Executive Officer Chairman s Statement Year at a Glance Operational Overview Operating & Financial Review Delivery on Promises 5 June 2008 Dzheitune (Lam) A/127 well on completed yielding a combined rate of 3,674 bopd with a depth of 3,627 metres using the Iran Khazar rig from the Dzheitune (Lam) A platform. 21 July 2008 Awarded US$170 million contract for the construction of a new 30-inch, 40-km trunkline to bring all of Dragon Oil s oil and gas onshore to its Central Processing Facility. 26 September 2008 Board Restructuring Resignation of Hussain M. Sultan from the role of Executive Chairman. Appointment of Mohammed Al Ghurair as Non- Executive Chairman. Appointment of Abdul Jaleel Al Khalifa, Chief Executive Officer as an Executive Director on the Board of the Company. 12 November 2008 Dzheitune Lam 22/130 well completed yielding a combined rate of 2,057 bopd with a depth of 3,770 metres using the CIS Rig from the Dzheitune (Lam) 22 platform. Dzheitune Lam A/131 well completed yielding a combined rate of 4,621 bopd with a depth of 4,120 metres using the Iran Khazar rig from the Dzheitune (Lam) A platform. Year at a Glance Our Business August October December July September November 16 July 2008 Dzheitune (Lam) 22/128 completed yielding a combine rate of 2,600 bopd. CIS 1 Rig, Lam 22 platform, 3848 metres. 29 August 2008 Dzheitune (Lam) A/129 well completed yielding a combined rate of 2,123 bopd with a depth of 4,135 metres using the Iran Khazar rig from the Dzheitune (Lam) A platform. 30 December 2008 Dzheitune Lam 21/132 completed yielding an initial rate of 916 bopd. Drilling of this well stopped at 3,001 metres when it encountered pressures that were higher than expected. As a result the main intended deeper intervals will not be penetrated, however, there are plans to revisit this well at a later date in order to reach the main targets. Deployed Dragon Oil s own refurbished Rig 40 to the Dzheitune (Lam) 13 Platform, where it spudded its first well in January 2009.

12 10 Stock code: DGO Operational Overview The Dragon Oil Group operates its principal asset offshore in the Caspian Sea from its onshore base in Turkmenistan. The base is in the town of Hazar, which is located on the western coast of Turkmenistan. 28% increase in Average Daily Production Rate In addition, Dragon Oil has offices in the capital of Turkmenistan, Ashgabat, where its Country Manager is located. The Dragon Oil Group s headquarters are situated in Dubai, United Arab Emirates ( UAE ) and most of the Company s management are located in the Dubai office, including the Chief Executive Officer. DZHEITUNE (LAM) The Dzheitune (Lam) Field is located in the Cheleken Contract Area, offshore Turkmenistan, west of the coastal town of Hazar. The field lies on the eastern end of the Apsheron Sill, which represents a prolific hydrocarbon trend stretching from the Apsheron Peninsula in Azerbaijan to the Cheleken Peninsula in Turkmenistan. Since signing the PSA in year 2000, Dragon Oil has drilled new wells on the Dzheitune (Lam) field and carried out a number of successful workovers. Discovered 1972, first production 1978 The first appraisal well based on 3-D seismic was drilled on the Dzheitune (Lam) west structure 3-D Seismic survey acquired in 2005, preliminary interpretation completed, additional studies ongoing Average Daily Production Rate Barrels of oil DZHYGALYBEG (ZHDANOV) The Dzhygalybeg (Zhdanov) Field is located to the north-east of Dzheitune (Lam). It was discovered in 1968 and has produced from a series of stacked Early to Middle Pliocene Red Series sandstone reservoirs. Dragon Oil has carried out a number of successful workovers. Discovered 1968, first production D Seismic survey acquired in 2005, preliminary interpretation completed, additional studies ongoing

13 11 Dragon Oil plc Annual Report for the period ended 31 December 2008 Highlights Message from the Chief Executive Officer Chairman s Statement Year at a Glance Operational Overview Operating & Financial Review C A S P I A N S E A CASPIAN SEA Operational Overview Our Business Sevemyy Chelekensky Bay CASPIAN SEA Cheleken Contract Area DZHYGALYBEG (ZHDANOV) DZHEITUNE (LAM) Hazar CPF Jetty Dragon Oil camp 28% increase in gross field production to 15 million barrels of oil in 2008 compared to 11.7 million barrels of oil in 2007 Nine development wells completed during 2008 compared to seven in 2007

