ARTUMAS GROUP INC. MANAGEMENT S DISCUSSION & ANALYSIS

Transcription

1 ARTUMAS GROUP INC. MANAGEMENT S DISCUSSION & ANALYSIS Years ended December 31, 2009 and 2008 The following management s discussion and analysis ( MD&A ), dated April 12, 2010 regarding the results of operations of Artumas Group Inc. ( Artumas, the Company or AGI ) for the years ended December 31, 2009 and 2008 and the financial condition of Artumas at December 31, 2009 should be read in conjunction with the Company s audited consolidated financial statements for the years ended December 31, 2009 and The MD&A includes forward-looking estimates that are subject to unknown risks and uncertainties, some of which are outside the Company s control. These risks and uncertainties include, but are not limited to, changes in market conditions, law or governing policy, operating conditions and costs, operating performance, commodity prices, exchange rates, and technical and economic factors. The Company s actual results, performance or achievement could differ materially from those expressed in or implied by these forward-looking estimates and accordingly Artumas can give no assurances that any of the events anticipated by the forward-looking estimates will transpire or occur. The consolidated financial statements associated with this report do not include any adjustments to the amounts and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern and, therefore, be required to realize its assets and discharge its liabilities in other than the normal course of business and at amounts different from those reflected in the accompanying consolidated financial statements. MANAGING CURRENT ECONOMIC CONDITIONS The deepening global economic, financial and commodity market downturn has presented fundamental challenges to companies throughout the energy sector in maintaining their existing operations and reaching their growth objectives. Artumas management has responded through a series of immediate cost control measures, postponement of discretionary capital program expenditures, and rationalization of the Company s asset portfolio. The aggressive cost-cutting measures committed to in the fall of 2008 and executed over the past year translate into a substantially reduced burn rate. Operating and general and administrative costs (before non-recurring costs) are down 60% over G&A costs are targeted for reduction from ~USD 35 million in 2008 to ~USD 12.0 million per year on a go-forward basis as management continues to examine avenues for further cost reductions. In addition, management anticipates that revenues associated with the full operation and growth of the MEP will more than offset both operating and G&A costs before the end of the coming year. These changes are a core element in the Company s ongoing financial and cost restructuring program, designed to bring ongoing operations and G&A costs into line with cash flow and financial capital availability. The conclusion of the seismic acquisition program and transfer of Onshore Block Operatorship to Anadarko in January 2009, together with cancellation of discretionary capital program activities and continued transfer of corporate functions to the Dar es Salaam office in

2 Management s Discussion and Analysis Years ended December 31, 2009 and 2008 In US$ (000 s) unless otherwise stated 2 Tanzania, allow the Company to continue to operate in a safe and efficient manner, even with a significant reduction to the Corporation s head office complement. Without access to traditional market sources for further funds, it became clear that assets would need to be monetized in order to generate sufficient financial capital to enable the Company s committed exploration and planned development capital programs in 2009 and In 2009, the Company restructured its debt and completed the farm-in transactions for the sale of the Tanzanian and Mozambique gas assets. In addition, the Company successfully arranged a credit facility with the Tanzania Investment Bank. Management estimates that these transactions will allow the Company to meet its current obligations as they come due, until mid-2010 and continues to actively pursue other possible sources of funding to satisfy longer term liquidity requirements including the completion of the financing of the MEP project, the conversion of the bonds into shares and capital markets. A letter of intent ( LOI ) has been signed with a strategic partner, which if the terms in the LOI are completed, will provide sufficient cash to meet the Company s operating and capital commitments for the next two years. Restructuring of debt On June 25, 2009, the bondholders of the Company s three convertible bonds agreed to convert the total outstanding principal amount of the Loans, including accrued but unpaid interest as at June 24, 2009, into common shares in Artumas and that interest no longer accrued from that date. The conversion price was NOK 0.25 per share based on a USD/NOK exchange rate of The total principal amount outstanding under the loans was $115 million, plus accrued interest of $2.7 million. The 2010 bond interest payment due June 20, 2009 was included in the calculation and was also converted into shares. After conversion, 3,018,762,988 new common shares were issued to bondholders, as follows: Date of Issuance Nov 20, 2007 Dec 20, 2006 Jun 30, 2006 Maturity Date Nov 21, 2012 Dec 20, 2010 Jun 30, 2009 Principal Amount $70 million $35 million $10 million Accrued interest $385 $1,789 $508 Common shares issued 1,805,516, ,708, ,538,390 In addition, a new bond has been placed to allow the Board of Directors and Management time to attempt to secure additional funds by raising additional debt or equity, sale of the Company s power assets, farm out of the Tanzanian gas assets, farm out of onshore and/or offshore Mozambique gas assets and cost reduction initiatives. Asset disposal/monetization On June 30, 2009, the Tanzania Petroleum Development Corporation ( TPDC ) and the Company entered into a Joint Operating Agreement ( JOA ) related to the gas concession in Tanzania. Under the terms of the agreement, TPDC will participate in a 20% share in the Mnazi Bay Development Area development assets. In addition, on November 25, 2009, the Company removed all conditions and received all approvals necessary to complete the sale of a portion of its participating interest in the Mnazi Bay petroleum development concession to Maurel & Prom and Cove Energy plc (the Purchasers ). The gross proceeds of the sale were $9.0 million. On July 21, 2009, the Company signed an option agreement with the Purchasers granting them the option to purchase a participating interest in Artumas Mozambique gas assets. The Company received $1,020 as consideration for entering into the option agreement. When the sale of assets was concluded on December 16, 2009, the option proceeds were applied to the proceeds from sale. The gross proceeds of the sale were $3.0 million.

