EXPAND STRATEGIC REPORT 2013

Transcription

1 EXPAND STRATEGIC REPORT 2013

2 EXPAND STRATEGIC REPORT 2013 CoRpoRaTE governance 2013 C ORPORaTE s OCial REsPOnsibiliTy 2013 financial statements 2013 HERITAGE OIL PLC Strategic Report 2013 Heritage Oil Plc is an independent oil and gas exploration and production company with a Premium Listing on the London Stock Exchange ( LSE ) (symbol HOIL). The Company is a member of the FTSE 250 Index and has Exchangeable Shares listed on the Toronto Stock Exchange ( TSX ) (symbol HOC) and the LSE (symbol HOX). Heritage is a versatile organisation, dedicated to creating and increasing shareholder value with a portfolio of quality assets managed by a highly experienced team with excellent technical, commercial and financial skills. The Company has producing assets in Nigeria and Russia and exploration assets in Tanzania, Papua New Guinea, Malta, Libya and Pakistan. CONTENTS THE HERITAGE OIL PLC ANNuAL REPORT and ACCOuNTS 2013 CONSISTS of four documents. overview Highlights Outlook assets Asset overview 02 The Heritage business model 04 strategic report The Strategic Report provides an overview of Heritage, its processes and a Business Review. PROTECT Corporate Social Responsibility The CSR Report provides detailed information concerning Heritage s CSR strategy, policies, systems and performance. strategy Vision and strategic overview 06 structure Corporate governance 08 protect Corporate Social Responsibility 10 STRUCTURE Corporate Governance The Corporate Governance Report provides detailed information on all aspects of Heritage s corporate governance. evolve Financial Statements The Financial Statements Report provides detailed information on Heritage s financial position. CHieF EXecutive S review 12 operational review Nigeria 16 Russia 18 Tanzania 19 Papua New Guinea 20 Malta 22 Libya 23 Pakistan 24 Other developments 25 evolve Financial review 26 Risks 32 Strategic report glossary 35 Advisers and financial calendar IBC

3 Strategic Report 2013 Heritage Oil PLC 01 Highlights 2013 operational Production from OML 30, Nigeria increased during the year and record gross production since acquisition, of over 50,000 bopd has been achieved Maintenance work over OML 30 is progressing as planned 2013 average production from the interest in OML 30, Nigeria, net to Heritage of 8,919 bopd and net production from Russia of 577 bopd Continued the work programme in Tanzania through processing of 2D seismic data on Rukwa which has identified several prospects in the retained Rukwa South licence area. A geochemical survey of the Kyela licence has been completed and interpretation of the data is proceeding to schedule Expanded the exploration portfolio with the farm-in to four licences in Papua New Guinea ( PNG ); Petroleum Prospecting Licence 319 ( PPL 319 ), Petroleum Retention Licence 13 ( PRL 13 ), Petroleum Prospecting Licence 337 ( PPL 337 ) and Petroleum Prospecting Licence 437 ( PPL 437 ) Work programmes in PNG commenced with the acquisition and processing of seismic and evaluation of legacy datasets Financial 1 Total revenues, net to Heritage, for 2013 of $431.9 million Profit after tax from continuing operations of $100.4 million, an increase of 104% year-on-year Operating cash flows of $235.3 million in 2013 compared to cash outflows of $207.5 million in 2012 Successfully completed the refinancing of the bridge loan facility with a five year $550 million Senior Secured Revolving Reserves Based Lending Facility drawn by Shoreline Natural Resources Limited ( Shoreline ) in Nigeria Heritage cash at 31 December 2013 of $183.8 million 1 The Group has changed the accounting policy for the proportion of Shoreline it consolidates into its results and it now proportionally consolidates Shoreline s financial results using 90% which is the eventual economic rights before completion of the partner s option. OutlOOk 2014 Continued investment in OML 30 during 2014 including the installation of gas lift compressors, refurbishment of equipment, statutory inspection and testing of all pressure vessels and inspection of all wellheads and pipelines continue to support well optimisation and result in further increases in production Development drilling on OML 30 remains on track for commencing in the second half of the year As a result of an enforced shut-in at OML 30 during the first quarter of this year, total production, net to Heritage, for 2014 is estimated in the range of 14,500-18,000 bopd 2014 expected year end exit gross production rate from OML 30 between 65,000 and 70,000 bopd Exploration activity is set to increase with multi-well drilling campaigns planned for PNG and Tanzania Continue to look for further opportunities to create value Intention to become a long-term sustainable dividend payer within the next 12 months All dollars are US dollars unless otherwise stated.

4 Heritage Oil PLC Strategic Report asset overview The Heritage asset portfolio provides both geographical and operational diversification. Assets in Nigeria provide significant production and reserves and a new joint venture will help build on the success in this region. The exploration portfolio has expanded in 2013 with the addition of four licences in Papua New Guinea. ProductiON The development priority for Heritage in 2013 was OML 30, Nigeria. Through Shoreline, the joint venture company created in partnership with Nigerian company Shoreline Power Company Limited ( Shoreline Power ), Heritage acquired an interest in OML 30, which has provided Heritage with a step change in production and reserves. OML 30 recently achieved record peak production since acquisition, of over 50,000 bopd. In November 2013, Heritage extended its position in Nigeria with the strategic joint venture alliance, Petrobay Energy Limited ( Petrobay ), between Heritage and Bayelsa Oil Company Limited ( Bayelsa Oil Company ). Petrobay should position Heritage to build upon its current interests in Nigeria, which is Africa s largest oil producer and contains the second largest oil reserves in the continent. Nigeria OML 30; 45% equity interest through Shoreline OML 30 lies onshore the Niger Delta in one of the most prolific oil provinces in the world with oil and gas contained in numerous stacked reservoirs. The licence covers 1,097 square kilometres and includes nine producing fields. In 2013 production net to Heritage from OML 30 was 8,919 bopd providing significant cash flow and revenues to Heritage. RPS Energy Consultants Limited ( RPS ), in an independent evaluation, estimated that OML 30 contains proved and probable reserves of 347 MMbbls of oil net to the Group as at 31 March In Tanzania, work programmes have progressed identifying principal prospectivity in the Rukwa South licence where several prospects have been identified and for which detailed prospect mapping and evaluation is ongoing. These prospects are geologically analogous to the Kingfisher discovery in Uganda. A geochemical survey of the Kyela licence has been completed and interpretation of the data is continuing. Infill seismic acquisition, designed to increase the density of the seismic grid to enable the mapping of potential prospects, is planned for the second half of A multi-well drilling programme across the two licences is planned for 2014/2015. In 2013 Heritage farmed-in to onshore PNG. In April 2013, Heritage entered into an agreement with Esrey Energy Ltd ( Esrey Energy ) to acquire interests in PPL 319 and PRL 13. In October 2013, Heritage agreed with Kina Petroleum Limited ( Kina Petroleum ) to farm-in to two licences, PPL 337 and PPL 437. Processing of seismic data over licences PPL 319 and PRL 13 was completed in late February Further seismic data acquisition over leads within the licences commenced in first quarter 2014 in order to firm up these leads in to additional drilling prospects. Well and logistical planning continues to enable drilling of the Tuyuwopi prospect in the short term. On PPL 337 two wells are proposed to be drilled in 2014; detailed well planning is ongoing. On PPL 437 legacy datasets have been evaluated and several leads identified. Further work will be undertaken to mature these leads to drillable prospects within the next two years. russia Zapadno Chumpasskoye; 95% equity interest The licence covers an area of approximately 200 square kilometres and contains the Zapando Chumpasskoye Field, discovered in RPS, in an independent evaluation, estimated that Zapadno Chumpasskoye contains proved and probable reserves of 65 MMbbls of oil net to the Group as at 31 March Heritage has held an interest in Russia since 2005 and has acquired 2D seismic, constructed pilot production facilities, commenced field production, drilled four wells and re-entered an existing well. A revised field development plan has been submitted and approved by the regulatory authorities.

5 Strategic Report 2013 Heritage Oil PLC 03 ExploratiON PAPua NEW GUINEA PPL 319; 80% 1 working interest & operator PRL 13; 80% 1 working interest & operator PPL 337; 70% 1 working interest & operator PPL 437; 30% 1 working interest PPL 319 and PRL 13 cover areas of approximately 2,025 square kilometres and 160 square kilometres respectively. PPL 337 covers an area of approximately 5,508 square kilometres and PPL 437 covers approximately 1,530 square kilometres. The licences are typically located in known hydrocarbon bearing regions and are close to current infrastructure. 1 Subject to completing minimum work programmes. TANZANia Rukwa South; 100% working interest & operator Kyela; 100% working interest & operator In 2011/2012 Heritage was awarded the Rukwa and Kyela licences. Work programmes have progressed identifying several prospects in the Rukwa South licence for which detailed prospect mapping and evaluation is ongoing. In the Kyela licence interpretation of the data from the geochemical survey is proceeding to schedule. Infill seismic acquisition is planned for the second half of A drilling programme across the two licences is planned for 2014/2015. Malta Area 2; 100% working interest & operator Area 7; 100% working interest & operator Areas 2 and 7 lie in the south-eastern offshore region of Malta and show geologic similarities to areas offshore Libya and Tunisia which contain a number of producing fields. Well planning continues which will enable the drilling of an identified prospect in Area 7 once necessary government approvals have been granted and the international boundary agreed. LIBYA 51% equity interest in Sahara Oil In August 2011, Heritage acquired a controlling 51% interest in Sahara Oil Services Holdings Limited ( Sahara Oil ) which owns the entire share capital of Sahara Oil Services Limited ( Sahara ) in Libya. Heritage believes it is well placed to play a significant role in the future development of the oil and gas industry in Libya. PakistaN Sanjawi; 54% working interest & operator Zamzama North; 48% working interest & operator The Sanjawi onshore exploration licence covers a gross area of 2,258 square kilometres. The Zamzama North licence covers an area of 1,229 square kilometres. The current seismic database used to map the Zamzama North licence comprises some 1,000 kilometres of good quality 2D seismic.

6 Heritage Oil PLC Strategic Report the heritage business model Heritage s vision is to be a leading exploration and production company. The business model creates the foundation upon which the Company can achieve this. The Company possesses certain key attributes, discussed overleaf, that provide it with a competitive advantage. Key Performance Indicators ( KPIs ) are used by the Company as one measure of performance and relate to both the underlying business model and the delivery of strategy. In addition, the Company actively monitors certain risks attached to the business model and strategy which are detailed on pages 32 to 34. Heritage s business model balances the exploration and appraisal process with cash generating production assets. This is supported through high standards of governance, regional knowledge and contacts and an effective Corporate Social Responsibility ( CSR ) policy framework. G O V E R N A N C E I P L I N E E X P L O R AT C O R P O R A T E S O C C A P I TA L D I S C I A L R E S P O N S P R O D U C T I B I L I T Y I O N + I O N + A P P R A I S A L D E V E L O P M E N T R E G I O N A L C O N T A C T S + K N O W L E D G E