14 12 Stock code: DGO Operating & Financial Review The Group s robust cash position secures funding for organic growth in Turkmenistan and its diversification plan over the next few years. Q&a Do you think your export route exposure to the Iranian market impacts negatively on your share price? Oil price volatility has a far greater impact on our share price. While we cannot control oil prices, we do everything possible to mitigate risks in the routes we use to export our oil. To date the Iranian route has proven reliable and most profitable. The other route for us is through Baku, Azerbaijan. We are also considering exporting our oil via Makhachkala in Russia and are exploring means to use the BTC pipeline to take the oil to the Mediterranean. We will continue to pursue commercial arrangements that are in the best interests of the business. Photograph above Aladja Jetty Photograph opposite Refurbishment of Rig 40 The drilling programme in the Group s 100%-owned Cheleken Contract Area continued successfully, delivering a 28% increase in the average daily rate of production to 40,992 barrels of oil over the course of In early 2008, unusually cold weather was experienced in this area of the Caspian Sea, which temporarily affected operations. In particular, production from Dzheitune (Lam) 28/120 well needed to be shut to enable a new coflex alternative pipeline to be installed. In April 2008, the production from this well was restored to full flow. Production and marketing Gross production during the year reflected a 28% increase over the previous year. Total 2008 gross field production from the Cheleken Contract Area was 15 million barrels of oil with an average daily gross production rate of 40,992 bopd. This compares to 11.7 million barrels of oil in 2007 and an average daily gross production rate of 31,997 bopd. The Group s entitlement barrels are dependent amongst other factors on operating and development expenditures and realised crude oil prices. As a result of the fiscal terms of the PSA, the Group s entitlement barrels in the current period were about 60% (2007: 68%) of the gross field production. The Group sold 7.5 million barrels (2007: 8.7 million barrels) of oil in 2008 and held a crude oil inventory of 0.7 million barrels at the year-end (2007: 0.2 million barrels). The quantity sold during the year is lower due to change in the lifting positions and inventory movement. At the year-end, the Group was in an underlift position of approximately 0.6 million barrels. The average realised price in 2008 was approximately US$90.8 per barrel (2007: US$70.9 per barrel). The realised oil prices achieved a discount of about 6% to Brent during the year. The Group continued to market approximately 80% of its crude oil through Neka in Iran during 2008 because it offered higher netback prices as compared to the western route through Baku, Azerbaijan. The Group moved approximately 20% of its crude through Baku in order to maintain marketing flexibility. The Baku route was briefly interrupted for two weeks earlier in 2008 due to the conflict in Georgia. During that time 100% of production was marketed through the Iranian swap agreement at Neka. The marketing team continues to assess the possibility of opening additional routes through Makhachkala in Russia and the BTC pipeline initiating at Baku. The drilling programme Nine development wells were completed during 2008: four from Dzheitune (Lam) 22 platform (L22/124, 126, 128 and 130) using the CIS Rig 1, four from Dzheitune (Lam) A platform (LA/125, 127, 129 and 131) using the Iran Khazar, and one from Dzheitune (Lam) 21 Platform (L21/132) also using the Iran Khazar. The drilled depths of the nine wells varied between 3,000 m and 4,200 m. Except for L21/132, which was completed as a single string completion, the other eight wells were completed as dual completions. Initial tested rates from the nine wells varied between 916 bopd (L21/132) to 4,682 bopd (LA/131). Further perforations were added to three wells in the fourth quarter of 2008 resulting in an incremental production of approximately 2,000 bopd. Following refurbishment of the Group s Rig 40, the Group mobilised the rig to begin drilling the first well in January This well was targeted at the Southern flank of the field beyond the fault line and was found to be wet. Therefore, we decided to sidetrack it in order to reach the planned depth and complete. We expect to complete three wells using Rig 40 by the year-end.

