Panoro Energy ASA is an independent E&P company with a. listed on the Oslo Stock Exchange with ticker PEN.

Transcription

1 Panoro Energy Annual Report 2011

2 Company Overview Contents Company Overview 2 Assets 4 CEO letter 6 Company Operations 8 Reserves and Contingent Resources 14 Directors Report Board of Directors 28 Senior Management 30 Consolidated Financial Statement 32 Notes to the Consolidated Financial Statements 36 Parent Company Financial Statement 72 Notes to the Parent Company Financial Statements 75 Auditor s Report 86 Corporate Governance 88 Corporate Social Responsibility/ Ethical Code of Conduct 92 Glossary and Definitions 94 Panoro Energy ASA is an independent E&P company with a balanced portfolio of high quality assets in the South Atlantic region. The Company has offices in London, Oslo and Rio de Janeiro. Panoro Energy was formed through the merger of Norse Energy s former Brazilian business and Pan- Petroleum in June The Company is listed on the Oslo Stock Exchange with ticker PEN. FINANCIAL CALENDAR May 9, 2012 First Quarter 2012 Results and Annual General Meeting August 10, 2012 Second Quarter 2012 Results November 9, 2012 Third Quarter 2012 Results Page 2 Panoro Energy Annual Report 2011

3 Company Overview Key figures 2011 Revenues (USD million) 36.6 EBITDA (USD million) 11.2 EBIT (USD million) 4.0 Net profit/loss (USD million) (30.2) 2P Reserves (MMBOE) C Contingent Resources (MMBOE) Production (BOE/day) 2,585 Share price Dec. 31, 2011 (NOK) 4.25 Highlights and events 2011 Highlights EBITDA of USD 11.2 million Group production of 2,585 BOE/day Completed a gross NOK 550 million (USD ~93 million net) equity raise at NOK 7.80 per share Signed a farm out agreement for three exploration blocks offshore Brazil for a consideration of USD 14.5 million plus a carried cost for drilling of three deep high impact wells Oil discovery in the Ruche-Marine-1 pre-salt exploration well offshore Gabon Reduced production from the Manati gas field offshore Brazil due to maintenance and repairs of platform risers Drilled three wells in Mengo-Kundji-Bindi, onshore Republic of Congo (Brazzaville) Manati net Production Share Price Development BOE/day NOK/share Panoro OSEBX January 2011 December 2011 Panoro Energy Annual Report 2011 Page 3

4 Assets Brazil 10% interest Manati gas field (BCAM-40 block), pipeline, gas plant and production platform, Camamu-Almada Basin 10% interest Camarão Norte discovery (BCAM-40 block), Camamu-Almada Basin 35% interest Coral field, Santos Basin 65% interest Estrela do Mar field, Santos Basin 50% interest Cavalo Marinho field, Santos Basin 15% interest BM-S-63 block, Santos Basin 15% interest BM-S-71 block, Santos Basin 15% interest BM-S-72 block, Santos Basin Congo-Brazzaville 20% interest in Mengo-Kundji-Bindi (MKB) license, onshore Gabon 33.33% interest in Dussafu Marin license, offshore Nigeria 6.502% participating interest (12.19% revenue interest) in OML 113 license (Aje Field), offshore Page 4 Panoro Energy Annual Report 2011

5 Panoro Offices Offices Panoro License area Panoro Energy Annual Report 2011 Page 5

6 CEO letter Moving forward in a challenging environment The first full year has passed since the establishment and listing of Panoro Energy. Looking back we see both reasons to be satisfied and reasons to be impatient about the progress. Panoro Energy entered 2012 in a much stronger condition than the Company was a year ago. The financial position improved significantly, mainly due to a successful equity issue that increased our financial capabilities and made it possible for the Company to carry out our operational activities without financial pressure. With increasing global economic uncertainty, a strong financial position is more important than ever in order to maintain and develop the asset values for the benefit of our shareholders. Financial flexibility increased with the entry into a farm-down agreement for our Round 9 exploration assets in Brazil, which enabled us both to recover historical costs and at the same time retain a meaningful interest in three high impact wells that will be drilled in Operationally, 2011 was a challenging year with delays in the drilling activity in Congo and unforeseen production problems on the Manati gas field offshore Brazil. Furthermore, we have seen that the expected concept selection for the BS-3 area in Brazil is still to be finalized. On the positive side, the Company made an oil discovery in the Ruche-Marine-1 pre-salt exploration well offshore Gabon. Panoro s management has throughout the year been persistent in pushing the operators to move the projects forward and get production back on track. However, we are not satisfied with the operational results in 2011 and have brought some of the challenges with us into the uncertain timing of new licence rounds and other opportunities in the Brazilian market. The size and location of the organisation have been changed to fit the strategy. The office in Rio de Janeiro has been strengthened, and will comprise the entire management team with the exception of the President for Africa who will continue to run the West Africa business unit out of London. The new model should significantly improve the efficiency of the organisation and enhance the ability to deliver shareholder value. We have strengthened the technical competence in Rio de Janeiro, and we now have a very strong team of geologists and geophysicists with long experience in exploration, as well as strong competence within operations and development. This greatly strengthens our capabilities to de-risk and promote value added transactions. For Panoro Energy with a clear growth ambition these are pivotal issues. Our main ambition is to obtain balanced growth while retaining a strong financial position, with shareholder value remaining the key performance indicator for transactions and operations alike. The global financial uncertainty will continue to influence our business and the Company going forward. We are therefore explicitly stating our determination to maintain a strong financial position, and will rather seek to fund growth in new areas through monetization of parts of the existing portfolio. The focus of the Company should gradually be moved towards more high impact exploration opportunities and into positions where we obtain more control of the operation of the assets. Selection of not only good assets, but also good partners is critical to achieve this success. We believe this approach will further strengthen the Company also through 2012, and build an even stronger platform to take advantage of longer term growth opportunities and increased value creation for our shareholders. Kjetil Solbrække CEO, Panoro Energy ASA In light of these portfolio challenges, the Company has thoroughly analysed its strategic position and concluded on the way forward. The strategy is to become more focused for growing our position in Brazil, while continuing an active search for new opportunities in West Africa. This should enable the Company to grow regardless of Page 6 Panoro Energy Annual Report 2011

7 Our main ambition is to obtain balanced growth while retaining a strong financial position, with shareholder value remaining the key performance indicator for transactions and operations alike. Panoro Energy Annual Report 2011 Page 7

8 Company Operations Panoro Energy currently has assets in two of the world s most prolific petroleum regions; Brazil and West-Africa. In Brazil, the Company has interests in three main projects of which one is a producing field. In West Africa, the Company is engaged in projects in Congo-Brazzaville, Gabon and Nigeria. Brazil Camamu-Almada Basin BCAM-40 Manati (10% interest) Camamu-Almada Basin The Manati natural gas field is located offshore Bahia state within the BCAM-40 Block and is operated by Petrobras. The other partners in the field are Queiroz Galvão which holds an interest of 45%, and Brasoil, which holds an interest of 10%. The field is a well-defined mixed trap, where the main reservoir is a thick sandstone section with high porosity and permeability, with a shale section forming the seal. The sandstone reservoirs consist of around 300 meters of gross section and 200 meters of net pay. The field has a single gas/water contact at a depth of 1,590 meters and is limited to the west by an unconformity, to the east by a down-to-the-basin fault and to north and south by structural dips. The field was discovered in 2000, and development work was conducted between 2004 and 2007, through (i) the drilling of six development wells, (ii) the construction of a natural gas processing plant located in São Francisco do Conde and (iii) the construction of an approximately 120 km long, 24 inch diameter pipeline to connect the offshore platform and the natural gas processing plant. Discovery Producing Field BRAZIL Camamu-Almada Basin Manati Camarao Norte For the full year 2011, natural gas production from the Manati field averaged 4.1 MMm3/day (2,585 BOE/day net to PEN), which is a decrease of approximately 34% compared to 2010 gas volumes. This decrease in production rates is the result of maintenance and repairs performed on the lower sections of the flowline risers during In early 2012, this maintenance was completed and Panoro Energy expects 2012 field production to average around 5.50 to 6.00 MMm3/day (~3,450 to 3,700 BOE/ day net to PEN), however, seasonal variances should be expected. The proven reserves at Manati are secured through a long-term takeor-pay contract with Petrobras and the gas price is fixed in Brazilian Reais and adjusted annually for Brazilian inflation (IGPM index). The average price (before royalty and taxes) achieved in 2011 was Page 8 Panoro Energy Annual Report 2011

9 USD 9.20 per MMBtu. During 2011, the IGPM index increased 4.5%, resulting in the 2012 price being 4.5% higher than the price received in Camarão Norte (part of BCAM-40 block, 10% interest) Camamu-Almada Basin Camarão Norte is an oil and gas accumulation discovered by the BAS-131 well, which was drilled by the consortium in 2001 in the southern part of BCAM-40 block. The consortium declared commerciality of this field, naming it Camarão Norte ( CRN ). The field is 9 km south of the Manati field and extends to the south into the BM-CAL-4 block which is 100% owned by El Paso. The Camarão Norte field reservoirs are Sergi sandstones, which is the same geologic sequence as the Manati field. The CRN is a ring fenced area of 17 square km in 40 meters of water depth. In September 2007, El Paso declared commerciality of the field in the BM-CAL-4 block and proposed the name of Camarão for the field. According to the Brazilian Petroleum Law, the areas of the field located on either side of the concession boundary must be unitized and a single development plan must be proposed to ANP. The unitization discussions and development plan preparation work which was underway in 2011 will continue during BS-3 BS-3 Project (Cavalo Marinho (50% interest), Estrela do Mar (65% interest) and Coral redevelopment (35% interest) Santos Basin Panoro defines the BS-3 Integrated Project as including the Cavalo Marinho (50% interest), Estrela do Mar (65% interest), Coral re-development (35% interest), Caravela and Tubarao (100% Petrobras) fields, a gas export pipeline and an onshore gas plant. The Company acquired 27.5% interest in the Cavalo Marinho field in 2001 and subsequently increased its interest to 42.5% in 2005 and to 50% in The consortium partners in the Cavalo Marinho field are Petrobras, the operator, which holds an interest of 35%, and Brasoil, owning an interest of 15% in the field. The Company acquired 27.5% interest in the Estrela do Mar field in 2001 and subsequently increased its interest to 57.5% in 2005 and to 65.0% in Petrobras holds the remaining 35% working interest in the Estrela do Mar field and is the operator of the asset. The Company acquired an indirect interest of 27.5% in the Coral Field through our subsidiary Coplex in A subsequent acquisition increased our interest to 35% in Our partners in the field are Petrobras, operator with an interest of 35%, Queiroz Galvão, owning an interest of 15% and Brasoil, owning an interest of 15%. The field produced approximately 12 million barrels of oil during the period from 2003 to 2008 and is considered viable for redevelopment as part of the BS-3 Integrated project. Updated development plans ( POD ) for the Cavalo Marinho and Estrela do Mar fields were filed with the Brazilian National Petroleum Agency ( ANP ) on January 13, The POD for Estrela do Mar was further amended and reissued in June 2011, following a request from ANP for additional information and plans focused on possible commercialization of the low permeability B1 zone. The B1 zone is present in all BS-3 fields in the Guaruja carbonate trend and contains a large oil-in-place, which is estimated at over 1 billion BOE, but exploitation of this interval was excluded from earlier PODs because of the low permeability and low expected productivity. Prompted by advances in drilling and completion technology, and substantially higher oil prices, the ANP has requested pilot projects on the B1 zone as a prerequisite for POD approvals for all of the BS-3 fields. During the remainder of 2011, work was focused on preparing more detailed plans for the B1 pilot programs, which will target the Estrela do Mar and Tubarão (100% Petrobras) fields, where well data indicate the most promising B1 reservoir properties. Horizontal production wells are now being considered with contingent water injection wells to be added later, depending on production performance. Discussions of the B1 pilot and the PODs continue into 2012, both within the consortia and with the ANP. It is expected that revisions of the PODs will be submitted to the ANP before concept selection and a final investment decision. Cavalo Marinho field (CVM), 50% interest The development concept as presented for Cavalo Marinho includes an FPSO (50,000 bbl/day capacity) to be shared with the Caravela field (100% Petrobras - approximately same size as Cavalo Marinho). The Plan of Development includes the scheduled start of production from the fields in Estrela do Mar field (EdM), 65% interest The development concept for Estrela do Mar was filed as a standalone oil development, with the associated gas being produced through the same gas export system as the other fields in the area. Integration of Estrela do Mar as a satellite field, tied back to a common FPSO will be evaluated. The Plan of Development schedules first production from this field in As described above, the Estrela do Mar development plan also Panoro Energy Annual Report 2011 Page 9

10 includes an extended production test in the B1 reservoir, with the objectives of both understanding reservoir productivity and demonstrating the economic potential of producing this reservoir in combination with the commercially proven B2 reservoir. Coral field, 35% interest Studies are planned to determine the viability of a redevelopment project for the Coral field as part of the overall development for the area. Santos Basin Oil Gas Condensale Oil & Gas Potential Oil BM-S-63, BM-S-71 & BM-S-72 exploration blocks (15% interest) - Santos Basin The Company was awarded the BM-S-63, BM-S-71 and the BM- S-72 blocks in the ninth bid round for exploration concessions held in November 2007 by the Brazilian National Petroleum Agency, ANP. The Company was awarded operatorship of the three blocks, with a 50% working interest in each of them, and Brasoil being awarded the remaining 50%. BM-S-71 BM-S-72 1-BSS.070 Tubarao Tiro Sidon BM-S-63 Piracuca The three blocks are located adjacent to each other in the Santos Basin offshore Brazil, about 100 kilometers northeast of the Coral field. Each of these blocks has a water depth of about 200 meters, and has expected reservoir characteristics similar to the Company s other assets in the area. These exploration blocks, which cover an area of approximately 510 square kilometers, are anticipated to hold significant exploration potential. Coral Caravela Sul Estrela do Mar Caravela Cavalo Marinho In 2011, the Company farmed out 35% of its working interest to Vanco Brasil Exploração e Produção de Petróleo e Gas Natural Ltda, a wholly owned subsidiary of Vanco Overseas Energy Ltd ( Vanco ), and retained 15% ownership in the blocks. Upon completion of the farm-out process, the Company received net proceeds of USD 14.5 million, which effectively reimbursed Panoro s historical costs on the licenses. Furthermore, Vanco will finance Panoro s share of drilling costs for three exploration wells, one on each license. Vanco will be entitled to recover the financed portion of successful wells and half of the financed portion of unsuccessful wells from Panoro s share of future production from discoveries made on the licenses. 1-SCS-013 In September 2011, the operator signed a rig contract with a subsidiary of Transocean for the GSF Arctic I semi-submersible drilling rig. The GSF Arctic I semi-submersible rig is operating in Brazil and is expected to be available to commence drilling of the Sabiá (BM-S-72), Canario (BM-S-63) and Jandaía (BM-S-71) prospects, starting in June/July The three prospects have estimated gross unrisked exploration potential of 675 MMBOE (~100 MMBOE net to PEN) with estimated chances of economic success of 15%-24%. Page 10 Panoro Energy Annual Report 2011

11 Congo-Brazzaville Mengo-Kundji-Bindi Mengo-Kundji-Bindi (20% interest) The onshore Mengo-Kundji-Bindi (MKB) permit includes three fields with potentially very large STOIIP, but low recovery from the pre-salt Mengo Sandstone reservoirs. The fields were discovered and produced in the 1980 s by Elf and abandoned in The oil is 32 API and waxy. Oil Gas Condensale Oil & Gas Potential Oil CONGO The Congolese state oil company Société Nationale des Pétroles du Congo ( SNPC ) is the operator of the MKB Permit with Société Nationale d Opérations Pétrolières de Côte d Ivoire ( PetroCI ) holding another 20% interest. SNPC drilled two new wells (KUN-4bis and KUN-5) in 2009 in the Kundji field. These were hydraulically fractured and put on a long term test in 2010 to demonstrate the viability of a re-development project. Pointe Indienne M Boundi Kouakouala Loufika A pilot program commenced in September 2011, consisting of up to six wells. During 2011, the KUN-201, KUN-202 and KUN- 203 wells were drilled from Kundji 200 platform, which is located about 3.5 km south of the Kundi 100 platform, where the KUN- 4bis and KUN-5 production wells are located. Coraf Pointe Noire Mengo MKB BLOCK Bindi Kundji Dinge The KUN-201 well was directionally drilled to a location 1.3 km NNW of the Kundji-200 drilling platform. The well was drilled to a final depth of 2,214 meters measured depth. Wireline logs indicate that the KUN-201 well had a gross vertical Mengo sandstone thickness of 183 meters, which was fully saturated to the base of the reservoir and with a net oil pay of 57 meters. Emeraude Djeno ANGOLA The KUN-202 well was directionally drilled to a location 1.45 km SE of the Kundji-200 drilling platform. The well was drilled to a final depth of 2,366 meters measured depth, which included coring approximately 36 meters of the reservoir. Wireline logs indicate that the KUN-202 well had a gross vertical Mengo sandstone thickness of 175 meters, which was oil-bearing over the top 129 meters with net oil pay of 52 meters, and assumed to be water bearing over the lower 46 meters. The KUN-203 well was vertically drilled to a location directly below the Kundji-200 drilling platform. The well was drilled to a final measured depth of 1,697 meters (1,582 meters TVDSS), which included coring approximately 83 meters of the reservoir before running logs. Wireline logs indicate that the KUN-203 well had a gross vertical Mengo sandstone thickness of 182 meters, which was oil-bearing over the top 134 meters with net oil pay of 27 meters, and assumed to be water bearing over the lower 48 meters. Panoro Energy Annual Report 2011 Page 11

12 The three well results have improved the confidence in the reservoir distribution model for the Kundji field and increased the Company s oil-in-place assessment compared with pre-drill estimates. Operations to perforate and hydraulically fracture the three wells were carried out in early 2012 with encouraging results. The partners will evaluate the next steps in the project after the completion of the pilot program. Nigeria OML 113 Aje field (6.502% participating interest, 12.19% revenue interest) Panoro Energy has a 12.19% revenue interest (6.502% participating interest and % paying interest) in the OML 113 license, which is operated by Yinka Folawiyo Petroleum (YFP) and is located in the extreme western part of offshore Nigeria. The license contains the Aje field as well as a number of exploration prospects. OML 113 Aje Oil Gas Condensale Oil & Gas Potential Oil BENIN NIGERIA West African Gas Pipeline Aje field was discovered in 1997, in water depths ranging from 100-1,500 meters. Unlike the majority of Nigerian fields which are Tertiary sandstones, Aje has multiple oil and gas condensate reservoirs in the Turonian, Cenomanian and Albian sandstones and is geologically in the same West Africa Transform Margin, a play in which recent discoveries have been made on both sides of the Atlantic. Block 02 Seme North Seme South Block 01 Block 04 Aje OML113 OPL310 Four wells have been drilled to date on the Aje field. Aje-1 and -2 tested oil and gas condensate at high rates. Aje-4, drilled in early 2008, logged significant pay and confirmed the presence of four productive reservoirs. The Aje field has full 3D seismic coverage. Fifa The Aje field development is being managed by Chevron, as Technical Advisor to Nigerian operator Yinka Folawaiyo Petroleum. One gas sales opportunity that may be available to the partnership is via access to the West Africa Gas Pipeline ( WAGP ). The WAGP was commissioned in May 2009 to provide Nigerian gas to end-users in Benin, Togo and Ghana, and is routed directly through OML 113, only 5km from the Aje field. Alternatively, the location of the Aje field only 43km south west of Lagos may also provide a ready market for gas and associated LPG. Various development concepts have been evaluated but progress towards a development decision has been slow, mainly because of delays in securing a commercially viable gas sales contract through the West Africa Gas Pipeline. Page 12 Panoro Energy Annual Report 2011

13 Gabon Dussafu Dussafu Marin Permit (33.33% Interest) Covering an area of 2,775 square kilometers, most of the Harvest Natural Resources operated block lies in less than 200 meters of water and has been explored since the 1970s. A total of 20 wells have been drilled on the block to date, of which five have been discoveries (4 oil and 1 gas) and oil shows are present in most other wells. To the north west of the block is the Etame-Ebouri trend, a collection of fields producing from the pre-salt Gamba sandstone, and to the north are the Lucina and M Bya fields which produce from the syn-rift Dentale and Lucina sandstones beneath the Gamba. Oil Gas Condensale Oil & Gas Potential Oil Olowi Field GABON The Dussafu Ruche Marine-1 ( DRM-1 ) well commenced drilling on April 28, 2011 with the Transocean Sedneth 701 semisubmersible drilling rig. The well was designed to test the potential of the pre-salt Gamba and Dentale formations, and approximately 19 meters of pay was discovered in a 28 meter oil column within the Gamba and 10 meters of pay in the Middle Dentale formation. The well reached a TD of 3,463 meters vertical depth. In a sidetrack drilled 1.2 kilometers to the southwest of DRM-1 a further 6 meters of net pay was found in a 15 meter oil column in the Gamba. Etame-Ebouri Complex Lucina Field M Bya & M Wengui Fields In a second sidetrack drilled 890 meters northwest of DRM-1, Panoro Energy discovered 12 meters of net pay in a 21 meter oil column. Following completion of drilling operations in the second sidetrack the well was suspended for potential reuse in the future. Dussafu Marin The well results show that the Gamba reservoir has average porosities around 18-20%, water saturation of 35% and good oil mobility with a probable oil water contact at 2,815 meters vertical depth. Initial indications are that the oil in place volume for the Gamba reservoir is around MMbbls, with estimated recoverable volumes of around 11 million barrels (100%). The Ruche drilling results have provided valuable new information on reservoir quality, charge and trapping mechanisms in the Dussafu pre-salt plays. These results have also demonstrated a working petroleum system beneath the outer Atlantic hinge line in the Gabon Basin, which is further offshore than any previous presalt discoveries in the area. This has positive implications for the prospectivity of the remainder of the block. Following the 2011 drilling campaign, the Company is assessing the potential of the Ruche discovery and nearby existing discoveries (Walt Whitman and Moubenga) for a possible cluster development. The development requires further resources to prove commercial and work has been completed to select the best possible prospects for the 2012 drilling campaign. The Dussafu JV partners further completed acquiring new 522 km2 infill 3D seismic in the fourth quarter The seismic survey fills a gap in coverage in the northwest of the block and covers an area which has been highlighted as prospective on earlier 2D seismic. The 3D seismic will be processed and mapped in 2012 with a view to develop additional drilling prospects in the next phase of the production sharing contract. Panoro Energy Annual Report 2011 Page 13