7 Strategic Report 2013 Heritage Oil PLC 05 core attributes Key performance indicators Exploration and appraisal Our technical team is responsible for assessing new areas for exploration campaigns and ensuring that we have the ability to continually replenish our exploration portfolio. The team will identify core plays and prioritise exploration options across the portfolio. After reviewing the initial exploration programme, the team will propose an appraisal campaign to prove up the size of the discovery and deem whether it is commercial. Further information on the current asset portfolio can be found in this report on pages 16 to 24. Production and development Once the area has been proven, appraised and confirmed commercially viable, the development team is responsible for providing information to enable the Company to best achieve revenue generation and cash flow by producing the hydrocarbons. A strong regard for the environment and respect for local communities are important. Capital discipline An appropriate capital structure balancing exploration and operational demands of the portfolio with financing requirements is required to ensure appropriate funding for long-term sustainable growth. This can include monetisation of assets or accessing capital markets and is an ongoing process to ensure efficient allocation of capital. Further information can be found in the Financial Statements Report. Supported by Governance Heritage seeks to achieve and maintain highest standards and best practice reporting in all areas of governance. Heritage uses a number of financial and operating KPIs that are closely aligned with the underlying business model and its strategy for delivering long-term sustainable growth. These are some of the indicators by which the Company monitors performance. Several of these are linked to the primary business risks of the Company which are detailed on pages 32 to 34. Lost Time Injury Frequency Rate ( LTIFR ) Operationally a top priority is to keep people safe. This includes employees, contractors and local communities where we operate. Staff turnover Retaining quality staff is important to ensure delivery of the strategy. Production from continuing operations Production is key to revenue and cash generation and Heritage aims to achieve levels in line with annual budgeting and market guidance. Reserves and contingent resources additions The core business model involves replenishing the exploration portfolio, ensuring the continued growth of the Company and the potential production profile. Average realised price OML 30 Nigeria crude is priced using the Forcados benchmark, which trades at a premium to Brent. In Russia, the realised price improves, in part, as production increases due to better price negotiation and a wider customer base. Prices were not hedged during the year LTIFR Staff turnover 2 2% 3% 2% 3% Production +256% +296% +24% +65% Reserves and contingent resources additions 3 0% +564% +0% +42% Average realised price % +8% +45% +26% 1 Lost Time Injury Frequency Rate per 10,000 hours worked. 2 Excludes staff members in Uganda who transferred with the sale of the Ugandan Assets in 2010 and excludes staff members in Kurdistan who transferred with the sale of an interest in the Miran Block in Management estimates. 4 Realised price is a measure of the price achieved for output sold. Further information can be found in the Corporate Governance Report. Regional knowledge and contacts Relationships with national and regional governments are a key focus within the business. These relationships provide the Company with the ability to assess risk and provide a competitive edge versus its peers.

8 Heritage Oil PLC Strategic Report Vision and strategic overview EXPAND Heritage s vision is to be a leading exploration and production company and the Company that generates long-term shareholder value. Vision and strategy Heritage sets out to achieve its aim of sustainable long-term shareholder value through a strategy that focuses on: having a balanced portfolio of oil and gas exploration, development and production assets in a diversified range of countries; high-impact international plays with the potential to discover significant hydrocarbon reserves; generating cash flow through production; and managing the portfolio effectively, which can include the acquisition of value creating opportunities. This is done against the background of: ensuring operations are safe and minimising Lost Time Injuries ( LTIs ) for staff and contractors; engagement with local communities who may be affected by our work; building successful long-term relationships with local governments, communities and stakeholders in the areas of operation; and high standards of corporate governance. Key attributes of heritage Heritage has a unique background with which it can deliver on its strategy because of the following key attributes: demonstrated success of first mover advantage in territories such as Uganda and Kurdistan; proven track record of monetising assets with the current management team having raised c.$2 billion from asset sales; an appreciation of risk, both political and security; management expertise with a team containing experience of corporate finance, legal and industry specific skills; technical expertise with senior members of the team having in excess of 30 years industry experience; a highly effective network of industry, political and institutional relationships; balanced portfolio of assets; and strategic positioning of assets. Heritage ensures this is done through: a diversified Board, which avoids group think ; and employing and retaining a world class team across all departments of the Group.

9 Strategic Report 2013 Heritage Oil PLC 07 Acquire and invest Strategic positioning Strong relationships Balanced portfolio Value CREATION Management expertise First mover advantage Technical expertise Appreciation of risk

10 Heritage Oil PLC Strategic Report Corporate Governance Structure The Company aims to achieve best practice reporting on corporate governance. With a Premium Listing on the LSE and a member of the FTSE 250 Index, the Company is subject to the Financial Conduct Authority s ( FCA ) Listing Rules and the requirement to explain how it has applied the main principles of the UK Corporate Governance Code (the Code ). HOW THE BOARD OPERATES The Board delegates certain responsibilities to its committees in line with recommendations of the Code and to facilitate the achievement of business objectives of the Company. The Board is collectively responsible for the success of the Company and each Director must take decisions objectively in the interests of the Company. The Board s principal role is to set strategy and the parameters within which the Group operates to further its objectives. DEVelopments IN 2013 In the UK, last year saw significant changes in the reporting regime with new regulations on remuneration reporting and the introduction of the new Strategic Report which replaces the Business Review. Heritage continues to apply best practice principles in its reporting and has implemented changes to its reporting as a result. This includes new information provided in the Strategic Report on the breakdown of gender information of employees, information about the Group s Human Rights Policy and information in the CSR Report on Greenhouse Gas ( GHG ) emissions. LOOKinG AHEAD With the acquisition of our Nigerian operations and continued search for development opportunities in line with our strategy, it is important that we have robust risk management review processes in place. This will remain a focus for the forthcoming year. We will also implement actions identified from the Board evaluation exercise and those that may be necessary arising from changes to the Listing Rules concerning controlling shareholders. We will continue to review our narrative reporting to ensure it meets new developments and best practice. The FCA is consulting on a number of measures designed to enhance protection for minority shareholders. As a Company with a controlling shareholder (a shareholder who owns 30% or more of the voting shares in a company), Heritage will be paying close attention to the new requirements. The new rules are expected to come into force mid-2014, although there will be transitional provisions to allow companies time to comply. We will monitor closely and put in place actions at the appropriate time. We continue to support open and constructive dialogue with all shareholders on governance, strategy and executive remuneration and welcome any feedback.

11 Strategic Report 2013 Heritage Oil PLC 09 For further information on Corporate Governance please see the Corporate Governance Report. Corporate Structure BOARD The Board is supported by the work of its committees and delegates day-to-day management of the Group to senior management SUPERVISION Review of performance against strategy Review of financial information Review of effectiveness of internal controls and risk management STEWARDSHIP Approval of strategy Values and standards Approval of Group policies board COMMITTEES A U D I T COMMITTEE REMUNERATION COMMITTEE NOMINATION COMMITTEE RESERVES COMMITTEE ANTI- BRIBERY AND CORRUPTION COMMITTEE CSR COMMITTEE Monitors integrity of financial statements Reviews accounting policies Manages relationship with and oversees external auditor Considers auditor independence Sets remuneration policy Reviews and approves remuneration of Executive Directors Reviews and approves LTIP schemes Makes recommendations on Board composition Reviews succession planning Reviews Board performance Oversight responsibilities with respect to the Company s oil and gas reserves evaluation process Considers independence of the technical evaluator Oversees anti-bribery programme and ethical policies and practices Sets CSR Policy Framework Reviews internal CSR programme SENIOR MANAGement/leadership TEAM

12 Heritage Oil PLC Strategic Report Corporate Social Responsibility Protect The business approach of Heritage is underpinned by CSR from the first stages of planning and being awarded a licence, through to exploration and production. Vision and strategy CSR encompasses the Company s management of relationships with stakeholders; shareholders, employees, contractors, partners and the local communities in which we work. In addition, it includes the impact the Company has on society and the environment. OUR CSR Vision to be a responsible and transparent business in all the areas in which the Company operates, believing this is important to the operational aim of generating long-term growth for the Company; to create lasting legacies for local communities; to operate to the highest international social, environmental and safety standards; and to maintain high standards of corporate governance. OUR CSR Strategy set policies Devise and maintain systems Measure and monitor performance Communicate and report to stakeholders Apply stakeholder feedback CSR IN ACTION Our approach to CSR supports our business model and sets out essential core values that we believe make Heritage a good corporate citizen. The Company sets itself a high standard against which to measure itself and recognises the importance of being a partner of choice. Heritage aims to make a positive contribution in all areas where it operates. Greenhouse Gas ( GHG ) Emissions Statement From 1 October 2013, all UK quoted companies are required to report on their greenhouse gas emissions as part of their annual Directors Report. As noted in previous reports, our primary activities in prior years have been in exploration, therefore we have not produced material amounts of GHG emissions and consequentially have not reported this information. However, with the acquisition of OML 30, Nigeria, we have formulated processes to secure all relevant information for reporting GHG emissions. This assessment has been carried out in accordance with the World Business Council for Sustainable Development and World Resources Institute s (WBCSD/WRI) Greenhouse Gas Protocol; a Corporate Accounting and Reporting Standard. This protocol is considered current best practice for corporate GHG emissions reporting GHG emissions Tonnes of equivalent CO 2 (tco 2e 1 ) Scope 1 1,949,067 Scope 2 4,115 Scope Total 1,953,448 Intensity ratio per bbl 1 Carbon dioxide equivalent or CO 2e is a term for describing different greenhouse gases in a common unit. For any quantity and type of greenhouse gas, CO 2e signifies the amount of CO 2 which would have the equivalent global warming impact.

13 Strategic Report 2013 Heritage Oil PLC 11 For further information on CSR please see the CSR Report. OUR AREAS OF IMPACT and OPPORTUNITY COMMUNITY AND HUMAN RIGhts MATTERS We support human rights, consistent with the stipulations contained within the United Nations Universal Declaration of Human Rights and remain committed to upholding these principles. We endeavour to ensure that these commitments extend to all of our supply chains and we work with our partners and contractors to ensure that they adhere to our contractual requirements. It is important to the Company that relationships with neighbours and local communities are conducted sensitively and with mutual respect. These relationships recognise that active and enduring partnerships are a central and fundamental element of our business. We aim to promote the sharing of economic benefit created by our activities through the conduct of our community relationships. gender disclosure Heritage operates in an environment with low representation of women at all levels of the industry. However, to address this Heritage operates equal opportunity policies in all its areas of activity and seeks to encourage the employment of women. Within Heritage women represent 32 of 143 (23%) total employees, 10 of 36 (27%) senior managers and 1 of 7 (14%) Board members. DEVelopments IN 2013 approximately $5.3 million spent on CSR-related initiatives, significantly higher than 2012; no major environmental incidents, fines or sanctions across all operations; zero fatalities and LTIs across all operations; zero breaches in business conduct policies; employment of local people remains high across all operations; secured all relevant information for reporting GHG emissions; and continued adoption of Heritage s CSR policies and systems in the Shoreline joint venture. Heritage recognises specific responsibilities in each of six core areas of potential impact and opportunity, specific to the CSR aspects of our activities. Adherence to these CSR values are viewed as a key factor in securing the long-term operational success of the Company. We aim to apply targets across our identified areas of impact and opportunity, to focus employees and enable the Company and stakeholders to monitor performance. Environment and sustainability Aim to make a positive contribution to global sustainability and to protect the environment. Health and safety A core element of all activities and a natural priority. Employees Our ability to create shareholder value is linked with our ability to recruit and retain high calibre staff. Community and human rights Active and enduring relationships are an essential and fundamental element of our business. Business conduct We maintain robust policies with respect to all matters concerning our business conduct. Corporate governance As a company with a Premium Listing, Heritage maintains high corporate governance standards.