15 13 Dragon Oil plc Annual Report for the period ended 31 December 2008 Highlights Message from the Chief Executive Officer Chairman s Statement Year at a Glance Operational Overview Operating & Financial Review The Iran Khazar rig underwent planned maintenance and was mobilised to the designated platform to commence drilling. We expect to complete four wells using the Iran Khazar rig by the year-end. The Group has commenced discussions to renew the contract for the Iran Khazar rig, which is due to expire in Q In July 2008, a US$170 million contract was awarded for the engineering, procurement and installation of a new 30-inch, 40-km oil and gas trunkline. Once commissioned, the trunkline will be capable of transporting all the oil and gas produced offshore in the Cheleken Contract Area to the Group s onshore Central Processing Facility. 21% increase in Profit for the year Operating & Financial Review Our Business On 6 March 2009, Dragon Oil announced that it Another project integral to the success of the field had decided not to renew the CIS Rig 1 contract. development plan is the phase 2 upgrade of the The management team concluded that a higher Central Processing Facility to handle up to 100,000 specification platform-based rig was more suitable barrels of liquid and 220 mmscfd of gas per day. In for drilling slanted wells to obtain higher productivity. October 2008, a contract worth US$37 million for the Subject to contract negotiations, the Group expects project was awarded. to award a contract in Q with an intention to complete one well by the end of Other important projects under way include the phase 2 upgrade of the export facility at the Aladja Jetty to Infrastructure increase loading capability and efficiency and the A number of important infrastructure projects were building of the desalination plant, which is planned to awarded over the course of ensure a constant supply of fresh water to the Group s operations as well as to the local community. Reserves and Resources as at 30 June 2008 Proved and Probable Remaining Recoverable Reserves Million barrels Gross field reserves of oil and gas condensate to 1 May C Resources Trillion cubic feet Gross Gas Contingent Resources 3.2 Note: Based on the latest reserves certification by independent petroleum engineers Profit for the Year US$m

16 14 Stock code: DGO Operating & Financial Review continued 29% increase in Gross Profit Gross Profit (US$m) Proved and probable remaining recoverable reserves as at 31 December 2008 on working interest and entitlement bases were 636 million barrels and 296 million barrels, respectively. Between June 2004 and April 2005, the Group acquired 3-D seismic data over an area of 652 kms 2 across both the Dzheitune (Lam) and Dzhygalybeg (Zhdanov) fields. This set of data was then processed and made available for interpretation in the Q A preliminary interpretation of the time-migrated data set was initiated at that time and the resultant maps were used to position the new Dzheitune (Lam) A platform and to identify the potential for hydrocarbons in the Dzheitune (Lam) West structure. Dzheitune (Lam) West was successfully appraised with the well Dzheitune (Lam) 28/120 and the Group has since drilled eight successful wells from the Dzheitune (Lam) A platform. Dragon Oil recognised that due to the structural complexity of the fields, the quality of the imaging could be improved with further processing of the seismic data. A full depth migration of the data (Pre-Stack Depth Migration) was conducted, which resulted in a significant improvement in the structural and stratigraphic imaging further improving our understanding of the fields. This latest reserves update incorporates the results of full field re-mapping, based on this improved dataset. Yemen. Studies for a possible commercialisation in conjunction with two existing small discoveries on Block 49 are ongoing. Geological and geophysical analysis is continuing on Block 35 in order to identify prospects to be drilled during the current exploration period. Block R2 has been relinquished after two dry holes were drilled in Commercialisation of the gas resources Significant strides were made in 2008 towards commercialising Dragon Oil s gas resources in the Cheleken Contract Area. This included award of the contracts for the 40-km trunkline project and the phase 2 upgrade of the Central Processing Facility. The Group is looking to award the six-month front end engineering and design contract shortly, following which the engineering, procurement and construction contract for the gas processing facility will be tendered. Our people In 2008 Dragon Oil increased its Group headcount by 10% over the previous year taking the average number of staff to 913 during The Group continues to maintain a very diverse culture in its approach to recruitment and to develop its human resources in line with our growth and diversification strategy. The Group is increasingly sourcing candidates from within Turkmenistan and this is expected to increase over time as we aim to nurture and encourage skilled local candidates for key roles in a growing Dragon Oil. Photograph above left Larisa Sysoeva Laboratory Technician Ashirsoltan Djumaeva Chief Laboratory Technician Ainabat Meredova Laboratory Technician Photograph above right Offshore employee Photograph Opposite Entrance to Dragon Oil s operations in Hazar, Turkmenistan Following completion of the gas facilities and a gas sales agreement in the future it is expected that Dragon Oil will be able to confirm the proportion of contingent gas resources that can be transferred to reserves. Yemen operations update In April 2008, Dragon Oil announced noncommercial findings of crude oil from Block 49 of its three non-operated acreage in the Republic of One of the focuses in 2008 was recruitment of additional staff into the contracts and purchasing department as well as the engineering and construction department both are crucial for the proper implementation of the field development strategy and oversight of the extensive infrastructure expenditure programme for The majority of this recruitment took place in the second half of 2008 and Dragon Oil expects the benefit of this to filter