3 Management s Discussion and Analysis Years ended December 31, 2009 and 2008 In US$ (000 s) unless otherwise stated 3 Credit facility On December 11, 2009, the Tanzania Investment Bank Limited ( TIB ) extended a credit facility of a maximum of 10 billion Tanzanian Shillings (approximately USD $7 million) to AG&P Gas Limited, a subsidiary of the Company for its operating requirements and the repayment of intercompany debt ($2.4 million) to its parent. Strategic partner On March 25, 2010, the Company announced it entered into an exclusive and confidential negotiation with Wentworth Resources Limited ( Wentworth ) and it is expected that a business combination of the two companies will conclude no later than June 1, The business combination could provide Artumas with $20 million in cash. The shareholders of Wentworth will receive shares constituting approximately $58.5% of the combined business. The increase in the Company s cash reserves from this transaction is expected to be sufficient to meet the Company s operating and capital requirements for the next two years. OPERATING HIGHLIGHTS Construction of Masasi Interconnection Works The Company has access to a $7.5 million loan facility which the Government of Tanzania has provided to repair and construct the Masasi Interconnection Works. Having secured this facility, during the third quarter the Company began construction of the system upgrades required to connect additional customer load in the town of Masasi, which will double customer load and revenue in 2010 when compared to Construction is estimated to be completed in February The total funds advanced at December 31, 2009, are $4.5 million. Mozambique Drilling Program Mecupa-1, the first exploration well on the 15,000 sq km onshore Mozambique Concession, commenced drilling on October 11, 2009 and reached the target depth of 2898m in mid-november. This first drilling location was selected based on the seismic data acquired in 2008 which showed positive structural closure on 3 of the 2D lines. After a necessary side track, on November 28, 2009 the well was plugged back and abandoned, mainly due to the condition of the well bore hole. While the well is not fit for production, the results are encouraging. The well encountered excellent developed reservoir quality sands and hydrocarbon indications throughout however, analysis of the logs suggest that the potential reservoir sections penetrated have high water saturation and would not flow commercial quantities of gas if drill stem tested. What the Mecupa-1 well has proven, is the presence of an effective hydrocarbon system in the MZ Rovuma Basin. It has now been established that the basin has both potential reservoir quality sands and source rock that have generated hydrocarbons. The well is therefore judged to have been a technical success. The results of this well will provide very important data and guidance with respect to the placement of future exploration wells and assist with risk mitigation associated with exploration for hydrocarbons in the Rovuma Onshore Block MZ. The drilling and logging results of the Mecupa-1 well, and other play types of Cretaceous and Jurassic, are under evaluation in the near term to determine the go-forward exploration plan. It should also be noted that the drilling of this well has satisfied the commitments made to secure the concession rights thereby removing financial demands from the onshore license in the near term.

4 Management s Discussion and Analysis Years ended December 31, 2009 and 2008 In US$ (000 s) unless otherwise stated 4 On February 18, 2010, Artumas was advised that Anadarko Petroleum Corporation has made a significant gas discovery at its first offshore exploration well location ( Windjammer ) in the Rovuma Basin, Mozambique. This is the first well in a minimum 4 well offshore programme. The Windjammer exploration well in the frontier Rovuma Basin offshore Mozambique has reached an intermediate casing point and encountered more than 480 net feet of natural gas pay in high quality reservoir sands, with a gross column of more than 1,200 feet. Artumas holds a 0.495% royalty interest in profit petroleum related to this Rovuma Offshore Area 1 Block. Mtwara Energy Project On February 18, 2010 Artumas announced that it has been granted a 15 year licensing exemption from the Electric and Water Utilities Regulatory Authority (EWURA) in Tanzania. This 15 year licensing exemption allows the regional power generation and distribution development project, known as the Mtwara Energy Project ( MEP ) to proceed in accordance with the long term contracts completed in Closure of Canadian Office On February 25, 2010, the Company announced that it will be closing its Canadian office in Calgary in As a result of this closure, the Company will incur severance costs in 2010 of approximately CAD $0.7 million. OTHER RELEVANT INFORMATION Results of operations The Company has a net loss for 2009 of $106.5 million ( $119.3 million), comprising $25.7 million of general and administrative expenses ( $36.7 million), $3.7 million of operating expenses ( $13.3 million), a $67.8 million non-cash impairment write-down of the Company s Tanzanian and Mozambique gas assets ( $67.2 million), and $17.4 million of other expenses ( $16.5 million), net of revenue of $2.9 million ( $2.9 million) and non-controlling interest of $5.2 million ( $11.5 million). Annual financial information A summary of selected financial information of the Company for the two years ended December 31, 2009 is as follows:

5 Management s Discussion and Analysis Years ended December 31, 2009 and 2008 In US$ (000 s) unless otherwise stated 5 ($ millions) Net loss (106.5) (119.3) Loss per common share ($/share) (6.63) (326.44) Working capital Property and equipment Convertible bond (including current portion) Non-controlling interest Share capital Power production (MWh) 28,579 26,594 Quarterly information (unaudited) A summary of the net loss on a quarterly basis is as follows: ($ millions) Q (9.0) (15.2) 2Q (47.0) (13.0) 3Q (24.1) (13.7) 4Q (26.4) (77.4) Net Loss (106.5) (119.3) Revenues: Artumas reported revenues of $2.9 million for the year ended December 31, 2009 (2008: $2.9 million). This revenue is net of the joint interest portion payable to the Tanzania Petroleum Development Corporation ( TPDC ). TPDC signed a joint operating agreement with AG&P Gas Limited on June 30, Operating and Overhead expenditures: The Company is beginning to realize the benefits of cost-saving measures implemented throughout its operations in the latter part of 2008 and early 2009, including acceleration of the orderly advancement of Tanzania nationals into positions currently occupied by expatriate workers and conversion of third-party contract workers to term employees. In addition, as a result of signing a JOA with TPDC, 20% of eligible costs (retroactive to January 1, 2009) will be covered by TPDC. Operating expenses totaled $3.7 for the year ended December 31, 2009 ( $13.3). These costs are detailed below:

6 Management s Discussion and Analysis Years ended December 31, 2009 and 2008 In US$ (000 s) unless otherwise stated 6 Operating expense Fuel purchases Maintenance and transportation 1,594 4,609 Salaries and benefits 1,223 1,427 Insurance, office supplies Consulting and professional fees 354 5,700 Travel and related expenditures Joint Interest billing (686) - Other Operating expense 3,689 13,268 The revenues earned on the Power operations under the Interim Power Purchase Arrangement are only a contribution towards costs and are not based on full cost recovery principles. Cost recovery will not be achieved until the Long term Power Purchase Agreement comes into effect, the regulator (EWURA) approves the cost of service application, and the anticipated transmission build out is completed (all are expected in 1Q 2010). The Company s cost-savings initiatives have also resulted in reductions in General & Administrative (G&A) expenses. During the year ended December 31, 2009, Artumas reported $25.7 million of G&A costs ( $36.8). These costs are detailed below:

7 Management s Discussion and Analysis Years ended December 31, 2009 and 2008 In US$ (000 s) unless otherwise stated 7 General & Administrative Expenses: Consultants & Professional fees 4,157 10,399 Salaries and benefits 4,829 9,055 Office expenses and other 2,461 5,922 Occupancy costs 2,171 2,584 Travel and related expenditures 871 4,302 Communication & delivery 887 1,827 Public company costs Sub-total 15,719 34,772 NonOperated G&A 1,254 - Non-recurring costs 8,891 4,729 General and administrative 25,864 39,501 Overheads capitalized and Joint Interest Billing (148) (2,744) Net general and administrative 25,716 36,757 Staff reductions during the first quarter of 2009 have had a positive impact on salaries and benefits, travel and related expenditures and communication and delivery costs. Non-recurring costs include costs associated with staff and executive restructuring and other cost containment strategies, as well as costs related to bond restructuring and the sale of assets and a provision for non-refundable VAT. Artumas has also limited its reliance on consultants and contractors and reduced discretionary spending wherever possible. Non-operated general and administrative costs are costs incurred in Mozambique and billed to the Company by the operator, Anadarko. The Company s cumulative total costs eligible for cost recovery under production sharing agreements in Tanzania and Mozambique are $188 million and approximately $37 million respectively. These costs are recoverable from revenues received as commercial projects are realized. In Tanzania the Company has also submitted a regulatory application which, if approved, will allow the Company to recover $26 million of costs spent to date on regulated power projects from future power tariffs. Impairment of property and equipment: The carrying value of the Company s assets was assessed, based on the option to purchase received in July 2009, the offer to purchase received in September 2009, and the relinquishment of interest in December This has resulted in Artumas recording a non-cash impairment of $67.8 million, comprising $48.9 on the Tanzanian gas assets and $18.9 million on the Mozambique gas assets.