14 Heritage Oil PLC Strategic Report chief executive s review R E C O R D B R E A K I N G Y E A R Anthony BuCKINGham CHIEF executive OffICER 2013 has been a remarkable year for Heritage with production increasing 256% and operating cash flows of $235 million. This step change has enabled the Company to continue building production in OML 30, a world class asset, and expand the exploration portfolio through obtaining additional exciting exploration opportunities. Our progress during 2013 resulted from increasing production in OML 30, where gross licence production exceeded 50,000 bopd in the first quarter of 2014, and on the exploration portfolio, the decision to enter PNG whilst continuing with our work programme in Tanzania. Our balanced portfolio includes significant producing fields and an enlarged exploration portfolio, a combination which provides both geographic and operational diversification. We are delighted to report operations in Nigeria are progressing and production is increasing. The extensive maintenance backlog is declining and a programme of refurbishment and replacement is resulting in higher production. An extensive list of well optimisation activities continues to be refined. Over the course of this year work will continue to optimise existing wells and facilities to achieve further increases in production. Commencement of development drilling remains on track for the second half of the year. In 2013 we started to build our exploration portfolio in onshore PNG by farming in to four licences. The exploration activities continue with seismic being acquired and multi-well drilling programmes in PNG and Tanzania planned for 2014/2015. NIGERIA Overview On 9 November 2012, Heritage announced that Shoreline, a special purpose private Nigerian company formed between a subsidiary of Heritage and a local Nigerian partner, Shoreline Power Company Limited ( Shoreline Power ), successfully completed the acquisition of a 45% interest in OML 30, together with a 45% interest in other assets under the joint operating agreement for OML 30, for a total cash consideration of $850 million, net of costs. Shoreline was structured with 55% of its equity interest held by Shoreline Power and the remaining 45% held by Heritage, through a wholly owned subsidiary. Under the arrangements Heritage s economic interest was 97.5%.

15 Strategic Report 2013 Heritage Oil PLC 13 Gross production from OML 30 reached over 50,000 bopd, in the first quarter of 2014, in part from the benefit of continued maintenance and rehabilitation programmes. As a result of successful community relations engagement, production from the Uzere West Field recommenced in December 2013 after having been shut-in for over two years. Production in the first quarter of this year, however, has been impacted as a result of a leak on the undersea tanker loading pipeline at the Forcados crude oil terminal. This stopped export shipments for approximately one month thereby forcing OML 30 to shut-in for a similar time once storage had reached capacity. The terminal resumed shipments in early April, and operations recommenced in OML 30. As a result of the enforced shut-in, 2014 production guidance from OML 30, net to Heritage, is now estimated in the range of 14,000 to 17,500 bopd, with an expected year end gross production exit rate from OML 30 between 65,000 and 70,000 bopd. In 2013, average production from OML 30 net to Heritage was 8,919 bopd at an average realised price of $114.7/bbl for total net revenues of $423.2 million. Average quarterly production increased during the year with production in Q averaging c.13,300 bopd net to Heritage, 63% higher than the average of c.8,150 bopd for the first nine months of The Asset OML 30 lies onshore within the Niger Delta in one of the most prolific oil and gas provinces in the world. The licence covers 1,097 square kilometres and includes eight producing fields with oil and gas contained in numerous stacked reservoirs. The fields are deltaic shallow marine shelf sands at intermediate depth. The fields each contain up to 40 stacked reservoirs and the reservoirs are underlain by substantial aquifers that provide nearly infinite pressure support. The oil is good quality 30 API and typically sells at over 2% premium to Brent. Since 1961 over 200 wells have been drilled on the licence and the strong aquifer support has enabled the majority of these to be producers. There is the potential to both stabilise and increase production in the near term through refurbishing infrastructure and restarting non-producing existing wells. Additionally, existing wells will be worked over to further increase production. The licence benefits from infrastructure being in place with nine flow stations that have the capacity to handle 395,000 bpd thereby allowing for the projected production growth. The facilities have been robustly designed and constructed, and benefit from a standard design so equipment can easily be replaced if required. Work PROGRAmme The development of OML 30 remains the priority for the Company. All existing facilities have been reviewed to identify opportunities for improvement and maintenance. A number of comprehensive operational, engineering and community projects that commenced in 2013 are generating significant production increases. Gas lift is the method of artificial lift within OML 30 and six of the eight fields have gas lift installed with plans to install gas lift in the remaining fields within the next two years. Work on the gas lift systems continues and the installation of new gas lift compressors procured in 2013 is nearing completion. A further five new gas compressors have been ordered to be installed later this year. In addition, replacement of gas lift engines for the existing compressors, installation of diesel generators and replacement of the instrument air compressors is in progress. Wellhead maintenance has been completed on wells throughout the licence in preparation of flow line and gas line repairs. An extensive list of well optimisation activities continues to be refined. Over the course of this year work will continue aimed at further optimisation of the existing wells and facilities. The drilling of new wells, planned to commence in the second half of 2014, should provide a significant increase to production with the longer term potential estimated at approximately 300,000 bopd gross. Trans Forcados PIPElINE The OML 30 acquisition included a 45% interest in the Trans Forcados Pipeline ( TFP ) that transports liquids from OML 30 to the Forcados Terminal. The 97 kilometre long pipeline is 26 inch in diameter and largely buried along most of its length. It has a capacity of 850,000 bpd. The TFP is used by several other operators and provides additional revenue for OML 30 through the tariffs charged. Maintenance and construction work was also undertaken on the TFP in 2013 to complete work that was initiated by the previous operator but delayed due to the prolonged sales process. CommunitIEs In Nigeria, engagement with local communities is fundamental to driving an improved performance from the licence and in generating shared wealth to all stakeholders. To this extent, a not for profit Non-Government Organisation ( NGO ), registered and working in Nigeria and West Africa for over 20 years, was engaged to work with the National Petroleum Development Company, the operator, and Shoreline to ensure a cohesive approach to community issues. Conclusions from extensive consultations with communities within the OML 30 licence area allowed Shoreline to gain an understanding of the fundamental issues of concern arising from activities in the area. This enabled Shoreline to engage accordingly in the interest of the impacted communities as well as helping to restore and build an environment such that all can benefit. PetROBAY ENERGY LimitED In November 2013, Heritage announced that a wholly owned subsidiary had entered into a joint venture agreement with Bayelsa Oil Company Limited ( Bayelsa Oil Company ), owned by the Bayelsa State government, and another Nigerian company to establish an indigenous Nigerian oil company called Petrobay Energy Limited ( Petrobay ). Heritage has a 45% equity interest in Petrobay which combines Bayelsa Oil Company s indigenous support from state government and Heritage s strong technical and financial capability. A number of upstream assets in the state of Bayelsa and the larger Niger Delta region have been identified and Petrobay will engage in both bilateral and competitive auction processes to acquire these assets. Petrobay will position Heritage to build upon its current interests in Nigeria, which is Africa s largest oil producer and contains the second largest oil reserves on the continent.

16 Heritage Oil PLC Strategic Report chief executive s review continued PAPUA NEW GUINEA In 2013 Heritage expanded its portfolio into onshore PNG through the farm-in to four licences. We look forward to developing and accelerating the work programme as this acreage provides the opportunity to discover large gas reserves at a time when regional gas demand is growing rapidly. In April 2013, Heritage entered into an agreement with Esrey Energy Ltd ( Esrey Energy ) to acquire interests in PPL 319 and PRL 13. The work programme began with the acquisition of the first 62 kilometres of 2D seismic data over the Tuyuwopi structure in PPL 319. Processing of the new seismic data, combined with the reprocessing of c.300 kilometres of legacy seismic data over these licences was completed in late February Further seismic data acquisition over leads within the licences commenced in first quarter 2014 in order to firm up these leads into additional drillable prospects. Well and logistical planning continues to enable drilling of the Tuyuwopi prospect in the short term. In October 2013, Heritage agreed with Kina Petroleum Limited ( Kina Petroleum ) to farm-in to two licences, PPL 337 and PPL 437. On PPL 337 two wells are proposed to be drilled this year; one located at the Raintree prospect where a Pliocene/Miocene age reef target is identified, and the second located on, or adjacent to, the Banam anticline where several Neogene age clastic targets have been identified. Detailed well planning is ongoing. PPL 337 has good road access and is close to potential local gas markets and the deep water port of Madang, which may be suitable for LNG export. On PPL 437 legacy datasets have been evaluated and several structural leads imaged. Further work will be undertaken to mature these leads to drillable prospects within the next two years. TANZANIA In Tanzania, there is exciting potential in the Rukwa Rift Basin and Kyela licence which we believe share certain geological similarities with the hydrocarbon prolific Albert Basin of Uganda, where we were the pioneering oil company to undertake active exploration in nearly 60 years. Reprocessing of the legacy seismic data in Rukwa was completed in 2012 and the acquisition of c.600 kilometres of 2D seismic data completed in March This data has been processed and initial interpretation completed with results indicating that the principal prospectivity lies in the Rukwa South area resulting in the Rukwa North licence being relinquished. Focused interpretation over the Rukwa South licence area has identified several prospects, for which detailed mapping and evaluation is ongoing. A geochemical survey of the Kyela licence has been completed and interpretation of the data is continuing. Infill seismic acquisition, designed and positioned using all available data, will increase the density of the seismic grid and enhance the mapping of potential prospects. The survey is planned for the second half of A multi-well drilling programme across the two licences is planned for 2014/2015. OthER ASSEts RussIA Production averaged 577 bopd for the year, a decrease of 5% year-on-year due to natural well decline and a temporary mechanical issue in 2013 that was resolved later in the year. Based on positive results from the horizontal well (well 363) drilled in August 2011, a revised field development plan was submitted for Zapadno Chumpasskoye replacing vertical producers with horizontal wells. The change in well type should result in a 50% reduction in the number of production wells required to develop the field and a corresponding reduction in drilling expenditure of approximately $200 million. The development proposal was approved by regulatory authorities at the end of December Preparations continue for further development drilling in 2014/2015. LIBYA AND MAltA Heritage is actively assisting government officials in both countries to move forward with discussions regarding the associated maritime boundary issues and hydrocarbon rights, ultimately to enable the exploration and development of Area 7 where a large prospect has been identified. Preparations are underway to enable the drilling of the prospect subject to necessary government approvals and the international boundary agreed. CORPORATE NIGERIAN Tax Status In November 2013, Heritage announced that Shoreline had been in discussions with relevant government departments in Nigeria about its tax status. Post period-end the discussions concluded successfully and Shoreline received approval from relevant authorities in Nigeria of a waiver of petroleum profit tax between 2013 and BOARD CHANGE We were deeply saddened to report that Sir Michael Wilkes KCB, CBE, passed away in October He had been a Non-Executive Director of the Company since its listing in the UK in As well as being Senior Independent Director, Sir Michael was a member of the Audit Committee, Remuneration Committee, Nomination Committee and Anti-Bribery and Corruption Committee. The Nomination Committee will seek to appoint a new Non- Executive Director in due course and there will be a review of Committee membership. Consideration will also be given for the appropriate candidate to fulfil the role of Senior Independent Director. CASH As at 31 December 2013, Heritage had a cash position of $183.8 million, which is more than sufficient to cover planned work programmes. Heritage s profit after tax from continuing operations in 2013 was $100.4 million, up 104% compared to $49.1 million in REFINANCING In June 2013, Shoreline successfully completed the refinancing of its bridge loan facility. The new facility is a five year $550 million Senior Secured Revolving Reserves Based Lending Facility (the RBL Facility ) which can be increased up to $600 million.

