MB Petroleum Services LLC and its subsidiaries FINANCIAL REVIEW

MB Petroleum Services LLC and its subsidiaries FINANCIAL REVIEW 30 September 2011

Review Report and financial information for 9 months period ended 30 September 2011 Pages 1. Summary of Financial Data 1-2 2. Financial Review 3-7 3. Consolidated Financial Statements a) Consolidated Statement of Comprehensive Income 8 b) Consolidated Statement of Financial Position 9 c) Consolidated Statement of Changes in Equity 10 d) Consolidated Statement of Cashflows 11 4. Notes to consolidated financial statements 12-27

SUMMARY OF FINANCIAL DATA Extracts from the unaudited condensed consolidated income statement, condensed statement of financial position and condensed statement of cashflow are as follows: A Key Consolidated Income Statement Information US$' 000 Nine months ended 30 September 2011 2010 Revenue 334,203 322,856 Cost of sales (i) (311,433) (284,559) Gross profit 22,770 38,297 Interest income 103 - Other income (ii) 1,587 1,750 General and administration expenses (20,750) (24,100) Depreciation and amortisation charges (iii) (955) (795) Finance costs (iv) (33,404) (16,792) Negative Goodwill - 4,022 Profit (loss) before tax (30,649) 2,382 Income tax 1,459 (1,952) Profit (loss) for the period (29,190) 430 Profit (loss) attributable to: Equity holders of the parent (29,190) 6,483 Non-controlling interests - (6,053) (29,190) 430 B. Key Consolidated Statement of Financial Position Information 30 September 2011 US$' 000 31 December 2010 Property, plant and equipment 435,219 414,250 Bank Balances & Cash 10,610 14,122 Total Assets 667,300 621,887 Total Debt (vi) 451,707 384,591 Shareholders equity 52,566 85,377 1

C. Key Consolidated Cash Flow Statement Information US$' 000 Nine months ended 30 September 2011 2010 Net cash from operating activities 11,617 (7,130) Net cash used in investing activities (59,311) (71,981) Net cash from financing activities 33,833 73,331 (Decrease) / Increase in cash and cash equivalents (17,068) (11,646) D. Other Key Financial Data US$' 000 LTM Nine months ended 30 September 30 September 2011 2011 2010 Revenue 448,384 334,203 322,856 EBITDA (vii) 51,213 40,060 49,267 Finance cost (iv) 42,366 33,404 16,792 EBITDA to Finance Cost (times) 1.2 1.2 2.9 Capital Expenditure (viii) 87,099 59,421 39,436 30 September 30 September 31 December 2011 2011 2010 Net Debt (ix) 441,097 441,097 370,469 LTM Annualised Actual EBITDA (vii) 51,213 53,413 60,420 Net Debt to EBITDA (ratio) 8.6 8.3 6.1 Notes: i) Cost of sales includes depreciation on operating assets amounting to $36,453 thousand for nine months period ended September 30 2011 and $33,320 thousand for the comparable period in 2010. ii) Other income includes profit on sale of fixed assets, rentals of equipment, insurance claims and other miscellaneous income in the normal course of business. iii) Depreciation and amortization charges include charges related to assets other than operating assets. iv) Finance cost includes interest expense plus gain or loss on foreign exchange. v) In 2007, MB Holding Company (MBHC) acquired 51% of the voting shares of MB Century Drilling Pty. Limited and its subsidiary (MBCD), its ultimate parent company registered in Australia and transferred the investment to MBPS Group effective 1 st Jan 2010. Subsequently, MBPS Group acquired remaining 49% in these companies on June 29 2010. vi) Total debt represents current and non-current term loans, short term loans, bank overdrafts and other bank borrowings. vii) EBITDA represents profit before net finance cost (calculated as finance cost less interest income), taxation, depreciation, amortization and negative goodwill. viii) Capital expenditure represents purchase of property, plant & equipment. ix) Net debt represents total debt less bank balances and cash. 2