8 Management s Discussion and Analysis Years ended December 31, 2009 and 2008 In US$ (000 s) unless otherwise stated 8 Other overhead costs: Financing costs (net) 14,481 7,782 Depletion, depreciation and amortization 4,952 3,668 Accretion of long-term receivable (2,946) - Stock based compensation 440 2,044 Exchange (gains) losses 503 2,992 Other overhead costs 17,430 16,486 Financing Costs for the year ended December 31, 2009 of $14.5 million are higher by $6.7 million than the costs for the same period in The following is a break-down of financing costs: Interest income $ (75) $ (2,794) Warrants issued 7,522 - Amortization of deferred financing costs 3,000 1,567 Accretion of convertible bonds 2,420 5, Put Option Interest expense and fees Write-off of MEP financing costs - 2,976 Total financing costs (net) 14, Based on the current capital structure, the ongoing financing costs will be significantly lower then have been incurred historically. The ongoing costs will be related to the new $2.4 bond and include: amortization of transaction costs, accrual of interest, and accretion of the equity portion. Depreciation, depletion and amortization is higher in 2009 due to a higher depletable/depreciable asset base in December 2009 compared to December 2008, increased capital expenditures and adjustments to the estimated useful lives of the major components of fixed assets during a review undertaken at the end of 2008, which resulted in increased depletion/depreciation. Accretion of the long-term receivable resulted from the signing of the JOA with TPDC in June Due to the long-term nature of the receivable, the fair value of the $34.0 million receivable was determined to be $17.4 million. This receivable will be accreted over the life of the asset. During the year ended December 31, 2009, the Company experienced a $0.5 million loss on foreign exchange as a result of holding Canadian and Tanzanian currency sufficient to meet ongoing expenditures denominated in those currencies (2008: $3.0 million loss). Stock based compensation recovery for the year ended December 31, 2009 of $0.4 is lower than the previous year due to the forfeiture of more than 20,000 unvested options for terminated employees. Stock based compensation for 2009 includes an accrual of $0.7 million for shares earned as part of an employee incentive plan, which have not yet been issued. Debt settlement gain and loss on equity component of bond conversion

9 Management s Discussion and Analysis Years ended December 31, 2009 and 2008 In US$ (000 s) unless otherwise stated 9 On June 25, 2009, the bondholders of the Company s three convertible bonds agreed to convert the debt into common shares. The Company accounted for these settlements in accordance with Emerging Issue Committee Abstract 96, Accounting for the Early Extinguishment of Convertible Securities through (1) Early Redemption or Repurchase and (2) Induced Early Conversion ( EIC- 96 ). Pursuant to EIC-96, the Company allocated the value of the incremental shares issued on conversion, to the corresponding liability and equity elements of the debentures, based on their relative fair values on the date of the conversion. The approach used in allocating the value of the incremental shares to the separate elements was consistent with the approach used in the original allocation of the proceeds received by the Company on the issuance of the original convertible debentures. The net realized loss of $22,198 arising from the early redemption consists of a gain on the debt component of $42,574 and a loss on the equity component of $64,772. The gain on the liability component and the loss in the equity component combined for a net increase to the Company s deficit. Capital Expenditures: Artumas incurred $5.2 million in capital additions during the year ended December 30, 2009 (2008: $46.6). Components of the capital additions include $2.9 million for the Rovuma Area 1 onshore and offshore project in Mozambique, $0.7 million of preliminary spending on the tie-in of the MB-3 well in Tanzania, $2.6 million associated with the pending build-out of Tanzanian power transmission and distribution and field operating equipment (offset by a construction loan of $2.6 million) and $0.2 million of field operating capital in the Tanzanian gas business. $4.0 million of the additions results from capitalization of interest on debt related to the financing of capital construction associated mainly with the Tanzanian gas assets. Of this $4.0 million in capitalized interest, $2.5 million was not paid to the bondholders as the outstanding debt was converted to share capital. At December 31, 2009, the Company has Property and Equipment of $55.4 million ( $149.0), which consists of: Property & Equipment - Net Book Value ($ millions) Tanzania (Energy Program) Mnazi Bay Gas Development $ 24.2 $ 75.3 Mtwara Region Gas to Power Gathering, Processing and Pipeline Power generation Transmission/ distribution Capital Inventory Office and field equipment Mozambique Program Rovuma Basin Petroleum drilling, exploration, development Canadian office equipment $ 55.4 $ 149.0

10 Management s Discussion and Analysis Years ended December 31, 2009 and 2008 In US$ (000 s) unless otherwise stated 10 Commitment for Capital As at December 31, 2009, the Company has no outstanding capital commitments. FINANCIAL CONDITION At December 31, 2009 Artumas had cash of $2.1 million and a further $3.3 million is held in trust to satisfy the obligation of the convertible bond, if it does not convert into shares. The Company s credit risk with respect to current accounts receivable is limited due to the high proportion of amounts due from government departments as tax input credits for Goods and Services Tax (GST) in Canada and Value Added Tax (VAT) in Tanzania and Mozambique and from other government entities such as the Tanzania Petroleum Development Corporation (for their share of the gas assets) and Tanesco (for power sales). The GST in Canada and VAT in Tanzania is now outstanding on a current basis. The VAT in Mozambique is past due and the company is working with the government of Mozambique to have the receivable recognized and determine when recovery will be made. Effective October 15, 2009, the Company consolidated its issued and outstanding shares capital on a 100 for 1 basis. At December 31, 2009 Artumas had 31.8 million shares issued and outstanding and one bond outstanding totaling $2.4 million. At April 7, 2010, the Company had 33.3 million shares issued and outstanding. The Company has earned full rights to the Mnazi Bay Concession in Tanzania and the Rovuma Basin Onshore Block in Mozambique. The management of Artumas have analyzed the options available to fund future operations and commitments of the Company. Expenditures to date in Tanzania have established a large asset base of proven resources with significant potential of additional resources both in Tanzania and Mozambique. The Company is in a reasonable position to leverage its asset holdings through the completed farm-down process, given the material 2-D and 3-D seismic acquisition programs executed in 2008 and the substantial (25,000 sq. km.) land position in what has been proven to be a highly prospective and high-interest deltaic basin. Funding decisions will be based on the assessment of the timing and availability of capital for the Company with a view to the following options: Strategic Partnerships In 2009, Artumas completed a farm-down process for both the Tanzania Mnazi Bay Concession and the Onshore and Offshore Block in Mozambique. This divestiture will provide the required capital to execute on its exploration program through 2010, as well as reflect current industry valuations of the Company s assets. Pursuant to the separate farm-out agreements between the Purchasers and Artumas dated September 17, 2009 Artumas will be granted the following: (a) a carried interest on an approximately 200 square km 3D seismic acquisition program in Tanzania; (b) a carried interest in one exploration well (c) an option to be carried on each of two appraisal wells to be drilled in Tanzania which can be exercised by Artumas in consideration for a further assignment to Cove and M&P of a 5% participating interest in the Tanzanian concession per well; (d) a 4.95% royalty on the offshore Mozambique asset after certain costs are recovered; and (e) a carried interest through the first well in respect of Artumas' retained 11.59% participating interest in the onshore Mozambique asset. The committed capital programme in Tanzania can be replaced by the Purchasers with an alternative exploration or appraisal programme of equal cost to the original commitment.

