DRAGON OIL P L C Report & Accounts 2004

Transcription

1 DRAGON OIL PLC Report & Accounts 2004

2 Corporate Contact Points The Company welcomes contact with its shareholders. If you have any queries about Dragon and its operations please contact: Dragon Oil Plc 60 Lower Baggot Street Dublin 2, Ireland Tel: (353) Fax: (353) Inernet http: /

3 Contents Chairman s Statement Chairman s Statement 1 Chief Executive s Review 4 Financial Report 7 Directors Report 9 Auditors Report 15 Statement of Accounting Policies 17 Group Profit & Loss Account 20 Group Balance Sheet 21 Company Balance Sheet 22 Group Cash Flow Statement 23 Notes to Financial Statements 24 Notice of Annual General Meeting Enclosed Proxy for Annual General Meeting Enclosed Dear Shareholder, I am pleased to report significant progress during 2004 which augurs well for the future of the Company ( Dragon ). In the second half of the year, total production reached 20,532 barrels of oil per day ( bopd ) following a successful drilling and well workover programme. I am also happy to announce that Mr. Essa Almulla was appointed Chief Executive Officer ( CEO ) of Dragon with effect from 18th October In addition to my role as Chairman, I was appointed CEO in February 2002 in order to commence the execution of the Field Development Plan ( FDP ). Upon substantial progress being achieved on the execution of the FDP, it was decided to divide the responsibilities of the CEO and the Chairman of the Board. As CEO, Mr. Essa Almulla has the full support of the Board in progressing Dragon for its benefit and in consequence the benefit of its shareholders. Reserves The underlying data in respect of the project is encouraging. The Board s assessment of remaining recoverable proved and probable reserves in the Cheleken Contract Area, offshore Turkmenistan comprising the two fields Dzheitun ( LAM ) and Dzhygalybeg ( Zhdanov ), as of 31st December 2004, at 661 million barrels of oil and condensate. Dragon s entitlement barrels under the Production Sharing Agreement ( PSA ) amount to 315 million barrels of oil and condensate. In arriving at this estimation of Dragon s share, a number of assumptions including the extension of the PSA for a period of 10 years over the initial period of 25 years have been made. Any changes to such assumptions could materially effect the calculation of Dragon s share of proven and probable reserves under the PSA. The principal assumptions are oil price of US$25 per barrel, forecasted cost and timing for capital expenditure and assumptions in relation to forecasted oil production profile. In addition, the best estimate for contingent gross gas resources for the Cheleken Contract Area is 3.5 trillion cubic feet Financial Results Dragon s turnover increased to US$97.1 million (2003: US$82.0 million). High crude oil prices and lower DRAGON OIL Report & Accounts

4 Chairman s Statement operating costs, primarily resulted in an increase of posttax profits to US$49.7 million (2003: US$28.8 million). During the year, Dragon, benefiting primarily from the stronger oil market, generated a net operating cash inflow of US$70.9 million (2003: US$55.4 million) resulting in a year-end free cash balance of US$33.1 million (2003: US$47.8 million). During the year, Dragon sold its crude production through Northern Iran under its swap agreement, and also at Baku. Dragon continues to obtain favourable netback prices depending on the movement of crude oil based on price and logistical considerations. Development The main activities for 2004 included completion of four wells from the upgraded LAM 21 platform using a jack up rig, and the workover of seven wells from two existing platforms. The LAM 21 platform drilling campaign concluded with the completion and testing of a fourth successful well, 21/109.The recently announced successful re-entry, sidetrack and completion of the development well 21/106, was achieved despite technical difficulties encountered in the first quarter of the year. Following refurbishment of the LAM 10 platform, Dragon commenced drilling well 10/110, the first of a series of planned wells from this platform, on 25th December Seven wells worked over during 2004 yielded excellent results and these wells are now contributing significantly to production. Production Dragon s daily production reached 20,532 bopd, thus achieving the stated production target for The average field production in the second half of the year increased to 15,625 as compared to 10,879 in the first half. This increase in production was due to the success of the continuous drilling and work over programmes. The total field production from the Cheleken Contract Area for 2004 was 4.9 million barrels of oil and the average gross production for the year was 13,264 bopd with 8,630 bopd attributable to Dragon. This compares to 4.8 million barrels of oil in 2003 with a total gross production of 13,217 bopd, of which 8,385 bopd was attributable to Dragon. 3D seismic Despite delays in the marine 3-D seismic survey resulting from adverse weather conditions, the data acquisition of the LAM Field and western Zhdanov Field has been completed. This data is under fast-track processing and will be used to select the location of a new wellhead and production platform to be installed in 2006 as part of the continuing field development.the 3-D seismic survey continues over the remaining part of the Zhdanov Field and is due to be completed in Financing Dragon continues to explore various sources of alternative financing options to fund its long term development plans. This remains an immediate priority for Dragon in order to progress its continuous drilling programme and may include an equity placement or other form of equity fund raising in excess of 10% of present issued share capital to fund capital expenditure for the Cheleken Contract Area. Strategy and outlook During 2004, Dragon continued the strategy of increasing production in its Cheleken Contract Area through investment in drilling and various development activities The continuous drilling programme along with a well workover programme has enabled Dragon to reach a production level in excess of 20,000 bopd.we look forward to achieving further production growth in As the contract for the existing jack-up rig expired in March 2005, a contract has been signed for an Iranian jack-up rig for an initial term of two years to be mobilised as a replacement. We expect the marine 3D seismic survey to deliver a much clearer picture of the fields internal reservoir architecture. This is critical to identifying further drilling targets that may lead to increased economic oil recovery from the fields. The results of the interpretation of the data will further enable Dragon to target geological sweet spots and help reduce the risks in drilling. Associated gas from the field, which is currently largely flared and not exploited commercially, is considered a key resource. The Board believes there is potential to add value by marketing natural gas. This will remain a key objective to be pursued by Dragon and will be developed as a separate project after positive feasibility. 2/3