Income statement review FINANCIAL REVIEW Nine months period ended 30 September 2011 compared to the corresponding period of 2010 Revenue Our revenue increased by 3.5% to $334.2 million in the nine months period ended September 30, 2011 from $322.9 million in the comparable period in 2010. Revenue growth was achieved on account of (i) increased drilling activity by 6.6% mainly under MB Century where rig utilization increased from 42% to 58%; (ii) increase in workover business by 7.0% on account of (a) higher revenues from operations in Bahrain which reported revenues for a period of nine months whereas the corresponding period reported revenue was for four months only; and (b) higher rig utilisation in Germany which increased from 81% to 89%; (iii) increase in production services business mainly under welltest in Oman due to rate increase and higher activities. The increase in revenue was partly offset by decrease in mud engineering activity under drilling fluids business by 11.6% as a result of lower call outs from client in Saudi Arabia. Revenue under manufacturing business was also lower as compared to the corresponding period as the facility in Germany was engaged in manufacture and sale of wireline equipment required under operations in Oman and the revenue was eliminated on consolidation. For the quarter ended 30 September 2011, our revenues increased by 10.4% as compared with the previous quarter on account of: (i) increase in drilling business by 12.7% mainly as a result of one rig going to work under Oman operations and 2 rigs in Syria working full quarter as compared to 50% utilisation in the previous quarter; (ii) increase in workover business by 8.3% mainly in Oman with rig utilisation increasing from 92% in the previous quarter to 98% in the current quarter coupled with rate increase under contract with a major client. The utilisation in Q2 was lower on account of strike as a result of Arab Spring ; (iii) increase in production services business by 6.8% mainly under well test activity in Saudi Arabia due to increase in utilisation from 37% to 57% and adhoc wireline equipment rental and service income from certain clients in Oman. Cost of sales The total cost of sales increased by $26.9 million to $311.4 million in the nine months period ended September 30, 2011 from $284.6 million in the comparable period in 2010 showing an increase of 9.4%. As a percentage to sales, the total cost of sales increased to 93.2% in nine months period ended September 30, 2011 from 88.1% in the comparable period in 2010. As a percentage of sales, cash cost of sales (excluding depreciation and amortization charges) increased to 82.3% in nine months period ended September 30, 2011 from 77.8% in the comparable period in 2010. Our costs increased mainly on account of: (i) increase in level of operations in MB Century and Bahrain with higher rig deployment days in the current period; (ii) costs incurred in 1Q 2011 in Oman on demobilization of two drilling rigs which came out of the contract and mobilization of six workover rigs; (iii) the Arab spring in Oman which escalated the employment costs after the local government increased the minimum wages for Omani citizens with retrospective effect from 1 March 2011. Major clients have in-principle agreed to the sharing of these costs. Currently 20% of the increase in wages cost is accounted in the books of the Company and the balance in expected to be reimbursed by the clients. 3

Depreciation costs increased by $3.1 million in nine months period ended September 30, 2011 over corresponding period in 2010, due to additions in property, plant & equipment. As compared to the previous quarter, the cash cost of sales as a percentage to sales has marginally decreased to 80.6% in the current quarter from 81.7% in the previous quarter, due to higher revenues as explained above. Gross profit Our gross profit decreased by $15.5 million to $22.8 million in the nine months period ended September, 2011 from $38.3 million in the comparable period in 2010. Our gross profit as a percentage to revenue for the nine months ended September 30, 2011 decreased to 6.8% from 11.9% in the corresponding period in 2010 due to increase in cost of sales as explained above. General and administration expenses Our general and administration expenses during nine months period ended September 30, 2011 decreased by 13.9% to $20.8 million from $24.1 million in the comparable period in 2010. The decrease in cost was on account of reclassification of certain expenses directly related to operating activities to cost of sales which were earlier shown as part of general and administration expenses. Finance costs Our finance cost in the nine months period ended September 30, 2011 increased by 98.9% to $33.4 million from $16.8 million in the comparable period in 2010. The increase has been on account of increase in bank borrowings pursuant to investment in fixed assets and meeting working capital requirements. The average rate of borrowing increased to 9.9%p.a. in the nine months period ended September 30, 2011 from 6.2%p.a. in the comparable period in 2010 on account of the financing done through bond at a coupon of 11.25% p.a. in November 2010. Depreciation and amortization charges Our depreciation and amortization charges in the nine months period ended September 30, 2011 increased by $0.2 million to $1.0 million from $0.8 million in the comparable period in 2010. Income tax expense The group reported tax credit position of $1.5 million in the nine months period ended September 30, 2011 from tax expense of $2.0 million in the comparable period in 2010 mainly on account of tax refund under operations in MB Century and lower provisioning required in Germany and Oman. Other Income Our other income includes profit or loss from sale of fixed assets as well as income from the rentals of equipment, insurance claims and other miscellaneous income in the normal course of business. Our other income for the nine months ended September 30, 2011 decreased to $1.6 million from $1.8 million in the corresponding period in 2010 mainly as a result of insurance claim amounting to $0.5 million received in the corresponding period in 2010. The decrease was partly offset by increase in other operational income in the current period. 4