17 15 Dragon Oil plc Annual Report for the period ended 31 December 2008 Highlights Message from the Chief Executive Officer Chairman s Statement Year at a Glance Operational Overview Operating & Financial Review through in 2009 as the major infrastructure projects begin to progress. The former employees involved in the irregularities identified by the Group s IAD have been replaced. The Group s operations are now driven by a high-calibre, motivated team of managers. infrastructure (including platforms, trunkline, upgrades to the Central Processing Facility and the export facilities). These expenditures will be internally funded. For the planning period of , the total spending on infrastructure projects is expected to be around US$ million. The level of capital expenditure is subject to approval of projects under the PSA and the availability of contractors Rig 40 refurbished and drilling its first well Operating & Financial Review Our Business Outlook for in the Caspian Sea region. The amount of capital We intend to complete eight wells by the end of expenditure for drilling is mainly determined by the Drilling will take place from the Dzheitune number of wells drilled. The progress of the drilling (Lam) A platform and from the refurbished Dzheitune programme is dependent on availability of rigs. (Lam) 28 and 13 platforms. The Group intends to complete up to 35 development wells in total during For gas development, we envisage capital the years expenditure in the range of US$ million for the onshore Gas Treatment Plant including facilities. The average daily production in 2008 was 40,992 bopd and the exit rate reached at the end of the Financial summary year was 45,600 bopd. Following the changes to the An 18% growth in revenue and a 30% growth in drilling programme, the Group expects to be able to operating profit were generated largely on the back achieve the annual production growth of up to 15% of increased realised prices in Earnings per on average during share was 21% higher than 2007 and net operating cash flow was up 24% over The year 2008 saw The Group has an estimated capital expenditure an increase of 36% in capital employed represented programme for 2009 of up to US$300 million for by higher expenditure in oil and gas interests and an increased cash balance at the year-end. Key financial highlights US$ million (unless stated) Change Average production on entitlement basis (bopd) 24,490 21,739 13% Revenue % Cost of sales (193.2) (198.7) 3% Gross profit % Operating profit % Profit for the year % Earnings per share, basic (US Cents) % Earnings per share, diluted (US Cents) % Capital employed 1, , % Net cash from operations % Cash used in investing activities (516.5) (390.8) (32%) Debt nil

18 16 Stock code: DGO Operating & Financial Review continued Your relationship with the host Q&a government appears to have stood the test of time. What factors do you think have contributed to your success? We believe in a reciprocal and complementary approach to business without any political agenda. Based in the UAE, leveraging the goodwill of the majority shareholder, we have developed a good relationship with the Turkmenistan government. We are receptive to ideas and suggestions and are progressive and agile enough to respond to business opportunities whilst contributing very positively to the economy of host governments. Our relationships are built on long-term trust and mutual understanding, which we believe will continue going forward. We are viewed as good partners we deliver on our promises and provide considerable support to the local economy through access to training, technology, suppliers, contractors and warehousing. In addition, Dragon Oil has always and will remain completely focused on and committed to the development of the Cheleken Contract Area. Income statement Revenue Production levels in 2008 averaged 40,992 bopd (2007: 31,997 bopd) on a working interest basis and 24,490 bopd (2007: 21,739 bopd) on an entitlement basis. 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. Due to the fact that the Group fully recovered its historic costs in 2007, the entitlement barrels have been and continue to be determined by, amongst other factors, the level of development expenditure and the realised oil prices. Revenue for the year was US$706 million compared with US$597 million in The increase of 18% over the previous year is primarily attributable to a higher average realised price of US$90.8 per barrel (2007: US$70.9 per barrel), despite a 14% decrease in the sales volumes during The realised oil prices achieved a discount of about 6% to Brent during the year. The decrease in sales volumes is attributable to change in lifting position and higher inventory sold after the year-end. 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. The underlift and overlift positions are dependent on factors similar to those affecting determination of the entitlement barrels. At the year end, the Group was in an underlift position of 0.6 million barrels that is recognised as revenue and measured at market value. Operating profit The Group generated an operating profit of US$474 million (2007: US$365 million). Cost of sales comprises operating and production costs and depletion charge. The Group s cost of sales was US$193 million in 2008 compared to US$199 million in 2007, a decrease of about 3%. The decrease is primarily due to a reversal of a 2007 overlift charge of US$24 million and a higher crude oil inventory at the year-end, offset by an increase in depletion charge. The average rate for depletion has increased by 30% to US$16.7 per barrel (2007: US$12.8 per barrel), mainly as a result of the upward revision of the long-term oil price assumption and the increased field development costs. Depletion and depreciation charges during the year were US$150 million (2007: US$102 million). The Group s view on long-term oil price until the end of the PSA was revised to US$70 per barrel for 2008 (2007: US$50 per barrel). Operating profit for 2008 was 30% higher than in the previous year despite an increase in other losses of US$5 million on account of derivative financial instruments. These instruments put in place for managing crude oil price exposure using zero-cost collars resulted in a net fair value charge of US$21 million at the year-end (2007: US$15 million). A write-off of US$0.4 million (2007: US$4 million) for exploration and evaluation expenditure in Yemen was made to the extent that the efforts did not result in commercial discoveries. Photograph above Aladja Jetty Photograph opposite Central processing facility