17 Strategic Report 2013 Heritage Oil PLC 15 The RBL Facility, which is secured at the Nigeria level, replaces the bridge loan executed as part of the acquisition of a 45% interest in the OML 30 licence and provides long-term financing to Shoreline to further develop the licence. The RBL Facility has been arranged on better terms and provides greater flexibility than the bridge loan. SHORELINE OPTION In December 2012, Heritage announced that Shoreline Power had exercised its call option to acquire a 30% economic interest in Shoreline. Completion of the transaction is expected imminently, following which Heritage will have an effective working interest in OML 30 of 30.71%. On completion, Heritage will receive cash of $31.5 million and the balance will be provided by way of an interest bearing, secured loan from Heritage to Shoreline Power. PETROFRONTIER CORP. Heritage currently holds 19.98% of the outstanding common shares of PetroFrontier Corp ( PetroFrontier ) for investment purposes. PetroFrontier is listed on the TSX Venture Exchange and is focused on a high-impact drilling programme in Australia targeting billions of barrels of resources. The exploration drilling programme commenced in April 2014 with the Oz-Alpha 1 well. Michael Hibberd became a director of PetroFrontier in September UGANDA As previously announced, a number of proceedings in connection with the sale of the Group s interests in Blocks 1 and 3A in Uganda to Tullow remain ongoing. Heritage Oil & Gas Limited ( HOGL ) continues to challenge both the Uganda Revenue Authority ( URA ) in the Ugandan courts and, in accordance with the Production Sharing Agreements, the Ugandan government through international arbitration proceedings in London, which commenced in May The arbitration tribunal ruled in April 2013 that the determination of tax was outside its jurisdiction, but that there were two areas of HOGL s claims which it will consider, in respect of contractual income tax stabilisation clause protection and breach of other contractual obligations. That determination by the arbitral tribunal marked the end to the preliminary phase. The proceedings (which are ongoing) have now continued to deal with the merits phase of Heritage s contractual claims against the Ugandan government and the underlying substantive Ugandan tax matters remain under appeal in the Ugandan courts. CORPORATE SOCIAL RESPONSIBILITY We continue to mature our approach to CSR and engagement with stakeholders towards achieving a shared future, which is a key element supporting our core business model. We have developed, and continue to review, a policy framework disclosing our essential core values. I am delighted to report that we continue to maintain a strong track record for health and safety which is fundamental in being viewed as a preferred partner. Community relations are a key factor for success in our new Nigerian operations where there are over 90 communities living on the licence. Through Shoreline we are working with the communities within the OML 30 licence and are striving to improve their lives in the areas of health, education and environment. A comprehensive series of CSR programmes have already commenced in Nigeria. During 2013, we spent a total of approximately $5.3 million on CSR-related activities with community programmes focused on areas where we were operationally more active. We are looking forward to having a positive contribution within our new areas of activity. OutlOOK This year will see Nigeria remain the focus and continue increasing production and cash flow whilst concurrently progressing with exploration programmes in PNG and Tanzania, in order to generate value from the drill bit. Cash flow generation from OML 30 is now so robust that it is the intention of Heritage to become a long-term sustainable dividend payer commencing within the next 12 months. As always, I am very grateful to our management team, employees and supportive Board for their dedication and contribution to the progress made by Heritage this past year. Finally, to our shareholders, thank you for your continued support and interest in Heritage. ANTHONY BUCKINGHAM CHIEF EXECutIVE OffICER 29 APRIL 2014 In April 2011, Tullow made a payment to the URA of $313,447,500 and subsequently filed a claim in the High Court in England seeking compensation for alleged breach of contract, in part arising from the URA appointing Tullow as the agent for Heritage, responsible for the payment of the tax alleged owing by Heritage to the URA, and the refusal of HOGL and Heritage to cover Tullow s payment. Heritage and HOGL filed their Defence and Counterclaim against Tullow. The case was heard in the High Court in March 2013 and judgment received in June The Judge found in favour of Tullow and Heritage s counterclaim was dismissed. Heritage was ordered to pay to Tullow $313,447,500 plus interest accrued on this amount and legal costs which have been paid. Heritage and HOGL made an application to the Court of Appeal for permission to appeal the judgment. Permission to appeal against the judgment was granted in September This appeal is expected to be heard in the Court of Appeal in May 2014.

18 Heritage Oil PLC Strategic Report operational review Nigeria NIGERIA OML 30 Kokori Escraros Forcados Warri Afiesere Osioka Evwreni Eriemu Oweh Olomoro-Oleh Oroni Uzere West OML 30 Oil pipeline Forcados pipeline Oil field OML 30 is a world class asset with gross 2P oil reserves of over 1.1 billion barrels. Gross production from OML 30 has reached over 50,000 bopd, in part from the benefit of continued maintenance and rehabilitation programmes. As a result of successful community relations programmes, production from the Uzere West Field recommenced in December 2013 after having been shut-in for over two years. In 2013, average production net to Heritage was 8,919 bopd at an average realised price of $114.70/bbl for total net revenues of $423 million. These revenues include November and December 2012 production sold in Production in Q averaged c.13,300 bopd net to Heritage, 63% higher than the average of c.8,150 bopd for the first nine months of the year. The development of OML 30 remains the priority for the Company. All existing facilities have been reviewed to identify opportunities for improvement and maintenance. A number of comprehensive operational, engineering and community projects that commenced in 2013 are generating and contributing to significant production increases. Gas lift is the method of artificial lift within OML 30 and six of the eight fields have gas lift installed, with the two remaining fields planned to have gas lift installed within the next two years. Work on the gas lift systems continues and the installation of new gas lift compressors procured in 2013 is nearing completion. A further five new gas compressors have been ordered to be installed later this year. In addition, replacement of gas lift engines for the existing compressors, installation of diesel generators and replacement of the instrument air compressors is in progress. Wellhead maintenance has been completed on wells throughout the licence in preparation of flow line and gas line repairs. An extensive list of well optimisation activities continues to be refined. Over the course of this year work will continue aimed at further optimisation of the existing wells and facilities. The drilling of new wells, planned to commence in the second half of 2014, should provide a significant increase to production with the longer term potential estimated at approximately 300,000 bopd gross. OML 30 lies onshore within the Niger Delta in one of the most prolific oil and gas provinces in the world. The licence covers 1,097 square kilometres and includes eight producing fields with oil and gas contained in numerous stacked reservoirs. The fields are deltaic shallow marine shelf sands at intermediate depth. The fields each contain up to 40 stacked reservoirs and the reservoirs are underlain by substantial aquifers that provide nearly infinite pressure support. The oil is good quality 30 API and typically sells at over a 2% premium to Brent. Since 1961 over 200 wells have been drilled on the licence and the strong aquifer support has enabled the majority of these to be producers. There is the potential to both stabilise and increase production in the near term through refurbishing infrastructure and restarting non-producing existing wells. Additionally, existing wells will be worked over to further increase production.

19 Strategic Report 2013 Heritage Oil PLC 17 The licence benefits from infrastructure being in place with nine flow stations that have the capacity to handle 395,000 bpd thereby allowing for the projected production growth. The facilities have been robustly designed and constructed, and benefit from a standard design so equipment can easily be replaced if required. The OML 30 acquisition included a 45% interest in the segment of the TFP that transports liquids from OML 30 to the Forcados Terminal. The 97 kilometre long pipeline is 26 inch in diameter and largely buried along most of its length. It has a capacity of 850,000 bpd. The TFP is used by several other operators and provides additional revenue for OML 30 through the tariffs charged. Maintenance and construction work was also undertaken on the Trans Forcados Pipeline ( TFP ) to complete work that was initiated by the previous operator but delayed due to the prolonged sales process. In November 2013, Heritage announced that a wholly owned subsidiary has entered into a joint venture agreement with Bayelsa Oil Company, owned by the Bayelsa State government and another Nigerian company, to establish an indigenous Nigerian oil company called Petrobay. Heritage has a 45% equity interest in Petrobay which combines Bayelsa Oil Company s indigenous support from state government and Heritage s strong technical and financial capability. A number of upstream assets in the state of Bayelsa and the larger Niger Delta region have been identified and Petrobay will engage in both bilateral and competitive auction processes to acquire these assets. Petrobay will look to enable Heritage to build upon its current interests in Nigeria, which is Africa s largest oil producer and contains the second largest oil reserves in the continent. In Nigeria, engagement with local communities is fundamental to driving an improved performance from the licence and in generating shared wealth to all stakeholders. To this extent, a not for profit Non-Government Organisation ( NGO ), registered and working in Nigeria and West Africa for over 20 years, was engaged to work with the National Petroleum Development Company, the operator, and Shoreline to ensure a cohesive approach to community issues. Conclusions from extensive consultations with communities within the OML 30 licence area allowed Shoreline to gain an understanding of the fundamental issues of concern arising from activities in the area. This enabled Shoreline to engage accordingly in the interest of the impacted communities as well as helping to restore and build an environment such that all can benefit. In December 2012, Heritage announced that Shoreline Power had exercised its call option to acquire a 30% economic interest in Shoreline. Completion of the transaction is expected imminently, following which Heritage will have an effective working interest in OML 30 of 30.71%. On completion, Heritage will receive cash of $31.5 million and the balance will be provided by way of an interest bearing, secured loan from Heritage to Shoreline Power. Heritage Group Gross Remaining Reserves Net Entitlement Reserves OML 30 SuMMary of Reserves 1,2 Gross of Royalty (mmstb) Net of Royalty (mmstb) Gross of Royalty (mmstb) Net of Royalty (mmstb) Proved Reserves (1P) Proved & Probable Reserves (2P) 1, Proved & Probable & Possible Reserves (3P) 1,733 1, Post exercise of Shoreline Power option. 2 As per RPS, as at 31 March 2012.

20 Heritage Oil PLC Strategic Report operational review continued Russia Z A PA D N O C H U M PA S S KOY E L I C E N C E WESTERN SIBERIA Heritage licence Oil pipeline Gas pipeline Oil producer Oil well Since 2005, the Group has owned a 95% equity interest in ChumpassNefteDobycha Limited, a Russian company whose sole asset is a 100% interest in the Zapadno Chumpasskoye licence. The Zapadno Chumpasskoye licence is in the hydrocarbon-rich West Siberian province of Khanty-Mansiysk, approximately 100 kilometres from the city of Nizhnevartovsk and in the area of the region s prolific Samotlor oilfield, which makes it accessible to existing infrastructure. The licence contains the Zapadno Chumpasskoye Field, discovered in A total of 13 wells have been drilled on the licence including four by the Group. The Chumpasskoye crude is light, sweet (42 API) oil, with moderate gas-to-oil ratios. Since 2006, the Group has acquired 2D seismic data covering an area of 200 kilometres, constructed pilot production facilities, commenced field production, drilled four wells and re-entered existing well 226. Production facilities were commissioned and production commenced in May A fracture stimulation was completed on well P3, well P2 was converted to an injector for water disposal and pressure maintenance, a water shut-off completed on well P4 and ESPs installed on all producers to arrest the natural production decline. Based on positive results from the horizontal well (well 363) drilled in August 2011, a revised field development plan was submitted for Zapadno Chumpasskoye replacing vertical producers with horizontal wells. The change in well type should result in a 50% reduction in the number of production wells required to develop the field and a corresponding reduction in drilling expenditure of approximately $200 million. The development proposal was approved by regulatory authorities at the end of December Preparations continue for further development drilling in 2014/2015. Production averaged 577 bopd for the year, a decrease of 5% year-on-year due to natural well decline and a temporary mechanical issue in 2013 that was resolved later that year. INDEPENDENTLY EStiMated REServeS AT THE Zapadno CHUMpaSSKoye FIELD 1 Net working and entitlement reserves MMbbls Net present value ($ million in money of the day) Proved Probable Additional Total Proved + Probable Total Proved + Probable + Possible A summary of RPS s net working interest reserves and their Net Present Value, based on forecast prices and costs, discounted at 10%, as of 31 March 2012.