5 Chairman s Statement We have come a long way and are seeing the fruits of our endeavours, but there is much more to do.we are guided by a clear strategy, with a talented and committed workforce. On behalf of the shareholders and my fellow Directors, I wish to record my appreciation of the outstanding efforts made by the executive team and the staff. Hussain M. Sultan Chairman DRAGON OIL Report & Accounts

6 Chief Executive s Report I am pleased to report that Dragon s daily production reached 20,532 bopd, thus achieving the stated production target for The average field production in the second half of the year increased to 15,625 bopd (the first half 10,879 bopd) of which Dragon s entitlement barrels amounted to 10,664 bopd (the first half 6,614 bopd).the 44% increase in production was due to the success of the continuous drilling and work over programmes in the second half of the year. Cheleken Offshore Dragon holds a 100% interest in, and is Operator of, a PSA for the Cheleken Contract Area located in the Caspian Sea, offshore Turkmenistan. The Cheleken Contract Area contains two producing oil and gas fields being LAM and Zhdanov. Development in the Cheleken Contract Area under the PSA commenced in May 2000 and will take place over a 25-year base term.there is an exclusive right to negotiate an extension to the PSA for a further period of not less than 10 years. Drilling Well 21/106 was spudded on 18th November 2003 and was the first of four wells to be drilled from the LAM 21 platform as part of the FDP. Due to drilling problems, the well was sidetracked twice before being drilled to a total depth of 3,197 meters. Oil and gas bearing sands were logged in the upper reservoir zones 3, 4 and 5 but due to technical reasons, the well was plugged and temporarily suspended. The well was sidetracked and reentered on 17th October 2004 and drilled to a depth of 3,093 meters.well 21/106 tested at a rate of 2,652 bopd from zones 3 and 4. The second well, 21/107 was spudded on 29th February, 2004 and was drilled to a depth of 4,264 meters. Oil and gas bearing sands were encountered in zones 4 through 9.The well tested at a rate of 2,035 bopd from reservoir zones 7, 8 and 9. Zone 4 was not flowed and tested at that time due to pressure differentials, and it is scheduled to be recompleted in The third well, 21/108 was spudded on 25th May 2004 and was drilled to a depth of 3,222 meters in 34 days using rotary steerable drilling technology.well 21/108 encountered over 80 meters of oil/gas/ condensate reservoirs in zone 4.Well 21/108 tested at a rate of up to 1,843 bopd from reservoir zones 3 and 4. Wireline logs indicate further production potential in reservoir zones 3, 4 and 5 which will be perforated and accessed at a future date after pressure stabilisation. The fourth well, 21/109 was spudded on 19th July 2004 and drilled to a depth of 4,670 meters.well 21/109 tested at a total rate of 5,330 bopd from zones 4 and 9. The jack-up rig was mobilized to the refurbished LAM 10 platform and well 10/110 was spudded on 25th December Dragon has signed a contract for an initial two-year term with North Drilling Company of Iran for the Iran Khazar jack-up rig. The rig is expected to be mobilized in Quarter to replace the existing jack-up rig at the end of its contract period. Workovers Well workovers during 2004 have yielded excellent results and these workover wells are now contributing significantly to production. A total of seven wells were worked over. Additional perforations were added in all wells of which two wells were worked over with a hydraulic work-over unit from LAM 63.The workover of the eighth well, 86/86 did not yield expected results and was temporarily suspended due to technical reasons and the well may be re-entered again in the future. Production The total field production for 2004 was 4.9 million barrels of oil and the average gross production for the year was 13,264 bopd with 8,630 bopd attributable to Dragon.This compares to 4.8 million barrels of oil in 2003 with a total gross production of 13,217 bopd, of which 8,385 bopd was attributable to Dragon. 4/5