14 Reserves and Contingent Resources Panoro s classification of reserves and resources complies with the guidelines established by the Oslo Stock Exchange and are based on the definitions set by the Petroleum Resources Management System (PRMS-2007), sponsored by the Society of Petroleum Engineers/ World Petroleum Council/ American Association of Petroleum Geologists/ Society of Petroleum Evaluation Engineers (SPE/WPC/ AAPG/SPEE) as issued in March Reserves are the volume of hydrocarbons that are expected to be produced from known accumulations: in production under development with development committed Reserves are also classified according to the associated risks and probability that the reserves will be actually produced. 1P Proven reserves represent volumes that will be recovered with 90% probability 2P Proven + Probable represent volumes that will be recovered with 50% probability 3P Proven + Probable+ Possible volumes that will be recovered with 10% probability Contingent resources are the volumes of hydrocarbons that are expected to be produced from known accumulations: In planning phase Where development is likely Where development is unlikely with present basic assumptions Under evaluation In this report, for contingent resources, only best (2C) or 50% probability estimates are quoted. Panoro Energy s reserve report per end 2011 is summarized in the table below: Asset 1P reserves MMBOE 2P reserves MMBOE 3P reserves MMBOE Manati Cavalo Marinho Estrela do Mar Kundji pilot Panoro total P development since last ASR Balance (previous ASR) as of December 31, Production 2011 (1.0) Revisions of previous estimates 0.0 Balance (current ASR) as of December 31, As of year-end 2011, Panoro was producing from two assets, one in Brazil and one in Congo. Further assets classified as reserves are assets with development plans committed. Panoro has four assets classified with reserves and nine with contingent resources. A summary description of each asset with status as of year-end 2011 is included below. In addition we refer to the Company website for background information on each asset. Unless otherwise specified, all numbers quoted below are net to Panoro s interest P reserves (MMBOE) P reserve development (MMBOE) n Manati n Cavalo Marinho n Estrela do Mar n Kundji pilot End 2010 Production End 2011 Page 14 Panoro Energy Annual Report 2011

15 Manati: gas field offshore Brasil, operator Petrobras, Panoro 10% Manati is Panoro s main field under production. The original development plan called for seven producing wells, but based on initial production experience and reservoir understanding, the operator concluded that six wells could potentially suffice to drain the reservoirs. The consortium consequently decided to postpone the decision to drill the seventh well production performance has been restricted following the late 2010 determination that extensive repairs were required on the riser systems on the Manati manifold platform. Inspections revealed that corrosion was approaching unacceptable levels, which triggered a program to replace damaged sections. As a consequence, some of the wells were periodially shut in for extended periods. During the year, a total of MMBOE was produced from the field, as compared to MMBOE in The operator has not presented any sub-surface technical studies during 2011, which would conflict with previous studies, and consequently, the 2011 year-end reserve statement is based on the 2010 reserves statement from Gaffney Cline & Associates (GCA), with adjustments for produced volumes: 1P reserves are 11.1 MMBOE, which is a reduction from 12.1 last year, while 2P reserves decreased from 14.4 to 13.4 MMBOE, reflecting MMBOE produced volumes during 2011 (gas + condensate). 3P volumes of 15.5 MMBOE assumes a 7th well draining the northern extension of the field. 5.2 MMBOE of the 11.1 MMBOE 1P reserves require installation of compression equipment and as such is sub-classified as proven, not developed. Compression is planned to be operational beginning in early MKB: onshore Congo, operator SNPC (Congo National Oil Company), Panoro 20% MKB is the term used to name a 700km2 license area onshore Congo holding three defined accumulations: Mengo, Kundji and Bindi. The accumulations were discovered and produced over a 10 year period by Elf Aquitaine back in the 1980 s, but were abandoned in Initial re-development efforts have been focused on Kundji where test production from two new Kundji wells drilled in 2009 has been conducted since August Plans for a step-wise development program have been started with a Kundji pilot project with up to six wells to be drilled and completed in the same accumulation as the two 2009 wells. By year end 2011, three of these wells were drilled, all confirming the resource potential, and extending the known oil accumulation. With well completion and stimulation activities ongoing into 2012 and limited test production from the two original wells, no new certification exercise has been commissioned with Gaffney Cline & Associates (GCA). For the year end 2011 reserve statements, 2010 reserve numbers are carried forward. These were based on GCA s best estimate of the Kundji STOOIP of 233 MMBBL (100%). GCA last year has certified reserves associated with the 8 well program in the Kundji pilot project area to be 1P reserves of 0.56 MMBBL, 2P reserves of 0.8 MMBBL and 3P reserves of 1.12 MMBBL net to Panoro. Note that associated gas is assumed to be flared, and is not included in the current reserve estimates. The 2P reserves case reflects an average of 0.5 MMBBL total recovery per well (100%), based on the historic Elf production data. Based on the evaluation of the observed well test results, it is fully expected that the predicted volumes will be realized. Best estimate contingent resources for the entire MKB license is 64 MMBBL, net to Panoro s share according to a 2009 study by TRACS. These volumes reflect a case where all three fields are developed and water injection is used to increase the recovery factor and thus represent an upside target. BS-3: offshore Brazil, operator Petrobras, Panoro 35-65% The BS-3 area offshore in the southern part of the Santos basin holds two Panoro assets classified with reserves: the Cavalo Marinho and Estrela do Mar oil fields. For these fields new development plans were filed with the Brazilian Petroleum Agency (ANP), in January and July Generally, all of the BS3 fields contain hydrocarbons in up to four separate, vertically stacked carbonate reservoir zones (B1-B4), where commercial production so far has been associated with the lower three. The uppermost zone, referred to as B1, holds significant hydrocarbon volumes in place but has low permeability and has not been considered commercial with traditional technology. The filed development plans include provisions for a B1 pilot project by drilling a dedicated horizontal well to test this Panoro Energy Annual Report 2011 Page 15

16 zone in Estrela do Mar. Previous long term tests have indicated that Estrela do Mar has the best B1 production properties of the Panoro BS-3 assets. Development of all fields in this area depends on a common gas export solution. This is being planned by Petrobras to be a gas pipeline, which will serve as a gas export route for BS-3 and other accumulations in the South Santos area. In addition to the Panoro assets these include the 100% Petrobras BS3 fields Caravela and Tubarao where development plans were also filed in January Cavalo Marinho field (CVM) 50% to Panoro In the January 2011 Cavalo Marinho development plan, an FPSO is shared with nearby Caravela field (100% Petrobras), providing necessary utilities, processing facilities and gas export. Based on the operator s work, Gaffney Cline & Associates (GCA) has certified volumes as follows: 1P reserves 5.7 MMBOE and 2P reserves of 14.2 MMBOE. P1 reserves are restricted since one of the hydrocarbon bearing sub-zones (B2) was not flow tested in the CVM discovery well (due to well mechanical problems). Panoro s internal technical studies of CvM were performed by the Norwegian petroleum engineering consultancy AGR. These technical studies show greater oil in place and are based on a proposed development scenario with more production wells and greater volumes. Based on this work an additional 5.3 MMBOE, compared with the operator s estimate, is carried as 2C (best estimate contingent resources). At this stage, resources in the low permeability B1 zone of CvM are regarded as prospective. Eventual reclassification is pending results of the B1 Estrela do Mar pilot. Estrela do Mar field (EdM) 65% to Panoro In the July 2011 EdM development plan, a stand-alone development solution with a dedicated FPSO is assumed, including a separate, horizontal well to test the low permeability B1 zone. Based on previous technical studies performed by the operator, Gaffney Cline & Associates ( GCA ) has certified EdM 2P reserves of 5.7 MMBOE, but no 1P volumes. This excludes gas volumes (assumed flared at the time of the certification review) and no B1 contribution. For the proven reservoirs on Estrela do Mar, Panoro s internal technical studies with AGR indicate an upside compared to the operator s work. A best estimate 2C of 7.8 MMBOE (including gas) in addition to the operator s 2P reserves estimate is carried as Contingent Resources. For the low permeability B1 zone, Panoro s internal reservoir simulation studies, performed by AGR, indicate a best 2C estimate of 33.9 MMBOE for a case where the pilot test well is successful and the reservoir is subsequently depleted by drilling 6 additional horizontal wells. This case represents an upside target for B1 development. The EdM partners recognize that further technical studies are necessary before the EdM development concept is resolved. This may include additional reservoir engineering studies, technical optimization studies (to possibly inter-connect EdM to other developments in the area), as well as commercial arrangements related to the shared facilities. Caravela-Sul field (CVS) 50% to Panoro This small field is located within the Cavalo Marinho ring fence just north of CVM, approximately underneath the location of the proposed FPSO for the Cavalo Marinho-Caravela Integrated project. Future development may be considered and the operator has performed technical studies, which indicate possible upside potential, however the development decision for CVS has been postponed. CVS volumes are presently included as contingent resources only related to the lower B4 zone, with a best estimate 2C of 0.4 MMBOE. Coral field (CRL) 35% to Panoro The Coral field was developed with three sub-sea producing wells, which produced during the period 2003 through late 2008, while flaring the associated gas. A pilot water injection scheme was tested successfully during the last 6 months of production, prior to abandonment. Both the operator and Panoro have conducted technical studies to identify the potential for further Coral oil recovery and a future redevelopment of the field is expected, and therefore, the partners have decided to retain the license. CRL volumes are included as contingent resources, with a best estimate 2C of 4.2 MMBOE. Aje: offshore Nigeria, operator Yinka Folawiyo Petroleum (YFP), Panoro % The Aje discovery, adjacent to the Benin border, is predominantly a gas discovery with significant condensate, but also contains a separate oil leg. Various development concepts have been evaluated, but progress towards a development decision has been slow, primarily because of delays in securing a commercially viable gas sales contract through the West Africa Gas Pipeline. Aje volumes, as reported by Chevron (technical assistant to the operator) are included as contingent resources, with a best estimate 2C of 20.7 MMBOE to Panoro s share. Camarão Norte: offshore Brazil, operator Petrobras, Panoro 10% Camarão Norte is a discovery extending into the BCAM 40 (Manati) block. It straddles the border with the neighboring block to the south (BM-CAL % owned and operated by a third party). Camarão Norte was declared commercial in July Five Page 16 Panoro Energy Annual Report 2011

17 wells have been drilled on the structure (four in block BM-CAL-4), proving the presence of both oil and gas. A unitization process is underway and volumes are included as contingent resources, best estimate 2C of 0.9 MMBOE. This includes both oil and gas volumes considered inside the BCAM 40 ring fence with a resource estimate scenario between the blocks. Dussafu: offshore Gabon, operator Harvest Natural resources, Panoro 33% An exploration well was drilled in 2011, which resulted in the Ruche discovery. In addition, two sidetracks were accomplished to delineate this discovery. Ruche volumes, as reported by Harvest Natural Resources (operator), are included as contingent resources, with a best estimate 2C of 3.7 MMBOE to Panoro s share, bringing the total Dussafu resource base to 5.6 MMBOE (net), including the previous Dussafu discoveries: Moubenga and Walt Whitman. Studies to evaluate possible Dussafu development options are ongoing and further exploration drilling is being considered. Management Discussion and Analysis Panoro uses the services of Gaffney, Cline & Associates (GCA) for 3rd party verifications of its reserves. For the reported reserves in Brazil, GCA has based their assessments on technical studies performed by the operator (Petrobras). For the MKB project in Congo, in-house technical work performed by Panoro staff and consultants form the basis for the reported reserves certified by GCA. All evaluations are based on standard industry practice and methodology, including production decline analysis and reservoir modeling based on geological and geophysical analysis. Panoro s policy is to update the Annual Statement of Reserves (ASR) whenever there are significant changes occurring or new information becomes available that materially influences the reported results. Compared to previously reported reserve reports the consequences for the year-end 2011 ASR are summarized per asset as follows: Manati; previous reserves volumes have been updated to reflect 2011 production. MKB; previously reported reserve volumes are maintained, reflecting the GCA 2011 certification associated to a defined Kundji pilot program (8 wells), covering part of the Kundji area. BS-3; previously reported reserve volumes are maintained, since the development plans filed in 2011 are based on the operator s previously reported volumes, certified by GCA in The development concepts described reflect stand-alone developments for both Estrela do Mar and Cavalo Marinho/ Caravela with gas off take shared with the nearby fields. Further optimization of technical solutions and area integration will continue in parallel to commercial negotiations, firming up development schedules and cost sharing principles. A new 3rd party certification will be performed and reported when these technical studies are completed. Asset acquisitions/disposals during 2011 No deals have been concluded in 2011 that effect the reserves position. Assumptions The end-2011 reported volumes have been economic limit tested based on an end-2011 market forward price with the following forward oil price projections in USD/bbl: End 2011 End ,6 93, ,4 92, ,2 92, ,3 92, ,4 93,4 Converting barrels to oil-equivalents is performed using a conversion factor of 6.29 bbl/m3 and 1,000 m3 gas equaling one m3 oil. Panoro s total 1P reserves at end of 2011 amount to 17.4 MMBOE. This reflects adjusting for 2011 production. Panoro s 2P- reserves after similar adjustment is 34.1 MMBOE. Panoro s contingent resource base includes Discoveries of varying degree of maturity awaiting development decisions. Upside potential identified through Panoro s own technical studies on existing licenses, specifically on the BS-3 fields, where our interpretations, as compared to those of the operator, have identified additional volumes. By end of 2011, including the Ruche discovery in Gabon, Panoro s assets sum up to a total 2C volume of MMBOE. Oslo, April 2012 Kjetil Solbrække CEO Panoro Energy Annual Report 2011 Page 17

18 Page 18 Panoro Energy Annual Report 2011

19 Panoro Energy Annual Report 2011 Page 19

20 Directors Report 2011 Panoro Energy ASA ( Panoro Energy or the Company ) is an independent E&P company with a balanced portfolio of assets in the South Atlantic region. Panoro Energy was listed on the Oslo Stock Exchange (OSE) on June 8, 2010 under the ticker symbol PEN. The Company s business activities are comprised of exploration and production of oil and natural gas. Main areas of operation include Brazil, Republic of Congo (Brazzaville), Nigeria and Gabon. The corporate headquarters are located in Oslo, Norway, and the Company has offices in London, United Kingdom and Rio de Janeiro, Brazil. Panoro has four assets classified with reserves and nine with contingent resources. Proved and probable (2P) reserves as of yearend 2011 were 34.1 MMBOE and best estimate (2C) contingent resources were MMBOE. Please refer to the Reserves and contingent resources section of the report for further information. Operations Operations in Brazil The Company s seven licenses in Brazil are located in the Santos Basin (six licenses) and Camamu-Almada Basin (one license). Panoro Energy s production is primarily from the Manati field in Brazil in the BCAM-40 block in the Camamu-Almada Basin, where the Company holds a 10% interest. The field commenced production in 2007 and daily natural gas production averaged 4.1 MMm3 per day in 2011 (2,585 boe per day net to Panoro), representing a decrease of approximately 34% from This decrease was caused by maintenance and repairs on the platform risers during the year. 2P reserves from this field were 13.4 MMBOE per year-end The Company has 10% interest in the Camarão Norte discovery, also located in the BCAM-40 block south of the Manati field. This field was discovered in 2001, and is located 9 km south of the Manati field. It extends to the Camarão field to the south into the BM-CAL-4 block, which is 100% owned by El Paso. Unitization discussions and development plan preparation for this field continued in C contingent resources amounted to 0.9 MMBOE for Camarão Norte per year-end In the Santos Basin, the Company has ownership in three discoveries in the BS-3 area, Cavalo Marinho (50% interest), Estrela do Mar (65% interest) and Coral (35% interest), as well as three shallow water exploration blocks, BM-S-63, BM-S-71 and BM-S-72. Panoro Energy and its partners have continued to work to optimize development of the fields in the BS-3 area. The operator filed new development plans for Cavalo Marinho and Estrela do Mar with the Brazilian National Petroleum Agency ( ANP ) in January Panoro is awaiting the operator s recommendation on development concept selection, which is necessary to progress the project towards a final investment position. 2P reserves for Cavalo Marinho were 14.2 MMBOE and 5.7 MMBOE for Estrela do Mar per year-end C contingent resources were 5.3 MMBOE for Cavalo Marinho and 41.7 MMBOE from Estrela do Mar, in which 33.9 MMBOE are from the low-permeability B1 reservoir. 2C contingent resources were 4.2 MMBOE for Coral per year-end The transfer of operatorship and a 35% working interest to Vanco in the BM-S-63, BM-S-71 and BM-S-72 licenses in the Santos Basin was completed with the ANP approval in December. USD 14.5 million for past cost was thus released to the Company from escrow, and Vanco will also carry Panoro s remaining 15% share of drilling cost for three exploration wells. The Transocean rig GSF Arctic I has been contracted to drill the wells, and the operator expects a drilling campaign on the Sabiá, Canario and Jandaía prospects to commence in June/July Operations in Congo-Brazzaville In Mengo-Kundji-Bindi ( MKB ), where Panoro holds a 20% working interest, the Company and its partners drilled three wells in Kundji as part of a pilot program to assess productivity of this part of the license. All three wells encountered good reservoir, and wireline logs confirm gross vertical Mengo sandstone thicknesses from meters and net pay ranging from meters. The three well results have improved the confidence in the reservoir distribution model for the Kundji field and increased the Company s oil-in-place assessment compared with pre-drill estimates. Operations to perforate and hydraulically fracture the Page 20 Panoro Energy Annual Report 2011

21 three wells were carried out in early 2012 with encouraging results. The partners will evaluate the next steps in the project after the completion of the pilot program. 2P reserves for the MKB field were 0.8 MMbbls and 2C contingent resources were 64.0 MMbbls per year-end Operations in Nigeria In Nigeria, the Company holds a 6.502% participating interest (12.19% revenue interest) in the OML 113 license, which is located in the extreme western part of offshore Nigeria. The license contains the Aje field as well as a number of exploration prospects. The Aje field was discovered in 1997, in water depths ranging from 100-1,500 meters. Unlike the majority of Nigerian fields, which are Tertiary sandstones, Aje is a cretaceous age field in the West African Transform Margin. The field contains multiple oil and gas condensate reservoirs in the Turonian, Cenomanian and Albian age sandstones. Various development concepts have been evaluated for the Aje field. However, progress towards a development decision has been slow, mainly because of delays in securing a commercially viable gas solution. 2C contingent resources for this field were 20.7 MMbbls per year-end Operations in Gabon The Dussafu license is a 2,775 km2 license offshore Gabon in which the Company holds a 33.33% interest. In 2011, the partners discovered oil in the Ruche-Marine-1 well and two appraisal sidetracks. Studies are ongoing to assess the potential of a possible cluster development for the Ruche discovery with existing nearby discoveries. The Ruche drilling results have provided valuable new information on reservoir quality, charge and trapping mechanisms in the Dussafu pre-salt plays. They have also demonstrated a working petroleum system beneath the outer Atlantic hinge line in the Gabon Basin, which is further offshore than any previous presalt discoveries in the area. This has positive implications for the prospectivity of the remainder of the block. The partners completed the acquisition of a new 522 km2 infill 3D seismic in the northwest portion of the block. This will be processed and mapped during 2012 to develop further prospects in the block. 2C contingent resources for this field were 5.6 MMbbls per year-end The Accounts The Board of Directors confirms that the annual financial statements have been prepared pursuant to the going concern assumption, in accordance with 3-3a of the Norwegian Accounting Act, and that this assumption was realistic at the time the accounts were approved. The going concern assumption is based upon the financial position of the Company and the development plans currently in place. The financial statements reflect the activities in 2011, and the Company s financial position is considered to be sound. The consolidated accounts are presented in US dollars. Panoro Energy ASA has changed its accounting policy for capitalisation of exploration and evaluation assets, to prepare the financial statements with more relevant information and make them comparable with a broader universe of other companies with similar size and operations to Panoro. The new policy is in accordance with IFRS 6 and is widely used in many oil and gas companies comparable to Panoro, and as such, the Company believes that a change of policy will provide more relevant and no less reliable information in comparison to the previous policy. Consequent to the change in Company s accounting policy for capitalization of exploration and evaluation assets, the Company has recorded certain retrospective adjustments per the requirements of IAS 8. Restating of the 2010 income statement resulted in a reduction of USD 1 million in net loss. Opening balances as of January 1, 2010 in the balance sheet have also been restated, resulting in an increase of exploration related assets by USD 7 million, reduction in deferred tax assets balance by USD 2.4 million and a corresponding increase in net equity by USD 4.6 million. Application of new policy to the December 31, 2010 figures resulted in a further increase of USD 2 million in exploration and evaluation assets, a reduction in deferred tax asset balance by USD 0.7 million; impacting equity by USD 1.3 million. The analysis below compares restated 2010 figures with 2011 figures. Financial Performance and Activities During 2011, the Company s asset base and capital structure were significantly strengthened through the issue of new equity of approximately USD 93.1 million (net of costs) in connection with a private placement and a repair issue. The Company held a cash position of USD million at year end. Panoro Energy Annual Report 2011 Page 21