19 17 Dragon Oil plc Annual Report for the period ended 31 December 2008 Highlights Message from the Chief Executive Officer Chairman s Statement Year at a Glance Operational Overview Operating & Financial Review Profit for the year Profit for the year was US$369 million (2007: US$304 million). The profit included finance income and a higher taxation charge. Finance income increased to US$25 million (2007: US$19 million) on the back of higher cash and cash equivalents and term deposits Current assets and liabilities Current assets rose by US$313 million mainly as result of a US$327 million increase in cash at bank due to increased cash from operations. The cash and cash equivalents and term deposits at the year-end were US$876 million, including interest receivable of US$9 million and deposits of US$91.5 million held for abandonment and decommissioning activities. The Dzheitune (Lam) 13 platform refurbished and upgraded 30% increase in Operating Profit Operating & Financial Review Our Business maintained during the year. increase in cash over the previous year reflects strong realised oil prices, despite a 14% decrease in sale During the year the tax rate applicable to the Group s operations in Turkmenistan was increased to 25% by the Hydrocarbon Resources Law of The volumes and a 32% increase in investing activities. Current liabilities rose by US$41 million primarily Operating Profit US$m 500 Group has applied this new rate in determining its tax liabilities as at 31 December The Group is in discussions with the authorities in Turkmenistan about the applicability of the new rate to prior periods, but it does not believe that prior periods are affected by the new rate. Consequently, no provision has been made in respect of any additional tax that could become payable if the increased tax rate were applied to prior periods. Balance sheet Investments in oil and gas interests were higher due to an increase of US$63 million in provision for abandonment and decommissioning on increased production and an increase of US$16 million in tax payable, offset by a US$11 million decrease in the fair value provision on derivative financial instruments and a movement of US$24 million in overlift creditors. Cash flows Net cash generated from operations during the year improved by approximately US$111 million to US$579 million (2007: US$467 million). The increase by US$138 million due to capital expenditure of was primarily attributable to higher sales prices US$287 million (2007: US$228 million) incurred, realised during the year for the sale of crude oil. offset by the depletion and depreciation charge Cash used in investing activities was US$516 million during the year. The expenditure during the year (2007: US$391 million), mainly comprising capital was primarily on drilling and infrastructure projects expenditure of US$288 million (2007: US$232 million) in Turkmenistan. Of the total capital expenditure for and placement of term deposits amounting to US$ , 60% was attributable to drilling. The balance of million (2007: US$173 million). Cash generated by the capital expenditure was spent on infrastructure financing activities was US$12 million (2007: US$1 projects including the refurbishment of Dzheitune million) on account of an increase in share capital (Lam) 13 and 28 platforms, the new Dzheitune resulting from exercise of share options. (Lam) B platform, construction of tanks at the Central Processing Facility and the 40-km trunkline. The Group s robust cash position secures funding Included in exploration and evaluation assets was for organic growth in Turkmenistan and its the acquisition of a minority working interest in three diversification plan over the next few years. exploration blocks in the Republic of Yemen. These assets are carried as intangible assets net of write-off due to lack of commercial success.