Profit / Loss for the period The group reported a loss of $29.2 million in the nine months period ended September 30, 2011 as compared to profit of $0.4 million in the comparable period in 2010. The loss was mainly on account of: (i) increase in cash cost of sales by $23.7 million; (ii) increase in depreciation by $3.1 million; (iii) increase in finance costs by $16.6 million; (iv) absence of income from write off of negative goodwill of $4.0 million earned in the corresponding period in 2010. The increase in costs was partly offset by increase in revenue by $11.3 million and reduction in general and administration expenses by $3.4 million as mentioned above. EBITDA Our EBITDA declined to $40.1 million in the nine months period ended September 30, 2011 from $49.3 million in the comparable period in 2010. EBITDA as a percentage of revenue declined from 15.3% to 12.0%. Although the group witnessed increase in revenue with increase in asset utilization, the EBITDA reduced due to (i) increase in cost of sales mainly in wages under operations in Oman; (ii) increase in cost under operations in Germany. As compared to the previous quarter, EBITDA improved by 28.4% in the quarter ended 30 September 2011 to $17.3 million from $13.5 million in the previous quarter as explained under revenue. 5

FINANCIAL REVIEW (Continued) Statement of financial position review Position as at 30 September 2011 compared to 31 December 2010: Property, plant and equipment Property, plant and equipment have increased by 5.1% to $435.2 million as on September 30, 2011 from $414.3 million as on December 31, 2010 as a result of higher capital expenditure as compared to depreciation for the period. Accounts receivable and prepayments Accounts receivable and prepayments increased by 14.0% to $142.4 million as on September 30, 2011 from $124.9 million as on December 31, 2010. The accounts receivable increased mainly on account of (i) unsettled wage increase claims lodged with various customers in Oman; (ii) increase in credit period for a major customer in Oman amounting to $6.5 million and; (iii) increase in operations in Bahrain and MB Century resulting in increase in receivables by $3.7 million. Accounts payable and accruals Accounts payable and accruals increased by 8.9% to $133.6 million as on September 30, 2011 from $122.7 million as on December 31, 2010 as a result of increase in operations and certain costs as described under cost of sales during the reporting period. Financing Our external financing increased by 17.5% to $451.7 million as on September 30, 2011 from $384.6 million as on December 31, 2010. The increase was mainly to fund the capital expenditure during the period and long term working capital requirements. 6

FINANCIAL REVIEW (Continued) Statement of cashflow review Comparison of the Group s net cashflow from operating, investing and financing activities for nine months period ended September 30, 2011 and September 30, 2010 is as follows: Net cash from operating activities Our net cash from operating activities increased to a surplus of $11.6 million in the nine months period ended September 30, 2011 from deficit of $7.1 million in the comparable period in 2010. The deficit in 2010 was as result of payment of loan of $34.1 million extended by Downer EDI Ltd the erstwhile holders of 49% stake in MB Century. Ignoring this one-off transaction, the net cash decreased by $15.4 million. The decrease was mainly on account of increase in Accounts receivables and prepayments as explained earlier. The cash from operating activities before working capital changes has decreased to $41.3 million in the nine months period ended September 30, 2011 from $51.0 million in the comparable period in 2010. This decrease was mainly due to lower margins in the current period. Net cash used in investing activities Our net cash used in investing activity decreased by $12.7 million to $59.3 million in the nine months period ended September 30, 2011 from $72.0 million in the comparable period in 2010. Cash used in investing activity during the reporting period was mainly under Property, plant and equipment amounting to $59.4 million in the nine months period ended September 30, 2011 as compared to investment done in corresponding period of (i) $39.4m under Property, plant and equipment and (ii) investment in subsidiary of $35.9 million for acquisition of remaining 49% shares in MB Century. Net cash from (used in) financing activities Our net cash from financing activity decreased to $33.8 million in the nine months period ended September 30, 2011 from $73.3 million in the comparable period in 2010. Net cash from financing activities was higher in 2010 mainly on account of loans taken for acquisition of 49% share in MB Century. Capital expenditure We made an overall capital expenditure of $59.4 million in the nine months period ended September 30, 2011 as compared to $39.4 million in the comparable period in 2010. Of the total capital expenditure in the nine months period ended September 30, 2011, $37.1 million relates to the amount spent on expansion for purchase of equipment including 1 drilling rig, 2 workover rigs, 6 wireline units, 1 reverse unit, 2 mud pumps and 2 logging units and certain well test equipment. The balance amount of $22.3 million was spent on maintenance of equipment. 7