22 Condensed Consolidated Income Statement (Amounts in USD 000) Restated Total revenues 36,618 44,354 Operating expenses Production costs (7,824) (5,160) Exploration related costs (1,379) (3,225) General and administrative costs (16,172) (12,793) Merger and restructuring costs - (6,217) Total operating expenses (25,375) (27,395) Earnings before interest, tax, depreciation and amortisation (EBITDA) 11,243 16,959 Depreciation (5,899) (8,703) Impairment (324) (1,686) Share based payments (991) (565) Earnings before interest and tax (EBIT) 4,029 6,005 Gain on acquisition of subsidiary - 2,329 Net financial items (30,962) (27,159) Loss before taxes (26,933) (18,825) Income tax (expense)/ benefit (3,312) 4,714 Net loss for the year (30,245) (14,111) Gas revenue amounted to USD 34.9 million in 2011, a decline of 21% from USD 44.1 million in The decline was a direct result of lower sales from Manati, which averaged 3,728 BOE/ day in 2010 and 2,476 BOE/day in Total revenues include other income of USD 1.7 million in 2011, representing reversal of accruals in relation to certain provisions. This compares to a gain of USD 0.3 million in 2010, from sale of a property in Brazil. Production cost for the year was USD 7.8 million, compared to USD 5.2 million in 2010, with the increase also explained by Manati maintenance costs. Expensed exploration related cost amounted to USD 1.4 million in 2011, a decrease from USD 3.2 million in 2010 in reflection of lower charge for exploration overheads. Total costs related to exploration expenditure amounted to USD 37 million in 2011 (2010: USD 73.1 million), reflecting expenses and capitalised exploration costs and seismic acquisition costs. General and administrative costs were USD 16.2 million in 2011, compared to USD 12.8 million in 2010, with the increase explained by a full year consolidation of West African costs in 2011 in comparison to just six months in Merger and acquisition costs for 2010 were USD 6.2 million. EBITDA was thus USD 11.2 million for 2011 compared to USD 17 million in Depreciation amounted to USD 5.9 million in 2011, compared to USD 8.7 million in The decline in depreciation can be explained by lower production in the Manati field. The Company recognized impairment of USD 0.3 million, compared to USD 1.7 million in 2010, which relates to minor incidentals on historical charges in Brazil. The 2010 impairment related to the assignment of Sardinha license area in Brazil to Petrobras. Share based payments expense of USD 1 million (2010: USD 0.6 million) represents expensing of fair value of share options. EBIT for 2011 was USD 4 million, compared to USD 6 million in The decline was primarily driven by the consolidation of a full year of West African general and administrative overheads, compared to consolidation of six months in The gain of USD 2.3 million on acquisition of subsidiary in 2010 represented the excess of fair value of the Pan-Petroleum net assets over the fair value of the consideration shares issued at the time of the merger. This was recognized as income in accordance with IFRS 3. Net financial items amounted to USD 31 million in 2011, including net interest cost of USD 14.6 million, net other financial cost of USD 5 million, net foreign exchange loss of USD 13.5 million, net gain on movement in fair value of financial instrument of USD 0.8 million and positive warrants effects of USD 1.3 million. This compares to net financial costs of USD 27.2 million in 2010, including interest of USD 20.8 million, net other financial cost of USD 4.1 million, net foreign exchange loss of USD 1.2 million, and negative warrants effects of USD 1.2 million. Net interest costs were lower in 2011 because of improved borrowing terms compared to 2010 and avoidance of debt restructuring costs in Net other financial cost increased due to expensing of certain intercompany financing costs during Foreign exchange loss in 2011 increased due to strengthening of BRL versus USD exchange rate compared to 2010, and mainly arose on revaluation of USD denominated balances in Brazil. Movement of fair value of financial instrument arises on currency swaps entered during Warrants expired on July 1, 2011 without being exercised, resulting in reversal of the liability to the income statement. The Group has recognized an income tax charge of USD 3.3 million for 2011, compared to a benefit of USD 4.7 million in The tax charge for 2011 is primarily driven by current tax provision in Brazil and net reversal of deferred tax balances. Net loss for 2011 was thus USD 30.2 million, compared to USD 14.1 million in Including exchange differences arising from translation of foreign operations and other comprehensive income, total comprehensive income amounted to a negative USD 65 million for 2011, compared to a negative USD 5.5 million for The other comprehensive income for the current year Page 22 Panoro Energy Annual Report 2011

23 includes USD 34.8 million of non-cash loss (2010: USD 8.6 million gain) arising on translation of Brazilian subsidiaries from BRL to USD for reporting purposes, as a direct result of BRL/USD weakening by around 13% during the year. All of the USD 65 million total comprehensive loss was attributable to shareholders of the parent company in 2011 and includes currency translation adjustment of USD 34.8 million, whereas a negative USD 3.1 million was attributable to shareholders of the parent company and a negative USD 2.4 million to noncontrolling interests in The Group s total assets of USD million increased by USD 20 million from USD million in 2010, which mainly reflects an increase in cash position as to the effects of an equity issue in February 2011 was only partially offset by reversal of deferred tax asset balances. Brazilian business accounted for USD million of total assets (USD million in 2010) and West Africa for USD million (2010: USD 66.9 million), with the remainder in corporate entities. Total current assets increased by approximately USD 46.9 million to USD million, through significant increases in cash and bank balances including restricted cash (USD 49.2 million), offset by a decline in receivables of USD 2.4 million. Non-current liabilities were USD million, a decrease of USD 17.2 million from USD million balance in The decrease was mainly attributable to the reclassification of current portion of senior secured callable bond to current liabilities (USD 15.7 million) with maturity in 2012, and settlement of certain non-current liabilities in Brazil. Equity increased by USD 29 million to USD million in 2011, and the book equity ratio increased to 58% from 54% at the end of The equity increase is primarily due to the issue of equity shares for cash of approximately USD 93.1 million (net of costs), offset by the loss for the year and movements due to currency translation. Net cash flows from operating activities were inflows of USD 0.4 million for 2011 compared to inflows of USD 6.3 million for This decline was primarily driven by higher loss due to a decline in revenues and higher general and administration costs. Working capital movements in 2011 generated USD 13.2 million increase in cash inflows compared to Net cash flows from investing activities were outflows of USD 24.3 million for 2011 compared to inflows of USD 24.9 million for The decrease in the current year is primarily due to USD 38.8 million investments in exploration projects in Gabon and Congo, offset by USD 14.5 million of proceeds from the farm-out of Round 9 licenses in In 2010, investments in exploration projects amounted to USD 11.2 million, offset by USD 30 million proceeds from disposal of interest in Ajapa marginal field, USD 1.8 million received from sale of property in Brazil, and USD 4.3 million of cash acquired as part of the acquisition of Pan-Petroleum. Net cash flows from financing activities for 2011 were inflows of USD 74.5 million compared to inflows of USD 18.7 million for The increase in 2011 is due to issue of equity shares for cash for USD 93 million (net of costs). Net finance costs were lower in 2011 compared to 2010, which reduced financial cost outflows by USD 9.4 million. Foreign exchange impact on cash balances was negative USD 2.9 million in 2011, compared to a positive USD 1 million in Parent company financial information During 2011, the parent company s asset base and capital structure was significantly strengthened after issue of shares for a consideration of USD 93.1 million (net of costs). The parent company held a cash position of USD 80.1 million (including restricted cash of USD 3 million) at year end. (Amounts in USD 000) Total revenues 1, Operating expenses Depreciation (25) (86) General and administrative costs (4,710) (3,969) Intercompany recharges (5,889) - Share based payments (375) (197) Merger and restructuring costs - (6,256) Impairment of investment (22,798) - Total operating expenses (33,797) (10,508) Earnings before interest and tax (EBIT) (32,712) (10,486) Net interest and financial items (10,373) (7,230) Loss before taxes (43,085) (17,716) Income tax benefit / (expense) - - Net loss (43,085) (17,716) The Company had a negative EBIT of USD 32.7 million in 2011 which comprised USD 4.7 million of general and administrative costs, USD 22.8 million of impairment of investment in subsidiary and USD 5.9 million of intercompany recharges. This was offset by revenue of USD 1.1 million. In comparison, the 2010 EBIT was negative USD 10.5 million comprising USD 4.2 million general and administrative costs and USD 6.3 million of merger and restructuring costs, and revenues of USD 22 thousand. General and administrative costs increased primarily due to recharging of intercompany service costs, whereas revenues increased due to management fee income from subsidiaries. In 2011, the Company recognised an impairment of investment in its subsidiary PPHCL amounting to USD 22.8 million. Net interest and financial items for the period amounted to USD 10.4 million comprising USD 9 million of financial income offset by USD 18.4 million of financial expense, USD 2.2 million of Panoro Energy Annual Report 2011 Page 23

24 foreign exchange loss and USD 1.2 million of positive changes in fair value of warrants liability. This compares in 2010 to USD 6.3 million of financial income, USD 9.1 million of financial expense, USD 3.2 million of currency loss and USD 1.2 negative movement in fair value of warrants liability. The movement in financial income is due to higher loan balances due from subsidiaries. The higher net financial expense primarily reflects higher average external loan balance compared to Foreign exchange items primarily represent currency differences on balances held in currencies other than US dollars. The positive movement in warrants liability in 2011 was due to reversal of liability after expiry of warrants in July Assets of the Company at December 31, 2011 were USD million, representing mainly investments and loans to subsidiaries of USD million, cash balances of USD 80.1 million, and remaining assets of USD 2.6 million. In comparison, total assets of the Company at December 31, 2010 were USD million, comprising investments and loans to subsidiaries of USD million, cash balances of USD 21.7 million, and remaining assets of USD 3.3 million. Investments and intercompany receivables have mainly increased due to funding of exploration ventures in West African subsidiaries. Cash balance has increased primarily due to issue of equity shares in February 2011 of around USD 93 million (net of costs). Total liabilities of USD million primarily represented USD million for bond loan and USD 5.9 million in relation to accounts and other payables. Total liabilities in 2010 were USD million, comprising USD 138 million for bond loan, USD 1.2 million in relation to warrants liability and USD 1.3 million of accounts and other payables. Equity balance at December 31, 2011 of USD 349 million represents USD 56.3 million in share capital, USD million in share premium, USD 64.6 million in additional paid-in capital and a negative USD 60.8 million in other equity. In comparison, equity balance in 2010 of USD million comprises USD 38.1 million in share capital, USD 214 million in share premium, USD 63.6 million in additional paid-in capital and other equity of a negative USD 17.6 million. Other equity represents accumulated losses at year end. Cash outflow from operations amounted to USD 8.8 million in 2011, compared to USD 7.7 million in The increase in outflows was primarily driven by higher loss for the year. Net cash outflow from investing activities was USD 9.8 million compared to USD 108 million. The decline in 2010 was primarily due to USD 83 million cash investment in Brazilian subsidiaries to redeem the local loans in full. Financing activities for 2011 resulted in net inflow of USD 76.4 million, compared to USD 136 million of inflow in The 2011 inflows are a result of equity issue of USD 93.1 million (net of costs) in 2011 offset by net financial outflow of USD 16.6 million comprising interest and charges. In 2010, net proceeds from equity issue was USD 54.6 million, with net cash inflow from refinancing the debts of USD 88.2 million and USD 7 million outflow in net interest costs. The Board of Directors proposes that the loss for the year of USD 43.1 million in the parent company be transferred to other equity. There is distributable equity in Panoro Energy ASA as per December 31, 2011 of USD 3.8 million. Funding The Company improved its financial position significantly during 2011 through the issuance of new equity and the reduction of capital commitment by successfully farming out part of its 50% interest in the three exploration Round 9 licenses in Brazil. With the completion of the bond issue in late 2010, Panoro Energy successfully refinanced all its outstanding interest bearing debt with a long term repayment schedule in harmony with its cash flow from the Manati field. A major milestone for the Company was achieved in January 2011 when the Company successfully agreed to a farm down agreement from 50% to 15% with Vanco on its three exploration licenses in the Santos Basin in Brazil. Vanco will carry the Company for the drilling of three potentially high impact exploration wells. The Company was reimbursed USD 14.5 million for past costs on the licenses in December 2011, when ANP approved the transfer of operatorship to Vanco. Panoro Energy thus participates with 15% in the drilling of three deep exploration wells in the heart of the Santos area without any additional capital requirements. In February 2011, the Company successfully raised NOK 550 million (USD 93 million net of costs) in new equity in a private placement directed at Norwegian and international institutional investors. The share issue was oversubscribed and the price was set at NOK 7.80 per share. With the significant share issue in place, a healthy debt structure and a balanced asset portfolio with a flexible capital investment program the Company is well positioned to capture business opportunities within its existing portfolio, as well as new ventures. Risk factors The development of oil and gas fields in which the Company is involved is associated with technical risk, alignment in the consortiums with regards to development plans, and on obtaining the necessary licenses and approvals from the authorities. Such operations might occasionally lead to cost overruns and production disruptions, as well as delays compared to the plans laid out by the operator of these fields. Furthermore, the Company has limited influence on operational risk related to exploration success and development costs. Risks related to cost overruns and time delays on projects, commodity price fluctuations, currency movements, production interruptions and failure to meet debt service payments are the main financial risks to the Company. The Company s ability to successfully bid on and acquire additional property rights, to discover reserves, to participate in drilling opportunities and to identify and enter into commercial arrangements with customers will be dependent upon developing and maintaining close working relationships with its future Page 24 Panoro Energy Annual Report 2011

25 industry partners, joint operators and authorities, as well as its ability to select and evaluate suitable properties and to complete transactions in a highly competitive environment. Financing and liquidity risks Financial risk management is managed by the financial department in close cooperation with the operating units, under policies approved by the Board of Directors. The overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on financial performance risk associated with currency exposures to servicing of debt and the price for oil and gas. Derivative financial instruments and currency swaps are being evaluated on a continuous basis for the hedging of such risk exposures. The Company operates internationally and is exposed to risk arising from various currency exposures, primarily with respect to the Norwegian Kroner (NOK), the US Dollar (USD), the Brazilian Real (BRL) and to a lesser extent the Pound Sterling (GBP). The Company currently has no interest rate risk exposure on longterm borrowings, as the Company has fixed rate borrowings only. The Company may be unable to raise sufficient funds through asset transactions, public or private financing, strategic relationships and/or other arrangements to meet its ongoing or future capital and operating expenditure needs. Similarly, the Company may be unable to obtain such funding in order for it to implement its growth strategy or take advantage of opportunities for acquisitions, joint ventures or other business opportunities. Negative market development or any unforeseen liabilities, may lead to a strained liquidity position and the potential need for additional funding through equity financing, debt financing or other means. Health, Safety and Environment (HSE) Panoro Energy s vision for Health, Safety and Environment (HSE) is to avoid accidents and incidents and minimize the impacts on the environment as a consequence of our activities. As a non-operator, Panoro is dependent on the efforts of our operators when it comes to achieving physical results in the field. Our focus is on active participation both through direct cooperation with the operator/partners and work in the various license committees to influence choice of technical solutions, vendors and quality of applied procedures and practices. Operational guidelines Building on the Company Corporate Governance principles a set of operational guidelines has been established, covering critical aspects of the operation ranging from ethical issues and practical travel advice to delegation of authority matrices. Panoro Energy Annual Report 2011 Page 25

26 Emergency preparedness The safety of the Company s employees is of the highest priority. With assets in South America and West Africa requiring frequent travel, focus is on ensuring adequate safety levels for employees travelling. An emergency preparedness organization is in place where membership in SOS International is a key factor. SOS International is an organization, which provides updated risk assessments, medical support and evacuation services worldwide. Operational safety As stated above, the Company is a non-operator but has chosen to take an active role in all its licenses with the conviction that achieving high safety standards is the best means to achieve a successful operation. In Brazil, the Company s 2011 production operations were conducted by the operator at acceptable HSE standards on behalf of the licensees. To the Company s satisfaction, no accidents resulting in loss of human lives or damages to individuals or property have been noted. Furthermore, to the Company s knowledge, all the operations where the Company was involved have been conducted within limits set by approved environmental regulatory authorities. Risk assessments The Company maintains a management level risk register for all its assets. Relevant HSE related risks are included with mitigating actions indicated for management follow up and monitoring. Environment Panoro Energy is committed to work towards minimizing waste and pollution as a consequence of its activities. Operations in Norway do not pollute the environment. A system for video-conferencing between the Oslo, London and Rio de Janeiro offices is installed to help reduce travel requirements, and thus the carbon footprint. The Company emphasizes the importance of a good working environment both for the individual employee and towards achieving Company goals and objectives. The objective is to create a working environment characterized by a spirit where constructive ideas and initiatives are welcome. This constructive work environment is founded on mutual trust between employees and management. Work environment Company time lost due to employee illness or accident was 935 hours which is less than two percent of the total hours worked during the year. It is the Company s policy to always work towards identifying and employing administrative and technical solutions that ensure a safe and efficient work-place. competitive company in the best interest of the shareholders, employees and society at large, within the laws and regulations of the respective country. The Board and management aim for a controlled and profitable development and long-term creation of growth through well-founded governance principles and risk management. Panoro Energy acknowledges that successful value-added business is profoundly dependent upon transparency and internal and external confidence and trust. Panoro Energy believes that this is achieved by building a solid reputation based on our financial performance, our values and by fulfilling our promises. Thus, good corporate governance combined with Panoro Energy s Code of Conduct is an important tool in helping the Board to ensure that we properly discharge our duty. The Board acknowledges the Norwegian Code of Practice for Corporate Governance of October 20, 2011 and the principle of comply or explain. Panoro Energy has implemented the Code and will use its guidelines as the basis for the Board s governance duties. A summary of the corporate governance policy is incorporated in a separate section of this report and a lengthier version of the policy is posted on the Company s website at Discrimination and Equal Employment Opportunities Panoro Energy is an equal opportunity employer, and integrates an equality concept into its human resources policies. All employees are governed by Panoro Energy s code of conduct to ensure uniformity within its workforce. At Panoro Energy, a diversified working environment is embraced, valuing and respecting individual abilities and differences. Employees are remunerated based upon skill level, performance and position within the Company. Panoro Energy is a knowledge-based company in which a majority of the workforce has earned a college or university level education, or has obtained industry-recognized skills and qualifications specific to their job requirements. Panoro Energy employed 32 persons representing more than 10 different nationalities at the end of 2011, whereof 5 in Norway, 8 in UK and 19 in Brazil. 69 % were men and 31 % were women. There are currently no women in Panoro Energy s senior management. Overall workforce turnover is relatively low. The Company has personnel policies to promote equal opportunities and rights and prevent discrimination based on gender, ethnicity, color, language, religion or belief. Directors and Shareholders According to its articles of association, the Company must have a minimum of three and a maximum of eight directors on its Board. The current number of Board members is five, all non-executive directors. Two Board members are female. The members have varied backgrounds and experience which offer the Company valuable perspectives. The Board held 13 meetings during the year. Corporate Governance Outlook The main objective for Panoro Energy ASA s (Panoro Energy) Corporate Governance is to develop a strong, sustainable and Panoro Energy s assets are located in two of the world s most prolific petroleum regions; Brazil and West-Africa. Page 26 Panoro Energy Annual Report 2011

27 The Company s main producing assets, the Manati field should continue to provide the Company with a solid cash flow contribution in 2012, as the maintenance and repair work on the lower platform risers were completed in The Company expects a normalized production level going forward, with actual production depending on the demand for natural gas rather than production constraints in For the BS-3 licenses, Panoro continues to work with the operator towards concept selection, which is necessary to progress the project towards a final investment decision and ultimately production from these fields. In the MKB in Congo-Brazzaville, the partners will finalize the pilot program by drilling up to three more wells and consequently gain more data points, which will be used to assess productivity of the area. Once the pilot program is completed, the partners will plan additional drilling and development of the Kundji field. For the Dussafu license offshore Gabon, the 2012 program includes drilling an exploration well to test another pre-salt structure in vicinity of the Ruche-Marin-1 discovery. The partners will further process and map the 3D seismic that was shot in late 2011, with a view to develop further prospects for drilling in the next phase of the PSC. The Company looks forward to commencing the drilling campaign in June/July 2012 on blocks BM-S-63, BM-S-71 and BMS-72 in the Santos Basin, offshore Brazil. The program will test the potential of approximately 100 MMBOE net to Panoro through drilling of the Sabía, Canario and Jandaía prospects. Panoro Energy was created through the merger of two distinct units in mid Throughout the past two years we have maintained a clear objective of creating and realizing shareholder value, while the share price has still to reflect these goals we remain clear in our strategy. Our implementation plan has, however, to be flexible and dynamic. The Board of Directors is extremely grateful to all our staff for their commitment and energy since the merger, during a time of considerable personal uncertainty. We are also grateful for those shareholders that have remained loyal and patient during these times. Inevitably over this period we have learned many lessons and this has led us to implement some changes. We have recently taken the decision to focus on Brazil as our area of primary growth but with a continued emphasis on delivering success from within West Africa. Our headquarters group will relocate to Rio de Janeiro, resulting in the closure of our Oslo office, and will be complemented by an empowered African business unit located in London. This should yield greater business focus as well as offering cost savings. Panoro entered 2012 in a strong financial position following our equity capital raise early in Our intention during 2012 is to ensure that this is converted into a year of great success for all our stakeholders. Oslo, April 17, 2012 The Board of Directors Panoro Energy ASA Phil Vingoe Tord Pedersen Marilda Rosado de Sá Ribeiro Chairman of the Board Director Director Ragnar Søegaard Katherine Støvring Kjetil Solbrække Director Director Chief Excecutive Officer Panoro Energy Annual Report 2011 Page 27

28 Board of Directors Dr. Philip A Vingoe Chairman of the Board Dr. Vingoe has over thirty-five years of oil and gas experience, commencing in the technical arena and progressing to executive leadership. His responsibilities have included the management of assets and people in the U.K., USA, Norway, Australia, South Africa, U.A.E., Egypt, Qatar, Pakistan, Oman, Thailand, Laos, Indonesia, Mozambique, Congo, Gabon, Nigeria and Equatorial Guinea, as well as wide ranging global responsibilities with various companies. During 18 years with BP, Dr. Vingoe held a number of positions, ranging from interpreting geophysicist, through General Management of various multidisciplinary teams to Technology Director. In 1995, he moved to Australia to co-lead the IPO of an Australian independent, Novus Petroleum. Over the ensuing five years, the company acquired a portfolio of assets across Asia, Africa and the Middle East. In 2000, he took up the role of Managing Director of Sasol Petroleum International (SPI) based initially in Johannesburg. In 2005, he joined Energy Equity Resources where he directed all the exploration and appraisal activity as well as communicating with investors and raising investment capital. During 2005 and 2006, he was also a non-executive director of the Canadian-listed company Pan-Ocean Energy Corporation Ltd. Pan-Ocean was sold to Addax for CAD 1.5 billion in September He resigned from EER in November 2007 in order to lead the creation of Pan-Petroleum and has been instrumental in the merger and creation of Panoro Energy. Dr. Vingoe is a UK citizen and resides in London, England. Marilda Rosado de Sá Ribeiro Non-Executive Director Ms. Rosado de Sá Ribeiro has had a career of over thirty years in the oil and gas industry. She started at Petrobras ( ), where she held various managing positions, including Head of Contracts Section (1984) and of the Legal Department at Petrobras International Braspetro ( ), leading her to conduct business internationally, including in Africa (Congo-Brazzaville and Angola), Middle East, Europe and North America. She was the general legal counsel at Repsol YPF Brasil ( ) and consultant to the same company (2004). As an officer of the Brazilian Regulatory Agency ANP, superintendent of licensing promotion, she surveyed the organization of the 7th and 8th Bid Rounds, the marginal fields special rounds and the discussions around the concession agreement for such bids ( ). She also maintained an active academic career with some editorial activity and as an author and co-author of some publications, mostly related to oil and gas or international law. She is since 1998 an adjunct professor of International Law at Rio de Janeiro State University -UERJ, where she also supervises a few research projects related to international investments and oil and gas agreements. She was the first Brazilian Member of AIPN Association of International Petroleum Negotiators, organization to which she has returned recently and has contributed as Co-chair of the Model Contract Workshop years of She presently is serving as member at large of AIPN s Board and is a co-chair of the Educational Advisory board of the Association. As from 2007, Ms. Rosado is partner of Doria, Jacobina, Rosado e Gondinho Advogados, where she coordinates the Oil & Gas area, advising oil and gas major companies and independents, giving legal opinions both in international matters as well as on regulatory and contractual issues. Ms. Rosado is a Brazilian citizen and resides in Rio de Janeiro, Brazil. Page 28 Panoro Energy Annual Report 2011