11 Management s Discussion and Analysis Years ended December 31, 2009 and 2008 In US$ (000 s) unless otherwise stated 11 Convertible Bond Restructuring On June 25, 2009, the bondholders of the Company s three convertible bonds agreed to convert the total outstanding principal amount of the Loans, including accrued but unpaid interest as at June 24, 2009, into common shares in Artumas and that interest no longer accrued from that date. The conversion price was NOK 0.25 per share based on a USD/NOK exchange rate of The total principal amount outstanding under the loans was $115 million, plus accrued interest of $2.7 million. The 2010 bond interest payment due June 20, 2009 was included in the calculation and was also converted into shares. In addition to the conversion of the existing bonds, the bondholders agreed to issue new Senior Secured Bonds ( New Bonds ) convertible into common shares of AGI. The new bond of $2.4 million closed on June 25, 2009, is denominated in notes of one US dollar each, carries a coupon of 15% per annum, and will mature on June 30, The security for the New Bonds shall be a pledge (under the laws of Jersey) over 100 per cent of the shares held by AGI in the Jersey company, Artumas Holdings (Jersey) Limited. Additional collateral interests granted may also comprise, without limitation, some or all of: (1) security agreement over all the assets of AGI; (2) cross-guarantees; (3) an assignment or charge over the receivables of any intercompany loan agreements; and (4) such other security interests deemed appropriate in relation to the new bonds. The security agreement was executed by the Company and subsequently registered. In addition, the new bond contains a covenant which prevents the sale of assets or shares in all subsidiaries without bondholder consent. Each holder of the New Bonds has the option to put some or all of the New Bonds to the Issuer at 135 per cent of the investment amount plus accrued interest upon 10 banking days written notice to the Company ( 135 Put Option ) provided that such notice shall be given no later than November 30, 2009, as which time the 135 Put Options shall expire. On October 12, 2009, the 135 Put Option was extended from November 30, 2009 to June 1, The new bondholders also initially had an option to put some or all of the New Bonds to the Issuer at 105 per cent of the investment amount plus accrued interest. The option expired without being exercised. Another bond for $5.6 million which was to close on or before August 3, 2009 was subsequently cancelled and replaced by warrants. On March 11, 2010, a proposed resolution for an early redemption of the outstanding bonds was approved. To reflect the terms of the put option in the bonds and in lieu of future interest payments, the bonds will be redeemed at 135.5% of the par value of the bonds plus accrued interest. The settlement date for the early redemption of the bonds will be March 17, Debt Financing Arrangements for debt financing of the Mtwara Energy Project are presently being renegotiated to include an interim facility which is intended to be refinanced into a nonrecourse facility over the next three to five years. Due to the current global banking crises and the Company s own financial position, the completion of this financing has taken an unforeseen extended period of time. The bridge facility is intended to cover 60% of forward capital costs of the MEP up to $35 million. As the arranger of this debt, FMO has