INTERIM CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the period ended 30 September 2011 (Unaudited) Nine months ended 30 September 2011 2010 US$' 000 US$' 000 Revenue 334,203 322,856 Cost of sales (311,433) (284,559) Gross profit 22,770 38,297 Interest income 103 - Other income 1,587 1,750 General and administration expenses (20,750) (24,100) Depreciation and amortisation charges (955) (795) Finance costs (33,404) (16,792) Negative Goodwill - 4,022 Profit (loss) before tax (30,649) 2,382 Income tax 1,459 (1,952) Profit (loss) for the period (29,190) 430 Profit (loss) attributable to: Equity holders of the parent (29,190) 6,483 Non-controlling interests - (6,053) (29,190) 430 Basic and diluted earnings per share for the equity holders of the parent (US $) (1.27) 0.34 Other comprehensive (loss) income Exchange differences on translation of foreign operations (3,621) (5,866) Other comprehensive (loss) income for the period, net of tax (3,621) (5,866) Total comprehensive (loss) income for the period, net of tax (32,811) (5,436) Total comprehensive (loss)income attributable to: Equity holders of the parent (32,811) 1,545 Non-controlling interests - (6,981) (32,811) (5,436) 8

INTERIM CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 30 th September 2011 (Unaudited) 30-Sept-11 31-Dec-10 Notes US $ 000 US $ 000 ASSETS Non-current assets Property, plant and equipment 435,219 414,250 Intangible assets 654 167 Investment in an associate 19 18 Deferred tax asset 13,304 13,552 449,196 427,987 Current assets Inventories 59,519 49,437 Accounts receivable and prepayments 142,416 124,922 Bank balances and cash 4 10,610 14,122 212,545 188,481 Assets classified as held for sale 5,559 5,419 218,104 193,900 TOTAL ASSETS 667,300 621,887 EQUITY AND LIABILITIES Equity Share capital 49,415 49,415 Statutory reserve 5,010 5,010 Share application money 10,403 10,403 Translation reserve (6,767) (3,146) Retained earnings (5,474) 23,716 Equity attributable to equity holders of the parent 52,587 85,398 Non-controlling interests (21) (21) Total equity 52,566 85,377 Non-current liabilities Term loans 5 35,499 35,486 Senior notes 320,000 320,000 Deferred tax liability 16,569 17,422 Government grants 1,997 1,829 Employees end of service benefits 7,848 6,919 Other payables - 227 381,913 381,883 Current liabilities Accounts payable and accruals 133,637 122,679 Bank overdrafts and other borrowings 68,440 11,613 Short term loans 3,805 - Term loans 5 23,963 17,492 Income tax payable 2,621 2,497 Government grants 355 346 232,821 154,627 TOTAL EQUITY AND LIABILITIES 667,300 621,887 9

INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the period ended 30 September 2011 (Unaudited) Attributable to equity holders of the parent Share Proposed increase in Statutory Translation Retained Non-controlling Capital share capital Reserve Reserve earnings Total Interests Total Equity US $ 000 US $ 000 US $ 000 US $ 000 US $ 000 US $ 000 US$ 000 US $ 000 At 1 January 2010 49,415-4,815 (4,905) 29,380 78,705 45,424 124,129 Profit/Loss for the year - - - - (8,076) (8,076) (6,053) (14,129) Other comprehensive income - - - 1,759-1,759 (928) 831 Total comprehensive income - - - 1,759 (8,076) (6,317) (6,981) (13,298) Transfer to statutory reserve - - 195 - (195) - - - Acquisition of additional interest - - - - 2,607 2,607 (38,464) (35,857) Increase in Share Capital - 10,403 - - - 10,403-10,403 Balance at 31 December 2010 49,415 10,403 5,010 (3,146) 23,716 85,398 (21) 85,377 Transfer to statutory reserve - - - - - - - - Profit/Loss for the year - - - - (29,190) (29,190) - (29,190) Other comprehensive income - - - (3,621) - (3,621) - (3,621) Increase in Share Capital - - - - - - - - Balance at 30 September 2011 49,415 10,403 5,010 (6,767) (5,474) 52,587 (21) 52,566 10