7 Chief Executive s Report Reserves The underlying data in respect of the Cheleken Contract Area remains encouraging. The Board s view of the total remaining recoverable proved and probable reserves (in the fields LAM and Zhdanov), as of 31st December 2004, are 661 million barrels (2003: 641 million barrels) of oil and condensate. Dragon s entitlement barrels under the PSA amount to 315 million barrels of oil and condensate as of 31st December 2004 (2003: 356 million barrels). In addition, the best estimate for the field s contingent gross gas resources is 3.5 trillion cubic feet. The increase in the total oil reserves was due to certification of the Cheleken Field Extension Area. A recent study has concluded that the existing onshore Cheleken field extends into the Contract Area operated by Dragon. Reserves associated with the Cheleken Field Extension have been certified and development of the Cheleken Field Extension is planned for a later point. The decrease in the Dragon s entitlement however, was due to an increase in the long-term forecast of oil price, as applied by the Board, in the calculation of Dragon s share of reserves pursuant to the terms of the PSA.The decrease in the entitlement barrels by application of a higher oil price, however, results in a higher net present value of the reserves attributable to Dragon. Engineering & Construction During the year, Dragon completed substantial engineering projects in the LAM field as part of the FDP. These included the refurbishment of the LAM 21 platform, connection of a sub sea pipeline and engineering for a new production platform. The LAM 21 platform was refurbished and strengthened to accommodate a jack-up rig. A sub-sea pipeline, to take the production of up to four new wells from the LAM 21 platform to the Block II riser platform, was installed. Following the LAM 21 programme, the LAM 10 platform was also refurbished to accommodate a jack-up rig and to drill further wells. A sub-sea infield pipeline from LAM 10 was also installed. Other major projects initiated include the engineering and construction of a LAM A wellhead and production platform together with an onshore processing facility. The processing facility is being located onshore and is being designed to process up to 50,000 bopd. Both the platform and the processing facility are planned to be commissioned in Marketing Dragon has the unrestricted right to market and export its share of oil under the PSA. The marketing objective of Dragon is to ensure the smooth, safe and uninterrupted transportation of crude oil to international markets and to achieve best netback prices for its share of production. Since 1998, Dragon has been marketing its oil production through a crude oil swap agreement with the National Iranian Oil Company. Under this agreement, Dragon transfers its crude oil at Hazar, Turkmenistan and ships it to the Caspian port of Neka, in northern Iran. Dragon then receives an equal swap volume of Iranian crude oil from Kharg Island, in southern Iran, for marketing to international third parties. Since December 2001, a second crude marketing route has been established through Baku, Azerbaijan and a third route through the port of Makhachkala, Russian Federation on the basis of transportation tenders. Constant efforts are being taken to further reduce the cost per barrel of moving crude oil from the Caspian Sea to international markets either via Iran, Azerbaijan or Russia. Dragon continues to obtain favourable netback prices depending on the movement of crude oil based on prices and logistical considerations. In 2004, Dragon sold a total of 2.8 million entitlement barrels under the PSA of which 1.6 million barrels (2003: 1.6 million barrels) were sold at Kharg Island in the south of Iran under its swap agreement and 1.2 million barrels (2003: 1.6 million barrels) at Baku. DRAGON OIL Report & Accounts

8 Chief Executive s Report Health Safety & Environment Dragon has maintained its drive towards enhancing the general HSE standards within all sectors of its operations; to this effect Dragon has dedicated additional resources in terms of manpower and material and focused on enhancing the quality of assistance provided to operations. Such efforts were manifested by pursuing firmly the company s training plan as well as enhancing personnel s awareness to safety reporting. The environmental campaign and projects have been pursued as planned. The air quality monitoring campaign for LAM 21 was satisfactorily completed in In addition, an Environment Impact Assessment and action plan was developed for the LAM 10 project. During 2004 the lost time incident rate figure rose compared to the previous year mainly due to the recategorization of incident reporting and safety performance parameters, in order to reflect a more accurate status of incidents. There is no room for complacency in our drive for zero accidents and incidents.we are encouraged by our improved safety performance and will continue to promote excellence in safety practices throughout our business. Essa Almulla Chief Executive Officer 6/7