12 Management s Discussion and Analysis Years ended December 31, 2009 and 2008 In US$ (000 s) unless otherwise stated 12 undertaken to put this funding is in place in connection with the change in their ownership to a larger share of the power assets. On December 11, 2009, the Tanzania Investment Bank Limited ( TIB ) extended a credit facility of a maximum of 10 billion Tanzanian Shillings (approximately USD $7 million) to AG&P Gas Limited, a subsidiary of the Company for its operating requirements and the repayment of intercompany debt ($2.4 million) to its parent. The term of the facility is eight years, with a two year grace period in which no interest or principal will be payable. Interest charges during the grace period will be added to the principal at the end of the grace period, whereas interest following the grace period will be paid quarterly at a rate of 9.18% per annum. Principal repayment will be made in 24 equal quarterly installments following the grace period. As of December 31, 2009, the Company has drawn-down $1.3 million of this facility. Security for the credit facility is a debenture/lien creating a first ranking charge over all issued share capital of AG&P Gas Limited supported by a pledge to assign to TIB the Company s exploration/concession rights over the Mnazi Bay petroleum reserves and wells in case of default. In addition, the Tanzanian Government has agreed to provide a $7.5 million loan to cover the 2009 capital program. This amount is repayable once the larger debt facility (above) and grant money is available. Grants The Development Related Transactions Program (ORET), an agency of the Netherlands government, has committed to contribute approximately 50% of the costs associated with Transmission and Distribution expenditures undertaken within the Artumas franchise area, to a maximum of 22.5 million (Euros), subject to the completion of project agreements and debt financing. As the arranger of the financing for this project, FMO has undertaken to put this grant is in place in connection with the change in their ownership to a larger share of these assets. The outcome of the actions described above cannot be predicted at this time. The consolidated financial statements associated with this report do not include any adjustments to the amounts and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern and, therefore, be required to realize its assets and discharge its liabilities in other than the normal course of business and at amounts different from those reflected in the accompanying consolidated financial statements. Sources and uses of cash At December 31, 2009, the Company has Cash (including cash equivalents, cash held in trust and short-tem investments of $5.5 million ( $ 43.9 million). Changes in the cash position during the year are summarized below:

13 Management s Discussion and Analysis Years ended December 31, 2009 and 2008 In US$ (000 s) unless otherwise stated 13 Cash Inflows: Opening Cash & Short-Term Investments Proceeds from sale of assets Convertible Bonds Proceeds from credit facility Cash Outflows: Repayment of convertible bonds Capital additions (net) Project operations and G&A Corporate Expenditures Bond conversion fee Repurchase and cancellation of shares Working capital (0.3) Ending Cash, Cash held in trust & Short-term Investments Working capital Working capital, including cash balances, was $1.8 million at December 31, The components of the deficiency are as follows: Cash of $2.1 million consists primarily of funds held in US dollars in Canadian Bank accounts. Cash held in trust of $3.3 million. These fund are held to satisfy the obligations of the convertible bond, if it does not convert to shares by June Accounts receivable of $4.1 million comprised of $1.2 million trade accounts receivable, $2.5 million of input tax credits for Mozambique and Tanzanian VAT (value added tax) and Canadian GST (Goods and Services Tax) and $0.5 million representing the current portion of the Long-term receivable from TPDC. Inventory of $0.7 million was comprised of consumables for the Power and Gas operations. Prepaid expense of $0.8 million includes prepaid insurance, office rentals, deposits and legal retainers. The accounts payable and accrued liabilities balance of $6.3 million is comprised of $3.0 million trade accounts payable, $0.5 million of accrued liabilities, and $2.8 million of VAT payable. The $3.0 million current portion of convertible bonds represents the Series 5 bond, due on June 30, 2010, including the 135 Put Option.

14 Management s Discussion and Analysis Years ended December 31, 2009 and 2008 In US$ (000 s) unless otherwise stated 14 Non-Controlling Interest: At December 31, 2007, the Netherlands Development Financial Institute ( FMO ) held an interest of 19.65% in the Company s Tanzanian investment. FMO s investment to date of $29.8 million represents the maximum investment allowed in this project by FMO s credit committee. The Company has an arrangement with FMO to reduce its interest in this investment when expenditures are not proportionately funded. On this basis, FMO has acknowledged the reduction. FMO s interest is now 12.67% based on total project costs as of December 31, FMO has proposed a transaction whereby it would exchange their interest in the Tanzanian gas assets for a larger share of the Tanzanian power assets. This proposal is being considered by the Board and if accepted would be completed by the end of 2Q CONTINGENCIES (a) Construction loan In accordance with Note 10 of the financial statements, the Company has a contingent liability of up to $7.5 million which will only become due and payable if the conditions precedent on the lease are removed and bank financing and grant money is available to fund the repayment. (b) Legal proceedings On June 2, 2009, a former employee filed a statement of claim in Tanzania in the amount of $1.5 million, in connection with a termination of employment. The Company has settled this claim for $150 subsequent to December 31, 2009 and the amount has been accrued as at December 31, On July 2, 2009, a former employee and officer filed a statement of claim in Canada in the amount of $5.6 million Canadian dollars and $1.3 million US dollars, in connection with a termination of employment. The Company is of the opinion that it has carried out the termination in accordance with its policies and contractual obligations and is therefore vigorously defending against the claim. In addition, the Company has filed a claim against the former employee and officer with respect to amounts outstanding of $1.3 million US dollars. On July 6, 2009, a former employee and officer filed a statement of claim in Canada in the amount of $0.8 million Canadian dollars, in connection with a termination of employment. The Company is of the opinion that it has carried out the termination in accordance with its policies and contractual obligations and is therefore vigorously defending against the claim. Accounting policy changes Effective January 1, 2009 the Company adopted Canadian Institute of Chartered Accountants (CICA) Handbook Section 3064, Goodwill and Intangible Assets and amended Section 1000, Financial Statement Concepts clarifying the criteria for recognizing assets, intangible assets and internally developed intangible assets. The adoption of this standard did not have a material impact on the Company s financial statements. In January 2009, the Emerging Issues Committee ( EIC ) issued a new abstract concerning the measurement of financial assets and financial liabilities, EIC 173, Credit Risk and the Fair Value of Financial Assets and Financial Liabilities ( EIC 173 ). There had been diversity in practice as to whether an entity s own credit risk and the credit risk of the counterparty are taken into account in