INTERIM CONSOLIDATED STATEMENT OF CASHFLOWS for the nine months period ended 30 September 2011 (Unaudited) 30-September 2011 2010 US $ 000 US $ 000 OPERATING ACTIVITIES Profit (loss) before tax (30,649) 2,382 Adjustments for: Depreciation and amortisation charges 37,408 34,115 Profit on sale of property, plant and equipment (5) (123) Accrual for employees end of service benefits 1,286 2,004 Release of Government grant - (198) Interest income (103) - Negative Goodwill - (4,022) Interest expense 33,404 16,792 41,341 50,950 Working capital changes: Inventories (10,082) (3,224) Receivables (14,979) 7,375 Payables (2,769) (59,634) Cash (used in) from operations 13,511 (4,533) Employees end of service benefits paid (357) (563) Taxation (1,537) (2,034) Net cash (used in) from operating activities 11,617 (7,130) INVESTING ACTIVITIES Purchase of property, plant and equipment (59,421) (39,436) Proceeds from sale of property, plant and equipment 494 3,312 Investment in subsidiary - (35,857) Addition to intangible asset (487) - Interest received 103 - Net cash (used in) investing activities (59,311) (71,981) FINANCING ACTIVITIES New term loans 16,416 50,109 Repayment of term loans (9,932) (55,395) Net movement in short term loans 3,805 80,635 Net movement in bank borrowings 43,271 14,774 Interest paid (19,904) (16,792) Receipts of Government grant 177 - Net cash from (used in) financing activities 33,833 73,331 Translation difference (3,207) (5,866) INCREASE / DECREASE IN CASH AND CASH EQUIVALENTS (17,068) (11,646) Cash and cash equivalents at the beginning of the period 6,249 11,691 CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD (10,819) 45 11

1 ACTIVITIES MB Petroleum Services L.L.C. (the company) and its subsidiaries (the group) owns and operates oil well drilling equipment, well servicing equipment and rigs, provides oilfield services, oil and gas well production and completion services, and supplies drilling fluids, chemicals, oilfield equipment and manpower to the oil industry. The address of its registered head office is PO Box 695 CPO, Seeb, Postal Code 111, Sultanate of Oman. The ultimate parent of the company is MB Holding Company LLC, a limited liability company registered in the Sultanate of Oman. The registered head office address of MB Holding Company LLC is PO Box 695 CPO, Seeb, Postal Code 111, Sultanate of Oman. 2 SIGNIFICANT ACCOUNTING POLICIES 2.1 Basis of preparation The consolidated financial statements are prepared under the historical cost convention. The group comprises operations with a number of functional currencies. Management uses US Dollars for controlling and maintaining the performance and financial position of the group accordingly the consolidated financial statements are presented in US Dollars. All values are rounded to the nearest thousand (US$ 000) except when otherwise indicated. Statement of compliance The consolidated financial statements of the group have been prepared in accordance with International Financial Reporting Standards (IFRS) and applicable requirements of the Commercial Company Law of the Sultanate of Oman. 2.2 Basis of consolidation The consolidated financial statements comprise those of MB Petroleum Services LLC and its subsidiaries as at 30 September 2011. 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 when 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 intra-group balances, transactions, unrealised gains and losses resulting from intra-group transactions and dividends are eliminated in full. Losses within a subsidiary are attributed to the non-controlling interest even if that results in a deficit balance. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the group loses control over a subsidiary, it: Derecognises the assets (including goodwill) and liabilities of the subsidiary Derecognises the carrying amount of any non-controlling interest Derecognises the cumulative translation differences, recorded in equity Recognises the fair value of the consideration received Recognises the fair value of any investment retained Recognises any surplus or deficit in profit or loss Reclassifies the parent s share of components previously recognised in other comprehensive income to profit or loss or retained earnings, as appropriate. 12