20 18 Stock code: DGO Corporate Social Responsibility Report The safety of employees continues to be a top priority for Dragon Oil. Our commitment In 2008, Dragon Oil was involved in a number of community support projects in Turkmenistan. Improving health care In 2008, Dragon Oil commenced refurbishment of the Hazar Town s ICU, which is expected to continue into In addition, there are plans to purchase medical equipment such as electro cardiograms and surgical instruments necessary for a fully working Intensive Care Unit. There are also plans to upgrade and refurbish other areas of the hospital in the future. Providing clean water Another major community project under way is a desalination plant in Hazar Town, which Dragon Oil is working on with the local authorities with a view to complete the project by the end of The Group has completed environmental surveys and an impact assessment. Having awarded the contract for this project, Dragon Oil has allocated a budget of US$4 million for the procurement, installation and commissioning of the plant. The plant will have a capacity to process 1,500 cubic metres per day of potable water, the major portion of which is expected to be supplied to Hazar Town where water supplies have historically been intermittent. Supporting education Dragon Oil recognises and understands the need to put in necessary programmes to improve the level of education for the communities in which it operates. There are plans and a budget in place to donate computer equipment to School Number Three in Hazar Town as part of Dragon Oil s education improvement programme. Health, Safety and Environment Key Performance Indicators Lost time incidents Total hours worked (million) Lost time incident frequency Environmental incidents

21 19 Dragon Oil plc Annual Report for the period ended 31 December 2008 Corporate Social Responsibility Report Board of Directors Senior Management Directors Report Corporate Governance Statement Directors Remuneration Report 1 Corporate Social Responsibility Report Our Governance 2 3 The safety of employees continues to be a top priority for Dragon Oil and once again the Lost Time Incident Frequency Rate decreased, moving to 1.79 in 2008 from 2.02 in This improvement is primarily attributable to the HSE management system, a strengthened Health and Safety team and ongoing improvement of the training programme, facilities and processes. Environmental protection is firmly on the corporate agenda, which is highlighted by Dragon Oil s involvement in the Caspian Seal Conservation Project in This included providing transport of people and equipment, as well as general support to the Turkmenistan Ministry of Environment and nature conservation scientists. In 2009, the Group plans to become more involved in supporting and raising awareness of this important project. Key CSR initiatives Complete the desalination plant project in 2009 Increase and upgrade HSE training facilities and activities Focus on improving contractor HSE training and overall performance Introduce a Centre of Excellence based in Dragon Oil s facility in Turkmenistan Improve environmental protection programme Photographs clockwise from top left 1 Hazar Town local woman 2 Durdyev Orazdurdy, helping to refurbish Hazar Town s intensive care unit 3 School number three, Hazar Town

22 20 Stock code: DGO Board of Directors 01 Mohammed Al Ghurair Non-Executive Chairman Mr Al Ghurair, aged 57, 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 2008, upon the resignation of Hussain M. Sultan from that role. He is a prominent executive Director in a number of leading companies in the Middle East, including ENOC and the Saudi International Petrochemical Company. He is also a member of the Nominations and Remuneration Committees. 02 Abdul Jaleel Al Khalifa Chief Executive Officer Dr Al Khalifa, aged 50, is presently the Chief Executive Officer for the Group. He was appointed to the Board of Dragon Oil plc on 26 September 2008 although he had been in the role of CEO since 1 May He joined the Company from Saudi Aramco where he managed a wide range of E&P departments, based in Dhahran, Saudi Arabia over the past 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). 03 Nigel McCue Senior Non-Executive Director Mr McCue, aged 57, has over 30 years experience in the petroleum industry. He is a Director and Chief Operating Officer 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 the Compensation Committee. Previously, Mr McCue 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 within the definition of the FRC Combined Code. He is a member of the Remuneration and Nominations Committees and is Chairman of the Audit Committee. He was appointed to the Board of Dragon Oil plc on 22 April Ahmad Sharaf Non-Executive Director Mr Sharaf, aged 42, is presently 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 a number of its international operations. He left ConocoPhillips in 2004 and is now the Chief Executive Officer for Tatweer Investments and is also a member of the Board of ENOC. Mr Sharaf is a member of Dragon Oil s Remuneration Committee and Nominations Committee. He was appointed to the Board of Dragon Oil plc on 25 April Ahmad Al Muhairbi Non-Executive Director Mr Al Muhairbi, aged 49, has a strong background in upstream oil and gas, with a comprehensive knowledge of well technology having been involved in petroleum field development and production since Mr Al Muhairbi has a degree in petroleum engineering and has been involved in field development and production since 1988, particularly with Margham Dubai Establishment. Mr Al Muhairbi is a member of Dragon Oil s Audit Committee and is the Chairman of the Nominations Committee. He was appointed to the Board of Dragon Oil plc on 22 May Saeed Al Mazrooei Non-Executive Director Mr Al Mazrooei, aged 48, received a Master s 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 Deputy Vice-President of Operations for Dolphin Energy, 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 the Board of Dragon Oil plc on 22 May Hussain M. Sultan Mr Sultan, aged 71, acted in the role of Executive Chairman for the Company until 26 September 2008 and was a Director for the entirety of 2008, resigning from the Company with effect from 31 December Jeremy Key Mr Key, aged 55, is a consultant of Taylor Wessing Middle East LLP (Solicitors). He resigned from the Company with effect from 21 May 2008.