21 Strategic Report 2013 Heritage Oil PLC 19 Tanzania UNITED REPUBLIC OF TANZANIA K E N Y A Mombasa Dodoma Dar es Salaam Heritage licence Exploration well Oil and gas shows Gas field Railway Ivuna-1 R U K W A S O U T H Galula-1 K Y E L A Z A M B I A Heritage has two licences in Tanzania that are considered to be geologically analogous to the Lake Albert Basin in Uganda. Heritage recognises that the Rukwa and Kyela licences share certain geological similarities with the hydrocarbon prolific Albert Basin of Uganda where Heritage has previous experience and had significant success. RUKWA In November 2011, Heritage announced the award of a PSA that covers virtually the entire Rukwa Rift Basin, split into two separate areas, Rukwa North and Rukwa South. Heritage is the operator with a 100% interest. A limited amount of exploration activity was undertaken in the region in the mid-1980s which resulted in the acquisition of c.2,300 kilometres of 2D seismic data and the drilling of two wells. Reprocessing of the legacy seismic data in Rukwa was completed in 2012 and the acquisition of c.600 kilometres of 2D seismic data completed in March This data was processed and initial interpretation indicated that the principal prospectivity lies in the Rukwa South licence area resulting in the Rukwa North licence being relinquished. Focused interpretation over the Rukwa South licence area has resulted in the identification of several prospects, which are believed to be geologically analogous to the Kingfisher oil discovery in Uganda. Detailed prospect mapping and evaluation is ongoing. Kyela In January 2012, Heritage was awarded the Kyela PSA covering the entire northern onshore area of the Lake Nyasa (Livingstone) Basin in Tanzania. The licence has never previously been targeted for hydrocarbon exploration. Gravity data over the area suggested the presence of a sedimentary section of sufficient thickness to allow for the generation of oil. The work programme commenced with the acquisition of a c.1,500 square kilometre very high resolution gravity survey. This indicated the presence of probable structural highs adjacent to a main depocentre corresponding to that observed on regional gravity data that is a potential hydrocarbon kitchen. A 100 kilometre reconnaissance seismic survey completed in January 2013 confirmed the presence of structures as indicated by the gravity data. A geochemical survey of the Kyela licence has been completed and interpretation of the data is continuing. Infill seismic acquisition, designed and positioned using all available data will increase the density of the seismic grid and enhance the mapping of potential prospects. The survey is planned for the second half of Satellite radar surveys indicate areas of wave-calming in Lake Rukwa and in Lake Nyasa that may be associated with oil seeps. In the event of a commercial oil discovery, at either Rukwa or Kyela, economic scoping shows the commercial viability of either rail export to Dar es Salaam or export by pipeline depending on exploration success. A multi-well drilling programme across the two licences is planned for 2014/2015. Blocks Area (sq km) Date awarded Heritage equity Partners Operator Rukwa South 8,745 November % Heritage Kyela 1,934 January % Heritage

22 Heritage Oil PLC Strategic Report operational review continued Papua New Guinea Madang PPL 337 PPL 437 PRL 13 PPL 319 PAPUA NEW GUINEA Lae Heritage licence Oil field Gas field Oil pipeline Gas pipeline Oil pipeline proposed Gas pipeline proposed Kerema Kumul Marine Terminal Popondetta In 2013, Heritage expanded its portfolio into onshore Papua New Guinea ( PNG ) through the farm-in to four licences. This acreage provides the opportunity to discover large gas reserves at a time when regional gas demand is growing rapidly. PPL 319/prl 13 In April 2013, Heritage announced the farm-in to Petroleum PPL 319 and PRL 13. The contiguous licences are located onshore and have respective gross areas of approximately 2,025 and 160 square kilometres. Heritage has been appointed operator, and in return for earning an 80% working interest in both licences Heritage will fund the costs of seismic acquisition and drilling an exploration well. In addition, Heritage made a $4 million contribution to Esrey Energy Limited s (formerly LNG Energy Limited) back costs on the licences. The licences are located at the junction of the Papuan fold belt and the Miocene carbonate platform where there are producing fields and discoveries including the multi-tcf Triceratops and Elk/Antelope gas discoveries. The licences benefit from being close to current and underconstruction infrastructure with the Kutubu oil export pipeline and the PNG Liquefied Natural Gas pipeline crossing the acreage. The licences also benefit from the Kikori River which provides a link to the open sea, thereby providing additional transport options. The work programme in 2013 began with the acquisition of the first 62 kilometres of 2D seismic data over the Tuyuwopi structure in PPL 319. Processing of the new seismic data, combined with the reprocessing of c.300 kilometres of legacy seismic data over these licences was completed in late February Further seismic data acquisition over leads within the licences has commenced in first quarter 2014, in order to firm up these leads as additional drilling prospects. Well and logistical planning continues to enable drilling of the Tuyuwopi prospect in the short term.

23 Strategic Report 2013 Heritage Oil PLC 21 PPL 337 In October 2013, Heritage announced the farm-in to PPL 337, which has a gross area of approximately 5,508 square kilometres. Heritage will earn a 70% working interest and operatorship, by funding the costs of drilling two shallow exploration wells. In addition, Heritage made a $500,000 contribution to Kina Petroleum s back costs on the licence and in the event of a discovery, Heritage will carry Kina Petroleum s costs of up to 100 kilometres of appraisal seismic data. PPL 337 is located within the south-eastern part of the North New Guinea Basin, in the under explored Ramu Sub Basin. To date, three prospects and one advanced lead have been identified on the licence. A local depocentre has been identified in proximity to mapped prospects and the presence of gas seeps within the licence indicates an active petroleum system. These mapped prospects are in clastic and carbonate reef geological settings, with principal exploration targets at the large Banam anticline with an area of over 200 square kilometres and potential reef structures in the north of the licence respectively. Legacy datasets, which include regional gravity and magnetic data, surface geological mapping, c.140 kilometres of 2D seismic acquired in 1997 and offset well data have been evaluated. Reprocessing of seismic data over the Banam anticline is ongoing. Two wells are proposed to be drilled this year; one located at the Raintree prospect where a Pliocene/Miocene age reef target is identified, and the second located on or adjacent to the Banam anticline where several Neogene age clastic targets have been identified. The shallow nature of the targets identified makes the early drilling of wells the most cost effective method of assessing the potential within the licence. Detailed well planning to enable drilling of the two wells in 2014 is ongoing. PPL 437 In October 2013, Heritage announced the farm-in to PPL 437 that has a gross area of approximately 1,530 square kilometres. Heritage will earn an initial 30% working interest, by carrying Kina Petroleum s seismic acquisition costs for a minimum of 100 kilometres of data and make a $300,000 contribution towards Kina Petroleum s back costs on the licence. During this phase Heritage will be the operator of the seismic work programme. Additionally, Heritage has an option to acquire a further 20% working interest from Kina Petroleum and operatorship of the licence by carrying Kina Petroleum through the drilling of an exploration well. PPL 437 lies within a proven hydrocarbon system less than 20 kilometres north of the Elevala and Ketu c.1.0 TCF gas condensate fields and the recent Tingu-1 discovery well. Legacy datasets, which include regional gravity and magnetic data and surface geological mapping, in addition to c.250 kilometres of 2D seismic, have been evaluated. The identified prospectivity in the licence is within several structural leads imaged on this legacy seismic data which will be incorporated into this process with the aim of maturing these leads to drillable prospects within the next two years. The licence is located close to an existing gas pipeline from PNG LNG s gas fields to the LNG plant in Port Moresby and gas commercialisation options for the Elevala and Ketu fields include a mid-scale LNG project with a LNG plant to be located at Daru. PPL 337 has good road access and is close to potential local gas markets and the deep water port of Madang, which may be suitable for LNG export. Block Area (sq km) Date farm-in Heritage equity 1 Partners Operator PPL 319 2,025 April % Esrey Energy Heritage PRL April % Esrey Energy Heritage PPL 337 5,508 October % Kina Petroleum Heritage PPL 437 1,530 October % Kina Petroleum Cott Oil & Gas Kina Petroleum 1 Heritage will earn its equity by funding minimum work programmes.

24 Heritage Oil PLC Strategic Report operational review continued Malta Tunis Siracusa MALTA T U N I S I A Sfax Medina Bank-1 A R E A 2 A R E A 7 Heritage licence Exploration well Oil and gas shows Oil field Gas field L I B Y A Tripoli The Group holds a PSC with the Maltese government for a 100% interest in Areas 2 and 7 in the south-eastern offshore region of Malta. The Maltese licences cover almost 18,000 square kilometres and are situated approximately 80 kilometres (Area 2) and 140 kilometres (Area 7) offshore, in water depths of up to approximately 300 metres. The two Areas are close to, and geologically similar to, a number of producing fields offshore Libya, such as the Bouri field, and Tunisia. With only one well previously drilled in Area 2, the Medina Bank-1 well in 1980 which did not reach its target, both licences are considered to be underexplored. Although drilled to a depth of 1,225 metres, the well failed to reach the deeper objective horizons, estimated to be between 1,500 and 4,500 metres. The interpretation of seismic data in Heritage s extensive dataset of approximately 5,000 kilometres of 2D seismic, has confirmed a highly attractive Lower Eocene carbonate reef play. Detailed prospect level mapping within Area 7 has identified a prospect with both Eocene and Cretaceous reef targets. These primary targets are recognised as major hydrocarbon producing zones in the central part of the Mediterranean. In addition, the Company has recognised the presence of a south-tonorth trending shelf margin on the eastern part of the blocks where a number of attractive reef prospects have been mapped. Preparations are underway to enable the drilling of the prospect identified in Area 7 subject to relevant government approvals and the international boundary agreed. Blocks Area (sq km) Date awarded Area 2 9,190 December % Area 7 8,778 December % Heritage equity

25 Strategic Report 2013 Heritage Oil PLC 23 Libya Tripoli Benghazi Sirte Oil field Gas field Oil pipeline Gas pipeline A L G E R I A LIBYA In August 2011, Heritage acquired a controlling 51% interest in Sahara Oil which holds the necessary long-term permits and licences to provide oil field services in Libya. Heritage has pursued its strategy of first mover advantage through pursuing participation in the restoration of the Libyan oil production sector which presents a dynamic and evolving environment. Libya, which has the largest proven hydrocarbon reserves in Africa, is considered to be a highly attractive oil province due to the low cost of oil recovery, high quality oil which is generally sweet with API gravity ranging between 32 44º, proximity to European markets and well developed infrastructure. A wholly owned subsidiary of Heritage acquired a 51% equity interest and control of Sahara Oil which owns the entire share capital of Sahara, a Libyan registered company providing services to the oil industry. Sahara Oil was established in April 2009 and has been granted long-term licences to provide full oil field services in Libya, including the ability to drill onshore and offshore and hold both oil and gas licences. Our efforts have the aim of playing a key role in the substantial rehabilitation work needed to resume, maintain and increase Libya s hydrocarbon production in line with National Oil Company ( NOC ) and Oil Ministry targets. Heritage established a base in Benghazi in the first half of 2011, having been in discussions with senior members of the National Transitional Council, the legitimate and recognised government of Libya at the time, as well as with its Executive Committee, the NOC and certain subsidiaries. The dialogue with parties in country that would enable Heritage to participate in the rehabilitation of Libya s hydrocarbons sector is ongoing.