2 SIGNIFICANT ACCOUNTING POLICIES (continued) 2.3 Changes in accounting policy and disclosures The accounting policies used in the preparation of the consolidated financial statements are consistent with those used in the previous year, except for where the group has adopted certain new standards of, amendments and interpretations to IFRS as described below: New standards of, amendments and interpretations to IFRS relevant to the group: The group has adopted the following new and amended standards and interpretations as of 1 January 2010: IFRS 3 Business Combinations (Revised) and IAS 27 Consolidated and Separate Financial Statements (Amended) effective 1 July 2009, including consequential amendments to IFRS 2, IFRS 5, IFRS 7, IAS 7, IAS 21, IAS 28, IAS 31 and IAS 39 IFRIC 17 Distributions of Non-cash Assets to Owners IFRS 2 Share-based Payment: Group Cash-settled Share-based Payment Transactions effective1 January 2010 IAS 39 Financial Instruments: Recognition and Measurement Eligible Hedged Items effective 1 July 2009 Improvements to IFRSs (May 2008) Improvements to IFRSs (April 2009) When the adoption of the standard or interpretation is deemed to have an impact on the consolidated financial statements or performance of the group, its impact is described below: IFRS 3 Business Combinations (Revised) and IAS 27 Consolidated and Separate Financial Statements (Amended) The group applies the revised standards from 1 January 2010. IFRS 3 (Revised) introduces significant changes in the accounting for business combinations occurring after this date. Changes affect the valuation of noncontrolling interest, the accounting for transaction costs, the initial recognition and subsequent measurement of a contingent consideration and business combinations achieved in stages. These changes will impact the amount of goodwill recognised, the reported results in the period that an acquisition occurs and future reported results. IAS 27 (Amended) requires that a change in the ownership interest of a subsidiary (without loss of control) is accounted for as a transaction with owners in their capacity as owners. Therefore, such transactions will no longer give rise to goodwill, nor will they give rise to gains or losses. Furthermore, the amended standard changes the accounting for losses incurred by the subsidiary as well as the loss of control of a subsidiary. The change in accounting policy was applied prospectively, and as a result the group s acquisition of additional 49% in a subsidiary was recorded as a transaction with owners in their capacity as owners (refer note 3 (v)). Other amendments resulting from improvements to IFRSs did not have any impact on the accounting policies, financial position or performance of the group. The following standards, amendments and interpretations are not yet effective: IAS 24 Related Party Disclosures (Amendment) The amended standard is effective for annual periods beginning on or after 1 January 2011. It clarified the definition of a related party to simplify the identification of such relationships and to eliminate inconsistencies in its application. The revised standard introduces a partial exemption of disclosure requirements for government related entities. The group does not expect any impact on its financial position or performance. Early adoption is permitted for either the partial exemption for government-related entities or for the entire standard. 13

2 SIGNIFICANT ACCOUNTING POLICIES (continued) 2.3 Changes in accounting policy and disclosures (continued) IAS 32 Financial Instruments: Presentation Classification of Rights Issues (Amendment) The amendment to IAS 32 is effective for annual periods beginning on or after 1 February 2010 and amended the definition of a financial liability in order to classify rights issues (and certain options or warrants) as equity instruments in cases where such rights are given pro rata to all of the existing owners of the same class of an entity s non-derivative equity instruments, or to acquire a fixed number of the entity s own equity instruments for a fixed amount in any currency. This amendment will have no impact on the group after initial application. 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 as defined in IAS 39. The standard is effective for annual periods beginning on or after 1 January 2013. In subsequent phases, the IASB will address classification and measurement of financial liabilities, hedge accounting and derecognition. The completion of this project is expected in early 2011. The adoption of the first phase of IFRS 9 is not expected to have any significant impact on the group s financial statements. IFRIC 14 Prepayments of a minimum funding requirement (Amendment) The amendment to IFRIC 14 is effective for annual periods beginning on or after 1 January 2011 with retrospective application. The amendment provides guidance on assessing the recoverable amount of a net pension asset. The amendment permits an entity to treat the prepayment of a minimum funding requirement as an asset. The amendment is expected to have no impact on the financial statements of the group. IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments IFRIC 19 is effective for annual periods beginning on or after 1 July 2010. The interpretation clarifies that equity instruments issued to a creditor to extinguish a financial liability qualify as consideration paid. The equity instruments issued are measured at their fair value. In case that this cannot be reliably measured, the instruments are measured at the fair value of the liability extinguished. Any gain or loss is recognised immediately in profit or loss. The adoption of this interpretation will have no effect on the financial statements of the group. Improvements to IFRSs (issued in May 2010) The IASB issued Improvements to IFRSs, an omnibus of amendments to its IFRS standards. The amendments have not been adopted as they become effective for annual periods on or after either 1 July 2010 or 1 January 2011. The amendments listed below, are considered to be relevant for the group: IFRS 3 Business Combinations IFRS 7 Financial Instruments: Disclosures IAS 1 Presentation of Financial Statements IAS 27 Consolidated and Separate Financial Statements The group, however, expects no impact from the adoption of the amendments on its financial position or performance. 14

2 SIGNIFICANT ACCOUNTING POLICIES (continued) 2.4 Summary of significant accounting policies: Business combinations and goodwill Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the acquirer measures the noncontrolling interest in the acquiree either at fair value or at the proportionate share of the acquiree s identifiable net assets. Acquisition costs incurred are expensed and included in administrative expenses. When the group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. If the business combination is achieved in stages, the acquisition date fair value of the acquirer s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through profit or loss. Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability will be recognised in accordance with IAS 39 either in profit or loss or as a change to other comprehensive income. If the contingent consideration is classified as equity, it should not be remeasured until it is finally settled within equity. Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interest over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognised in profit or loss. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the group s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained. Revenue recognition Sales Sales are recognised when the significant risks and rewards of ownership of the goods have passed or services have been rendered to the buyer and the amount of revenue can be measured reliably. Service revenue Revenue from rendering of services is recognised when the outcome of the transaction can be estimated reliably, by reference to the stage of completion of the transaction at the reporting date. Stage of completion is measured by reference to labour hours incurred to the date as a percentage of total estimated labour hours for each contract. Dividend income Dividend income is recognised when the right to receive payment is established. Interest income Interest revenue is recognised as the interest accrues using the effective interest method, under which the rate used exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. 15