29 Tord Pedersen Non-Executive Director Tord Pedersen is one of the founders of Core Energy and has 30 years experience from the oil industry. He was appointed Managing Director of VNG Norge in 2009, the same position he had held with Endeavour Energy Norway since joining them in From 2001, he worked for ConocoPhillips in the Middle East and Norway as Business Development Manager. Prior to this, he worked 11 years for Saga Petroleum (later Norsk Hydro) overseeing international business development in SE Asia, Africa and Middle East. He started his career as a geologist for Conoco, located in Norway, USA and Egypt. Mr. Pedersen holds a MSc degree in geology from University of Trondheim. Mr. Pedersen is a Norwegian citizen and resides in Oslo, Norway. Katherine H. Støvring Non-Executive Director Ms. Støvring currently works as Vice President Major Subsea Projects with Aker Solutions, and is former Vice President International Exploration and Production in Statoil. Prior to this, she worked with Planning and Performance Management in the Gas, Power and Renewables division of BP plc in London. Ms. Støvring graduated from London Business School (Sloan Programme) in In addition, she is a member of the Norwegian Bar and a Solicitor Admitted to the Rolls of England and Wales. Ms. Støvring is a Norwegian and US citizen and resides in Houston, USA. Ragnar Søegaard Non-Executive Director Mr. Søegaard is the CEO of Clean Energy Group. He has long experience from high-level managerial positions in large companies as well as comprehensive experience as a Board member in Norwegian and international companies. He has 20 years experience in the power sector as CFO of E-CO, the second largest power company in Norway with 10 TWh under management. Mr.Søegaard is also a professor at the Asian Institute of Technology in Bangkok and Chairman of the Board in Ruter, the public transportation company in the Oslo area; as well as in Energiselskapet Buskerud, a regional utility in Norway. Mr. Søegaard is a Norwegian citizen and resides in Oslo, Norway. Panoro Energy Annual Report 2011 Page 29

30 Senior Management Kjetil Solbrække Chief Executive Officer In 1989, he completed his degree in Economics at the University of Oslo. After graduation he worked for the Ministry of Petroleum and Energy in Norway for six years. Mr. Solbrække joined Hydro in 1998, where he held many different positions, including Chief Financial Officer and Senior Vice President of International Business Development. In 2005, Mr. Solbrække became the Country manager for Hydro Brazil, responsible for establishing Hydro Oil and Energy within Brazil. In October 2007, after the Statoil and Hydro merger, Mr. Solbrække was appointed Senior Vice President for the South Atlantic Region, with responsibility for Latin America and Africa in the Department of International Exploration and Production in the newly formed Norwegian oil and gas giant StatoilHydro, based in Oslo. He joined Norse in early 2008 as CEO of the Brazilian subsidiary, and continued as CEO of Panoro Energy ASA after divestment from Norse Energy and merger with Pan-Petroleum in Mr. Solbrække is a Norwegian citizen and resides in Rio de Janeiro, Brazil. Anders Kapstad Chief Financial Officer Mr. Kapstad holds a Bachelor of Science degree from the University of San Francisco and an MBA from SDA Bocconi in Milan, Italy. Mr. Kapstad has 15 years of investment banking experience, holding positions within equity sales, portfolio management, private banking and corporate finance. He was previously CFO of Norse Energy from 2005 and continued as CFO of Panoro Energy ASA after divestment from Norse Energy and merger with Pan-Petroleum in Mr. Kapstad is a Norwegian citizen and resides in Oslo, Norway. Nishant Dighe President Africa Mr. Dighe obtained a first class Master of Engineering degree in Chemical Engineering from Imperial College, University of London, a Master of Science degree in Petroleum Engineering also from Imperial College, and an MBA from Warwick University. Mr. Dighe held positions in Mobil and later ExxonMobil in the UK and US on assets located in Europe, USA, Middle East and Africa. Following his MBA, Mr. Dighe joined Marakon Associates, a value-based management consultancy, gaining experience in a number of different sectors. In 2002, Mr. Dighe re-joined the E&P sector working as a consultant to Sasol Petroleum International. In 2005, Mr. Dighe joined Energy Equity Resources, as Vice President Technical and Commercial, and in late 2007 Mr. Dighe co-founded Pan-Petroleum which ultimately merged with Norse Energy s assets in Brazil to create Panoro Energy. Mr. Dighe is a British citizen and resides in London, UK. Page 30 Panoro Energy Annual Report 2011

31 Dimas Coelho President Exploration Dr. Dimas Coelho has over 30 years of varied upstream oil and gas experience, having held positions as Interpreter Geophysicist, consultant in geophysical and geological numerical modeling, Exploration Coordinator, General R&D Exploration Coordinator, Exploration Manager in Campos and Santos basins and Joint Venture Manager for 14 blocks in Santos basin all at Petrobras, the Brazilian National Oil Company. Dr. Dimas Coelho holds a BSc in Geology from the Federal University of Rio de Janeiro, a MSc in Geophysics from the Federal University of Bahia, a PhD in Geology from Cornell University (USA) and a MBA in Administration from Federal University of Rio de Janeiro. In addition to native Portuguese, he is fluent in English, Spanish and French. Dr. Dimas Coelho joined Panoro Energy in late Dr. Dimas Coelho is a Brazilian citizen and resides in Rio de Janeiro, Brazil. Mark Scarbrough President Development and Production Mr. Scarbrough has over 30 years of varied upstream oil and gas experience, having held positions in major and independent operators, including Exxon, Shell and El Paso. His broad experience in both onshore and offshore environments includes positions in reservoir, production, drilling, completions and management. Mr. Scarbrough holds a BSc in Engineering from the University of Texas at El Paso. In addition to native English, he is fluent in Portuguese, Spanish and French. Mr. Scarbrough joined the Company in early Mr. Scarbrough is a US citizen and resides in Rio de Janeiro, Brazil. Panoro Energy Annual Report 2011 Page 31

32 Consolidated Statement of Comprehensive Income For the year ended December 31, 2011 USD 000 Note Restated* Total revenues 4 36,618 44,354 Expenses Production costs (7,824) (5,160) Exploration related costs (1,379) (3,225) Depreciation 10,11 (5,899) (8,703) Impairment 9 (324) (1,686) Merger and restructuring costs 5 - (6,217) General and administrative costs 5 (16,172) (12,793) Share-based payments 21 (991) (565) Total operating expenses (32,589) (38,349) Operating profit 5 4,029 6,005 Gain on acquisition of subsidiary 3-2,329 Fair value movement on warrants 20 1,250 (1,154) Net foreign exchange loss (13,487) (1,160) Fair value of movement in financial instrument Finance income 6 3,881 2,103 Finance expense 6 (23,450) (26,948) Loss before income taxes (26,933) (18,825) Income tax (expense) / benefit 7 (3,312) 4,714 Net loss (30,245) (14,111) Exchange differences arising from translation of foreign operations (34,803) 8,596 Other comprehensive (loss) / income (34,803) 8,596 Total comprehensive (loss) / income (65,048) (5,515) Net (loss)/income attributable to: Equity holders of the parent (30,245) (12,738) Non-controlling interests - (1,373) Total (30,245) (14,111) Total comprehensive income attributable to: Equity holders of the parent (65,048) (3,128) Non-controlling interests - (2,387) Total (65,048) (5,515) Basic and diluted earnings per share 8 (0.14) (0.11) * Certain amounts shown here do not correspond to the 2010 financial statements and reflect adjustments made as detailed in Note 2.3. The annexed notes form an integral part of these financial statements. Page 32 Panoro Energy Annual Report 2011

33 Consolidated statement of financial position For the year ended December 31, 2011 USD 000 Note As at January 1, 2010 Restated* Restated* ASSETS Non-current assets Intangible assets Licenses and exploration assets 9 207, , ,257 Deferred tax assets 7 10,265 28,653 21,723 Total intangible assets 217, , ,980 Tangible assets Production assets and equipment 10 93, , ,756 Property, furniture, fixtures and equipment ,329 2,743 Other non-current assets 2,427 1,803 1,790 Total tangible assets 96, , ,289 Total non-current assets 314, , ,269 Current assets Accounts and other receivables 12 19,539 22,738 14,864 Other financial asset Cash and cash equivalents ,939 60,269 9,423 Restricted cash 14 2,980 1,444 3,682 Total current assets 131,302 84,451 27,969 TOTAL ASSETS 445, , ,238 EQUITY AND LIABILITIES Equity Share capital 15 56,333 38, Share premium 288, , Additional paid-in capital 64,636 63,645 - Total paid-in equity 409, , Other equity (152,662) (87,614) 70,340 Total equity attributable to shareholder of the parent 257, ,155 70,513 Non-controlling interest ,462 Total equity attributable to shareholder of the parent 257, , ,975 Non-current liabilities Non-current interest bearing debt , ,365 - Deferred tax liability 7 7,813 8,535 - Other non-current liabilities 17 6,130 8,278 8,263 Asset retirement obligation 18 12,665 12,665 12,665 Total non-current liabilities 148, ,843 20,928 Current liabilities Accounts payable and accrued liabilities 19 23,785 28,316 33,827 Current interest bearing debt 16 15,676 1, ,508 Other financial liabilities 20-1,199 - Corporation tax liability Total current liabilities 39,808 31, ,335 TOTAL EQUITY AND LIABILITIES 445, , ,238 * Certain amounts shown here do not correspond to the 2010 financial statements and reflect adjustments made as detailed in Note 2.3. The annexed notes form an integral part of these financial statements. Panoro Energy Annual Report 2011 Page 33

34 Consolidated statement of changes in equity As at December 31, 2011 Attributable to the equity holders of the parent USD 000 Note Issued capital Share premium Additional paid-in capital Retained earnings Other reserves Currency translation reserve Total Noncontrolling interest Total equity At December 31, reported (68,281) 117,179 18,226 67,297 30,084 97,381 Change of accounting policy - restatements , ,216 1,378 4,594 At January 1, restated (65,240) 117,179 18,401 70,513 31, ,975 Net loss restated (12,738) - - (12,738) (1,373) (14,111) Other comprehensive income/(loss) restated ,610 9,610 (1,014) 8,596 Total comprehensive income/(loss) restated (12,738) - 9,610 (3,128) (2,387) (5,515) Reduction of share capital (17) (156) (173) - (173) Share issue on execution of de-merger and merger 15 38, ,389 63,080 - (154,826) - 163,784 (29,075) 134,709 Transaction costs on share issue (net of taxes) - (3,406) (3,406) - (3,406) Employee share options At December 31, 2010 restated 38, ,983 63,645 (77,978) (37,647) 28, , ,155 At January 1, 2011 restated 38, ,983 63,645 (77,978) (37,647) 28, , ,155 Net loss (30,245) - - (30,245) - (30,245) Other comprehensive income/(loss) (34,803) (34,803) - (34,803) Total comprehensive income/(loss) (30,245) - (34,803) (65,048) - (65,048) Share issue for cash 15 18,192 78, ,158-97,158 Transaction costs on share issue (net of taxes) - (4,091) (4,091) - (4,091) Employee share options At December 31, , ,858 64,636 (108,223) (37,647) (6,792) 257, ,165 The annexed notes form an integral part of these financial statements. Page 34 Panoro Energy Annual Report 2011

35 Consolidated cash flow statement For the year ended December 31, 2011 USD 000 Note Restated* Cash flows from operating activities Net (loss)/ income for the year before tax (26,933) (18,825) Adjusted for: Depreciation 10,11 5,899 8,703 Fair value movement on warrants 20 (1,250) 1,154 Asset write off 9-5,686 Net gain on sale of tangible assets - (67) Net finance costs 6 19,569 24,845 Share-based payments Gain on acquisition of subsidiary 3 - (2,329) Foreign exchange gains/losses 8, Increase/(decrease) in trade and other payables (2,148) (9,328) (Increase)/decrease in trade and other receivables 6, Movement in other liabilities and asset retirement obligations 17,18 (8,172) (3,500) Taxes paid (2,449) (881) Net cash flows from operating activities 414 6,281 Cash flows from investing activities Investment in exploration, production and other assets 9,10,11 (38,761) (11,177) Proceeds from sale of property and farm-out of interest 9 14,489 1,798 Proceeds from disposal of assets held for sale 9-30,000 Net cash acquired at acquisition of subsidiary - 4,304 Net cash flows from investing activities (24,272) 24,925 Cash flows from financing activities Net proceeds from issuance of shares 15 93,067 54,753 Increase / (reduction) of share capital - (173) Interest paid (22,487) (30,109) Interest received 3,881 2,103 Proceeds from debt issue ,865 Repayments of borrowings 16 - (148,752) Net cash flows from financing activities 74,461 18,687 Effect of foreign currency translation adjustment on cash balances (2,933) 953 Change in cash and cash equivalents during the period 47,670 50,846 Cash and cash equivalents at the beginning of the period 60,269 9,423 Cash and cash equivalents at the end of the period 107,939 60,269 The cash and cash equivalents above do not include restricted cash balance of USD 3 million (2010: USD 1.4 million). * Certain amounts shown here do not correspond to the 2010 financial statements and reflect adjustments made as detailed in Note 2.3. The annexed notes form an integral part of these financial statements. Panoro Energy Annual Report 2011 Page 35

36 Notes to the Consolidated Financial Statements Note 1. Corporate information The parent company, Panoro Energy ASA ( the Company ), was incorporated on April 28, 2009 as a public limited company under the Norwegian Public Limited Companies Act. The registered organization number of the Company is and its registered office is Dronning Maudsgt. 1-3, 0124 Oslo, Norway. The Company and its subsidiaries are engaged in the exploration and production of oil and gas resources in Brazil and West Africa. The consolidated financial statements of the Group for the year ended December 31, 2011 were authorised for issue by the Board of Directors on April 17, The Board of Directors confirms that the annual financial statements have been prepared pursuant to the going concern assumption, in accordance with 3-3a of the Norwegian Accounting Act, and that this assumption was realistic at the time the accounts were approved. The going concern assumption is based upon the financial position of the Group and the development plans currently in place. The Company s shares are traded on the Oslo Stock Exchange under the ticker symbol PEN. Note 2. Basis of preparation The consolidated financial statements of Panoro Energy ASA and its subsidiaries ( Panoro or the Group ) have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union ( EU ). The consolidated financial statements are prepared on a historical cost basis, except for certain financial instruments which have been measured at fair value. The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated. The consolidated financial statements are presented in USD, which is the functional currency of Panoro Energy ASA. The amounts in these financial statements have been rounded to the nearest USD thousand unless otherwise stated. Comparative information Panoro Energy ASA was formed to effect a business combination between two existing entities, Panoro Energy do Brasil (PEdB) and Pan- Petroleum (Holding) Cyprus Limited (PPHCL). The acquisition by the Company of PPHCL and PEdB were both settled by the issuance of ordinary shares in Panoro Energy ASA in exchange for shares in PPHCL and PEdB. The transaction was effected in a two stage process. On June 7, 2010, the demerger from Norse Energy Corporation ASA ( NEC ) was completed, whereby voting shares in a portfolio of the Brazilian assets (PEdB) were split from the NEC group and acquired by the Company. Ordinary shareholders in NEC at the time of demerger were issued one share in the Company (Panoro or PEN ) for every ten ordinary shares held in NEC. For the purpose of these financial statements the transaction has been accounted for under the pooling of interests method which involves presenting companies as if they had always been combined with no fair value adjustments. The pooling of interests method requires presentation of PEdB and Panoro as a combined business since inception and therefore the comparative information represents the PEdB historical financial statements pooled with Panoro. The second step was the acquisition of PPHCL by Panoro, in which Panoro has been considered the acquirer. The assets and liabilities of Pan Petroleum have been included with fair value adjustments at the date of acquisition. The comparative statements of comprehensive income for the year ended December 31, 2010 includes full year results of Panoro Energy ASA and PEdB and only six months of post acquisition results of PPHCL. Page 36 Panoro Energy Annual Report 2011

37 Note 2.1 Basis of consolidation The consolidated financial statements include Panoro Energy ASA and its subsidiaries as of December 31 for each year. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All inter-company transactions and balances are eliminated in the consolidation. Non-controlling interests in subsidiaries are identified separately from the Group s equity therein. Total comprehensive income is attributed to non-controlling interests even if this result in the non-controlling interests having a deficit balance. The purchase method of accounting is applied for business combinations. The cost of the acquisition is measured as the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in exchange for control of the acquirer. If the initial accounting for a business combination can only be determined provisionally, then provisional values are used. However, these provisional values may be adjusted within 12 months from the date of the combination. Note 2.2 Significant accounting judgments, estimates and assumptions a. Estimates and assumptions The preparation of the financial statements in conformity with IFRS as adopted by the EU requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and contingent liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Estimates and judgments are continuously evaluated and are based on management s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. However, actual outcomes can differ from these estimates. In particular, significant areas of estimation uncertainty considered by management in preparing the consolidated financial statements are as follows: Reserves The Group generally obtains independent evaluations for each asset whenever new information becomes available that materially influences the reported results. Any significant reduction in reserves might lead to a write down of field investments through impairment tests, increased future depreciation and alterations of planned capital expenditures. Exploration and leasehold costs The Group capitalises the costs of drilling exploratory wells and leasehold costs when it is considered probable that future economic benefits will be recoverable. Judgments on whether these expenditures should remain capitalised or charged to exploration and dry hole cost in the period may materially impact the results. Asset retirement costs and obligations Asset retirement costs will be incurred by the Group at the end of the operating life of certain Group facilities and properties. The ultimate asset retirement costs are uncertain and cost estimates can vary in response to many factors including changes to relevant legal requirements, the emergence of new restoration techniques or experience at other production sites. The expected timing and amount of expenditure can also change, for example in response to changes in reserves or changes in laws and regulations or their interpretation. As a result, there could be significant adjustments to the provisions established which would affect future financial results. Panoro Energy Annual Report 2011 Page 37

38 Income taxes The Group recognises the net future tax benefit related to deferred income tax assets to the extent that it is probable that the deductible temporary differences will reverse in the foreseeable future. Assessing the recoverability of deferred income tax assets requires the Group to make significant estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecast cash flows from operations and the application of existing tax laws in each jurisdiction, to the extent that future cash flows and taxable income differ significantly from estimates. The ability of the Group to realise the net deferred tax assets recorded at the date of the statement of financial position could be impacted. Additionally future changes in tax laws in the jurisdictions in which the Group operates could limit the ability of the Group to obtain tax deductions in future periods. b. Judgments In the process of applying the Group s accounting policies, the directors have made the following judgments, apart from those involving estimates, which have the most significant effect on the amounts recognised in the consolidated financial statements: Impairment indicators The Group assesses each cash generating unit annually to determine whether an indication of impairment exists. When an indication of impairment exists, a formal estimate of the recoverable amount is made. The recoverable amounts of cash-generating units and individual assets have been determined based on the higher of value-in-use calculations and fair values less costs to sell. These calculations require the use of estimates and assumptions. It is reasonably possible that the oil price assumption may change which may then impact the estimated life of the field and may then require a material adjustment to the carrying value of goodwill and tangible assets. The Group monitors internal and external indicators of impairment relating to its tangible and intangible assets. Technical risk in development of oil and gas fields and production start-up The development of the oil and gas fields, in which the Group has an ownership, is associated with significant technical risk and uncertainty with regards to timing of production start. Risks include, but are not limited to, cost overruns, production disruptions as well as delays compared to initial plans laid out by the operator. Some of the most important risk factors are related to the determination of reserves, the recoverability of reserves, and the planning of a cost efficient and suitable production method. There are also technical risks present in the production phase that may cause cost overruns, failed investment, and destruction of wells and reservoirs. Contingencies By their nature, contingencies will only be resolved when one or more future events occur or fail to occur. The assessment of contingencies inherently involves the exercise of significant judgment and estimates of the outcome of future events. Note 2.3 Change of accounting policy Panoro Energy ASA has changed its accounting policy for capitalisation of exploration and evaluation assets, to prepare the financial statements with more relevant information and make them comparable with a broader universe of other companies with similar size and operations to Panoro. The new policy is in accordance with IFRS 6 and is widely used in many oil and gas companies comparable to Panoro, and as such, the Company believes that a change of policy will provide more relevant and no less reliable information in comparison to the previous policy. Under the previous policy Panoro Energy capitalised only well costs and cost of acquiring the licences. Under the new policy Panoro has capitalised all relevant costs necessary to conduct exploration and evaluation activities. These types of cost include (but not restricted to) seismic data acquisition, essential geological and geophysical studies, concept studies and reservoir studies. The Company has estimated the implication of applying this policy change retrospectively and have concluded that a retrospective change prior to the year 2009 will not be practicable and reliable to determine considering challanges in availability of relevant information prior to merger. As a result, the restatements have been made to the 2010 opening balance for the items expensed in 2009 and profit and loss has been adjusted for the years 2010 and 2011 to reflect reversal and capitalisation of items expensed under the previous policy. The impact of the change of accounting policy has been retrospectively applied in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Page 38 Panoro Energy Annual Report 2011

39 As a result of the voluntary accounting policy change, the following adjustments were made to the financial statements: USD 000 As of January 1, 2010 Increase in licenses and exploration assets 6,962 Net decrease in deferred tax assets 2,367 Net increase in opening retained earnings 4,595 Net increase in results attributable to the equity holders of the parent company 3,216 Net increase in results attributable to non-controlling interest 1,379 As of and for the year ended December 31, 2010 Increase in licenses and exploration assets 1,948 Net decrease in deferred tax assets 663 Net income recognised in other comprehensive income 239 Net decrease in loss after tax 1,046 As of and for the year ended December 31, 2011 Decrease in licenses and exploration assets 3,687 Net decrease in deferred tax assets 1,369 Net expense recognised in other comprehensive income 319 Net decrease in loss after tax 1,999 The effect on earnings per share related to the restatement in 2010 and impact on 2011 was less than USD 0.01 per share. Note 2.4 Summary of significant accounting policies a. Joint ventures IFRS defines joint control as contractually agreed sharing of control over an economic activity, and exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control (the venturers). Jointly controlled assets A jointly controlled asset involves joint control and offers joint ownership by the Group and other venturers of assets contributed to or acquired for the purpose of the joint venture, without the formation of a corporation, partnership or other entity. The Group accounts for its share of the jointly controlled assets, any liabilities it has incurred, its share of any liabilities jointly incurred with other ventures, income from the sale or use of its share of the joint venture s output, together with its share of the expenses incurred by the joint venture, and any expenses it incurs in relation to its interest in the joint venture. b. Foreign Currency translation Items included in the financial statements of each of the Group s entities are measured using the currency of the primary economic environment in which the entity operates ( the functional currency ). The functional currency of the Group s subsidiaries incorporated in Gabon, Nigeria, Cyprus, Netherlands, British Virgin Islands, Republic of Congo and the Cayman Islands is the US dollar ( USD ). The functional currency of the Group s Brazilian subsidiaries is Reais ( BRL ) and for the British subsidiaries is the Pound Sterling ( GBP ). In the consolidated financial statements, the assets and liabilities of non-usd functional currency subsidiaries, including related goodwill, are translated into USD at the rate of exchange ruling at the balance sheet date. The results and cash flows of non-usd functional currency subsidiaries are translated into USD using applicable average rates as an approximation for the exchange rates prevailing at the dates of the different transactions. Foreign exchange adjustments arising when the opening net assets and the profits for the year retained by non-usd functional currency subsidiaries are translated into USD are taken to a separate component of equity. Panoro Energy Annual Report 2011 Page 39