26 Heritage Oil PLC Strategic Report operational review continued pakistan Peshawar Islamabad Lahore A F G H A N I S T A N Quetta S A N J A W I Heritage licence Oil field Gas field Oil pipeline Gas pipeline IR A N PAKISTAN Z A M Z A M A N O R T H I N D I A Heritage is operator of two Blocks in Pakistan. SanJawi Heritage has a 54% interest and is operator of the Sanjawi licence (number ) in Zone II (Baluchistan), which was awarded in November 2007, and which covers a gross area of 2,258 square kilometres. The Block is considered prospective due to an oil discovery to the west, a number of gas fields to the south-east and the presence of oil seeps in the licence. The licence area is dominated by a series of broad east-west trending surface features including the large Dabbar and Warkan Shah anticlines, the former being some 300 square kilometres in area. ZAMZAMA NORTH In December 2008, Heritage obtained a 48% interest in the Zamzama North licence (number ) and was appointed operator. The Zamzama North licence covers an area of 1,229 square kilometres and is located in the south of Pakistan, in the western part of the Sindh Province, approximately 200 kilometres north-west of Hyderabad. There is considerable infrastructure in the area as one of the main pipelines runs through the licence and any discovered hydrocarbons could be readily connected. The Zamzama Gas Field, a major gas field in production, lies immediately to the south of, and adjacent to, Zamzama North. Using the current seismic database Heritage has mapped a number of structural prospects and leads and a drilling programme is under consideration. The database comprises some 1,000 kilometres of good quality 2D seismic data. Blocks Area (sq km) Date awarded Heritage equity Partners Operator Sanjawi 2,258 November % Hycarbex Heritage American Energy Sprint Energy Trakker Energy Zamzama North 1,229 December % Hycarbex Heritage American Energy Sprint Energy Trakker Energy

27 Strategic Report 2013 Heritage Oil PLC 25 Other developments DISpoSal OF UGANDAN ASSetS As previously announced, a number of proceedings in connection with the sale of the Group s interests in Blocks 1 and 3A in Uganda to Tullow remain ongoing. Heritage Oil & Gas Limited ( HOGL ) continues to challenge both the Uganda Revenue Authority ( URA ) in the Ugandan courts and, in accordance with the Production Sharing Agreements, the Ugandan government through international arbitration proceedings in London, which commenced in May The arbitration tribunal ruled in April 2013 that the determination of tax was outside its jurisdiction, but that there were two areas of HOGL s claims which it will consider, in respect of contractual income tax stabilisation clause protection and breach of other contractual obligations. That determination by the arbitral tribunal marked the end to the preliminary phase. The proceedings (which are ongoing) have now continued to deal with the merits phase of Heritage s contractual claims against the Ugandan government and the underlying substantive Ugandan tax matters remain under appeal in the Ugandan courts. In April 2011, Tullow made a payment to the URA and subsequently filed a claim in the High Court in England seeking compensation for alleged breach of contract, in part arising from the URA appointing Tullow as the agent for Heritage, responsible for the payment of the tax alleged owing by Heritage to the URA, and the refusal of HOGL and Heritage to cover Tullow s payment. In March 2013, an 11 day hearing took place in the Commercial Court in London. In June 2013 judgment was awarded in favour of Tullow and payment made in August Heritage was granted permission to appeal the judgment in September 2013 with the appeal hearing to be heard before the Court of Appeal in May The case was heard in the High Court in March 2013 and judgment received in June 2013 found in favour of Tullow and Heritage s counterclaim was dismissed. Heritage was ordered to pay to Tullow $313,447,500 plus interest accrued on this amount and legal costs which have been paid. Heritage and HOGL made an application to the Court of Appeal for permission to appeal the judgment. Permission to appeal against the judgment was granted in September This appeal is expected to be heard in the Court of Appeal in May 2014.

28 Heritage Oil PLC Strategic Report Financial review A solid performance PAUL ATHerTON CHIEF Financial OFFicer Selected operational and financial data restated Change Production bopd 9,496 2, % Sales volume 1 bopd 11, ,800% Average realised price 2 $/bbl % Petroleum revenue 2 $ million ,808% Profit from continuing operations after tax $ million % (Loss)/gain from discontinued operations $ million (483.9) n/a Net (loss)/profit $ million (385.5) n/a Cash generated by/(used in) continuing operating activities $ million (207.5) 214% Total cash investing and capital expenditures $ million Year-end cash balance $ million For 2012, sales volumes are from the sale of crude from the Zapadno Chumpasskoye Field, Russia. For 2013, sales volumes are from both the Zapadno Chumpasskoye Field in Russia and OML 30 in Nigeria. 2 The Group changed its accounting policy for the proportion of Shoreline it consolidates into its results and it now proportionally consolidates Shoreline s financial results using 90% which is the eventual economic right due to the holders of Class A shares (see note 5 of the Financial Statements), therefore the petroleum revenue in the table above includes just 90% of Shoreline s petroleum revenue. Production and sales volumes are presented at Heritage s current economic share of 97.5%.

29 Strategic Report 2013 Heritage Oil PLC 27 CORPORATE PERFormance PRODUCTION AND SALES VOLUmes In November 2012, Heritage, through Shoreline, completed the acquisition of a 45% interest in a producing oil mining licence in Nigeria, OML 30, together with a 45% interest in other assets owned under a joint operating agreement for OML 30 (the Acquisition Assets ). Shoreline is a special purpose Nigerian company formed between a subsidiary of Heritage and a Nigerian partner, Shoreline Power, which acquired the 45% of OML 30. Production from OML 30 is incorporated within the Group results with effect from 1 November Average daily production, net to Heritage s economic interest, of 8,919 bopd was generated from OML 30 in Nigeria in In 2012, there was only two months production post acquisition from OML 30. The difference between the production volumes and sales volumes is due to the change in the oil inventory balance during the year. Average daily production from the Zapadno Chumpasskoye Field in Russia decreased from 607 bopd in 2012 to 577 bopd in 2013, primarily due to natural well decline and the replacement of the electric submersible pump on horizontal well 363 in the first quarter of Average production for the second half of 2013 was higher at 680 bopd as a result of resolution of mechanical issues. REVENUE Heritage s net economic share of petroleum revenue from its interest in OML 30 was $458.5 million in 2013, however, Heritage proportionally consolidates 90% of Shoreline s results, and therefore is reflecting petroleum revenue of $423.2 million from OML 30, 90% is the eventual economic right due to the holders of Class A shares, (see note 5 of the Financial Statements) for its interest in the licence. Average daily sales volumes in 2013 were 10,953 bopd and the average realised commodity price was $114.70/bbl. Sales volumes were higher than production volumes in the year because of the build-up of inventories at the beginning of the year as the first sale after completion of the acquisition of the interest was in January OML 30 crude is priced using the Forcados benchmark, which trades at a premium to Brent typically of over 2%. Petroleum revenue from the Zapadno Chumpasskoye Field in Russia decreased by $0.2 million (2%) to $8.7 million in This decrease comprises: a reduction of $0.5 million from a decrease in sales volumes from 607 bopd in 2012 to 577 bopd in 2013; and offset by a $0.3 million increase in average commodity prices from $39.74/bbl in 2012 to $41.17/bbl in OPERATING RESULTS Expenses Net operating costs included in the Group results for OML 30 were $121.2 million. As stated above, Heritage proportionally consolidates 90% of Shoreline s results (see note 5 of the Financial Statements). Average operating cost per produced barrel of oil was $39.79/bbl in 2013, as the Group s share of production is reflected at 97.5%, for the calculation of operating costs per barrel, the value of operating costs used for the calculation was based upon an economic share of 97.5% ($129.5 million). The average operating costs per barrel in 2013 were higher than expected as a result of the lower level of production and a certain portion of the operating costs, such as manpower, being fixed. In the 2013 there was a change in inventory of $8.1 million. $8.3 million was held in inventory as at 31 December 2012 and transferred to the income statement in the first quarter of 2013 when the crude inventory was sold. As at 31 December 2013, there were inventories of $0.2 million in Nigeria. At 31 December 2013, Heritage s net economic share of barrels held in inventory from OML 30 production was 11,067 barrels compared to 753,380 barrels at the beginning of the year. Petroleum operating costs for the Zapadno Chumpasskoye Field in Russia increased by 3% to $3.1 million in Average operating cost per produced barrel of oil increased from $13.37/bbl in 2012 to $14.55/bbl in This was due primarily to production being 5% lower in 2013 compared to the same period last year and the fixed nature of certain costs, including certain personnel. Production and other taxes in Nigeria recognised in 2013 was $88.3 million. Production royalty of $84.5 million was recognised in 2013 and is calculated on production levels at 20%. In 2013, $3.8 million was recognised for Education Tax in Nigeria. Education Tax is levied on tax adjusted profit before capital allowances. Production tax in Russia for 2013 of $4.6 million was marginally lower than in 2012 at $4.7 million, which is in line with the slight reduction in revenue. The impact of lower production volumes was offset by increased average commodity prices in 2013, as both production volumes and price are used in the calculation of the tax. General and administrative expenses increased from $18.7 million in 2012 to $32.1 million in This was principally due to additional costs arising from the office established by Shoreline in Lagos to support operations in Nigeria. General and administrative expenses are comprised of salaries of management, finance and administrative staff, consulting, legal and professional fees, transportation costs and other costs.

30 Heritage Oil PLC Strategic Report Financial review continued If share-based compensation expenses are excluded, net general and administrative expenses increased from $18.5 million in 2012 to $27.6 million in In 2013, the Group capitalised $6.3 million (2012 $5.5 million) of general and administrative costs relating to exploration and development activities, including share-based compensation of $1.8 million (2012 $1.1 million). Depletion, depreciation and amortisation expenses increased by 226% from $6.9 million in 2012 to $22.5 million in 2013, primarily as a result of the inclusion of depletion for Heritage s net interest in OML 30. Depletion for the Zapadno Chumpasskoye Field decreased in line with the lower production volumes. Exploration expenditures expensed in the year, and not capitalised, increased from $4.7 million in 2012 to $8.6 million in Exploration expenditures in 2013 related principally to activities in Africa as the Company looked to expand its portfolio in one of its core areas. In 2012, a net gain arising from acquisition of $157.0 million was recognised, nil was recognised in The gain arose as a result of the fair value accounting applied to the acquisition of an interest in OML 30 Nigeria. There was a prior year adjustment to the fair value of the net assets acquired (see note 7 of the Financial Statements). This was partially offset by costs incurred in respect of the acquisition. The Group did not recognise an impairment of intangible exploration and evaluation assets in 2013 compared to an impairment of $34.3 million recognised in 2012, which comprised of two elements. Firstly, after a technical review and consideration of the security situation, management decided to relinquish the licences in Mali and fully write-off all expenditure of $18.4 million. Secondly, after a technical review, management decided to write-off expenditure of $15.9 million incurred with respect to the Latham licence area in Tanzania, which has since been relinquished. In 2013, the Group recognised an impairment write-down of property, plant and equipment of $2.2 million (2012 $2.1 million) relating to a reduction in the fair value of an aircraft. Finance income/costs In 2013, interest income was $1.0 million (2012 $3.2 million). Cash and cash equivalents are typically held in interest bearing treasury accounts. This decrease in interest income is primarily due to a decrease in average cash and cash equivalents balances and balances held in restricted cash. Other finance costs increased from $37.4 million in 2012 to $60.2 million in 2013, due primarily to financing fees and interest charges incurred by Shoreline for a full year, incurred on the bridge facilities for the first half of the year which was refinanced by way of a secured reserves based loan at the end of June This is partially offset by the elimination of interest charges incurred in 2012 on the $294 million exchangeable loan provided by Genel Energy plc ( Genel ) (see the Kurdistan section of note 6 in the Financial Statements), which was cancelled following completion of the sale of this asset. In 2013, the Group had foreign exchange gains of $0.6 million compared to a $0.1 million loss in The gain arose from net foreign exchange gains and losses on revaluation of balances denominated in currencies different from the functional currency. Heritage recognised an unrealised loss on investments of $2.7 million in 2013 (2012 $7.7 million), which comprised of a decrease in market value of investments in shares of PetroFrontier. As at 31 December 2013, the Company held 15,860,467 shares of PetroFrontier representing 19.98% of listed shares of the company. The investment in share capital of PetroFrontier is classified as available-for-sale and valued at fair value which is determined using market price at the end of the period. At 31 December 2013, the market price of PetroFrontier shares was Cdn$0.17 per share. Heritage holds 1,500,000 of the listed shares in Afren plc ( Afren ). The investment in Afren shares is classified as available-for-sale and valued at fair value which is determined using market price at the end of the period. The valuation at market price as at 31 December 2013 resulted in a gain of $0.9 million (2012 $1.1 million) which was recognised in equity.