9 Financial Report Dragon Oil plc, an Irish public limited company, and its subsidiaries, form an energy Group actively developing oil and gas reserves in Turkmenistan. The Company s shares are listed on the Irish and London Stock Exchanges. This financial review is intended to assist in the understanding of the results of the Group s operations for the year ended 31st December 2004 and of its financial position at that date. The consolidated financial statements and notes contain additional information and should be referred to in conjunction with this financial review. They have been prepared in accordance with applicable Irish law. Cash flow and net debt The net cash inflow from operating activities during 2004 was US$70.9 million (2003: US$55.4 million). The increase in cash inflow from operating activities is a direct result of increased sales revenue generated in the year through higher sales prices and lower operating costs. During the year, US$76.1 million (2003: US$20.6 million) was spent in acquiring tangible fixed assets, mainly attributable to the drilling and well workover programme. At the end of 2004, the total bank and cash balances amounted to US$39.4 million (2003: US$52.2 million). At the year-end, total debt amounted to US$73.5 million (2003: US$75.2 million). The net debt, after reducing the Bank and Cash balances, was US$34.1 million (2003: US$23.0 million). On 3rd May 2004, the majority shareholder, Emirates National Oil Company Limited (ENOC) LLC ( ENOC ), provided a new loan facility of US$40 million. Its term is for one year repayable on 3rd May 2005.The proceeds of this new loan were utilised to repay the then existing US$40 million loan made by ENOC.This new loan carries an interest rate of LIBOR plus 325 basis points. There were no further drawdowns during the year under the European Bank for Reconstruction and Development ( EBRD ) loan facility. In February 2004, US$1.7 million of the principal was repaid following the sixth borrowing base review. The net proceeds of the EBRD loan at 31st December 2004 were US$32.4 million after deducting financing costs of US$1.1 million. Interest is charged on outstanding amounts at LIBOR plus 325 basis points. Subsequent to the year end in February 2005, a further US$0.5 million of principal was repaid and is accordingly reclassified as amounts due within one year, together with an amount of US$5.4 million due to be repaid in August 2005 under the loan amortisation schedule. Turnover and profits Turnover in 2004 was US$97.1 million compared with US$82.0 million for The increase of US$15.1 million is attributed to better prices (US$24.8 million) realised during the year, partly offset by lower volumes (US$9.7 million) sold. Dragon s share of production under the PSA increased during the year to an average of 8,630 bopd from 8,385 bopd in Reduction in the unit operating and production costs led to a decrease in costs to US$20.1 million in 2004 from US$27.8 million in This decrease was primarily due to savings in certain operating costs and year-end stock movement. Consequent to the revision in rates due to an increase in the long-term oil price forecast applied by the Board in the calculation of reserves under the PSA, the Depreciation Depletion and Amortisation ( DD&A ) charge for the year 2004 was US$16.7 million (2003: US$13.5 million). Accordingly, a gross profit of US$60.3 million was recorded against US$40.7 million for Administration costs were US$5.4 million in 2004 compared to US$4.2 million in 2003, primarily on account of increased overhead costs, partly offset by a lower charge for the oil hedge in Interest payable and similar charges amounted to US$7.3 million (2003, US$8.4 million) primarily due to a lower ENOC loan arrangement fee. Profit after taxation and earnings per share Dragon made a post tax profit of US$49.7 million in 2004 compared to a post tax profit of US$28.8 million in The basic earnings per share amounted to cents compared to an earning of 7.89 cents per share in In view of the implementation of the ongoing FDP and Dragon s financial commitments, the Directors do not recommend a dividend for the year. Capital Expenditure Programme Fixed assets increased by US$72.4 million from US$269.6 million in 2003 compared to US$342 million in 2004.This was due to the completion of the drilling DRAGON OIL Report & Accounts

10 Financial Report campaign from the LAM 21 platform in January 2005, commencement of the drilling programme from the LAM 10 platform with a jack-up rig, in line with the FDP in December The increase in tangible fixed assets of US$89.1 million, mainly due to capital expenditure incurred on the LAM 21 platform drilling programme, is largely offset by the DD&A charge of US$16.7 million. Commercial Risks The main commercial risks Dragon is exposed to are oil price, exchange rate, counterparty and liquidity risks in its operations.wherever possible, Dragon attempts to minimise the impact of such commercial risks. Counterparty risks are minimised through shortterm crude oil sale contracts and prepayments received for the cargoes moving west to Baku. Dragon receipts and expenditures are mainly in US dollars which minimise the exchange rate risks. Dragon also seeks to retain sufficient liquidity, either in the form of cash or maturing deposits to manage its ongoing FDP. In line with managements strategy to hedge the oil price, Dragon has entered into an oil put option contract at a strike price of US$28 per barrel for an estimated 60 per cent of its entitlement barrels for /9

11 Directors Report The Directors present their report and the audited consolidated financial statements of Dragon Oil plc for the year ended 31st December Principal activities Dragon s principal asset is the substantial oil and gas reserves located in Turkmenistan whose development and exploitation commenced under the PSA in May 2000 and will take place over a 25-year term.there is an exclusive right to negotiate an extension to the PSA for a further period of not less than 10 years.the level of production will be dependent on the development programme achieving its predicted results. Furthermore, the value of the reserves is dependent on future capital expenditure levels and crude oil prices realised over the period of the PSA. Business Review A full review of the Group s activities during the year, recent events and future developments is contained in the Chairman s Statement on pages 1 to 3, the Chief Executives Report on pages 4 to 6 and the Financial Report on pages 7 to 8. Results and Dividends The results of the Group for the year ended 31st December 2004 are set out in the Group Profit and Loss Account on page 20.The profit on ordinary activities after taxation amounted to US$49.7 million (2003: US$28.8 million) No dividend is recommended for the year. (2003: nil). Directors The following individuals served as Directors during the period from 1st January 2004 to 2nd April 2005: Hussain M. Sultan (Chairman) (U.A.E.) Essa Almulla (Executive Director and CEO) (U.A.E.) Re-elected on 4th May 2004 Mirza Al Sayegh (Non Executive Director) (U.A.E.)** Brent Kinney (Senior Non Executive Director, Chairman of the Remuneration Committee) (Canada)* Jeremy Key (Non Executive Director, Chairman Nomination Committee since 1st January 2004) (UK)* Christopher Dixon (Alternate for Jeremy Key) (UK)* Nigel Robert McCue (Non Executive Director, Chairman of the Audit Committee) (UK)* Re-elected on 4th May 2004 * Members of the current Audit Committee, Remuneration Committee and Nomination Committee ** Member of the Nomination Committee. Member of the Audit Committee to 22nd March The current non-executive Directors were not appointed for specific terms, but they do have contracts of appointment, with the exception of Mr. Brent Kinney and they are subject to retirement from the Board by rotation at Annual General Meetings. In accordance with the Articles of Association, Brent Kinney and Mirza Al Sayegh retire, and being eligible, offer themselves for re-election at the Annual General Meeting. Non-Executive Directors Mirza Al Sayegh Mr. Al Sayegh, aged 55, is presently the Vice-Chairman and a member of the board of Emirates National Oil Company Limited (ENOC) LLC. He is a director of a number of companies including subsidiaries of ENOC. Brent Kinney Mr. Kinney, aged 62, is presently a director of Husky Energy Inc., a Canadian based integrated oil company. Jeremy Key Mr. Key, aged 51, is the Managing Partner of Key and Dixon (Solicitors); he specialises in company and commercial law with emphasis on construction and energy aspects. He is currently Company Secretary of Dubai Natural Gas Company Limited. DRAGON OIL Report & Accounts

