Results of Operations

Administrative expenses of $8.6 million for 2008 increased from $7.8 million for 2007 and reflect the growing scale of the company’s activities over the past twelve months, albeit a less significant growth than from 2006 to 2007. The company incurred higher levels of cost on various transactions and other corporate activity in 2008 which more than offset any US dollar equivalent cost reduction of those general administrative costs incurred in GBP sterling, which fell as the US strengthened in the second half of 2008.

The overall impact of foreign exchange is not significant in 2008 or 2007. Foreign exchange losses were incurred during the second half of 2008 following the strengthening of the US dollar against the GBP sterling and the Norwegian Kroner, and its impact on the US dollar equivalent of cash deposits and other recoverable denominated in those currencies. These losses were partially offset by foreign exchange gains booked on the US dollar equivalent of the GBP sterling element of a loan draw-down.

Pre-license costs include direct cost and allocated general administrative cost incurred on oil and gas interests prior to the award of licenses, concessions or exploration rights. During 2008 significant work was undertaken on the UK 25th licensing round from which the company has been awarded interests in three licenses. This activity has largely caused the increase in expense of $0.9 million from $0.3 million in 2007 to $1.2 million in 2008. Pre-license expense has been incurred at similar levels in South East Asia in 2007 and 2008.

Asset write offs in 2008 of $24 million related to the Chablis ($11.4 million), Oak ($6.1 million) and Spain ($6.1 million) assets in Q4 2008 and Biliton asset ($0.4 million) in Q1 2008. The aggregate asset write off was split in respect of E&E assets ($23.2 million), Goodwill ($0.4 million) and other assets ($0.4 million). The asset write offs of $9.3 million during 2007 comprised $9 million of Biliton PSC costs and $0.3 million from relinquished licenses in the UK.

Share-based payment costs of $1.8 million reflect allocations of charges related to share option grants made during the course of 2005, 2006, 2007 and 2008 and compare with costs of $2 million for 2007. The decline in the charge for options granted in 2005, 2006 and 2007 has generally offset the incremental charge generated from further share options granted in March and November 2008.

Negligible depletion and depreciation charges in all periods represent office equipment and fixtures and fittings. Those costs of petroleum and natural gas properties classified as exploration and evaluation assets are not currently subject to such charges pending further evaluation. The balance of Kambuna development costs is held within plant, property and equipment and will be depleted once production commences.

In August 2008 the company completed the sale of a 15% interest in the Glagah Kambuna TAC to a subsidiary of Salamander Energy plc (Salamander) for consideration of $52.7 million including working capital. This disposal generated a profit of $36.6 million after deducting the relevant proportional element of book development costs.

Finance revenue, comprising interest income of $1.8 million for 2008, compares with $2.7 million for 2007. The decrease from last year is due to both a reduction in average cash deposit balances held through the respective years and reduced average interest rate yields earned in 2008.

Finance costs consist of interest payable, issue costs spread over the term of the bank loan facility, and other fees. The first drawdown on the senior secured debt facility occurred soon after the facility was arranged in fourth quarter of 2007 and a second drawdown occurred in June 2008. The increase of $2.8 million from $0.3 million in 2007 to $3.1 million in 2008 results from a full year of costs being charged in 2008 following the facility arrangement late in 2007.

The net taxation credit from continuing operations was $0.2 million in 2008 and $0.4 million in 2007. Expenditures during 2005, 2006, 2007 and 2008 have reduced any potential current income tax expense arising for 2006, 2007 and 2008.

The accounting profit in 2007 was largely generated from tax recoveries recognized in the period.

The fourth quarter 2008 loss includes asset write offs of $23.6 million in regard to the Chablis, Oak and Spain assets.

The third quarter 2008 profit includes a profit of $36.6 million generated on the disposal of a 15% interest in the Kambuna field.

The fourth quarter 2007 loss includes asset write offs of $9 million in regard to the Biliton PSC.

Inventories decreased from $7 million to $4.6 million over the year as materials were utilized in the Kambuna drilling programme and the company reduced its working interest in the joint venture balances held.

Trade and other receivables at December 31, 2008 totaled $7.1 million, and included recoverable amounts from partners in Joint Venture operations in the UK and Indonesia, prepayments and sundry UK and Indonesian working capital balances. Significant amounts due as at 30 September 2008 from the Kutai disposal ($2.7 million) and Chablis farm-out ($1.6 million) were recovered in fourth quarter of 2008. The 2007 year end balance of $21.9 million included a $9.4 million upfront deposit payment for the Global Santa Fe drilling rig for Indonesian operations, which was utilized during the 2008 Indonesian drilling campaign and accounts for a significant proportion of the $14.8 million decrease in balance over the year.

The tax receivable as at December 31, 2007 represented expected recovery of exploration expenditure from the Norwegian fiscal authorities, which was received in full in December 2008.

Cash and cash equivalents increased from $22.6 million to $56.8 million in the year. The company raised additional new funds in first quarter (Q1) 2008 of $48.6 million through the issue of shares, received $25 million in further draw-downs on its loan facility and received $52.7 million from the Kambuna disposal in third quarter (Q3) 2008. These cash inflows were partially offset by the significant capital expenditure on the Kambuna development and appraisal drilling in the UK on Chablis. Other cost was incurred on exploration work across the portfolio in South East Asia and the UK and Ireland, together with ongoing administrative costs, operational expenses and corporate activity.

Trade and other payables of $14.6 million at December 31, 2008 chiefly include significant trade creditors and accruals from the Kambuna development and Chablis appraisal well drilling. Other smaller items include sundry creditors and accruals for administrative expenses and other corporate costs.

Financial liabilities are represented by the first drawdown of about GBP5 million under the senior secured debt facility, which occurred in fourth quarter (Q4) 2007, and second drawdown of $25 million in June 2008. The total is disclosed net of the unamortized portion of allocated issue costs.

The $27.2 million of additions were incurred on the following assets:

In South East Asia, $7.2 million was incurred in Vietnam on a seismic survey and preparations for drilling, $3.8 million was incurred on seismic, exploration work and G&A on the Kutai concession in Indonesia and $1 million on East Seruway.

In the UK & Western Europe, $8 million was spent on the Chablis site survey and appraisal drilling, $4.3 million of expenditure was incurred in other UK and Ireland assets on exploration work and G&A, including the Columbus FDP. $1.2 million of expenditure related to Spain and $1.7 million to Norway in first half of 2008 prior to the announcement of the Norwegian interest disposal.