31 Strategic Report 2013 Heritage Oil PLC 29 RESULTS From CONTINUING OPERATIONS Heritage s gain after tax from continuing operations in 2013 was $100.4 million, compared to $49.1 million in 2012, an improvement of $51.3 million. The adjusted profit from continuing operations in 2013 was $91.6 million compared to a $63.5 million loss in 2012 if certain non-cash items (share-based compensation expense, impairment of intangible exploration and evaluation assets, property, plant and equipment impairment write-down, foreign exchange gains, unrealised gains/losses on revaluation of Afren and PetroFrontier shares and one-off acquisition costs) are excluded. RESULTS From DISCONTINUed OPERATIONS In 2013, the loss arising from discontinued operations was $483.9 million compared to a profit of $210.9 million in The loss in 2013 includes the payment of the Award to Tullow Uganda Limited (a wholly owned subsidiary of Tullow Oil Plc) ( Tullow ), legal fees and costs relating to the litigation in regards to the sale of HOGL 50% interests in Blocks 1 and 3A in Uganda (the Ugandan Assets ) and a provision against the receivable due from the URA, which has been recognised for the sake of prudence. Full details of the discontinued operations can be found in note 6 of the Financial Statements. PROFIT/(loss) PER SHare Heritage s net loss, after the exceptional loss from discontinued operations in 2013, was $383.5 million, compared to a profit of $260.0 million in In 2013, the basic and diluted earnings per share from continuing operations was $0.38 and $0.37 respectively, compared to basic and diluted earnings per share of $0.19 and $0.18 respectively in In 2013, the basic and diluted loss per share was $1.46, compared to the basic and diluted earnings per share of $1.01 and $0.96 respectively in CASH Flow AND CAPITal EXPENDITURES Cash provided by continuing operating activities was $235.3 million in 2013 compared to cash used in continuing operating activities of $207.5 million in Total cash capital expenditures in 2013 were $52.0 million, $794.0 million lower than in 2012, as the prior year included the acquisition of the interest in OML 30. The following major work programmes and an acquisition were undertaken in 2013: in April, Heritage entered into an agreement with Esrey Energy (formerly LNG Energy Limited) to farm-in to two licences onshore PNG; PPL 319 and PRL 13 from subsidiary companies of Esrey Energy. In return for obtaining up to 80% working interests and operatorship, Heritage has paid Esrey Energy $4.0 million in contribution to its back costs on the licences and repaid the costs Esrey Energy incurred for the acquisition of 22 kilometres of 2D seismic data in 2013 as well as agreeing to fund a future seismic programme and drill one exploration well; Heritage s PNG work programme regarding PPL 319 commenced in the second quarter of 2013 with the acquisition of 62 kilometres of 2D seismic data over the Tuyuwopi structure in PPL 319. Processing of the acquired seismic data and reprocessing of c.300 kilometres of legacy seismic data over licences PPL 319 and PRL 13 was completed in 2013; in October, Heritage entered into an agreement with Kina to farm-in to PPL 337. In return for obtaining a 70% working interest and operatorship, Heritage paid Kina $0.5 million in contribution to its back costs on the licence and agreed to drill two exploration wells which are scheduled to be drilled in 2014; in October 2013, Heritage entered into an agreement with Kina to farm-in to PPL 437. In return for obtaining a 30% working interest, Heritage has paid Kina $0.3 million in contribution to its back costs on the licence and agreed to acquire a seismic programme which is planned to be acquired within the next year; acquisition, processing and interpretation of approximately 600 kilometres of 2D seismic data in the Rukwa licence in Tanzania was completed; acquisition of an approximately 100 kilometres reconnaissance seismic survey across the Kyela licence in Tanzania was completed in January. The data has been processed and interpreted. A geochemical survey of the Kyela licence has been completed and interpretation of the data has commenced; and gas lift compressors were acquired and are in the process of being installed in OML 30, Nigeria.

32 Heritage Oil PLC Strategic Report Financial review continued Financial POSITION LIQUidiTY There was a net increase in cash and cash equivalents in 2013 of $96.9 million, following cash receipts from operations received from Heritage s net share in OML 30 and the release of $50 million from restricted cash which had been used to provide security on the bridge facility. In June 2013, Shoreline refinanced its bridge facility loan through a new five year $550 million RBL Facility, which can be increased up to $600 million. At 31 December 2013, Heritage had a working capital surplus of $58.3 million, including cash and cash equivalents of $183.8 million. The RBL Facility, which is secured at the Nigeria level, replaces the bridge loan executed as part of the acquisition of a 45% interest in the OML 30 licence and provides long-term financing to Shoreline to develop the licence further. The RBL Facility has been arranged on more favourable terms and provides greater flexibility than the bridge loan. Like most oil and gas exploration companies, Heritage raises financing for its activities from time to time using a variety of sources. Sources of funding for future exploration and development programmes will be derived from inter alia disposal proceeds from the sale of assets, such as the sale of the Company s interest in the Miran PSC in 2012 and Company s Ugandan Assets in 2010 (see note 6 of the Financial Statements), using its existing treasury resources, new credit facilities, reinvesting its funds from operations, farm-outs, issuing debt and, when considered appropriate, issuing additional equity. Accordingly, the Group potentially has a number of different sources of finance available to it. CAPITal STRUCTURE Heritage s financial strategy has been to fund its capital expenditure programmes and any potential acquisitions by selling non-core assets, reinvesting funds from operations, using existing treasury resources, finding new credit facilities and, when considered appropriate, either issuing unsecured convertible bonds or equity. At 31 December 2013, Heritage had net debt of $331.2 million (31 December 2012 $434.4 million) (cash and cash equivalents less borrowings) and 28% gearing (31 December %). Net debt as a percentage of total capital, total capital is calculated as equity as shown in the consolidated balance sheet plus net debt. CREDITors PAYMENT POLICY It is the Company and Group s general policy to settle all debts with creditors on a timely basis and in accordance with the terms of credit agreed with each supplier. Average creditor payment days in 2013 were approximately 45 days ( days). PRIMARY RISKS AND UncerTainTies Facing THE BUsiness Heritage s business, financial standing and reputation may be impacted by various risks, not all of which are within its control. The Group identifies and monitors the key risks and uncertainties affecting the Group and runs its business in a way that minimises the impact of such risks where possible. The primary business risks include: Production delivery risk failure to control risks could result in delays to projects, cost overruns and not achieving set targets. Production operations are closely monitored to ensure that unplanned downtime is kept to a minimum and that operating costs are tightly controlled. Actual production is regularly checked against the annual production forecast. Oil and gas sales volumes and prices whilst not under the direct control of the Company, a material movement in commodity prices could impact on the Group. The Group did not hedge oil prices in Factors associated with operating in developing countries, political, fiscal and regulatory instability the Group maintains close contact with governments in the areas where it operates and, where appropriate, invests in community projects. Considerable work is undertaken before commencing operations in any new territory. Exploration and development expenditures and success rates the Group has experienced management and technical teams with a track record of finding major hydrocarbon discoveries and has a diversified portfolio of exploration, appraisal, development and production assets. Considerable technical work is undertaken to reduce related areas of risk and maximise opportunities. Title disputes notwithstanding potential challenges in Malta, the Group believes that it has good title to its oil and gas properties. However, the Group cannot control or completely protect itself against the risk of title disputes or challenges and there can be no assurance that claims or challenges by third parties against the Group s properties will not be asserted at a future date. Naturally, the Group strives to employ the best internal and advisory knowledge available to help to minimise this risk associated with its activities.

33 Strategic Report 2013 Heritage Oil PLC 31 Provisions for taxes these are made using the best estimate of the amount expected to be paid and are subject to measurement uncertainty as tax filings made by the Company are subject to review and confirmation by government regulatory agencies and such review and reassessment may result in changes. Heritage has previously announced that Shoreline had been in discussions with relevant government departments in Nigeria about its tax status. Post period-end the discussions concluded successfully and the Company received, from relevant authorities in Nigeria, approval of a waiver of petroleum profit tax between 2013 and Such approvals may be subject to challenge and review by local authorities. Loss of key employees remuneration packages are regularly reviewed to ensure key executives and senior management are properly remunerated. Long-term incentive programmes have been established. Employees are encouraged to develop their potential and, where appropriate, to further their careers within the Group. This is one of the Group s Key Performance Indicators and staff turnover continues to remain at low levels. Foreign exchange exposure generally, it is the Group s policy to conduct and manage its business in US dollars, which is its reporting currency. Cash balances in Group subsidiaries are primarily held in US dollars but small amounts may be held in other currencies in order to meet immediate operating or administrative expenses or to comply with local currency regulations. Heritage maintains insurance policies in accordance with industry standards. Heritage believes that the level of insurance it maintains is adequate, based on various factors such as the cost of the policies, industry standard practice and the risks associated with the exploration and development of oil and gas properties in the countries in which it operates. Heritage does not insure against political risk and, therefore, shareholders have full exposure to the risks and rewards of investing in its territories. Heritage maintains detailed financial models which allow the Company to plan future operating and capital activities in an efficient manner. Paul Atherton Chief Financial Officer 29 April 2014 INTERNAL CONTROL A system of internal control was designed and tailored to ensure key risks are addressed appropriately and to provide assurance regarding the reliability of financial reporting and preparation of financial statements. Risk and internal control are assessed continually. One weakness identified in its financial procedures reporting concerns accounting for complex transactions and the Company ensures that it seeks third party advice to mitigate this weakness. As part of the internal control systems, all transactions with related parties are identified, scrutinised and disclosed in the financial statements appropriately.

34 Heritage Oil PLC Strategic Report Risks Heritage s business, financial standing and reputation may be impacted by various risks, not all of which are within its control. The Group identifies and monitors the key risks and uncertainties affecting the Group and runs the business in a way that minimises their impacts where possible. As a global business with activities focused on the exploration, development and production of hydrocarbons, Heritage has to face a variety of risks and the management of these risks is an essential element of how the business is run. Accordingly, it is a Board level responsibility. The effective management of risk is essential for the Group to deliver its key strategic and operational objectives whilst also maintaining an excellent health and safety record. The Group s overall strategy of risk management is to employ suitably skilled personnel, implement appropriate policies and procedures and maintain a diversified portfolio of assets. Heritage continually identifies potential risks that could affect the Group and the achievement of its business plans and strategic objectives. The identification, together with the mitigation of risks to an acceptable level, is of critical importance to the Group as it continues to grow and generate long-term shareholder value. Key risks are monitored on an ongoing basis by the Executive Directors and senior management with regular reports received on all aspects of the Group s performance. The Executive Directors, with whom the authority remains, report to the Audit Committee on matters concerning risk. Health, safety and environment production delivery risk Exploration risk magnitude of impact Loss of key employees Unfulfilled PSA obligations Fiscal changes Forex exposure Commodity prices Political/ country specific risks New acquisitions Title disputes Malta primary risk other potential risks likelihood of occurrence