12 Directors Report Nigel McCue Mr. McCue, aged 53, is presently a Director and CEO of Nemmoco Petroleum Limited, a private oil company. Christopher Dixon Mr. Dixon, aged 60, is a partner in Key and Dixon (Solicitors), Dubai. He specialises in banking and commercial law. Directors Responsibilities Irish company law requires the Directors to prepare financial statements for each financial period which give a true and fair view of the state of affairs of the Company and of the profit or loss for that period. In preparing those financial statements, the Directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping proper books of account which disclose with reasonable accuracy at any time the financial position of the Company and of the Group and to enable them to ensure that the financial statements are prepared in accordance with accounting standards generally accepted in Ireland and comply with Irish statute comprising the Companies Acts 1963 to 2003 and the European Communities (Companies: Group Accounts) Regulations, They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The measures taken by Directors to secure compliance with the Company s obligation to keep proper books of account are the use of appropriate systems and procedures and the employment of competent persons. The books of account are kept at the Dubai branch of a subsidiary company. The maintenance and integrity of the Dragon Oil plc website is the responsibility of the Directors. Legislation in Ireland governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The Board The Board currently comprises the Executive Chairman, the CEO and four Non-Executive Directors. Each of the Executive Directors has an extensive knowledge of the oil and gas industry. There is a clear division of responsibilities between the Chairman and the Chief Executive. The Senior Independent Director is Mr. Brent Kinney. In this role, he is available to shareholders who have concerns that cannot be resolved through discussion with the Chairman or the CEO. The Board considers each of the current Non-Executive Directors to be independent of management and free from any business or other relationships that could materially interfere with the exercise of their independent judgment. The Board meets regularly throughout the year and met a total of ten times in All Directors were in attendance at each of those meetings other than Mr Mirza Al Sayegh and Mr. Brent Kinney who were absent from four meetings and one meeting respectively. All necessary information is supplied to the Directors on a timely basis to enable them to discharge their duties effectively. All Directors have access to independent professional advice, at Dragon s expense, as and when required. There is a formal schedule of matters reserved for consideration by the Board, which includes the overall strategy with respect to field development, major capital expenditure projects and financial policy. Subject to those reserved matters, the Board delegates authority for the management of the business primarily to the CEO and certain other matters are delegated to the principal Board Committees, namely the Audit, Remuneration and Nomination Committees, each of which are described in more detail below. Corporate Governance The Irish Stock Exchange has adopted the Principles of Good Governance and Code of Best Practice (the Combined Code ) with effect for years ending on or after 31 March The Company is therefore reporting on Corporate Governance as set out in the Code of Best Practice published by the Committee on the Financial Aspects of Corporate Governance (the Cadbury Committee ) as applied by the Irish Stock Exchange. The Directors are committed to maintaining high standards of corporate governance and this statement describes how the Company has applied the Principles of the Combined Code on Corporate Governance. In July 2003, the Financial Reporting Council issued a revised Combined Code (the New Code ). The New Code applies to accounting periods beginning on or after 1st November 2003 and thus formally applies to the Company for the financial year 10/11