40 The foreign exchange rates applied were: Average rate Reporting date rate Average rate Reporting date rate Norwegian Kroner/USD Brazilian Real/USD British Pound/USD Transactions in foreign currencies are initially recorded at the functional currency spot rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency spot rate of exchange ruling at the reporting date. All differences are taken to the income statement. Non-monetary items that are measured in terms of historical cost in foreign currency are translated using the spot exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. c. Business combinations and goodwill Business combinations are accounted for under IFRS 3 using the purchase method. Any excess of the cost of the business combination over the Group s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities is recognised in the statement of financial position as goodwill and is not amortised. To the extent that the net fair value of the acquired entity s identifiable assets, liabilities and contingent liabilities is greater than the cost of the investment, a gain is recognised immediately in the income statement. After initial recognition, goodwill is stated at cost less any accumulated impairment losses, with the carrying value being reviewed for impairment, at least annually and whenever events or changes in circumstances indicate that the carrying value may be impaired. For the purpose of impairment testing, goodwill is allocated to the related cash-generating units monitored by management, usually at business segment level or statutory company level. Where the recoverable amount of the cash-generating unit is less than its carrying amount, including goodwill, an impairment loss is recognised in the statement of comprehensive income. The carrying amount of goodwill allocated to a cash-generating unit is taken into account when determining the gain or loss on disposal of the unit, or of an operation within it. Acquisitions of oil and gas properties are accounted for under the purchase method where the acquisition meets the definition of a business combination. Transactions involving the purchases of an individual field interest, or a group of field interests, that do not qualify as a business combination are treated as asset purchases, irrespective of whether the specific transactions involved the transfer of the field interests directly or the transfer of an incorporated entity. Accordingly, no goodwill arises and the consideration is allocated to the assets and liabilities purchased on an appropriate basis. d. License interests, exploration and evaluation assets, and field investments, and depreciation The Group applies the successful efforts method of accounting for Exploration and Evaluation ( E&E ) costs, in accordance with IFRS 6 Exploration for and Evaluation of Mineral Resources. E&E expenditure is capitalised when it is considered probable that future economic benefits will be recoverable. Costs that are known at the time of incurrence to fail to meet this criterion are generally charged to expense in the period they are incurred. E&E expenditure capitalised as intangible assets includes license acquisition costs, and exploration drilling, geological and geophysical costs and any other directly attributable costs. E&E expenditure, which is not sufficiently related to a specific mineral resource to support capitalization, is expensed as incurred. E&E assets are carried forward, until the existence, or otherwise, of commercial reserves have been determined subject to certain limitations including review for indications of impairment. If no reserves are, found the costs to drill exploratory wells, including exploratory geological and geophysical costs and costs of carrying and retaining unproved properties, are written off. Once commercial reserves have been discovered, the carrying value after any impairment loss of the relevant E&E assets is transferred to development tangible and intangible assets. No depreciation and/or amortisation is charged during the exploration and development phase. If however, commercial reserves have not been discovered, the capitalised costs are charged to expense after the conclusion of appraisal activities. Development tangible and intangible assets Expenditure on the construction, installation or completion of infrastructure facilities such as platforms, pipelines and the drilling of commercially proven development wells, is capitalised within property, plant and equipment and intangible assets according to nature. When development is completed on a specific field, it is transferred to production assets. No depreciation or amortisation is charged during the Exploration and Evaluation phase. Page 40 Panoro Energy Annual Report 2011

41 Farm-outs in the exploration and evaluation phase The Group does not record any expenditure made by the farmee on its account. It also does not recognise any gain or loss on its exploration and evaluation farm-out arrangements, but redesignates any costs previously capitalised in relation to the whole interest as relating to the partial interest retained. Any cash consideration received directly from the farmee is credited against costs previously capitalised in relation to the whole interest with any excess accounted for by the farmor as a gain on disposal. Oil & gas production assets Development and production assets are accumulated on a cash generating unit basis and represent the cost of developing the commercial reserves discovered and bringing them into production together with E&E expenditures incurred in finding commercial reserves transferred from intangible E&E assets as outlined in accounting policy above. The cost of development and production assets also includes the cost of acquisitions and purchases of such assets, directly attributable overheads and the cost of recognising provisions for future restoration and decommissioning. Where major and identifiable parts of the production assets have different useful lives, they are accounted for as separate items of property, plant and equipment. Costs of minor repairs and maintenance are expensed as incurred. Depreciation/amortisation Oil and gas properties and intangible assets are depreciated or amortised using the unit-of-production method. Unit-of-production rates are based on proved and probable reserves, which are oil, gas and other mineral reserves estimated to be recovered from existing facilities using current operating methods. Oil and gas volumes are considered produced once they have been measured through meters at custody transfer or sales transaction points at the outlet valve on the field storage tank. Impairment exploration and evaluation assets Exploration and evaluation assets are tested for impairment when reclassified to development tangible or intangible assets, or whenever facts and circumstances indicate impairment and prior to year-end in an annual review. An impairment loss is recognised for the amount by which the exploration and evaluation assets carrying amount exceeds their recoverable amount. The recoverable amount is the higher of the exploration and evaluation assets fair value less costs to sell and their value in use. Impairment proved oil and gas production properties and intangible assets Proven oil and gas properties and intangible assets are reviewed annually for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The carrying value is compared against the expected recoverable amount of the asset, generally by net present value of the future net cash flows, expected to be derived from production of commercial reserves. The cash generating unit applied for impairment test purposes is generally the field, except that a number of field interests may be grouped together where there are common facilities. e. Financial assets Financial assets within the scope of IAS 39 are classified as financial assets through profit or loss, loans and receivables, held-to-maturity investments, available-for-sale financial assets, or as derivatives, as appropriate. The Group determines the classification of its financial assets at initial recognition. Financial assets at fair value through profit or loss This category has two sub-categories: financial assets held-for-trading, and those designated at fair value through profit or loss. Upon initial recognition, a financial asset is classified in this category if acquired principally for the purpose of selling in the short-term or if so designated by management. Derivatives are also categorised as held-for-trading unless they are designated as hedges. Gains and losses on investments held for trading are recognised in profit or loss. Assets in this category are classified as current assets if they are either held-fortrading or are expected to be realised within twelve months of the balance sheet date. The Group s financial assets include cash, trade and certain other receivables. Trade and other receivables Trade and other receivables are measured at amortised cost less impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash and cash equivalents Cash and cash equivalents includes cash at hand, and deposits held on call with banks. Restricted cash with banks is not considered as a cash equivalent. Cash balances in current accounts, short-term deposits and placement with maturity of six months or less in highly liquid investments are classified as cash and cash equivalents. Panoro Energy Annual Report 2011 Page 41

42 Impairment of financial assets The Group assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event ) and that the loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors of a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Impairment of financial assets carried at amortised cost For financial assets carried at amortised cost, the Group first assesses individually whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss has incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial asset s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in income statement. Interest income continues to be accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as part of finance income in income statement. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Group. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to finance costs in income statement. f. Financial liabilities Financial liabilities within the scope of IAS 39 are classified as financial liabilities at fair value through profit or loss, loans and borrowings or as derivatives, as appropriate. The Group determines the classification of its financial liabilities at initial recognition. All financial liabilities are recognised initially at fair value and in the case of loans and borrowing, including directly attributable transaction costs. The Group s financial liabilities include trade and other payables, and loans and borrowings. Trade payables Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Loans and borrowings All borrowings are initially recorded at fair value. Interest-bearing loans and overdrafts are initially recorded at the proceeds received, net of directly attributable issue costs. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for on an accruals basis in the income statement using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. g. Provisions General Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is recognised through profit and loss net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as interest expense. The present obligation under onerous contracts is recognised as a provision. h. Asset retirement obligation An asset retirement liability is recognised when the Group has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount of obligation can Page 42 Panoro Energy Annual Report 2011

43 be made. A corresponding amount equivalent to the obligation is also recognised as part of the cost of the related production plant and equipment. The amount recognised in the estimated cost of asset retirement, discounted to its present value. Changes in the estimated timing of asset retirement or asset retirement cost estimates are dealt with prospectively by recording an adjustment to the provision, and a corresponding adjustment to production plant and equipment. The unwinding of the discount on the asset retirement provision is included as a finance cost. i. Income tax Income tax expense represents the sum of the tax currently payable and movement in deferred tax. Current tax Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date, in the countries where the Group operates and generates taxable income. Current income tax relating to items recognised directly in equity is recognised in equity and not in the income statement. Management periodically evaluates positions taken in the tax returns with respect to situations which applicable tax regulations are subject to interpretation and established provisions where appropriate. Deferred tax Deferred tax is provided using the liability method on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences, except: Where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affect neither the accounting profit nor taxable profit or loss; and In respect of taxable temporary differences associated with investments in subsidiaries, associates and interest in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets are recognised for all deductible temporary differences; carry forward to unused tax credits and unused tax losses, to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences and the carry forward of unused tax credits and unused tax losses can be utilized except: Where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and In respect of deductible temporary differences associate with investments in subsidiaries, associate and interest in joint ventures, deferred income tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient future taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred tax relating to items recognized directly in equity is recognized in equity and not in the income statement. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. Tax benefits acquired as part of a business combination, but not satisfying the criteria for separate recognition at that date, would be recognised subsequently if new information about facts and circumstances arose. The adjustment would either be treated as a reduction to goodwill (as long as it does not exceed goodwill) if it occurred during the measurement period or in profit or loss. Production-sharing arrangements According to the production-sharing arrangement (PSA) in certain licences, the share of the profit oil to which the government is entitled in any calendar year in accordance with the PSA is deemed to include a portion representing the corporate income tax imposed upon and due by the Group. This amount will be paid directly by the government on behalf of Group to the appropriate tax authorities. This portion of income tax and revenue are presented net in income statement. Panoro Energy Annual Report 2011 Page 43

44 Sales tax Revenues, expenses and assets are recognised net of the amount of sales tax except: Where the sales tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case, the sales tax is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable Receivables and payables that are stated with the amount of sales tax included The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position. j. Revenue recognition Revenue from petroleum products Revenue from the sale petroleum products is recognized as income using the entitlement method. Under this method, revenue is recorded on the basis of the asset s proportionate share of total gas produced from the affected fields. Revenue is stated net of value-added tax and royalties. Revenue from test production is recognised as a direct off-set to the capitalised cost of the exploration and evaluation asset. Interest income and financial instruments measured at amortised cost Interest income is recognized on an accruals basis. For all financial instruments measured at amortised cost and interest-bearing financial assets classified as available for sale, interest income or expense is recorded using the effective interest rate (EIR), which is the rate that exactly discounts the estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability. Interest revenue is included in finance income in income statement. Rendering of services Sales of services are recognized in the accounting period in which the services are rendered, and it is probable that the economic benefits associated with the transaction will flow to the entity, by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. k. Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date: whether fulfillment or the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset. For arrangements entered into prior to January 1, 2005, the date of inception is deemed to be January 1, 2005 in accordance with the transitional requirements of IFRIC 4. Group as a lessee Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are reflected in the income statement. Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term. Operating lease payments are recognized as an expense in the income statement on a straight line basis over the lease term. l. Property, plant and equipment Property, plant and equipment not associated with exploration and production activities are carried at cost less accumulated depreciation. These assets are also evaluated for impairment. Depreciation of other assets is calculated on a straight line basis as follows: Computer equipment % Furniture, Fixtures & fittings % m. Defined contribution pension plan The Group pays contributions into a defined contribution plan. Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement in the periods during which services are rendered by employees. Page 44 Panoro Energy Annual Report 2011

45 n. Share-based payment transactions Employees (including senior executives) of the Group receive remuneration in the form of share-based payment transactions, whereby employees render services as consideration for equity instruments (equity-settled transactions). Equity-settled transactions The cost of equity-settled transactions is recognised, together with a corresponding increase in additional paid in capital reserve in equity, over the period in which the performance and/or service conditions are fulfilled. The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group s best estimate of the number of equity instruments that will ultimately vest. The income statement expense or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period and is recognised in share-based payments expense. No expense is recognised for awards that do not ultimately vest, except for equity-settled transactions for which vesting is conditional upon a market or non-vesting condition. These are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied. When the terms of an equity-settled transaction award are modified, the minimum expense recognised is the expense as if the terms had not been modified, if the original terms of the award are met. An additional expense is recognised for any modification that increases the total fair value of the share-based payment transaction, or is otherwise beneficial to the employee as measured at the date of modification. When an equity-settled award is cancelled, it is treated as if it vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. This includes any award where non-vesting conditions within the control of either the entity or the employee are not met. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award, as described in the previous paragraph. The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share. Panoro Energy Annual Report 2011 Page 45

46 Note 2.5 New and amended standards and interpretations The Group has adopted new standards and interpretations that became effective for accounting periods beginning January 1, The impacts of new standards are noted below: IAS 24 Related Party Transactions (Amendment) The IASB issued an amendment to IAS 24 that clarifies the definitions of a related party. The new definitions emphasise a symmetrical view of related party relationships and clarifies the circumstances in which persons and key management personnel affect related party relationships of an entity. In addition, the amendment introduces an exemption from the general related party disclosure requirements for transactions with government and entities that are controlled, jointly controlled or significantly influenced by the same government as the reporting entity. The adoption of the amendment did not have any impact on the financial position or performance of the Group. IAS 32 Financial Instruments: Presentation (Amendment) The IASB issued an amendment that alters the definition of a financial liability in IAS 32 to enable entities to classify rights issues and certain options or warrants as equity instruments. The amendment is applicable if the rights are given pro rata to all of the existing owners of the same class of an entity s non-derivative equity instruments, to acquire a fixed number of the entity s own equity instruments for a fixed amount in any currency. The amendment has had no effect on the financial position or performance of the Group because the Group does not have these types of instruments. Improvements to IFRSs (issued in May 2010) In May 2010, the IASB issued its third omnibus of amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording. There are separate transitional provisions for each amendment. The adoption of the following amendments resulted in changes to the stated accounting policies of the Group but did not have any impact on the financial position or performance of the Group on initial application. - IFRS 7 Financial Instruments: Disclosures: The amendment was intended to simplify the disclosures required, by reducing the volume of disclosures around collateral held and improving disclosures by requiring qualitative information to put the quantitative information in context. - IAS 1 Presentation of Financial Statements: The amendment clarifies that an entity has an option to present an analysis of other comprehensive income by item, for each component of equity, either in the statement of changes in equity or in the notes to the financial statements. Other amendments resulting from Improvements to IFRSs to the following standards did not have any impact on the accounting policies, financial position or performance of the Group: IFRS 3 Business Combinations (Contingent consideration arising from business combination prior to adoption of IFRS 3 (as revised in 2008) IFRS 3 Business Combinations (Un-replaced and voluntarily replaced share-based payment awards) IAS 27 Consolidated and Separate Financial Statements IAS 34 Interim Financial Statements The following interpretation and amendments to interpretations did not have any impact on the accounting policies, financial position or performance of the Group: IFRIC 13 Customer Loyalty Programmes (determining the fair value of award credits) IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments Page 46 Panoro Energy Annual Report 2011

47 Note 2.6 Standards issued but not yet effective Standards issued but not yet effective up to the date of issuance of the Group s financial statements are listed below. The listing is of standards and interpretations issued, which the Group reasonably expects to be applicable at a future date. The Group intends to adopt those standards when they become effective. IAS 1 Financial Statement Presentation Presentation of Items of Other Comprehensive Income (OCI) The amendments to IAS 1 change the grouping of items presented in OCI. Items that could be reclassified (or recycled ) to profit or loss at a future point in time (for example, upon de recognition or settlement) would be presented separately from items that will never be reclassified. The amendment affects presentation only and has there no impact on the Group s financial position or performance. The amendment becomes effective for annual periods beginning on or after July 1, IAS 27 Separate Financial Statements (as revised in 2011) As a consequence of the new IFRS 10 and IFRS 12, what remains of IAS 27 is limited to accounting for subsidiaries, jointly controlled entities, and associates in separate financial statements. The Group does not present separate financial statements impacted by these standards. The amendment becomes effective for annual periods beginning on or after January 1, IAS 28 Investments in Associates and Joint Ventures (as revised in 2011). As a consequence of the new IFRS 11 and IFRS 12, IAS 28 has been renamed IAS 28 Investments in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates. The amendment becomes effective for annual periods beginning on or after January 1, IFRS 7 Financial Instruments: Disclosures Enhanced Derecognition Disclosure Requirements The amendment requires additional disclosure about financial assets that have been transferred but not derecognised to enable the user of the Group s financial statements to understand the relationship with those assets that have not been derecognised and their associated liabilities. In addition, the amendment requires disclosures about continuing involvement in derecognised assets to enable the user to evaluate the nature of, and risks associated with, the entity s continuing involvement in those derecognised assets. The amendment becomes effective for annual periods beginning on or after July 1, The amendment affects disclosure only and has no impact on the Group s financial position or performance. IFRS 9 Financial Instruments: Classification and Measurement IFRS 9 as issued reflects the first phase of the IASBs work on the replacement of IAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in IAS 39. The standard is effective for annual periods beginning on or after January 1, In subsequent phases, the IASB will address hedge accounting and impairment of financial assets. The adoption of the first phase of IFRS 9 will have an effect on the classification and measurement of the Group s financial assets, but will potentially have no impact on classification and measurements of financial liabilities. IFRS 10 Consolidated Financial Statements IFRS 10 replaces the portion of IAS 27 Consolidated and Separate Financial Statements that addresses the accounting for consolidated financial statements. It also includes the issues raised in SIC-12 Consolidation Special Purpose Entities. IFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by IFRS 10 will require management to exercise significant judgement to determine which entities are controlled, and therefore, are required to be consolidated by a parent, compared with the requirements that were in IAS 27. This standard becomes effective for annual periods beginning on or after January 1, IFRS 11 Joint Arrangements IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities Non-monetary Contributions by Venturers. IFRS 11 removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture must be accounted for using the equity method. This standard becomes effective for annual periods beginning on or after January 1, The Group is considering what impact the adoption of this standard will have on its financial position and /or performance, disclosures and stated accounting policies. IFRS 12 Disclosure of Involvement with Other Entities IFRS 12 includes all of the disclosures that were previously in IAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included in IAS 31 and IAS 28. These disclosures relate to an entity s interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required. This standard becomes effective for annual periods beginning on or after January 1, IFRS 13 Fair Value Measurement IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. This standard becomes effective for annual periods beginning on or after January 1, The Group has not early adopted any other standard, interpretation or amendment that was issued but is not yet effective. Panoro Energy Annual Report 2011 Page 47

48 Note 3. Business Combinations At the time of the demerger described in Note 2, Pan Holding AS ( Pan AS ) a newly incorporated company under Norwegian law acquired a 30% interest in Panoro Energy do Brasil ( PEdB ) from Sector Asset Management (Sector). Thereafter, Pan AS on June 29, 2010 acquired 100% shareholding in Pan-Petroleum (Holding) Cyprus Limited ( PPHCL ). As a result, immediately prior to the merger, Pan AS held 30% interest in PEdB and 100% interest in PPHCL. The Company completed the acquisition of Pan AS through the issue of 86,942,991 equity shares in exchange for 100% of the equity in Pan AS. Of the total shares issued, 20,063,767 shares represented consideration for the 30% interest in PEdB and the remaining 66,879,224 issued as consideration for 100% interest in PPHCL. This business combination was executed as a legal merger between Panoro and Pan AS under Norwegian law and immediately following the completion, Pan AS ceased to exist with all assets and liability in Pan AS directly owned by Panoro. Details of assets acquired and liabilities assumed The final fair values of the identifiable assets and liabilities of Pan AS recognised as of June 29, 2010 were as follows: USD 000 Cash and cash equivalents 4,304 Furniture, fixtures and equipment 298 Prepayments and other receivables 1,878 Intangibles, exploration and evaluation assets 59,691 Assets held-for-sale 30,000 Total Assets 96,171 Accounts payable, accruals and other liabilities 7,592 Loan from shareholder (Sector) 10,244 Income tax payable 55 Deferred tax liability 8,533 Non-current liabilities 4,351 Total liabilities 30,775 Fair value of net assets at acquisition 65,396 Gain on acquisition of subsidiary (i) (2,329) Total consideration 63,067 Cash inflow on acquisition Net cash acquired with the subsidiary 4,304 Consideration as of June 29, 2010 USD 000 Issue of ordinary shares (66,879,224 shares at USD 0.943) (ii) 63,067 (i) Gain on acquisition of subsidiary represents excess of fair value of net assets acquired over the purchase consideration. The gain is a direct consequence of the relatively low share price of the Company on the acquisition date. (ii) Purchase consideration has been determined based on the consideration shares attributable to the PPHCL in the combined entity using share price as of June 29, 2010 when the merger became effective. (iii) Pan AS was acquired in the prior year and therefore its results have been included in the Group for the full year in (iv) There were no adjustments on finalization of the provisional fair values recognised in Page 48 Panoro Energy Annual Report 2011

49 Note 4. Operating segments The Group operates predominantly in a business segment being the exploration and production of oil and gas, which is split by geographic areas for management purposes and the two regions being West Africa and Brazil. The Group s reportable segments, for both management and financial reporting purposes, are as follows: West Africa Brazil Corporate (this category consists of head office and service company operations that are not directly attributable to the other segments.) Transactions between segments are recognised at fair value using arm s length principle. Management monitors the EBITDA and capital expenditure of business segments separately for the purpose of making decisions about resources to be allocated and of assessing performance. EBITDA is measured as earnings before interest, tax, depreciation, amortization, asset write-off, foreign exchange gains or losses, fair value movement on warrants, share-based payments and gain on acquisition of subsidiary. Details of Group segments are reported below USD 000 Brazil West Africa Corporate Total Revenue 34,897 1,721-36,618 EBITDA 21, (10,580) 11,243 Depreciation (5,648) - (251) (5,899) Impairment (324) - - (324) Share-based payments (96) (91) (804) (991) Finance income 1,820-2,061 3,881 Finance expense (4,997) (1) (18,452) (23,450) Net foreign exchange gain/(loss) (10,690) (7) (1,946) (12,643) Fair value movement on warrants - - 1,250 1,250 Income tax (5,257) 679 1,266 (3,312) Net profit/(loss) (4,105) 1,316 (27,456) (30,245) Segment Assets 255, ,299 84, ,598 - Additions to licenses and exploration assets 1,275 34,356-35,631 Panoro Energy Annual Report 2011 Page 49