35 Strategic Report 2013 Heritage Oil PLC 33 DESCRIPtion OF RISK Potential IMPact mitigation STRATEGIC RISKS Incorrect portfolio mix Company could become reliant on certain local geographical, political and cyclical market risks which could impact achievement of longterm objectives. Acquisitions and disposals Effective portfolio management is key to achieving long-term sustainable growth. The Group maintains a diverse, balanced portfolio of assets across a range of geographies and life cycles in order to minimise exposure. In 2012 Heritage increased its exposure to producing assets and expanded its exploration portfolio in The Group and its advisers have considerable experience in the business environment in which the Group operates. This experience is applied regularly and carefully to assess potential merger, acquisition and disposal opportunities. In 2012 Heritage acquired a major interest in OML 30, Nigeria, through Shoreline and disposed of its interest in Kurdistan. The current management team has raised over $2 billion in cash through disposals. OPerational RISKS Production delivery risk Exploration and development expenditure and success rates Factors associated with operating in developing countries, political and regulatory instability Fiscal changes Unfulfilled PSA obligations Title disputes Loss of key employees Failure to control risks could result in delays to projects, cost overruns and not achieving set targets. The failure to sustain exploration success can potentially impact investor confidence on generating long-term value. Potential loss of licences or inability to operate which may impact on achieving long-term objectives. Adverse changes could impact on future revenue streams for the Group impacting on medium and long-term value. Failure to fulfil PSA obligations could lead to the loss of a licence. Potential loss of licences or inability to operate which may impact on achieving long-term objectives. The loss of key staff can potentially cause short and medium-term disruption to the business. Production operations are closely monitored to ensure that unplanned downtime is kept to a minimum and that operating costs are tightly controlled. Actual production is regularly checked against production forecasts. The Group has experienced management and technical teams with a track record of finding attractive hydrocarbon discoveries and has a diversified, balanced portfolio of exploration, development and production assets. The technical team has development and production experience. Considerable technical work is undertaken to reduce related areas of risk and maximise opportunities. The Group maintains close contact with governments in the areas where it operates and, where appropriate, invests in community projects. Considerable work is undertaken before commencing operations in any new territory. The Group continually reviews fiscal regimes and enters into robust, transparent PSAs or licences. The Group continually monitors compliance with licence obligations and maintains good working relations with governments and joint venture partners. Notwithstanding potential challenges in Malta, the Group believes it has good title to its oil and gas properties. However, the Group cannot control or protect itself completely against the risk of title disputes or challenges and there can be no assurance that claims or challenges by third parties against the Group s properties will not be asserted at a future date. Naturally, the Group strives to employ the best internal and advisory knowledge available to help to minimise this risk associated with its activities. Remuneration packages are reviewed regularly to ensure key executives and senior management are properly remunerated. Long-term incentive programmes have been established. Employees are encouraged to develop their potential and, where appropriate, to further their careers within the Group. This is one of the Group s KPIs and continues to remain at very low levels.

36 Heritage Oil PLC Strategic Report Risks continued DESCRIPtion OF RISK Potential IMPact mitigation Environmental issues An environmental incident could lead to a loss of reputation and/ or revenue and increased costs. Health and safety A major event can impact employees, contractors and local communities leading to a potential loss of reputation and/or revenue. The Group undertakes operations to the highest international environmental standards of the oil industry. EIAs are prepared before any major capital expenditure is incurred. Heritage did not incur any significant environmental issues in The Group has devised a comprehensive policy framework as well as health and safety management and reporting systems. These are monitored and reviewed by our CSR Committee and senior management. The Group also works closely with local authorities where it operates to manage this aspect of our activities. This is a KPI for the Company and Heritage continued to operate with no fatalities or LTIs in financial RISKS Oil and gas sales volumes and prices Foreign exchange exposure Commodity prices impact on the Company s revenue stream and can affect investor sentiment. Could adversely impact the Company s results. Liquidity risk In the extreme this could impact the Group s ability to continue as a going concern. Whilst not under the direct control of the Company, a large movement in commodity prices could have a material impact on the Group. The Group could hedge commodity prices but did not in Generally, it is the Group s policy to conduct and manage its business in US dollars, its reporting currency. Cash balances in Group subsidiaries are primarily held in US dollars, but small amounts may be held in other currencies in order to meet immediate operating or administrative expenses or to comply with local currency regulations. A formal budgeting and forecasting process is in place and cash forecasts identifying liquidity requirements of the Group are reviewed regularly to ensure compliance with approved funding plans. other RISKS Legal, regulatory and litigation Investor expectations Corporate governance and business conduct Changes could affect the short, medium and long-term value of the Group. A failure to meet shareholder expectations can lead to a loss of shareholder confidence and reduction in the share price. Failure to comply with corporate governance codes and practices could result in negative sentiment towards the Company. The Group s activities are subject to various laws and regulations around the world. Risks are mitigated by employing skilled and experienced staff and advisers to conduct proactive assessment, contingency planning and, where necessary, the use of appropriate mitigation techniques. The Company maintains a regular dialogue with the Group s shareholder base and the general public. A Senior Independent Director has been appointed and the Company employs an investor relations specialist. The Board is aware of reporting responsibilities and, where necessary, takes advice to ensure that material information is released on a timely basis. It is the Company s policy not to comment on market rumours or press speculation. The Group recognises the importance of maintaining strong corporate governance procedures and processes and continues to develop systems in this area. Generally this is managed by employing the skill, expertise and resources of the Group and its advisers. The Board reviews compliance with the Code and other regulatory guidelines regularly and enters into dialogue with major shareholders and institutions. The Board continually makes changes to its procedures in order to ensure adherence to codes and practices. More information is provided in the Corporate Governance Report.

37 Strategic Report 2013 Heritage Oil PLC 35 Strategic Report GloSSary $ US dollars unless otherwise stated API a specific gravity scale developed by the American Petroleum Institute for measuring the relative density of various petroleum liquids, expressed in degrees BBL/BBLS barrel/barrels BBLS/D OR BopD barrels per day or barrels of oil per day BCF billion cubic feet Boe barrels of oil equivalent 1 Boe/D OR BoepD barrels of oil equivalent per day CDP Carbon Disclosure Project CODe UK Corporate Governance Code COMPANy Heritage Oil Plc CONDENSATE low density, high API hydrocarbon liquids that are present in natural gas fields where it condenses out of the raw gas if the temperature is reduced to below the hydrocarbon dew point temperature of the raw gas CONTINgeNT RESOUrceS those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations by application of development projects but which are not currently considered to be commercially recoverable due to one or more contingencies CSR Corporate Social Responsibility EIA Environmental Impact Assessment ESrey ENergy Esrey Energy Limited Fca Financial Conduct Authority GROUP, Heritage the Company and all of its subsidiaries Hogl Heritage Oil and Gas Limited HOC OR CORPORATION Heritage Oil Corporation, incorporated in Canada and a wholly owned subsidiary of the Company KINA Kina Petroleum Limited Kpi Key Performance Indicator LEAD potential drilling target that is less well defined than a prospect and requires further data before being considered a prospect for drilling LSE London Stock Exchange LTI Lost Time Injury LTIFr Lost Time Injury Frequency Rate per 10,000 hours worked LTIP Long-Term Incentive Plan M metres MBBLS thousand barrels MMBBLS million barrels MBoe thousands of barrels of oil equivalent MMBoe millions of barrels of oil equivalent MCF thousand cubic feet MCF/D thousand cubic feet per day MMBTU million british thermal units MMSCF million standard cubic feet MMSCFD million standard cubic feet per day MMSTB million stock tank barrels N/A not applicable Ngo Non-Governmental Organisation NPDC Nigerian Petroleum Development Company 1 boes may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

38 Heritage Oil PLC Strategic Report Strategic Report GloSSary continued OML 30 P10 P50 P90 PASS-THroUGH DIVIDEND PETRODel PETROFroNtier PETROLEUM PNg POSSIBle RESerVES PPL PRL PROBABle RESerVES PROSpect PROSpectiVE RESOUrceS PROVED RESerVES PSA OR PSC RBL Facility RPS SAHARA SAHARA OIL SHoreliNE SHoreliNE POWer Spa TCF TSR TSX TUlloW Ura UgaNDAN ASSetS Wti Oil Mining Licence in Nigeria 10% certainty 50% certainty 90% certainty special dividend paid to Bondholders Petrodel Resources Limited PetroFrontier Corp. any mineral, oil or relative hydrocarbon (including condensate and natural gas liquids) and natural gas existing in its natural condition in strata (but not including coal or bituminous shale or other stratified deposits from which oil can be extracted by destructive distillation) Papua New Guinea those additional reserves which analysis and geoscience and engineering data suggest are less likely to be recovered than Probable Reserves. The total quantities ultimately recovered from the project have a low probability to exceed the sum of Proved plus Probable plus Possible Reserves Petroleum Prospecting Licence Petroleum Retention Licence those additional reserves that are less likely to be recovered than Proved Reserves but more certain to be recovered than Possible Reserves. It is equally likely that actual remaining quantities recovered will be greater than or less than the sum of the estimated Proved plus Probable Reserves potential drilling target that is well defined, usually by seismic data those quantities of petroleum which are estimated, as of a given date, to be potentially recoverable from undiscovered accumulations those quantities of petroleum, which by analysis and geoscience, can be estimated with reasonable certainty to be commercially recoverable. It is likely that the actual remaining quantities recovered will exceed the estimated Proved Reserves production sharing agreement or production sharing contract Five year $550 million Senior Secured Revolving Reserves Based Lending facility RPS Energy Consultants Limited Sahara Oil Services Limited Sahara Oil Services Holdings Limited Shoreline Natural Resources Limited Shoreline Power Company Limited Sale and Purchase Agreement trillion cubic feet Total Shareholder Return Toronto Stock Exchange Tullow Uganda Limited Uganda Revenue Authority HOGL s 50% interests in Blocks 1 and 3A in Uganda West Texas Intermediate CONVerSioN TABle The following table sets forth standard conversions from Standard Imperial Units to the International System of Units (or metric units). To convert from To Multiply by boe mcf 6 mcf cubic metres cubic metres cubic feet bbls cubic metres cubic metres bbls oil feet metres metres feet miles kilometres kilometres miles acres hectares 0.405

39 Strategic Report 2013 HERITAGE OIL PLC ADVISERS AND FINANCIAL CALENDAR COMPANY SECRETARY Woodbourne Secretaries (Jersey) Limited Ordnance House 31 Pier Road St Helier JE4 8PW Jersey Channel Islands REGISTERED OFFICE OF THE COMPANY Ordnance House 31 Pier Road St Helier JE4 8PW Jersey Channel Islands HEAD OFFICE AND DIRECTORS BUSINESS ADDRESS Fourth Floor Windward House La Route de la Liberation St Helier JE2 3BQ Jersey Channel Islands UK OFFICE OF THE COMPANY 34 Park Street London W1K 2JD United Kingdom BROKER AND FINANCIAL ADVISERS J.P. Morgan Securities Limited 25 Bank Street Canary Wharf London E14 5JP United Kingdom ENGLISH LEGAL ADVISERS TO THE COMPANY McCarthy Tétrault Registered Foreign Lawyers & Solicitors 125 Old Broad Street, 26th Floor London EC2N 1AR United Kingdom JERSEY LEGAL ADVISERS TO THE COMPANY Mourant Ozannes 22 Grenville Street St Helier JE4 8PX Jersey Channel Islands AUDITORS OF THE COMPANY KPMG Audit Plc 15 Canada Square Canary Wharf London E14 5GL United Kingdom REGISTRARS OF THE COMPANY Computershare Investor Services (Jersey) Ltd Queensway House Hilgrove Street St Helier JE1 1ES Jersey Channel Islands PRINCIPAL BANKERS OF THE COMPANY Standard Bank (Europe) Barclays Bank Investec Bank of Scotland (Europe) INDEPENDENT PETROLEUM ENGINEERING CONSULTANTS TO THE COMPANY RPS Energy Consultants Limited 309 Reading Road Henley-on-Thames Oxfordshire RG9 1EL United Kingdom PRESS AGENTS FTI Consulting 200 Aldersgate Aldersgate Street London EC1A 4HD United Kingdom FINANCIAL CALENDAR Group results for the year to 31 December are announced in March/ April. The Annual General Meeting is held during the second quarter. Half year results to 30 June are announced in August. Additionally, the Group will issue an Interim Management Statement between ten weeks after the beginning and six weeks before the end of each half year period. W E B S I T E CANADIAN LEGAL ADVISERS TO THE COMPANY McCarthy Tétrault LLP Suite th Avenue SW Calgary Alberta T2P 4K9 Canada

40 HERITAGEOILPLC.COM Heritage Oil PLC Fourth Floor, Windward House La Route de la Liberation St Helier JE2 3BQ Jersey Channel Islands T: +44 (0) F: +44 (0)