13 Directors Report ending 31st December The Board, which is committed to the implementation of the New Code, has carried out a review of the Company s corporate governance practices. A number of the new recommendations have already been implemented and are set out below. The Board considers that the Company has complied with the provisions set out in Section 1 of the Combined Code throughout the financial year under review. Committees The Board has established the following principal Committees - Audit, Remuneration and Nomination, and has written terms of reference setting out their authority and duties. Audit Committee The membership of this Committee currently comprises Mr. Nigel McCue (Chairman), Mr. Brent Kinney and Mr. Jeremy Key. The Board considers that each of the members has the requisite skills and attributes to enable the Committee to discharge its responsibilities. The Committee met six times during the year to review the interim and annual financial statements and the Group s internal controls, policies and procedures. There was full attendance by Committee members at each of those meetings, other than that of Mr. Brent Kinney who was absent from one meeting. The Committee is primarily responsible for monitoring the integrity of the financial statements, reviewing internal financial controls, monitoring and reviewing the effectiveness of the internal audit function, recommending the appointment of external auditor and reviewing their independence, objectivity and effectiveness of the audit process. The external auditors have unrestricted access to the Chairman of the Audit Committee. Remuneration Committee The membership of this Committee currently comprises Mr. Brent Kinney (Chairman), Mr. Nigel McCue and Mr. Jeremy Key. The Committee is primarily responsible for determining and agreeing with the Board, the framework or broad policy for the remuneration of the Chairman, CEO and other senior members of the executive management. The Remuneration Committee also reviews and assesses proposals to grant share options to employees under the share option scheme. Participation is at the discretion of Directors for eligible employees. There was full attendance by Committee members at each of the Committee meetings. The Company has fully complied with the Irish Stock Exchange s requirement in relation to the disclosure of Director s remuneration contained in Section A of the Best Practice Provisions annexed to the Listing Rules. The Remuneration Committee applies the same philosophy in determining Executive Directors remuneration as is applied in respect of all employees. The underlying objective is to ensure that individuals are appropriately rewarded relative to their responsibility, experience and value to Dragon. The Remuneration Committee is mindful of the need to ensure that, in a competitive environment, Dragon can attract, retain and motivate executives who can perform to the highest levels of expectation. Annual bonuses, if any, are determined by the Remuneration Committee on the basis of objective assessments based on Dragon s performance during the year in terms of key financial indicators, as well as a qualitative assessment of the individual s performance. Nomination Committee The membership of this Committee currently comprises Mr. Jeremy Key (Chairman), Mr. Mirza Al Sayegh, Mr. Nigel McCue and Mr. Brent Kinney. The Committee considers the composition of the Board and makes recommendations on the appointment of new Directors as well as making recommendations to the Board on succession planning. Chairman and Chief Executive Mr. Essa Almulla, Deputy CEO, was appointed CEO of Dragon with effect from 18th October 2004 after a recommendation by the Nomination Committee. Mr. Hussain M. Sultan remains Chairman of the Board. Internal Control The Directors are responsible for the implementation and review of Dragon s system of internal financial control appropriate to the various business environments in which it operates. The system has been designed to enable Dragon to manage significant business risks in order to achieve Dragon s objectives and respond accordingly. This is an ongoing process to identify, evaluate and manage significant risks faced by Dragon and includes the safeguarding of the assets DRAGON OIL Report & Accounts

14 Directors Report from inappropriate use or loss or fraud, the identification and management of liabilities, the maintenance of proper records to ensure quality internal and external reporting and compliance with the applicable laws and regulations governing Dragon s conduct of business. In addition, the Audit Committee has reviewed the internal audit reports and presentations in its meetings and the status of implementation of the Internal Audit recommendations. Any system of internal control can provide only reasonable, and not absolute, assurance that material financial irregularities will be detected or that the risk of failure to achieve business objectives is eliminated. The Directors, having reviewed the effectiveness of the system of internal financial, operational and compliance controls and risk management, consider that the system of internal control operated effectively throughout the financial year and up to the date the financial statements were signed. The system is periodically reviewed by the Directors using processes in accordance with the Turnbull guidance issued in September 1999 (Internal Control: Guidance for Directors on the Combined Code). Going Concern The recoverability of amounts recorded as assets for oil and gas interests is dependent upon the satisfactory completion of the development of the oil reserves in Turkmenistan. Dragon does not generate sufficient cash flow from operations to fund its entire development activities and therefore intends to rely upon the issuance of securities and external funding to finance its operations and development activities to the extent that sufficient cash flow from operations is not available. However, the results of the ceiling test as at 31st December 2004 indicate the carrying value of the oil and gas interests to be fully recoverable. In addition, the Directors are conducting a further review of ongoing capital investment with a view to optimising the FDP and the Directors are also currently evaluating a number of alternative long-term funding proposals. Directors Interests: The interests of the Directors in the share capital of the Company, all of which are beneficial, are as follows: 2nd April st January st January 2004 Number Number Number of Shares of Shares of Shares Directors Hussain M. Sultan 3,829,785 3,829,785 3,829,785 Essa Almulla 100, , ,000 Non-executive Directors Jeremy Key 161,563 Mirza Al Sayegh Brent Kinney Nigel McCue... 3,929,785 3,929,785 4,091,348 Company Secretary Ian Philliskirk 10,714 10,714 10,714 12/13

15 Directors Report Directors Share Options Average Weighted market price average price at As at 1st Granted Exercised As at 31st exercise exercise January during during December price date Exercisable 2004 the year the year 2004 (Stg. pence) (Stg. pence) up to Directors Hussain M. Sultan Essa Almulla 1,750, ,000 2,050, Mirza Al Sayegh 1,000, ,000 1,250, Jeremy Key 1,000, ,000 1,250, Brent Kinney 1,000, ,000 1,250, Nigel McCue 500, , , ,250,000 1,300,000 6,550, Company Secretary Ian Philliskirk 235, , , ,485, ,400, ,885, Options granted during the year are not exercisable before 31st December All other options outstanding at the year-end are available for immediate exercise. Directors Remuneration Benefits in Fees Salary Bonus kind Total Total Executive directors Hussain M. Sultan Essa Almulla Non-executive directors Jeremy Key Mirza Al Sayegh Brent Kinney Nigel McCue The emoluments of the Chairman were US$144,000 (2003: US$151,000). The emoluments of the highest paid Director were US$307,000 (2003: US$322,000), which principally comprised salary and benefits. Auditors PricewaterhouseCoopers have expressed their willingness to continue in office and are eligible for reappointment. A resolution to reappoint them as the Company s auditors and authorise the Directors to determine their remuneration will be proposed at the Annual General Meeting. Health and Safety It has been and continues to be the policy of the Company to ensure the health, safety and welfare of employees by maintaining a safe place and system of work. This policy is based on requirements of employment legislation which includes Safety, Health and Welfare at Work Act, Supplier Payment Policy It is Company and Group policy to settle all debts with creditors on a timely basis and in accordance with the terms of credit agreed with each supplier. DRAGON OIL Report & Accounts