23 21 Dragon Oil plc Annual Report for the period ended 31 December 2008 Corporate Social Responsibility Report Board of Directors Senior Management Directors Report Corporate Governance Statement Directors Remuneration Report Board of Directors Our Governance

24 22 Stock code: DGO Senior Management 01 Tarun Ohri Director of Finance Tarun Ohri was appointed as Finance Manager in March 2002 and is responsible for the finance functions of the Group. He has over 20 years experience in finance, accounting and audit predominantly in oil-related industries in Qatar and the UAE, including McDermott-ETPM East Inc and ENOC. He is an associate of the Institute of Chartered Accountants of India with a CISA qualification. 02 Alex Ridout Legal Council and Company Secretary Alex trained as a solicitor with Boodle Hatfield, a London law firm, and on qualification in 1999 joined another London firm, AIZ (formerly Llewelyn Zietman), specialising in IP and commercial contracts. In 2002, he joined Baker Hughes, a global oilfield services contractor, as head of the Middle East legal group based in Dubai where he managed all aspects of the legal and compliance functions and focused on upstream oilfield contracts. In 2006, Alex joined Dragon Oil as Legal Council. Alex is a member of the Law Society of England & Wales and the Association of International Petroleum Negotiators. 03 Andreas Brandt New Ventures & Business Development Coordinator Andreas graduated from the University of Hamburg and subsequently completed a Doctorate degree in geology. He has been working in upstream oil and gas for 28 years. He began his career in 1981 with Texaco Germany (now RWE Dea), eventually becoming Senior Geological Expert for the Group. During his tenure he went on numerous foreign assignments in addition to assessing new venture opportunities in MENA, the North Sea, Europe, Russia and CIS countries. In 2007 he joined Dragon Oil as New Ventures & Business Development Coordinator to assess economic, strategic and risk aspects of new ventures and to build a team, which devotes its attention solely to seeking out investment opportunities. 04 William V. Mandolidis Integrated Projects and Planning Manager William is a member of the Association of Professional Engineers, Geologists and Geophysicists of Alberta (Canada), and the Society of Petroleum Engineers. Having graduated from the University of Toronto with an Honours Degree in Chemical Engineering in 1980, he went on to gain 29 years of oil and gas experience with companies including Shell Canada, Wascana Energy, Nexen Energy and Wood Group ESP. He has held a variety of senior managerial positions in Corporate Planning, Operations, Business Development, Engineering and Construction and Reservoir Engineering. He joined Dragon Oil in 2007 as Petroleum Development Manager prior to being appointed as Corporate Planning Manager where he coordinates the development and management of the Group s strategy and field development plan. 05 Jin Chiang Head of Reservoir Development Jin is a Petroleum Engineering graduate of Stanford University. He began his career as a petroleum engineer with Phillips Petroleum (now ConocoPhillips) and went on to hold various senior reservoir engineering positions in the US, UK and China. During his tenure, he worked on various projects in the Cook Inlet, Alaska, the Gulf of Mexico, the North Sea and the South China Sea. Jin joined Dragon Oil in November 2003 and as Head of Reservoir Development he is primarily responsible for overseeing Dragon Oil s subsurface activities.

25 23 Dragon Oil plc Annual Report for the period ended 31 December 2008 Corporate Social Responsibility Report Board of Directors Senior Management Directors Report Corporate Governance Statement Directors Remuneration Report Senior Management Our Governance