50 2010 USD 000 Brazil West Africa Corporate Total Revenue 44, ,354 EBITDA 30,929 (1,289) (12,681) 16,959 Depreciation (8,579) - (124) (8,703) Impairment (1,686) - - (1,686) Share-based payments (51) (62) (452) (565) Finance income 1, ,103 Finance expense (17,747) - (9,201) (26,948) Net foreign exchange gain/(loss) 2,013 (4) (3,169) (1,160) Fair value movement on warrants - - (1,154) (1,154) Gain on acquisition - - 2,329 2,329 Income tax 5,134 - (420) 4,714 Net profit/(loss) 11,597 (1,355) (24,353) (14,111) Segment Assets 304,914 68,630 52, ,623 - Additions to licenses and exploration assets - restated 2,948 * 66,936 ** - 69,884 * includes USD 1.6 million of G&G costs capitalised a result of the accounting policy change made in ** includes USD 59.7 million of assets acquired through the merger with PPHCL. Revenue from major sources: USD Natural gas revenue 34,897 44,103 Other income 1, Total Revenue 36,618 44,354 One customer makes up 100% of the Group s revenue. There are no differences in the nature of measurement methods used on segment level compared with the consolidated financial statements. Page 50 Panoro Energy Annual Report 2011

51 Note 5. Operating Profit Operating profit is stated after (charging)/crediting: USD 000 Note Employee benefits expense 6,861 6,343 Depreciation 10,11 5,899 8,703 Impairment ,686 Operating lease payments 955 1,199 Merger and restructuring costs - 6,217 Note 5a. Employee benefit expenses General and administrative expenses include wages, employers contribution and other compensation as detailed below: USD Salaries 4,272 4,528 Employers contribution 1, Pension costs Other compensation 1, Total 6,861 6,343 The number of employees in the Group as at year end is detailed below: Number of employees Note 5b. Board of Directors statement on remuneration of executives Statement for the current year (2011) In accordance with the Norwegian Public Limited Liability Companies Act 6-16a, the Board of Directors must prepare a statement on remuneration of executives. The remuneration of the members of the Board is determined on a yearly basis by the Company at its annual general meeting. The directors may also be reimbursed for, inter alia, travelling, hotel and other expenses incurred by them in attending meetings of the directors or in connection with the business of Panoro Energy. A director who has been given a special assignment, besides his normal duties as a director of the Board, in relation to the business of Panoro Energy may be paid such extra remuneration as the directors may determine. Panoro Energy ASA has established a compensation programme for executive management that reflects the responsibility and duties as management of an international oil and gas company and at the same time contributes to add value for the Company s shareholders. The goal for the Board of Directors has been to establish a level of remuneration that is competitive both in domestic and international terms to ensure that the Group is an attractive employer that can obtain a qualified workforce. Remuneration for executive management consists of both fixed and variable elements. The fixed elements consist of salaries and other benefits (free phone, electronic communication, newspapers etc.), while the variable elements consist of a performance based bonus arrangement and a share option scheme that was approved by the Board of Directors in The annual bonus will be determined based on the achievement of certain pre-set targets. Panoro Energy Annual Report 2011 Page 51

52 Note 5c. Management remuneration Executive management is considered to consist of the CEO, CFO, and COO. Executive management remuneration is summarized below: 2011 Short term benefits USD 000 (unless stated otherwise) Salary 2011 Bonus Benefits Pension costs No. Options awarded in 2011 Fair value of options expensed Kjetil Solbraekke, CEO , Anders Kapstad, CFO , Nishant Dighe, COO , Total 1, Short term benefits USD 000 (unless stated otherwise) Salary 2010 Bonus Benefits Pension costs No. Options awarded in 2010 Fair value of options expensed Kjetil Solbraekke, CEO , Anders Kapstad, CFO , Nishant Dighe, COO , Total (i) Under the terms of employment, the CEO, CFO and COO in general are required to give at least six months written notice prior to leaving the Company. (ii) Per the respective terms of employment, the CEO, CFO and COO are entitled to 12 months of base salary in the event of a change of control; whereby a tender offer is made or consummated for the ownership of more than 50% or more of the outstanding voting securities of the Company; or the Company is merged or consolidated with another corporation and as a result of such merger or consolidation less than 50.1% of the outstanding voting securities of the surviving entity or resulting corporation are owned in the aggregate by the persons by the entities or persons who were shareholders of the Company immediately prior to such merger or consolidation; or the Company sells substantially all of its assets to another corporation that is not a wholly owned subsidiary. Under the share options plan should such an event occur, all outstanding share options will also vest immediately and the Company may have the right to terminate the options by: Compensating the difference between the fair market value of the options and the exercise value; or Replacing the options with new options in the acquiring company; or Compensating the holder of the options with an amount of cash equivalent to the fair market value of the options, using the full contractual life of the option when calculating the fair market value. (iii) The compensation for 2010 of Kjetil Solbrække represents seven months remuneration paid under Panoro after the demerger in the capacity of Chief Executive Officer of the Group. (iv) The compensation for 2010 of Anders Kapstad represents seven months remuneration paid under Panoro after the demerger in the capacity of Chief Financial Officer of the Company. (v) The compensation for 2010 of Nishant Dighe in the respective capacities of Chief Operating Officer represents six months of compensation under Panoro since the merger. Remuneration prior to the demerger and merger for these key personnel was in the capacity of their previous positions held in NEC and PPHCL and therefore is not included in the comparatives. The Group has a long-term note receivable from Kjetil Solbrække, CEO, of BRL 2 million (2010: BRL 2 million).the note principal is due in March 2013 and carries an interest of 3% per annum. Refer to note 21 for further information on the share option scheme. note 5d. Board of Directors remuneration Remuneration to members of the Board of Directors is summarized below: USD Philip Vingoe Tord Pedersen Katherine Stovring Christine Wheeler Ragnar Soegaard Marilda Rosado de Sá Ribeiro 42 - Total No loans have been given to, or guarantees given on the behalf of, any members of the Management Group, the Board or other elected corporate bodies with the exception of the loan note to the CEO mentioned above. (i) Ms. Christine Wheeler resigned as Director during 2011 and was replaced by Ms. Marilda Rosado de Sá Ribeiro. (ii) The remuneration for 2010 represents seven months of compensation after demerger from NEC. Page 52 Panoro Energy Annual Report 2011

53 note 5e. Pension plan The Company is required to have an occupational pension scheme in accordance with the Norwegian law on required occupational pension ( Lov om obligatorisk tjenestepensjon ). The Company contributes to an external defined contribution scheme and therefore no pension liability is recognized in the statement of financial position. note 5f. Auditors remuneration Fees, excluding VAT, to the auditors are included in general and administrative expense and are shown below: USD Ernst & Young Statutory audit Tax Services Other Deloitte Statutory audit - 1 Tax Services - - Other Total Note 6. Finance income and expense Finance expense USD Interest expense 18,475 22,879 Other financial expense 4,975 4,069 Total 23,450 26,948 Finance income USD Interest income from placements and deposits 3,881 2,103 Total 3,881 2,103 Panoro Energy Annual Report 2011 Page 53

54 Note 7. Income tax Income tax The major components of income tax in the consolidated statement of comprehensive income are: USD Restated Income Taxes Current income tax 2,300 2,270 Deferred income tax 1,012 (6,984) Tax charge/(benefit) for the period 3,312 (4,714) A reconciliation of the income tax expense applicable to the accounting profit before tax at the statutory income tax rate to the expense at the Group s effective income tax rate is as follows: USD Loss before taxation (26,933) (18,825) Tax calculated at domestic tax rates applicable to profits in the respective countries (8,429) (5,087) Expenses not deductible 1,127 2,485 Differences due to functional currency effects in subsidiaries 4,719 (4,910) Gain on acquisition of subsidiary - (652) Tax effect of losses not utilised in the period 9,871 5,696 Effect of differing tax rates (2,496) (1,170) Expenses exclusively deductible for tax purposes (1,629) (954) Prior year adjustments Others 345 (122) Tax charge / (benefit) 3,312 (4,714) Deferred tax The analysis of deferred tax assets and deferred tax liabilities is as follows: USD Deferred tax assets - to be reversed within 12 months to be reversed after more than 12 months 10,265 28,653 Total deferred tax assets 10,265 28,653 Restated Deferred tax liabilities - to be reversed within 12 months to be reversed after more than 12 months 7,813 8,535 Total deferred tax liabilities 7,813 8,535 Net deferred tax assets 2,452 20,118 The gross movement on the deferred income tax account is as follows: USD Restated As December 31, reported - 24,090 Change in accounting policy (note 2.3) - (2,367) As at January 1 - restated 20,118 21,723 Movement in the period (17,666) 6,862 Arising on acquisition of subsidiary - (8,467) As at 31 December 2,452 20,118 The movement in deferred income tax assets and liabilities, without taking into consideration the offsetting balances within the same jurisdiction, is as follows: Page 54 Panoro Energy Annual Report 2011

55 2011 Deferred tax assets USD 000 Tax losses Oil and gas assets Provisions and others As at January 1, restated 15,595 9,105 3,953 28,653 (Charged) / credited to the statement of comprehensive income (4,486) (9,219) (4,683) (18,388) As at December 31, ,109 (114) (730) 10,265 Total Deferred tax liabilities USD 000 Tangible assets Exploration assets As at January 1, ,499 8,535 (Charged) / credited to the statement of comprehensive income (18) (704) (722) As at December 31, ,795 7,813 Total 2010 restated Deferred tax assets USD 000 Tax losses Oil and gas assets Provisions and others As at December 31, reported 13,429 6,033 4,628 24,090 Change in accounting policy (note 2.3) (2,367) - - (2,367) As at January 1, restated 11,062 6,033 4,628 21,723 (Charged) / credited to the statement of comprehensive income 4,533 3,072 (707) 6,898 Arising on acquisition of subsidiary As at December 31, restated 15,595 9,105 3,953 28,653 Total Deferred tax liabilities USD 000 Tangeble assets Exploration assets As at January 1, (Charged) / credited to the statement of comprehensive income Arising on acquisition of subsidiary - 8,499 8,499 As at December 31, ,499 8,535 Reversal of deferred tax assets in 2011 is primarily driven by full utilization of available tax losses in one of the Brazilian subsidiary Rio das Contas. Furthermore, due to internal restructuring in Brazil through merging Coplex with PEdB during 2011; available tax losses in Coplex could no longer be utilised and as a result the related deferred tax on these losses has been reversed in the current year. The movement in deferred tax assets also factors in the reversal of currency translation adjustments that had accumulated over time on these balances. Deferred tax assets are recognised for tax loss carry-forwards to the extent that the realization of the related tax benefits through future taxable profits is probable. The deferred taxes as of the year end have only been recognized in Brazil using forecasts where management believes that future taxable income will be available to realize the tax losses and credits. The Group did not recognise deferred income tax assets of USD 29.8 million (2010: USD 23 million) in respect of losses that can be carried forward against future taxable income. The Group has accumulated tax losses as of year end that will be indefinitely available to offer future taxable income in the respective jurisdictions. Total USD Norway 104,473 80,869 UK 1, Cyprus 1, Brazil 32,673 54,776 Total 140, ,288 In Brazil the amount of loss that can only be offset towards taxable income in any given year is limited to 30%. Panoro Energy Annual Report 2011 Page 55

56 Note 8. Basic and diluted earnings per share Basic earnings per share USD 000, unless otherwise stated Net loss attributable to equity holders of the parent (30,245) (12,738) Weighted average number of shares outstanding - in thousands 222, ,069 Basic and diluted earnings per share (USD) (0.14) (0.11) The weighted average number of ordinary shares for 2010 has been adjusted by the exchange ratio at the demerger date between PEdB outstanding shares and the attributable share capital of the Company. Diluted earnings per share When calculating the diluted earnings per share, the weighted average number of shares outstanding is normally adjusted for all dilutive effects relating to the Group s warrants, whereas, at December 31, 2010, 7.5 million warrants were outstanding. For the year ended December 31, 2011, no warrants were outstanding for the Group. Since the Group had a net loss for the year ended December 31, 2010, the warrants have an anti-dilutive effect and therefore not considered when calculating diluted earnings per share. The share options in issue also have an anti-dilutive effect on the earnings per share for the periods presented. Restated Note 9. Licenses and exploration assets 2011 USD 000 Brazil West Africa Total Acquisition Cost At January 1, 2011 restated 194,284 66, ,220 Acquisitions Additions 1,275 34,356 35,631 Proceeds from farm-out (14,489) - (14,489) Foreign currency translation (20,489) - (20,489) At December 31, , , ,873 Accumulated Impairment/ exploration costs charged to profit At January 1, ,496-61,496 Foreign currency translation (6,872) - (6,872) At December 31, ,624-54,624 Net carrying value at December 31, , , ,249 Page 56 Panoro Energy Annual Report 2011

57 2010 USD 000 Brazil West Africa Total Acquisition Cost At December 31, reported 182, ,142 Restatement due to accounting policy change (note 2.3) 6,962-6,962 At January 1, 2010 restated 189, ,104 Acquisitions - 59,691 59,691 Additions 2,948 7,245 10,193 Asset write-off (5,686) - (5,686) Foreign currency translation 7,918-7,918 At December 31, ,284 66, ,220 Accumulated Impairment/ exploration costs charged to profit At January 1, ,847-58,847 Foreign currency translation 2,649-2,649 At December 31, ,496-61,496 Net carrying value at December 31, ,788 66, ,724 During 2011, the Company reached an agreement with Vanco Brasil Exploração e Produção de Petróleo e Gas Natural Ltda, a wholly owned subsidiary of Vanco Overseas Energy Ltd ( Vanco ) to farm out 35% of Panoro s 50% interest in its three shallow water exploration BM-S-63, BM-S-71 and BM-S-72 in the Santos Basin offshore Brazil, retaining 15% interest in these blocks. After approval from ANP was granted, Panoro has received net proceeds of approximately USD 14.5 million, covering Panoro s historical costs on the licenses. Vanco will finance Panoro s share of drilling costs for three exploration wells, one on each license. During 2010, license and exploration assets of USD 59.6 million were acquired as part of the merger with Pan Petroleum. Summary of licenses As of December 31, 2011, the Company through its subsidiaries had interest in the following licenses: Licence area Panoro s interest Country Expiry of current phase Additional information Coral 35% Brazil August 2025 Cavalo Marinho 50% Brazil August 2030 Estrela-do-Mar 65% Brazil August 2025 BM-S-63 15% Brazil March 2013 The Group has the option to enter into second exploration / appraisal phase after expiry of the current phase. BM-S-71 15% Brazil March 2013 The Group has the option to enter into second exploration / appraisal phase after expiry of the current phase. BM-S-72 15% Brazil March 2013 The Group has the option to enter into second exploration / appraisal phase after expiry of the current phase. OML % Nigeria June 2018 Mengo-Kundji-Bindi 20% Congo August 2022 Dussafu Marin permit 33.33% Gabon May 2012 The Group has the option to enter into third exploration / appraisal phase after expiry of the current phase. Impairment During 2011 USD 0.3 million was charged to the income statement. This charge related to expenses on the liabilities of Coral license area in Brazil. During 2010 USD 1.7 million was charged to the income statement in relation to the relinquishment of the Sardinha license area in Brazil. The breakdown of the net impairment expense is: USD Asset relinquishment - cost - 5,686 Expenditure on impaired assets Less: liabilities reversed - (4,000) Charged to income statement 324 1,686 Panoro Energy Annual Report 2011 Page 57

58 Note 10. Production assets and equipment USD Acquisition Cost At January 1 144, ,755 Additions Foreign currency translation (15,318) 7,705 At December , ,153 Accumulated Depreciation At January 1 34,490 24,999 Depreciation 5,530 8,366 Foreign currency translation (4,266) 1,125 At December 31 35,754 34,490 Net carrying value at December 31 93, ,663 All of the production assets and equipment related to Brazilian operations. Depreciation method/rates Depreciation for the gathering systems and the transmission lines are computed using the straight-line method over a twenty and thirtyyear useful life, respectively. Field investments are depreciated over the life of the field using the unit-of-production method. Note 11. Property, furniture, fixtures and equipment 2011 USD 000 Property Furniture, Fixture and Fittings Computer Equipment Acquisition cost At January 1, , ,205 Additions Disposals Currency translation (92) (432) (524) At December 31, , ,968 Total Accumulated depreciation At January 1, Disposals Depreciation Currency translation - (6) (230) 236 At December 31, ,009 Net carrying value at December 31, Page 58 Panoro Energy Annual Report 2011

59 2010 USD 000 Property Furniture, Fixture and Fittings Computer Equipment Acquisition cost At January 1, , ,486 Additions Acquisitions Disposals (1,788) (184) - (1,972) Currency translation At December 31, , ,205 Total Accumulated depreciation At January 1, Disposals (241) - - (241) Depreciation Currency translation At December 31, Net carrying value at December 31, ,329 Depreciation method and rates Category Straight-line depreciation Useful life Furniture, fixtures and fittings % 3-10 years Computer equipment % 3-5 years Note 12. Accounts and other receivables USD Accounts receivable 11,652 12,290 Other receivables and prepayments 7,887 10,448 Total 19,539 22,738 Accounts receivables are non-interest bearing and generally on days payment terms. At December 31, 2011 and 2010 the allowance for impairment of receivables was USD nil. Risk information for the receivable balances is disclosed in note 23. Note 13. Other financial asset USD Other financial asset Other financial asset at the end of the period Other financial assets represents fair value of currency swap agreements of USD 0.8 million at the end of This has been credited to the statement of comprehensive income. All the currency swaps that were entered into are economic hedges and deemed ineffective and the gains and loss arising on these items have been taken to the statement of comprehensive income. Panoro Energy Annual Report 2011 Page 59

60 Note 14. Cash and bank balances USD Cash and bank balances 110,919 61,713 Less: Restricted cash (2,980) (1,444) Cash and cash equivalents at the end of the period 107,939 60,269 Cash and cash equivalents at period end include USD 21 million (2010: nil) of placement in a NOK denominated fixed income fund with investments in interest based securities. However, the currency exposure is fixed in USD. The Group is holding USD 20 million of funds in BRL based notes which are averaging a gross return of 8.05% per annum. As of the period end, the Company also had USD 10 million invested in two Merrill Lynch high yield funds. Restricted cash Restricted cash relates to cash held in debt service reserve account in accordance with the requirement of the Senior Secured Callable Bond agreement. Overdraft facilities The Group had no bank overdraft facilities as at December 31, Note 15. Share capital and reserves Share capital Amounts in USD 000 unless otrherwise stated Number of shares Nominal Share Capital January 1, ,947,081 38,141 Issue of shares 70,598,705 18,192 December 31, ,545,786 56,333 Amounts in USD 000 unless otrherwise stated Number of shares Nominal Share Capital January 1, , Reduction of share capital on demerger (1,000) (17) Issue of shares 163,947,081 38,141 December 31, ,947,081 38,141 All shares are fully paid-up and have a par value of NOK and carry equal voting rights. The Company is incorporated in Norway and the share capital is denominated in NOK. The share capital given above is translated to USD at the foreign exchange rate in effect at the time of each share issue. Shares owned by the CEO, board members and key management, directly and indirectly, at December 31, 2011 are: Shareholder Position Number of shares % of total Dr Philip Vingoe Chairman, Panoro Energy ASA 1,439, % Ragnar Søegaard Director, Panoro Energy ASA 73, % Tord Pedersen Director, Panoro Energy ASA 47, % Kjetil Solbrække CEO, Panoro Energy ASA 376, % Nishant Dighe COO, Panoro Energy Limited 1,309, % Anders Kapstad CFO, Panoro Energy ASA 60, % Page 60 Panoro Energy Annual Report 2011

61 Reserves Share premium Share premium reserve represents excess of subscription value of the shares over the nominal amount. Other reserves Other reserves represent items arising on consolidation of PEdB as comparatives and execution of merger. Additional paid-in capital Additional paid-in capital represents reserves created under the continuity principle on demerger. Share-based payments credit is also recorded under this reserve. Currency translation reserve The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations. Note 16. Interest-bearing debt USD 000 Note Current Non-current Current Non-current Norway 16.1 NOK denominated loans 3,899 29, ,268 USD denominated loans 11,777 92,108 1, ,097 Total 15, ,017 1, ,365 Note 16.1 Senior secured callable bond In November 2010 the Company issued bonds of USD 140 million Panoro Energy Senior Secured Callable Bond Issue 2010/2018. The bond proceeds were primarily used to refinance the NEC 01 bond of NOK million and Brazilian BNDES and treasury loans amounting to BRL 140 million. The residual amount after refinancing is available for general corporate purposes. The bond issue is denominated in NOK and USD with tranches of NOK 205 million and USD 105 million carrying fixed interest rates of respectively 13.5% and 12% per annum. Interest is payable semi-annually. The first principal repayment is due on November 15, 2012 of NOK 20.5 million and USD 10.5 million and the same amounts are repayable every year on November 15 to the year The remaining principal amounts of NOK 82 million and USD 42 million are repayable at the bond redemption date on November 15, The bondholders carry a first priority pledge over Company s shares in Brazilian subsidiaries (Rio das Contas and PEdB) which effectively hold 10% working interest in Manati gas field. In addition to this, the bond agreement also stipulates issue of unconditional and irrevocable on-demand guarantees in favour of the Bond Trustee by the Brazilian subsidiaries. The main covenants of the bond loan are as follows: The issuer shall maintain at all times, a Book Equity ratio of the Group of minimum 25% which needs to be measured at every quarter end date. The Book Equity ratio measures the proportion of the Group s equity compared to total assets. The issuer shall not declare or make any dividend payments or other distributions or loans to its shareholders and should not engage in any activity having the effect of reducing capital or equity in the parent company. The Company shall not provide loans to any of its Brazilian subsidiaries, except to the extent such loans are subject to a first priority pledge to secure the obligations of the bond issuer. The Company shall not provide guarantees or other credit support to, or make investments in, any person or entity other than in the conditions as prescribed in the loan agreement. The amount above includes accrued interest to December 31, 2011 and is net of unamortised bond issue costs of USD 3,851,000 (2010: USD 4,490,000). Panoro Energy Annual Report 2011 Page 61