16 Political Donations No political donations were made during the year ended 31st December 2004 (2003: nil). Significant Shareholdings Number of % of Ordinary Issued Share Shares Capital Emirates National Oil Company Limited (ENOC) L.L.C 241,413, Close Company Provisions The Directors are of the opinion that the Company is not a close company as defined by the Taxes Consolidation Act 1998 and there has been no change in this respect since 31st December Annual General Meeting Details of the resolutions to be proposed at the Annual General Meeting are given in a letter attached to the Notice of Annual General Meeting, which is published separately and sent to shareholders with this report. On behalf of the Board of Directors: 2nd April 2005 Hussain M. Sultan Director 14/15

17 Independent auditors' report to the members of Dragon Oil plc We have audited the financial statements which comprise the group profit and loss account, the group balance sheet, the company balance sheet, the group cash flow statement, the group statement of total recognised gains and losses and the related notes. These financial statements have been prepared under the historical cost convention and the accounting policies set out in the statement of accounting policies. Respective responsibilities of directors and auditors The directors' responsibilities for preparing the annual report and the financial statements in accordance with applicable Irish law and accounting standards generally accepted in Ireland are set out in the statement of directors' responsibilities. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements, auditing standards issued by the Auditing Practices Board applicable in Ireland and the Listing Rules of the Irish Stock Exchange. This report, including the opinion, has been prepared for and only for the company s members as a body in accordance with Section 193 of the Companies Act 1990 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with Irish statute comprising the Companies Acts, 1963 to 2003, and the European Communities (Companies: Group Accounts) Regulations, We state whether we have obtained all the information and explanations we consider necessary for the purposes of our audit and whether the company balance sheet is in agreement with the books of account. We also report to you our opinion as to: - whether the company has kept proper books of account; - whether the directors report is consistent with the financial statements; and - whether at the balance sheet date there existed a financial situation which may require the company to convene an extraordinary general meeting; such a financial situation may exist if the net assets of the company, as stated in the company balance sheet, are not more than half of its called-up share capital. We also report to you if, in our opinion, information specified by law or the Listing Rules regarding directors remuneration and transactions is not disclosed. We read the other information contained in the annual report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. The other information comprises only the chairman's statement, the chief executive s report, the financial report and the director s report. We review whether the director s report reflects the company's compliance with the nine provisions of the Combined Code (issued 2003) specified for our review by the Listing Rules and we report if it does not. We are not required to consider whether the board's statements on internal control cover all risks and controls or to form an opinion on the effectiveness of the company's or group's corporate governance procedures or its risk and control procedures.

18 Basis of audit opinion We conducted our audit in accordance with auditing standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the company's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion the financial statements give a true and fair view of the state of affairs of the company and the group at 31 December 2004 and of the profit and cash flows of the group for the year then ended and have been properly prepared in accordance with the Companies Acts, 1963 to 2003, and the European Communities (Companies: Group Accounts) Regulations, We have obtained all the information and explanations we consider necessary for the purposes of our audit. In our opinion proper books of account have been kept by the company. The company balance sheet is in agreement with the books of account. In our opinion the information given in the directors' report is consistent with the financial statements. The net assets of the company as stated in the company balance sheet are more than half of the amount of its called-up share capital and, in our opinion, on that basis there did not exist at 31 December 2004 a financial situation which under Section 40(1) of the Companies (Amendment) Act, 1983 would require the convening of an extraordinary general meeting of the company. PricewaterhouseCoopers Chartered Accountants and Registered Auditors Dublin 2 April 2005 (a) (b) The maintenance and integrity of the Dragon Oil plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. Legislation in Ireland governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