2 SIGNIFICANT ACCOUNTING POLICIES (continued) 2.4 Summary of significant accounting policies (continued) Taxation Current income 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. Taxation is provided based on relevant laws of the respective countries in which the group operates. 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 assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on laws that have been enacted at the reporting date. Deferred income tax assets are recognised for all deductible temporary differences and carry-forward of unused tax assets and unused tax losses to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry-forward of unused tax assets and unused tax losses can be utilised. 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 taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered. Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the respective assets. All other borrowing costs are expensed in the period they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and any impairment in value. Land is not depreciated. Depreciation is calculated on a straight line basis over the estimated useful lives of other assets as follows: Freehold buildings 16 2/3 to 40 years Porta cabins and plant and machinery 3 to 15 years Rigs and allied equipment 10 to 15 years Vehicles 5 to 8 years Furniture, fixtures and office equipment 3 to 6 2/3 years Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term.the carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets are written down to their recoverable amount, being the higher of their fair value less costs to sell and their value in use. Expenditure incurred to replace a component of an item of property, plant and equipment that is accounted for separately is capitalised and the carrying amount of the component that is replaced is written off. Other subsequent expenditure is capitalised only when it increases future economic benefits of the related item of property, plant and equipment. All other expenditure is recognised in the statement of comprehensive income as the expense is incurred. 16

2 SIGNIFICANT ACCOUNTING POLICIES (continued) 2.4 Summary of significant accounting policies (continued) Property, plant and equipment (continued) An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the statement of comprehensive income in the year the asset is derecognised. The asset s residual values, useful lives and methods of depreciation are reviewed, and adjusted if appropriate, at each financial year end. Intangible assets and amortisation Intangible assets acquired are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life is reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortisation period or method, as appropriate, and treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the income statement in the expense category consistent with the function of the intangible asset. Investments in associates The group s investment in its associates is accounted for under the equity method of accounting. An associate is an entity in which the group has significant influence and which is neither a subsidiary nor a joint venture. Under the equity method, the investment in the associate is carried at cost plus post- acquisition changes in the group s share of net assets of the associate. Goodwill relating to an associate is included in the carrying amount of the investment. After application of the equity method, the group determines whether it is necessary to recognise any additional impairment loss with respect to the group s net investment in the associate. The statement of comprehensive income reflects the share of the results of operations of the associate. Where there has been a change recognised directly in the equity of the associate, the group recognises its share of any changes and discloses this, when applicable, in the statement of changes in equity. Profits and losses resulting from transactions between the group and the associate are eliminated to the extent of the interest in the associate. Available for sale investments Investments designated as available-for-sale investments are initially recorded at cost and subsequently measured at fair value, unless this cannot be reliably measured. Changes in fair value are reported as a separate component of equity. On derecognition the cumulative gain or loss or on impairment the cumulative loss previously reported in equity is included in the statement of comprehensive income for the period. Derecognition of financial instruments Financial assets A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when: the rights to receive cash flows from the asset have expired; or the group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a pass-through arrangement; and either (a) the group has transferred substantially all the risks and rewards of the asset, or (b) the group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. 17

2 SIGNIFICANT ACCOUNTING POLICIES (continued) 2.4 Summary of significant accounting policies (continued) Derecognition of financial instruments (continued) When the group has transferred its rights to receive cash flows from an asset or has entered into a pass through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, a new asset is recognised to the extent of the group s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset, is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the group could be required to repay. When continuing involvement takes the form of a written and/or purchased option (including a cash settled option or similar provision) on the transferred asset, the extent of the group s continuing involvement is the amount of the transferred asset that the group may repurchase, except that in the case of a written put option (including a cash settled option or similar provision) on an asset measured at fair value, the extent of the group s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price. Financial liabilities A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the statement of comprehensive income. Impairment of non-financial assets The group assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the group makes an estimate of the asset s recoverable amount. An asset s recoverable amount is the higher of an asset s or cash-generating unit s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are corroborated by valuation multiples or other available fair value indicators. For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such an indication exists, the group makes an estimate of the recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset s recoverable amount since the last impairment loss was recognised. If that is the case the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such a reversal is recognised in the statement of comprehensive income. Impairment losses recognised in relation to goodwill are not reversed for subsequent increases in its recoverable amount. 18