62 Note 17. Other non-current liabilities USD At December 31, 6,130 8,278 Included in the above balance, the Group has recorded acquisition related liabilities related to various acquisitions that occurred in 2005, 2006 and These liabilities are dependent upon certain operational milestones being achieved and consist of USD 3.5 million related to Estrela-do-Mar and Cavalo Marinho (2010: USD 3.3 million) and USD 2.6 million related to MKB permit (2010: USD 3.4 million). These liabilities, where applicable, have been estimated using probabilistic assumptions of production milestones as per the agreements with the relevant stakeholders. These liabilities will be settled either in cash or through issue of the Company s shares subject to the requirements of the respective acquisition agreements. All related milestones are expected to be met after more than one year from the date of the statement of financial position. Other non-current liabilities as at December 31, 2010 of USD 1.5 million were settled during the year. Note 18. Asset retirement obligation In accordance with the agreements and legislation, the wellheads, production assets, pipelines and other installations may have to be dismantled and removed from oil and natural gas fields when the production ceases. The exact timing of the obligations is uncertain and depend on the rate the reserves of the field are depleted. However, based on the existing production profile of Manati field and the size of its reserves, it is expected that expenditure on retirement is likely to be after more than ten years. The following table presents a reconciliation of the beginning and ending aggregate amounts of the obligations associated with the retirement of oil and natural gas properties: USD At December 31, 12,665 12,665 All of the obligations are expected to be fulfilled after more than one year from the date of the statement of financial position. For the year ended December 31, 2011, included in the asset retirement obligation is USD 12.7 million (2010: USD 12.7 million) for Brazil and is based on an appraisal report prepared by the operator of Manati Field s engineers to Agencia Nacional de Petroleo (Petroleum National Agency, ANP ). Note 19. Accounts payable and accrued liabilities USD Accounts payables 12,541 13,179 Accruals and other liabilities 11,244 15,137 Total 23,785 28,316 Note 20. Other financial liabilities Warrants The 7,500,000 warrants issued under the demerger agreement expired on July 1, The fair value liability as at December 31, 2011 is nil. (2010: USD 1.2 million). Page 62 Panoro Energy Annual Report 2011

63 Note 21. Share-based payment plans Share Option Plan Following the merger in June 2010, the Company established an option plan (the Panoro Option Plan ) whereby options were granted to the key management and employees on August 17 and September 2, Grants under this plan have been referred to as 2010 awards hereafter. Under 2010 awards, 485,000 new options were allocated to the Group employees in 2011 in addition to 6,770,000 grants allocations of ,920,000 new share options were approved by the Board of Directors on December 21, 2011 under the 2011 awards. Both the grants through 2010 and 2011 awards are under Panoro Option Plan and have only been identified separately for convenience of disclosures. The Panoro Option Plan governs all future grants of options by the Company to Directors, officers, key employees and certain consultants of the Group. Options are granted under the Panoro Options Plan at the discretion of the Board of Directors. No changes were made to the options plan during the current and previous financial year. During the year, 5,405,000 share options were allocated to the management and the employees (2010: 6,770,000 options). In the previous year, 7,000,000 options were approved by the Board of Directors. Vesting of all these options will be over a three year period, with 1/3 of the options exercisable each year. The exercise price of the options set at the time of issue is to be increased by 8 percent after year two and additional 8 percent annually thereafter. The exercise price for the options is as follows: 2010 awards 2,333,333 options had a vesting period until August 17, 2011 and can be exercised until August 17, 2012 at NOK 6.0 or until August 17, 2013 at NOK 6.48; 2,333,333 options have a vesting period until August 17, 2012 and can be exercised until August 17, 2013 at NOK 6.48 or until August 17, 2014 at NOK 7.0; and 2,333,334 options have a vesting period until August 17, 2013 and can be exercised until August 17, 2014 at NOK 7.0 or until Aug 17, 2015 at NOK awards 1,640,000 options had a vesting period until December 21, 2012 and can be exercised until December 21, 2013 at NOK 6.00 or until December 21, 2014 at NOK 6.48; 1,640,000 options had a vesting period until December 21, 2013 and can be exercised until December 21, 2014 at NOK 6.48 or until December 21, 2015 at NOK 7.00; and 1,640,000 options had a vesting period until December 21, 2014 and can be exercised until December 21, 2015 at NOK 7.00 or until December 21, 2016 at NOK Of the 10,170,000 outstanding options, 3,875,000 options have been allocated to key employees and the Chairman of the Board of Directors. The remaining 6,295,000 options represent grants to other employees of the Company under the same conditions. As of the year end, 1,746,657 options were exercisable at NOK 6.00 per share, of which 708,332 options related to Chairman and key employees and the remaining 1,038,325 options related to other employees. No options were exercised during the year. Options will be considered as vested if an employee stays in employment of the Company or its subsidiaries over the full length of the individual vesting period of each tranche granted. Should any of the Group companies or an employee decide to terminate their employment prior to the start of exercise period, the options shall expire without any further compensation. All options under the plan will be settled in shares. The Company calculates the value of share-based compensation using a Black-Scholes option pricing model to estimate the fair value of share options at the date of grant. The estimated fair value of options is amortised to expense over the options vesting period. USD 991 thousand has been charged to the statement of comprehensive income since grant dates during 2011 (2010: USD 565 thousand) and the same amount credited to additional paid-in capital. Panoro Energy Annual Report 2011 Page 63

64 The assumptions made for the valuation of options are as follows: Key assumptions Weighted average risk free interest rate, depending on the length of the option 1.29% % 2.3%-2.46% Dividend yield Nil Nil Weighted average expected life of options 2-4 years for tranches vesting between years for tranches vesting between Volatility range based on a peer study 59.53% % 75.27%-89.22% Weighted average remaining contractual life of options 3.28 years 3.63 years As of December 31, 2011, 10,170,000 options were outstanding for 34 (2010: 36 employees) employees including the Chairman and key management personnel and of these 1,746,657 options were vested and exercisable at NOK 6.00 per share. A summary of outstanding and vested options is tabled below: Outstanding Options Vested options Weighted average Weighted Average Weighted Average Exercise price in NOK Outstanding options 2011 remaining contractual life Exercise Price - NOK Vested options 2011 Exercise Price - NOK ,389, ,746, or ,389, or ,390, or Total 10,170, ,746, The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in, share options during the period: Number of options WAEP NOK Exercise value NOK 000 Outstanding balance at January 1, ,820, ,771 Grants during the period 5,405, ,997 Options terminated (1,055,000) (7.37) (7,775) Outstanding at December 31, ,170, ,993 The weighted average fair value of options granted during the period was NOK 2.32 per option (2010: NOK 2.57 per option) based on 5,405,000 options granted (2010: 6,770,000 options). The distribution of outstanding options amongst the employees and Chairman is as follows: Name Number of options Options vested Exercise price in NOK Exercise period Fair value expensed USD 000 Philip Vingoe 375, , August 17, 2011 December 21, Kjetil Solbraekke 1,500, , August 17, 2011 December 21, Anders Kapstad 1,000, , August 17, 2011 December 21, Nishant Dighe 1,000, , August 17, 2011 December 21, Other employees 6,295,000 1,038, August 17, 2011 December 21, Total 10,170,000 1,746, No vested options were exercised by either Chairman, key management and other employees in the current financial year. Under the share option plan in an event where there is a change of control, all outstanding share options will vest immediately and the Company may have the right to terminate the options by: Compensating the difference between the fair market value of the options and the exercise value; or Replacing the options with new options in the acquiring company; or compensating the holder of the options with an amount of cash equivalent to the fair market value of the options, using the full contractual life of the option when calculating the fair market value. A change of control is defined under the options plan as an event; whereby a tender offer is made and consummated for the ownership of more than 50% or more of the outstanding voting securities of the Company; or the Company is merged or consolidated with another corporation and as a result of such merger or consolidation less than 50.1% of the outstanding voting securities of the surviving entity or resulting corporation are owned in the aggregate by the persons by the entities or persons who were shareholders of the Company immediately prior to such merger or consolidation; or the Company sells substantially all of its assets to another corporation that is not a wholly owned subsidiary. Page 64 Panoro Energy Annual Report 2011

65 Note 22. Financial instruments Fair Value Set out below is a comparison by category of carrying amounts and fair values of all the Group s financial instruments that are carried in the financial statements: Carrying amount Fair value USD 000 Financial instrument classification Financial assets Cash and bank balances Fair value through the P&L 110,919 61, ,919 61,713 Other financial asset Held for trading Accounts receivable Loans and receivables 11,652 12,290 11,652 12,290 Financial liabilities Accounts payable and accrued liabilities Other financial liabilities 23,785 28,812 23,785 28,812 Interest-bearing loans and borrowings Other financial liabilities 137, , , ,866 Liabilities related to warrants Fair value through the P&L - 1,199-1,199 Fair value hierarchy Liabilities relating to warrants are classified as level 1. Other financial asset represent currency swaps and are classified as level 2. Liabilities related to warrants The 7,500,000 warrants issued under the demerger agreement expired on July 1, As part of the demerger from NEC, 7.5 million warrants were issued by the Company on June 15, 2010 to holders of NEC-J warrants. Determination of fair value The fair value of interest bearing loans and borrowings is determined by reference to the quotation trades of the bond instrument in the secondary market at period end. The carrying amount of cash and bank balances is approximately equal to fair value since these instruments have a short term to maturity. Similarly, the carrying amount of accounts receivables and accounts payables is approximately equal to fair value since they are entered into on normal terms and conditions. Panoro Energy Annual Report 2011 Page 65

66 Note 23. Financial risk management The Group s principal financial liabilities comprise accounts payable and bond loans. The main purpose of these financial instruments is to manage short-term cash flow and raise finance for the Group s capital expenditure program. The Group has various financial assets such as accounts receivable and cash which arise directly from its operations. It is, and has been throughout the year ending December 31, 2011 and December 31, 2010, the Group s policy that no speculative trading in derivatives shall be undertaken. The main risks that could adversely affect the Group s financial assets, liabilities or future cash flows are interest rate risk, foreign currency risk, liquidity risk and credit risk. The management reviews and agrees policies for managing each of these risks which are summarized below. The following discussion also includes a sensitivity analysis that is intended to illustrate the sensitivity to changes in the market variables on the Group s financial instruments and show the impact on profit or loss and shareholders equity, where applicable. Financial instruments affected by market risk include bank loans, accounts receivables, accounts payable and accrued liabilities. The sensitivity has been prepared for periods ending December 31, 2011 and 2010 using the amounts of debt and other financial assets and liabilities held as at those reporting dates. Commodity price risk The Group at present is not exposed to the risk of fluctuations in prevailing market commodity prices on the gas production in Brazil due to fixed price contracts. The Group s policy is to manage commodity price risk through a mix of fixed and floating price contracts. Interest rate risk The Group s exposure to the risk of changes in market interest rates relates primarily to the Group s cash balances. All long term borrowings as of December 31, 2011 have fixed interest rates. The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Group s profit before tax through the impact on floating rate borrowings and cash and cash equivalents. USD bps -100bps +100bps -100bps Cash 975 (975) 21 (21) Net effect 975 (975) 21 (21) Foreign currency risk The Company operates internationally and is exposed to risk arising from various currency exposures, primarily with respect to the Norwegian Kroner (NOK), the Pound Sterling (GBP) and the Brazilian Real (BRL). From a financial statements perspective, subsidiaries in Brazil have a BRL functional currency and are exposed to fluctuations for presentation purposes in these financial statements. The volatility in BRL has resulted in a cumulative translation loss of USD 34.8 million as of December 31, 2011 (2010: USD 8.6 million gain). The Group has transactional currency exposures. Such exposure arises from sales or purchases in currencies other than the respective functional currency. The Group reports its consolidated results in USD, any change in exchange rates between its operating subsidiaries functional currencies and the USD affects its consolidated income statement and balance sheet when the results of those operating subsidiaries are translated into USD for reporting purposes. Group companies are required to manage their foreign exchange risk against their functional currency. The Group evaluates on a continuous basis to use cross currency swaps if deemed appropriate by management in order to hedge the forward foreign currency risk associated with its foreign currency denominated bond loans. A 20% strengthening or weakening of the USD against the following currencies at December 31, 2011 would have increased / (decreased) equity and profit or loss by the amounts shown below. The Group s assessment of what a reasonable potential change in foreign currencies that it is currently exposed to have been changed as a result of the changes observed in the world financial markets. This hypothetical analysis assumes that all other variables, including interest rates and commodity prices, remain constant. Page 66 Panoro Energy Annual Report 2011

67 USD USD vs NOK + 20% -20% + 20% -20% Cash (325) 325 (617) 617 Loans 6,762 (6,762) 6,945 (6,945) Currency swap (169) Receivables (40) 40 (35) 35 Payables 102 (102) 217 (217) Net effect 6,330 (6,330) 6,510 (6,510) USD vs GBP + 20% -20% + 20% -20% Cash (55) 55 (127) 127 Receivables (102) 102 (129) 129 Payables 129 (129) 106 (106) Net effect 28 (28) (150) 150 USD vs BRL + 20% -20% + 20% -20% Cash (5,721) 5,721 (1,535) 1,535 Receivables (1,748) 1,748 (1,855) 1,855 Payables 2,260 (2,260) 2,876 (2,876) Net effect (5,209) 5,209 (514) 514 Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its obligations as they fall due. Prudent liquidity risk management includes maintaining sufficient cash and marketable securities, the availability of funding from an adequate amount of committed credit facilities, and the ability to close out market positions. Due to the dynamic nature of our underlying business, parent company management maintains its funding flexibility under available bank credit lines, the bond market and the equity market. The table below summarises the maturity profile of the Group s financial liabilities at December 31, 2011 based on contractual undiscounted payments USD 000 On demand Less than 1 year 1 to 2 years 2 to 5 years >5 years Total Interest bearing loans and borrowings - 31,115 29,395 77,861 85, ,408 Accounts payable and accrued liabilities - 23, ,785 Total - 54,900 29,395 77,861 85, , USD 000 On demand Less than 1 year 1 to 2 years 2 to 5 years >5 years Total Interest bearing loans and borrowings - 17,600 31,673 84, , ,168 Accounts payable and accrued liabilities - 28, ,812 Total - 46,412 31,673 84, , ,980 As of December 31, 2011 the Group has cash resources of USD million which management believes is adequate cover to meet short term liquidity requirements in relation to servicing the bond and meet current liabilities. The remaining cash is sufficient to meet exploration funding requirements and corporate overheads in the foreseeable future. As of the year end, the Group has no firm works commitments on its exploration licenses. Commitments beyond current period are mainly to service external debt and sustained revenue from Brazil is expected to meet these obligations when they fall due. Should the Group enter into new firm commitments through expansion of exploration portfolio; alternative sources of funding may need to be considered beyond the current period. Panoro Energy Annual Report 2011 Page 67

68 Credit risk The Group is exposed to credit risk that arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions. For banks and financial institutions, only independently rated parties with a minimum rating of A are accepted. Any change of financial institutions (except minor issues) are approved by the Group CFO. If the Group s customers are independently rated, these ratings are used. Otherwise, if there is no independent rating, risk control in the operating units assesses the credit quality of the customer, taking into account its financial position, past experience and other factors. The utilization of credit limits is regularly monitored and kept within approved budgets. Most of the credit risk is associated with the sole buyer of gas (Petrobras), where management considers the risk of default to be low. Past due but not impaired USD 000 Total Neither past due nor impaired < 30 days days days days >120 days ,652 8,740-1, , ,290 11, Capital Management The objective of the Group s capital management is to ensure that it maintains a strong credit rating and healthy capital ratio in order to support its business and increase shareholder value. The Group manages cash and bond loans as capital and regularly reviews its net debt position to manage capital requirements. As part of the bond agreements the Group is required to maintain an equity ratio of 25%. Management regularly monitor equity ratio to ensure covenant compliance. USD Non-current debt (122,017) (136,365) Current debt (15,676) (1,614) Cash and bank balances (including restricted cash) 110,919 61,713 Net debt (26,774) (76,266) Book Equity Ratio (Assets to Equity ratio) 58% 54% Page 68 Panoro Energy Annual Report 2011

69 Note 24. Guarantees and pledges Brazil The bondholders carry a first priority pledge over Company s shares in Brazilian subsidiaries (Rio das Contas and PEdB) which effectively hold 10% working interest in Manati gas field. In addition to this, the bond agreement also stipulates issue of unconditional and irrevocable on-demand guarantees in favour of the Bond Trustee by the Brazilian subsidiaries. The Company has provided a performance guarantee to the Brazilian directorate ANP, in terms of which the Company is liable for the commitments of Coral, Estrela-do-Mar, Cavalo Marinho and BCAM-40 licenses in accordance with the given concessions for the licenses. The guarantee is unlimited. Note 25. Other commitments and contingent liabilities Leasing arrangements Operating leases relate to leases of office space and apartments with lease terms of between 1 to 10 years. Non - cancellable operating lease commitments USD Not later than 1 year 1,092 1,129 Later than 1 year and not later than 5 years 1,728 2,868 Later than 5 years Total 3,323 4,754 Note 26. Related parties transactions The only related party transactions during the year relate to directors remuneration which is disclosed in note 5. Panoro Energy Annual Report 2011 Page 69

70 Note 27. Subsidiaries Details of the Group s subsidiaries as of December 31, 2011, are as follows: Subsidiary Place of incorporation and ownership Ownership interest and voting power Panoro Energy do Brasil Ltda. Brazil 100% Pan-Petroleum (Holding) Cyprus Limited Cyprus 100% Rio das Contas Produtora de Petroleo Ltda Brazil 100% Pan Petroleum Holding B.V. Netherlands 100% Prevail Energy Congo Limited British Virgin Islands 100% Panoro Energy Limited UK 100% African Energy Equity Resources Limited UK 100% Pan Petroleum Nigeria Holding B.V. Netherlands 100% Pan-Petroleum Services Holding B.V. Netherlands 100% Pan-Petroleum Gabon Holding B.V. Netherlands 100% PPN Services Limited Nigeria 100% Pan Petroleum Gabon B.V. Netherlands 100% Pan Petroleum Gabon Holdings B.V. Netherlands 100% Pan-Petroleum Gryphon Marin B.V. Netherlands 100% Prevail Energy Congo Limited British Virgin Islands 100% Prevail Energy Congo SAU Congo 100% Energy Equity Resources Oil and Gas Limited Nigeria 100% Energy Equity Resources AJE Limited Nigeria 100% Energy Equity Resources (Cayman Islands) Limited Cayman 100% Energy Equity Resources (Nominees) Limited Cayman 100% Syntroleum Nigeria Limited Nigeria 100% Energy Equity Resources (Cayman Islands) Limited Cayman 100% Energy Equity Resources (Nominees) Limited Cayman 100% Syntroleum Nigeria Limited Nigeria 100% Page 70 Panoro Energy Annual Report 2011

71 Note 28. Non- cash transactions During 2010, USD million of share capital and share premium was issued as consideration for certain assets and liabilities acquired by the Group. Note 29. Reserves (unaudited) The Group has adopted a policy of regional Reserve Reporting using external third party companies to audit its work and certify reserves and resources according to the guidelines established by the Oslo Stock Exchange ( OSE ). Reserve and Contingent Resource estimates comply with the definitions set by the Petroleum Resources Management System ( PRMS ) issued by the Society of Petroleum Engineers ( SPE ), the American Association of Petroleum Geologists ( AAPG ), the World Petroleum Council ( WPC ) and the Society of Petroleum Evaluation Engineers ( SPEE ) in March Panoro uses the services of Gaffney, Cline & Associates ( GCA ) for 3rd party verifications of its reserves. The following is a summary of key results from the reserve reports (net of the Group s share): Asset 1P reserves (MMBOE) 2P reserves (MMBOE) Manati Cavalo Marinho Estrela do Mar Kundji pilot Panoro total During 2011, the Group had the following reserve development: 2P reserves (MMBOE) Balance (previous ASR) as of December 31, Production 2011 (1.0) Balance (current ASR) as of December 31, Definitions: 1P) Proved Reserves Proved Reserves are those quantities of petroleum, which by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under defined economic conditions, operating methods, and government regulations. 2P) Probable Reserves Probable Reserves are those additional reserves which analysis of geoscience and engineering data indicate are less likely to be recovered than Proved Reserves but more certain to be recovered than Possible Reserves. Panoro Energy Annual Report 2011 Page 71

72 Panoro Energy ASA Parent Company Income Statement For the year ended December 31, 2011 USD 000 Note Operating income Operating revenues 1, Total operating income 1, Operating expenses General and administrative expense 2 (5,085) (4,166) Intercompany recharges 2 (5,889) - Merger and restructuring costs 2 - (6,256) Impairment of investment in subsidiary 7 (22,798) - Depreciation 6 (25) (86) Total operating expenses (33,797) (10,508) Operating result 2 (32,712) (10,486) Financial income 3 9,023 6,290 Financial expense 3 (18,436) (9,148) Fair value movement in currency swaps Currency loss (3,054) (3,218) Fair value movement on warrants 13 1,250 (1,154) Result before income taxes (43,085) (17,716) Income tax Result for the year (43,085) (17,716) Earnings per share (basic and diluted) - USD (0.19) (0.20) The annexed notes form an integral part of these financial statements. Page 72 Panoro Energy Annual Report 2011

73 Panoro Energy ASA Parent Company Balance Sheet As at December 31, 2011 USD 000 Note ASSETS Non-current assets Furniture, fixtures and office equipment Investment in subsidiaries 7 304, ,537 Intercompany receivables 8 1,446 2,913 Loans to subsidiaries 8-15,868 Other non-current assets Total non-current assets 306, ,471 Current assets Loans to subsidiaries 8 105,200 70,117 Other financial asset Other current assets Cash and cash equivalent 77,075 20,286 Restricted cash 10 2,980 1,447 Total current assets 186,297 92,060 TOTAL ASSETS 492, ,531 EQUITY AND LIABILITIES EQUITY Paid-in capital Share capital 11 56,333 38,141 Share premium reserve , ,983 Additional paid-in capital 64,636 63,645 Total paid-in capital 409, ,769 Other equity Other reserves 11 (60,801) (17,716) Total other equity (60,801) (17,716) TOTAL EQUITY 349, ,053 LIABILITIES Non-current liabilities Bond loan , ,365 Total non-current liabilities 122, ,365 Current liabilities Accounts payable Bond loan 12 15,676 1,614 Warrants liability 13-1,199 Intercompany payables 5,383 - Other current liabilities ,047 Total current liabilities 21,571 4,113 TOTAL LIABILITIES 143, ,478 TOTAL EQUITY AND LIABILITIES 492, ,531 The annexed notes form an integral part of these financial statements. Panoro Energy Annual Report 2011 Page 73