19 Statement of Accounting Policies The principal accounting policies applied in the preparation of these consolidated financials are set out below: These policies have been consistently applied to all the years presented unless otherwise stated. (a) (b) (c) (d) (e) (f) Basis of preparation The financial statements have been prepared under the historical cost convention and in accordance with Accounting Standards generally accepted in Ireland and in accordance with Irish statute comprising the Companies Acts 1963 to 2003, and the European Communities (Companies: Group Accounts) Regulations, Accounting Standards generally accepted in Ireland in preparing financial statements giving a true and fair view are those published by the Institute of Chartered Accountants in Ireland and issued by the Accounting Standards Board. The Group s financial statements fall within the scope of the UK Oil Industry Accounting Committee s Statement of Recommended Practice ( SORP ) Accounting for Oil and Gas Exploration, Development, Production and Decommissioning Activities and have been prepared in accordance with the provision thereof. The preparation of consolidated financial statements in conformity with accounting principles generally accepted requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reporting Currency The financial statements are presented in US dollars, being the principal currency in which the Group transacts its business. Consolidation Subsidiaries are all entities over which the Group has power to exercise control over its polices generally accompanying a shareholding of more than one half of its voting rights. The Group s financial statements consolidate the financial statements of Dragon Oil Plc and its subsidiary undertakings made up to 31st December Consolidation follows the acquisition method, with any consideration being allocated to the respective assets and liabilities at the effective date of acquisition. The full results of the subsidiary undertakings acquired or disposed of in the year are included in the consolidated profit and loss account from the effective date of acquisition or up to the date of disposal. Inter-company transactions, balances and unrealised losses and gains on transactions between Group companies are eliminated. Turnover Turnover represents the Group s share of oil sales and related income, net of sales taxes and royalties. The turnover represented by sales through Iran is stated at gross realisation values and swap fees are shown as part of cost of sales.the turnover represented by sales to the west and north of the Caspian is stated net of transportation discounts. Revenue is recognised when the title to the oil involved passes to the customer, generally on delivery. Foreign Currency Translation Transactions denominated in currencies other than US dollars are translated at the rate of exchange ruling at the date of transaction. Monetary assets and liabilities denominated in currencies other than US dollars at the yearend are translated at the rates of exchange prevailing at the year-end. Exchange gains and losses are reflected in the profit and loss account. The accounting records of all trading subsidiary undertakings are denominated in US dollars. Leases Rentals under operating leases are charged on a straight-line basis over the lease term, even if the payments are not made on such a basis. Benefits received and receivable as an incentive to sign an operating lease are similarly spread on a straight-line basis over the lease term, except where the period to the review date on which the rent is first expected to be adjusted to the prevailing market rate is shorter than the full lease term, in which case the shorter period is used. DRAGON OIL Report & Accounts

20 Statement of Accounting Policies (g) Financing Costs Costs incurred, that can be directly attributed to obtaining finance, are deducted from the proceeds of the finance received by the Group and charged to the profit and loss account over the life of the debt instrument at a constant rate in relation to the carrying amount. (h) (i) (j) Pension Costs The provision for end of service benefits for all employees is made in accordance with the local labour legislation in the relevant countries of operations. Turkmenistan local employees make a voluntary contribution that is deposited with the local government authorities. Expatriates in Turkmenistan are governed by contractual terms that do not provide for end of service benefits. The Group provides for end of service benefits for employees based in the United Arab Emirates in accordance with the Group s Provident Scheme ( the Provident Scheme ) the entitlements of which are, in lieu of and, at least equivalent to that required to be paid as per the local labour legislation.the charge for the year is recorded in the profit and loss account and the related accrual amount is transferred to the Provident Scheme. The Provident Scheme assets are held separately from those of the Group in an independently administered fund. Taxation Corporation tax is provided on taxable profits at the current rate. All deferred taxation liabilities arising from timing differences are recognised. Deferred taxation assets arising from timing differences are recognised to the extent that they are expected to become recoverable in the foreseeable future. Timing differences are temporary differences between profits as computed for taxation purposes and profits as stated in the financial statements which arise because certain items of income and expenditure in the financial statements are dealt within different periods for taxation purposes. Tangible and Intangible Fixed Assets - Oil and Gas Interests The Group s exploration, development and production activities are conducted in accordance with the PSA, between Dragon Oil (Turkmenistan) Ltd and the Competent Body For Use Of Hydrocarbon Resources In Turkmenistan, that was signed on 10th November 1999 and effective from 1st May The PSA terms allow the capital and operating costs to be recovered as part of the cost recovery mechanism provided for in the agreement. The Group follows the full cost method of accounting under which all costs relating to the exploration for and development of oil and gas reserves, whether productive or non-productive, are capitalised as fixed assets in two geographical cost pools. These cost pools represent the Group s areas of interest, being Central Asia and the Far East. Costs dealt with in this way include licence acquisition costs, technical work, exploration and appraisal drilling, general technical support and a proportion of directly attributable administrative and overhead costs. Costs are transferred to tangible fixed assets and treated as depletable interests in each regional cost pool upon declaration of commerciality and development approval or upon cessation of exploration on each licence. Any proceeds arising from the sale or farm-out of assets are deducted from the relevant cost pool. Depletion of costs in the depletable pools is provided under the unit-of-production method, which uses the estimated commercial reserves in the cost pool and the sum of the total costs in the pool and any further anticipated costs to develop such reserves. Changes in estimates affecting the unit-of-production calculations for depletion are accounted for prospectively. At the end of each year an assessment is made as to whether the economic value of interests is in excess of costs capitalised as non-depletable interests.where there is an indication that the value of a regional cost pool may be impaired, the net amounts at which such cost pools either in production or under or being considered for development are recorded in the financial statements are assessed for recoverability on a cost pool by cost pool basis against the anticipated discounted future net cash flows to be derived from their estimated remaining commercial reserves. The assessment is made on the basis outlined in the SORP. Any impairment is transferred to depletable geographical pools and depreciated. Costs capitalised as depletable interests in excess of the estimated value of the Group s discounted future net revenues of its commercial reserves are written off immediately as additional depletion. 18/19