15 Management s Discussion and Analysis Years ended December 31, 2009 and 2008 In US$ (000 s) unless otherwise stated 15 determining the fair value of financial instruments. The EIC reached a consensus that these risks should be taken into account in the measurement of financial assets and financial liabilities. EIC 173 was effective for all financial assets and financial liabilities measured at fair value in interim and annual financial statements issued for periods ending on or after the date of issuance of EIC 173, with retrospective application without restatement of prior periods. The adoption of this standard has not had a material impact on the Company s financial statements. In July 2009, the Accounting Standards Board approved amendments to Section 3855 Financial Instruments: Recognition and Measurement in order to converge with international standards for impairment of debt instruments by changing the categories into which debt instruments are required and permitted to be classified. These amendments apply only to investments in debt instruments and do not apply to investments in equity instruments or to debt instruments that have been designated at origination as held-for-trading. The amendments are effective for annual financial statements for fiscal years beginning on or after November 1, The adoption of this standard did not have an impact on the classification of its debt instruments. Effective September 30, 2009, the Company adopted the CICA amendments to section 3855, Financial Instruments Recognition and Measurement, in relation to the impairment of financial assets. The adoption of the amendments to this standard did not have an impact on the Company s financial statements. In June 2009, the CICA amended Section 3862, Financial Instruments Disclosures, to include additional disclosure requirements about fair value measurement for financial instruments and liquidity risk disclosures. The amendments to Section 3862 apply to annual financial statements for fiscal years ending after September 30, The amendments are consistent with recent amendments to financial instrument disclosure standards in IFRS. The additional disclosures required have in included in these financial statements (see Note 19). On June 17, 2009, the Accounting Standards Board of Canada ( AcSB ) released Embedded Derivatives on Reclassification of Financial Assets, amending Section 3855, Financial Instruments Recognition and Measurement. The amendment indicates that contracts with embedded derivatives cannot be reclassified out of the held for trading category if the embedded derivative cannot be fair valued. The implementation of this standard did not have a material impact upon the consolidated financial statements. In January 2009, the AcSB issued Section 1582, Business Combinations, Section 1601, Consolidated Financial Statements, and Section 1602, Non-controlling Interests. These sections are effective for fiscal years beginning on or after January 1, 2011, with earlier application permitted. Once adopted, this standard will impact the accounting treatment for future business combinations. The Canadian Accounting Standards Board has confirmed that International Financial Reporting Standards ( IFRS ) will replace Canadian GAAP effective January 1, 2011, including comparatives for 2010, for Canadian publicly accountable enterprises. The Company has established a preliminary timeline for the execution and completion of its IFRS conversion project. The Company is beginning its high-level IFRS impact study. The impact of IFRS on the Company s consolidated financial statements is not reasonably determinable at this time. Related party transactions Related party transactions are described in Notes 8 and 21 of the consolidated financial statements.

16 Management s Discussion and Analysis Years ended December 31, 2009 and 2008 In US$ (000 s) unless otherwise stated 16 Critical accounting estimates Artumas uses certain assumptions and estimates in applying generally accepted accounting principles ( GAAP ) in the preparation of its financial statements. Estimates and assumptions are assessed regularly by the Company in light of historical results and currently-available information. Actual results may differ materially from these estimates and assumptions. The Company has identified the critical accounting policies affecting its Financial Statements as disclosed in Notes 1 to 3 of the December 31, 2008 audited annual Financial Statements and Notes 1 to 3 of the December 31, 2009 Financial Statements which are incorporated by reference herein. These policies are affected by the assumptions, judgments and estimates used by management in the preparation of these statements. Business Risks Recent global market events and concerns about the general condition of capital markets and financial institutions have caused credit markets to deteriorate and stock markets to decline substantially. In order to fund current operations and future exploration & development plans, the Company will require additional financing, which may not be available or, if available, may not be available on favorable terms, particularly under these challenging global economic conditions. Failure to obtain financing on a timely basis could cause Artumas to default on financial obligations or forfeit concession rights thereby having a material adverse effect on the Company s financial situation and results of operations and ability to continue as a going concern. To mitigate these risks, the Company has undertaken a Financial Response plan, which includes: sale of the Company s power assets, farm out of the Tanzanian gas assets, farm out of onshore and/or offshore Mozambique gas assets, renegotiation of debt repayment terms and cost reduction initiatives. Artumas is subject to normal market risks inherent in the oil and gas business. The Company s gas assets are in the development stage resulting in uncertainties such as: operational and technical risks; reserve estimates; risks of operating in a foreign country (including economic, political, social and environmental risks); commodity price fluctuations; and available resources. We recognize these risks and manage our operations to minimize our exposures to the extent practical. Artumas resources are an estimated value that were independently evaluated and reviewed. It is important to note that resource reports include assumptions about the productive capability of each reservoir and each well into those reservoirs. Being estimates, each well and reservoir could perform differently than estimated, significantly altering the net production revenue ultimately realized. Artumas is subject to all of the operating risks normally associated with the exploration, production, storage, transportation and marketing of oil and gas. These risks include blowouts, explosions, fire, gaseous leaks, and migration of harmful substances. In addition, Artumas operations will be subject to all the normal risks including encountering unexpected formations or pressures, premature declines of reservoirs, equipment failures and other accidents, sour gas releases, natural gas or well fluids, adverse weather conditions, pollution and other environmental risks. Artumas mitigates this risk by employing qualified staff and contractors and has adequate insurance in place. The Company has also developed comprehensive health, safety and environment (HSE) management framework to diminish physical risk. Artumas operations and related assets are located in countries outside Canada, which sustain different economic and political risks. Exploration or development activities in countries like Tanzania and Mozambique may require protracted negotiations with host governments, renegotiation or nullification of existing contracts, taxation policies, and international monetary