74 Panoro Energy ASA Parent Company statement of Cash Flow For the year ended December 31, 2011 USD 000 Note CASH FLOW FROM OPERATING ACTIVITIES Net result for the year (43,085) (17,716) Adjusted for: Depreciation Impairment of investment in subsidiary 7 22,798 - Fair value movement on warrants 13 (1,250) 1,154 Share based payments Financial Income 3 (9,023) (6,290) Financial Expenses 3 18,436 9,148 Fair value movement in currency swaps (844) - Foreign exchange gains/losses 3,054 2,085 (Increase)/decrease in trade and other receivables (2,365) 2,330 Increase/(decrease) in trade and other payables (788) 1,299 (Increase)/decrease in intercompany receivables (1,467) - Increase/(decrease) in intercompany payables 5,383 - Net cash flows from operating activities (8,751) (7,707) CASH FLOWS FROM INVESTING ACTIVITIES Investments in subsidiaries - (83,000) Additions to furniture and equipment 6 (4) (146) Net proceeds from loans to subsidiaries 6,103 - Increase in loans to subsidiaries (15,853) (24,846) Net cash flows from investing activities (9,754) (107,992) CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from issuance of bond loan - 134,280 Reduction of share capital - (173) Repayment of borrowing - (46,085) Net proceeds from issuance of shares - net of costs 93,067 54,753 Interests paid (18,722) (7,534) Interests received 2, Net cash flows from financing activities 76, ,757 Effect of foreign currency translation adjustment on cash balances (1,136) 55 Net increase in cash and cash equivalents 56,789 20,113 Cash and cash equivalents at the beginning of the year 20, Cash and cash equivalents at the end of the year 77,075 20,286 The cash and cash equivalents above do not include restricted cash balance of USD 3 million (2010: USD 1.4 million). The annexed notes form an integral part of these financial statements. Page 74 Panoro Energy Annual Report 2011

75 Panoro Energy ASA Notes to the Financial Statements Note 1. Accounting principles The annual accounts for the parent company Panoro Energy ASA (the Company ) are prepared in accordance with the Norwegian Accounting Act and accounting standards and practices generally accepted in Norway. The consolidated financial statements have been prepared under International Financial Reporting Standards ( IFRS ) as adopted by the European Union ( EU ) and are presented separately from the parent company. The accounting policies under IFRS are described in note 2 of the consolidated financial statements. The accounting principles applied under NGAAP are in conformity with IFRS unless otherwise stated in the notes below. The Company s annual financial statements are presented in US Dollars (USD) and rounded to the nearest thousand, unless otherwise stated. USD is the currency used for accounting purposes and is the functional currency. Shares in subsidiaries and other shares are recorded in Panoro Energy ASA s accounts using the cost method of accounting and reduced by impairment, if any. Bond loans are booked net of the unamortized transaction costs and transaction costs are amortized over the loan period. Note 2. General and administrative expenses Operating result Operating result is stated after (charging)/crediting: USD Employee benefits expense 1,908 2,087 Impairment of investment in subsidiary 22,798 - Depreciation Operating lease payments Merger and restructuring costs - 6,256 Intercompany recharges 5,889 - Salaries The Company had 5 employees at December 31, 2011 (2010: 5 employees), and an average of 5 employees during the year (2010: 5 employees). Wages and salaries for these employees are included in general and administrative expenses. The Company has an option program amounting to a total of 10.2 million shares, approved in the General Meetings. For further details on this program see share-based payment section. Employee related expenses: USD Wages 1,382 1,359 Employer's contribution Pension costs Other compensation Share-based payments Total 2,283 2,284 For details relating to remuneration of CEO and CFO, refer to note 5 in the consolidated financial statements. Panoro Energy Annual Report 2011 Page 75

76 Directors remuneration Please refer to note 5 of the Group financial statements for details on how directors remuneration is determined. USD Philip Vingoe Tord Pedersen Katherine Støvring Christine Wheeler Ragnar Søegaard Marilda Rosado de Sá Ribeiro 42 - Total (i) Ms. Christine Wheeler resigned as director during 2011 and was replaced by Ms. Marilda Rosado de Sá Ribeiro. No pension benefits were received by the directors during 2011 and There are no severance payment arrangements in place for management or directors. Pensions The Company is required to have an occupational pension scheme in accordance with the Norwegian law on required occupational pension ( Lov om obligatorisk tjenestepensjon ). The Company contributes to an external defined contribution scheme and therefore no pension liability is recognized in the balance sheet. Auditor Fees (excluding VAT) to the Company s auditors are included in general and administrative expenses and are shown below. The other fees related to advisory services provided in respect of consultations on corporate matters during the year. No auditors fee was charged directly to equity. USD Ernst & Young Statutory audit Tax services 50 2 Merger and demerger services - 46 Other Deloitte Statutory audit - 1 Tax services - - Merger and demerger services Total Share based payment Share Option Plan Following the merger in June 2010, the Company established an option plan (the Panoro Option Plan ) whereby options were granted to the key management and employees on August 17 and September 2, Grants under this plan have been referred to as 2010 awards hereafter. Under 2010 awards, 485,000 new options were allocated to the Group employees in 2011 in addition to the grants allocation of 6,770,000 options in ,920,000 new share options were approved by the Board of Directors on December 21, 2011 under the 2011 awards. Both the grants through 2010 and 2011 awards are under Panoro Option Plan and have only been identified separately for convenience of disclosures. The Panoro Option Plan governs all future grants of options by the Company to Directors, officers, key employees and certain consultants of the Group. Options are granted under the Panoro Options Plan at the discretion of the Board of Directors. During the year, 5,405,000 share options were allocated to the management and the employees (2010: 6,770,000 options). Vesting of all these options will be over a three year period, with 1/3 of the options exercisable each year. The exercise price of the options set at the time of issue is to be increased by 8 percent after year two and additional 8 percent annually thereafter. The exercise price for the options is as follows: Page 76 Panoro Energy Annual Report 2011

77 2010 awards 2,333,333 options had a vesting period until August 17, 2011 and can be exercised until August 17, 2012 at NOK 6.0 or until August 17, 2013 at NOK 6.48; 2,333,333 options have a vesting period until August 17, 2012 and can be exercised until August 17, 2013 at NOK 6.48 or until August 17, 2014 at NOK 7.0; and 2,333,334 options have a vesting period until August 17, 2013 and can be exercised until August 17, 2014 at NOK 7.0 or until Aug 17, 2015 at NOK awards 1,640,000 options had a vesting period until December 21, 2012 and can be exercised until December 21, 2013 at NOK 6.00 or until December 21, 2014 at NOK 6.48; 1,640,000 options had a vesting period until December 21, 2013 and can be exercised until December 21, 2014 at NOK 6.48 or until December 21, 2015 at NOK 7.00; and 1,640,000 options had a vesting period until December 21, 2014 and can be exercised until December 21, 2015 at NOK 7.00 or until December 21, 2016 at NOK The Company calculates the value of share-based compensation using a Black-Scholes option pricing model to estimate the fair value of share options at the date of grant. The estimated fair value of options is amortised to expense over the options vesting period. USD 375 thousand has been charged to the statement of comprehensive income during 2011 (2010: USD 197 thousand) and the same amount credited to additional paid-in capital. The amount charged pertains to the employees of the Company only and the rest of the Group charge has been expensed in respective subsidiaries. Of the total share-based payment charge of USD 991 thousand (2010: USD 565 thousand) for the Group, USD 616 thousand relates to the Company s direct and indirect subsidiaries and such amount has been recorded as an investment in subsidiaries with the corresponding credit taken to additional paid-in capital. The assumptions made for the valuation of options are as follows: Key assumptions Weighted average risk free interest rate, depending on the length of the option 1.29% % 2.3%-2.46% Dividend yield Nil Nil Weighted average expected life of options 2-4 years for tranches vesting between years for tranches vesting between Volatility range based on a peer study 59.53% % 75.27%-89.22% Weighted average remaining contractual life of options 3.28 years 3.63 years As of December 31, 2011, 2,500,000 options were outstanding for six employees (2010: six employees) including the Chairman and key management personnel and of these 633,331 options were vested and exercisable at NOK 6.00 per share. A summary of outstanding and vested options is tabled below: Outstanding Options Vested options Weighted average Weighted Average Weighted Average Exercise price in NOK Outstanding options 2011 remaining contractual life Exercise Price - NOK Vested options 2011 Exercise Price - NOK ,389, ,746, or ,389, or ,390, or Outstanding at December 31, ,170, ,746, Panoro Energy Annual Report 2011 Page 77

78 The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in, share options during the period: Number of options WAEP NOK Exercise cost NOK 000 Outstanding balance at January 1, ,820, ,771 Grants during the period 5,405, ,997 Options terminated (1,055,000) (7.37) (7,775) Outstanding at December 31, ,170, ,993 The weighted average fair value of options granted during the period was NOK 2.32 per option (2010: NOK 2.57 per option) based on 5,405,000 options granted, (2010: 6,770,000 options). The distribution of outstanding options amongst the Company s employees and Chairman is as follows: Number of Options vested Exercise price Exercise period Fair value expensed Name options in NOK USD 000 Philip Vingoe 375, , August 17, 2011 December 21, Anders Kapstad 1,000, , August 17, 2011 December 21, Other employees 1,125, , August 17, 2011 December 21, Total 2,500, , No vested options were exercised by either Chairman, key management or other employees in the current financial year. Under the share option plan in an event where there is a change of control, all outstanding share options will vest immediately and the Company may have the right to terminate the options by: Compensating the difference between the fair market value of the options and the exercise value; or Replacing the options with new options in the acquiring company; or compensating the holder of the options with an amount of cash equivalent to the fair market value of the options, using the full contractual life of the option when calculating the fair market value. A change of control is defined under the option plans as an event; whereby a tender offer is made and consummated for the ownership of more than 50% or more of the outstanding voting securities of the Company; or the Company is merged or consolidated with another corporation and as a result of such merger or consolidation less than 50.1% of the outstanding voting securities of the surviving entity or resulting corporation are owned in the aggregate by the persons by the entities or persons who were shareholders of the Company immediately prior to such merger or consolidation; or the Company sells substantially all of its assets to another corporation that is not a wholly owned subsidiary. Remuneration for CEO is paid through a subsidiary and can be referred to in note 5 of the Group consolidated financial statements. Note 3. Financial items The financial expense breakdown is below: USD Interest income from subsidiaries 6,992 5,774 Other interest income 2, Total 9,023 6,290 Interest income from subsidiaries represents an interest on the intercompany loans. Refer to Note 8 for further information on these balances. The financial expense breakdown is below: USD Interest expense on bond loans 17,818 6,528 NEC 01 early redemption charge - 1,571 Amortisation of debt issue costs 614 1,045 Bank and other financial charges 4 4 Total 18,436 9,148 The 2011 interest expense on bond loans and the amortisation of debt issue costs relate to Panoro Energy Senior Secured Callable Bond Issue 2010/2018. NEC 01 early redemption charge relates to the early repayment of the NEC 01 Bond loan repaid during Page 78 Panoro Energy Annual Report 2011

79 Note 4. earnings per share Basic earnings per share USD 000 unless otherwise stated Net result for the period (43,085) (17,716) Weighted average number of shares outstanding - in thousands 222,619 87,119 Basic and diluted earnings per share (USD) (0.19) (0.20) Diluted earnings per share When calculating the diluted earnings per share, the weighted average number of shares outstanding is normally adjusted for all dilutive effects relating to the Company s warrants. As of December 31, 2010, 7.5 million warrants were outstanding. For the year ended December 31, 2011, no warrants were outstanding for the Company. Since the Company had a net loss for the year ended December 31, 2010, the warrants have an anti-dilutive effect and therefore not considered when calculating diluted earnings per share. The share options in issue also have an anti-dilutive effect on the earnings per share for the periods presented. Note 5. income tax USD Tax payable - - Change in deferred tax - - Income tax expense - - Specification of the basis for tax payable: USD Result before income tax (43,085) (17,716) Effect of permanent differences 18,229 (2,248) Tax losses not utilised 24,856 19,964 Basis for tax payable - - Specification of deferred tax: USD Losses carried forward 104,473 80,869 Taxable temporary differences (3,851) (4,490) Basis for calculating deferred tax asset 100,622 76,379 Calculated deferred tax asset (28%) 28,174 21,386 Unrecognised deferred tax asset (28,174) (21,386) Deferred tax asset recognised on Balance Sheet - - The tax losses carried forward are available indefinitely to offset against future taxable profits. The deferred tax asset is not recognized on the balance sheet due to uncertainty of income. Panoro Energy Annual Report 2011 Page 79

80 Note 6. Furniture, fixtures and office equipment USD 000 Permanent building fixtures and fittings Furniture and fixtures IT and office equipment Acquisition cost at January 1, Additions Acquisition cost at December 31, Accumulated depreciation at December 31, 2011 (12) (12) (87) (111) Net carrying value at December 31, Total Depreciation for the year Acquisition cost at January 1, Additions Acquisition cost at December 31, Accumulated depreciation at December 31, 2010 (6) (6) (74) (86) Net carrying value at December 31, Depreciation for the year IT and office equipment is depreciated over three years on a straight-line basis, furniture and fixtures are depreciated over ten years also on a straight-line basis. Note 7. Investment in subsidiaries Investments in subsidiaries are carried at the lower of cost and fair market value. As of December 31, 2011, (2010: USD 327 million) the holdings in subsidiaries consist of the following: Ownership interest USD 000 Headquarters and voting rights Carrying value Panoro Energy do Brasil Ltda. Rio de Janeiro, Brazil 100% 198,431 Pan-Petroleum Holding (Cyprus) Ltd Limassol, Cyprus 100% 129,106 Provision for impairment (22,798) Total investments in subsidiaries 304,739 Impairment represents loss in value of Company s investment in shares of Pan-Petroleum Holding (Cyprus) Limited by approximately USD 22.8 million. The impairment has been determined by comparing estimated recoverable value of the underlying investment with the carrying amount. Note 8. Related party transactions and balances Operating revenues relate to administrative services provided to subsidiaries. The Company s loans to the Brazilian subsidiaries Rio das Contas and Panoro Energy do Brasil are classified as current and amount to USD 72.4 million as of December 31, 2011 (2010: USD 70.1 million). These loans carry an interest rate of 10% and mature on December 31, Subsequent to year end, these loans have been renewed for three years. The Company s loan to the Cypriot subsidiary Pan-Petroleum (Holding) Cyprus Limited was classified as current and amounted to USD 32.8 million as at December 31, 2011 (2010: USD 15.9 million ). This loan carries an interest rate of 10% and matures on June 30, The intercompany recharges due from subsidiaries to the Company are classified as non-current and amounted to USD 1.4 million as at December 31, 2011 (2010: USD 2.9 million). Payable balance on account of intercompany recharges was USD 5.3 million (2010: nil). These balances do not carry an interest rate and have no maturity date. See note 2 for details regarding directors remuneration. Page 80 Panoro Energy Annual Report 2011

81 Note 9. Other financial asset USD Other financial asset Other financial asset at the end of the period Other financial assets represents fair value of currency swap agreements of USD 0.8 million at the end of 2011 which has been credited to the income statement. All the currency swaps that were entered into are economic hedges and deemed ineffective and the gains and loss arising on these items have been taken to the statement of comprehensive income. Note 10. Restricted cash As of December 31, 2011, USD 3 million (2010: USD 1.4 million) is restricted cash in relation to contributions in the debt service accounts as per the requirements of the Senior Secured Callable bond agreement. Note 11. Shareholders equity and shareholder information Nominal share capital in the Company at December 31, 2011 amounted to NOK 342,547,500. (USD 56,333,267) consisting of 234,545,786, shares at a par value of NOK All shares in issue are fully paid-up and carry equal voting rights. The table below shows the changes in equity in the Company during 2010 and 2011: USD 000 Share capital Share premium reserve Additional paid-in capital Other equity Total Equity at January 1, Loss for the year (17,716) (17,716) Share based payments Reduction of share capital (17) (156) - - (173) Issue of shares on demerger and merger 31, ,999 63, ,451 Issue of shares for cash (net of costs) 6,769 47, ,753 Transfer of historical share-based payments reserve (565) - Equity at December 31, , ,983 63,645 (17,716) 298,053 Loss for the year (43,085) (43,085) Issue of shares for cash (net of costs) 18,192 74, ,067 Share-based payments Equity at December 31, , ,858 64,636 (60,801) 349,026 Panoro Energy Annual Report 2011 Page 81

82 Ownership structure The Company had 4,346 shareholders per December 31, 2011 (2010: 4,762 shareholders). The twenty largest shareholders were: Shareholder Number of shares Holding in % 1 UBS AG, LONDON BRANCH 32,303, % 2 GOLDMAN SACHS INT. - EQUITY - 22,386, % 3 EUROCLEAR BANK S.A./N.V. 17,381, % 4 GOLDMAN SACHS & CO - EQUITY 15,602, % 5 VARMA MUTUAL PENSION INSURANCE 9,377, % 6 STATE STREET BANK AND TRUST CO. 5,050, % 7 DEUTSCHE WERTPAPIERSERVICE BANK AG 5,000, % 8 BANK OF NEW YORK MELLON SA/NV 4,741, % 9 HSBC BANK PLC 4,360, % 10 MORGAN STANLEY & CO LLC 3,946, % 11 JPMORGAN CHASE BANK 3,689, % 12 CREDIT SUISSE SECURITIES 3,660, % 13 UBS AG,LONDON BRANCH 2,974, % 14 BANK OF NEW YORK MELLON SA/NV 2,860, % 15 MP PENSJON PK 2,708, % 16 KLP AKSJE NORGE VPF 2,565, % 17 DNB NOR SMB 2,400, % 18 J.P. MORGAN BANK LUXEMBOURG S.A 2,306, % 19 TOLUMA NORDEN AS 2,016, % 20 STATE STREET BANK AND TRUST CO. 1,986, % Top 20 shareholders 147,319, % Other shareholders 87,226, % Total shares 234,545, % Shares owned by the CEO, board members and key management, directly and indirectly, at December 31, 2011: Shareholder Position Number of shares % of total Philip Vingoe Chairman, Panoro Energy ASA 1,439, % Ragnar Søegaard Director, Panoro Energy ASA 73, % Tord Pedersen Director, Panoro Energy ASA 47, % Kjetil Solbrække CEO, Panoro Energy ASA 376, % Anders Kapstad CFO, Panoro Energy ASA 60, % Shareholder distribution per 31 December 2011: Amount of shares # of shareholders % of total # of shares Holding in % 1-1,000 2, % 883, % 1,001-5,000 1, % 2,743, % 5,001-10, % 2,504, % 10, , % 17,131, % 100,001-1,000, % 38,905, % 1,000, % 172,377, % Total 4, % 234,545, % Page 82 Panoro Energy Annual Report 2011

83 Note 12. Bond loans In November 2010 the Company issued bonds of USD 140 million Panoro Energy Senior Secured Callable Bond Issue 2010/2018. The bond proceeds were primarily used to refinance the NEC 01 bond of NOK million and Brazilian BNDES and treasury loans amounting to BRL 140 million. The residual amount after refinancing is available for general corporate purposes. The bond issue is denominated in NOK and USD with tranches of NOK 205 million and USD 105 million carrying fixed interest rates of respectively 13.5% and 12% per annum. Interest is payable semi-annually. The first principal repayment is due on November 15, 2012 of NOK 20.5 million and USD 10.5 million and the same amounts are repayable every year on November 15 to the year The remaining principal amounts of NOK 82 million and USD 42 million are repayable at the bond redemption date on November 15, The bondholders carry a first priority pledge over Company s shares in Brazilian subsidiaries (Rio das Contas and PEdB) which effectively hold 10% working interest in Manati gas field. In addition to this, the bond agreement also stipulates issue of unconditional and irrevocable on-demand guarantees in favour of the Bond Trustee by the Brazilian subsidiaries. The main covenants of the bond loan are as follows: The issuer shall maintain at all times, a Book Equity ratio of the Group of minimum 25% which needs to be measured at every quarter end date. The Book Equity ratio measures the proportion of the Group s equity compared to total assets. The issuer shall not declare or make any dividend payments or other distributions or loans to its shareholders and should not engage in any activity having the effect of reducing capital or equity in the parent company. The Company shall not provide loans to any of its Brazilian subsidiaries, except to the extent such loans are subject to a first priority pledge to secure the obligations of the bond issuer. The Company shall not provide guarantees or other credit support to, or make investments in, any person or entity other than in the conditions as prescribed in the loan agreement. The amount above includes accrued interest to December 31, 2011 and is net of unamortised bond issue costs of USD 3,851,000 (2010: USD 4,490,000). Note 13. Warrants The 7,500,000 warrants issued under the demerger agreement expired on July 1, The fair value liability as at December 31, 2011 is nil. (2010: USD 1.2 million). Note 14. Other current liabilities The breakdown of other current liabilities is below: USD Accruals Employee related costs payable (including taxes) TOTAL 424 1,047 Note 15. Non cash transactions During 2010, USD million worth of shares were issued as consideration for investment in subsidiary shares and net assets acquired. Panoro Energy Annual Report 2011 Page 83

84 Note 16. Commitments Non cancelable operating lease commitments USD Not later than 1 year Later than 1 year and not later than 5 years Later than 5 years Total 1,341 1,703 Non-cancellable operating lease commitments relate to office premises rental. Note 17. Financial market risk and business risk See details in Note 23 in the consolidated financial statements. Note 18. Guarantees and pledges The bondholders carry a first priority pledge over Company s shares in Brazilian subsidiaries (Rio das Contas and PEdB) which effectively hold 10% working interest in Manati gas field. In addition to this, the bond agreement also stipulates issue of unconditional and irrevocable on-demand guarantees in favour of the Bond Trustee by the Brazilian subsidiaries. The Company has provided a performance guarantee to the Brazilian directorate ANP, in terms of which the Company is liable for the commitments of Coral, Estrela-do-Mar, Cavalo Marinho and BCAM-40 licenses in accordance with the given concessions of the licenses. The guarantee is unlimited. Page 84 Panoro Energy Annual Report 2011

85 Statement of Directors Responsibility We confirm to the best of our knowledge that the financial statements for the period January 1 to December 31, 2011 have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union, as well as additional information requirements in accordance with the Norwegian Accounting Act, that the financial statements for the parent company for 2011 have been prepared in accordance with the Norwegian Accounting Act and generally accepted accounting practice in Norway, and that the information presented in the financial statements gives a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the Group taken as a whole, and that the Board of Directors report includes a fair review of the development and performance of the business and the position of the Company and the Group taken as a whole, together with a description of the principal risks and uncertainties that they face. Oslo, April 17, 2012 The Board of Directors Panoro Energy ASA Phil Vingoe Tord Pedersen Marilda Rosado de Sá Ribeiro Chairman of the Board Director Director Ragnar Søegaard Katherine Støvring Kjetil Solbrække Director Director Chief Excecutive Officer Panoro Energy Annual Report 2011 Page 85

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