2. SIGNIFICANT ACCOUNTING POLICIES (continued) 2.4 Summary of significant accounting policies (continued) Impairment of non-financial assets (continued) The following criteria are also applied in assessing impairment of specific assets: Associates After application of the equity method, the group determines whether it is necessary to recognise an additional impairment loss of the group s investment in its associates. The group determines at each reporting date whether there is any objective evidence that the investment in associate is impaired. If this is the case the group calculates the amount of impairment as being the difference between the fair value of the associate and the acquisition cost and recognises the amount in the statement of comprehensive income. Goodwill Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of the cash-generating unit (or group of cash-generating units), to which the goodwill relates. Where the recoverable amount of the cash-generating unit (or group of cash-generating units) is less than the carrying amount of the cash-generating unit (group of cashgenerating units) to which goodwill has been allocated, an impairment loss is recognised. Impairment losses relating to goodwill cannot be reversed in future periods. The group performs its annual impairment test of goodwill as at 31 December. Impairment and uncollectibility of financial assets An assessment is made at each reporting date to determine whether there is objective evidence that a specific financial asset may be impaired. If such evidence exists, any impairment loss is recognised in the statement of comprehensive income. Impairment is determined as follows: (a) (b) (c) For assets carried at fair value, impairment is the difference between cost and fair value; For assets carried at cost, impairment is the difference between cost and the present value of future cash flows discounted at the current market rate of return for a similar financial asset. For assets carried at amortised cost, impairment is the difference between carrying amount and the present value of future cash flows discounted at the original effective interest rate. Term deposits Term deposits are carried at their principal amount. Interest received in advance is charged to income as it accrues, with amounts received in advance included in accounts payable and accruals to the extent due within one year. Accounts receivable Accounts receivable are stated at original invoice value less a provision for any uncollectible amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when there is no possibility of recovery. Inventories Inventories are stated at the lower of cost and net realisable value. Costs are those expenses incurred in bringing each product to its present location and condition, as follows: Spares, consumables and goods for resale Work in progress purchase cost on a weighted average percentage completion basis Work in progress on long term contracts is calculated at cost plus attributable profit, to the extent that this is reasonably certain after making provision for contingencies, less any losses foreseen in bringing contracts to completion and less amounts received and receivable as progress payments. Cost for this purpose includes direct labour, direct expenses and an appropriate allocation of overheads. Net realisable value is based on estimated selling price less any further costs expected to be incurred to completion and disposal. 19

2. SIGNIFICANT ACCOUNTING POLICIES (continued) 2.4 Summary of significant accounting policies (continued) Cash and cash equivalents For the purpose of the Cash Flows Statement, cash and cash equivalents consists of cash and bank balances, net of outstanding bank overdrafts, and bank deposits with original maturities of three months or less. Non-current assets held for sale and discontinued operations Non-current assets and disposal groups classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. Non-current assets and disposal groups are classified as held for sale if their carrying amounts will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. In the consolidated statement of comprehensive income of the reporting period, and of the comparable period of the previous year, income and expenses from discontinued operations are reported separate from normal income and expenses down to the level of profit after taxes, even when the Group retains a non-controlling interest in the subsidiary after the sale. The resulting profit or loss (after taxes) is reported separately in the statement of comprehensive income. Property, plant and equipment and intangible assets once classified as held for sale are not depreciated / amortised. Accounts payable and accruals Liabilities are recognised for amounts to be paid in the future for goods or services received, whether or not billed by the supplier. Interest bearing borrowings All loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Installments due within one year at amortised cost are shown as a current liability. Gains and losses are recognised in net profit or loss when the liabilities are derecognised as well as through the amortisation process. Interest costs are recognised as an expense when incurred except those that qualify for capitalisation. Employees end of service benefits The group provides staff terminal benefits to its employees under the laws of the country in which they are employed. The entitlement to these benefits is based upon the employees final salary and length of service, subject to the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment. Group companies registered in Oman make payment to the Omani Government Social Security scheme under Royal Decree 72/91 for Omani employees, calculated as a percentage of the employees salary. The group s obligations are limited to these contributions, which are expensed when due. Government grants Government grants are recognised where there is reasonable assurance that the grant will be received and all attached conditions will be complied with. When the grant relates to an expense item, it is recognised as income over the period necessary to match the grant on a systematic basis to the costs that it is intended to compensate. Where the grant relates to an asset, it is recognised as deferred income and released to income in equal amounts over the expected useful life of the related asset. 20