17 Management s Discussion and Analysis Years ended December 31, 2009 and 2008 In US$ (000 s) unless otherwise stated 17 fluctuations. Artumas has helped hedge the economic or political risks through partnerships with the Tanzanian government and will enter into partnerships with the Mozambique government in the course of its operations in that country. There are a number of social and environmental risks when drilling for natural resources in a remote area. Apprehension often includes environmental concerns, human rights controversies, product liability issues, employee concerns and other reputation issues. With Artumas public Corporate Social Responsibility (CSR) statement and policies we are able to educate the community of the world class social and environmental standards we uphold. Artumas is exposed to normal financial risks inherent within the oil and gas industry, including commodity price risk, exchange rate risk, interest rate risk and credit risk. The Company conducts its operations in a manner intended to minimize exposure to these risks. Artumas financial performance is most sensitive to prevailing prices of crude oil and natural gas. Prices for crude oil and natural gas fluctuate in response to changes in the supply of and demand for crude oil and natural gas, market uncertainty and a variety of additional factors that are largely beyond the Company s control. The business is managed so that the Company can substantially withstand the impact of a lower price environment, while maintaining the opportunity to capture significant upside when the price environment is higher. In oil and gas exploration and development, the ability to secure drilling services and equipment, financing and even qualified employees, is critical in order to be successful. With any increase in industry activity levels and competition, Artumas success is dependent upon its ability to attract and retain experienced management and qualified, professional staff.

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19 Consolidated Financial Statements For the year ended December 31, 2009

20 Consolidated Balance Sheets (USD 000s) unless otherwise stated December 31, December 31, ASSETS Current Cash and cash equivalents (Note 20) $ 2,144 $ 39,907 Cash held in trust (Note 4) 3,340 - Short-term investments (Note 5) - 3,986 Accounts receivable 4,113 10,618 Prepaid expenses and refundable deposits (Note 6) 814 5,117 Inventory (Note 7) Due from directors/employees (Note 8) ,108 60,508 Long-term receivable (Note 9) 19,556 - Property and equipment (Note 10) 55, ,020 $ 86,071 $ 209,528 LIABILITIES AND SHAREHOLDERS' EQUITY Current Accounts payable and accrued liabilities $ 6,289 $ 17,003 Convertible bonds current portion (Note 11(b)) 2,975 29,708 9,264 46,711 Asset retirement obligation (Note 12) Credit facility (Note 13) 1,273 - Convertible bonds (Note 11(a)) - 86,772 Non-controlling interest (Note 14) 7,351 13,746 17, ,311 Shareholders' equity Share capital (Note 15(b)) 335, ,109 Contributed surplus (Note 15(d)) 9,665 7,741 Warrants (Note 15(e)) 7,522 - Convertible bonds equity portion (Note 11(b)) ,491 Deficit (284,783) (156,124) 68,090 62,217 Going concern assumption (Note 1) Commitments and contingencies (Note 24) Subsequent events (Note 25) Approved on behalf of the Board $ 86,071 $ 209,528 (Signed) Cameron Barton (Signed) Alastair Robertson Director Director 2 The accompanying notes are an integral part of these unaudited interim consolidated financial statements

21 Consolidated Statements of Operations and Comprehensive Loss and Deficit (USD 000s) unless otherwise stated December 31, Revenues Operating revenue, net of royalties $ 2,894 $ 2,850 Expenses Operating expense 3,689 13,268 General and administrative (Note 16) 25,716 36,758 Impairment of property and equipment (Note 10) 67,810 67,183 Net financing expense (Note 17) 14,481 7,782 Depletion, depreciation, amortization and accretion 4,952 3,668 Accretion of long-term receivable (Note 9) (2,946) - Foreign exchange losses 503 2,992 Stock based compensation (Note 15(c)) 440 2,044 Gain on disposal of property and equipment (40) - Total expenses 114, ,695 Net loss for the year before non-controlling interest (111,711) (130,845) Non-controlling interest 5,250 11,538 Net loss and comprehensive loss for the year (106,461) (119,307) Deficit, beginning of year (156,124) (36,817) Loss on bond conversion (Note 11(a)) (22,198) - Deficit, end of year $ (284,783) $ (156,124) Net loss per share basic and diluted ($/share) $ (6.63) $ (326.44) Weighted average number of shares 16,056, ,476 3 The accompanying notes are an integral part of these unaudited interim consolidated financial statements