Corporate Development:
— Develop valuable partnerships
— Mandate letter with The European Bank for reconstruction and development widened to include Albania
— Excellent working relationships with Moroccan and Albanian authorities gives regional first mover advantage
— Board strengthened: Two new directors joined the board with a wide range of international energy and financial experience
Paul Griffiths, chief executive officer of Island Oil & Gas commented:
In a testing global financial climate we are confident that our regionally targeted strategy, combined with our top quality management will bring Island Oil & Gas through to success.
Europe desperately needs to consider solutions to its security of supply issues. We believe that all of our current operations could be part of the solution. Our balanced portfolio contains both gas storage potential, in addition to exploration and development on the frontiers of Europe, where there is the proven potential for significant new discoveries.
We look forward to moving our operations forward in Morocco and Albania, moving up the exploration and development chain and utilizing our wide skill set to both develop operations and trade assets in order to create value for our shareholders.
Financial Results:
The company recorded an operating loss of GBP0.40 million for the half year period compared to a profit of GBP0.90 million in the previous comparable period. A profit arising on the sale of part of an asset in the previous period accounts for most of this variance. The loss in the current period relates to the normal operating conditions as there were no major write offs of capitalized exploration costs during the period.
Revenue from our interest in the Seven Heads Gas Field amounted to GBP1.29 million compared to GBP0.92 million in the previous comparable period, reflecting a reduction in gas produced, GBP(0.13 million), offset considerably by a higher average gas price increasing sales by GBP0.50 million, over the previous comparable period.
Cost of sales at GBP0.65 million for the half year were lower than the prior comparable period of GBP0.69 million. Administration costs for the half year were GBP0.91 million in line with the comparable period. A program of cost cutting was instituted in last quarter of 2008 to reduce the Dublin office overheads which should reflect in further savings against prior year numbers in the second half of the year. GBP0.18 million in pre-licence exploration expenditure was written off in the period.
Finance income at GBP0.45 million largely comprised an unrealised foreign exchange gain of GBP0.43 million, arising on US Dollar cash holdings, as a result of the sharp depreciation of Sterling against the US Dollar in the latter part of 2008. Finance expense for the half year amounted to GBP2.30 million compared to the prior period half year amount of GBP0.53 million.
Interest expense of GBP0.34 million was incurred on the advance due to Delta Hydrocarbons B.V. (Delta). This compares to an interest expense of GBP0.53 million incurred (on Bank Borrowings) in the same prior year period.
A GBP1.95 million unrealized foreign exchange loss was incurred on the $10 million advance due to Delta. This advance will be repayable against future production royalties.
Cash balances at the period end amounted to GBP1.91 million. It is anticipated that a farm out and/or an asset sale may result in further cash payments to the company over the coming months.
Gas Production Revenue
Gas sales revenues for the interim period amounted to GBP1.293 million an increase of 41% compared with GBP0.920 million for the same period last year. The increase reflects higher gas prices despite a reduction in gas volumes.
The seven heads Gas field produced at gross rates ranging from 6.5 – 9.5 million standard cubic feet per day (mm scfpd) during the six month period to January 31, 2009, versus a range of 10.5 – 12 mm scfpd for the previous comparable period. It is expected production rates will be maintained at 5.5 mmscf pd until the end of September 2009.
Estimated gross remaining technical resources as of January 1, 2009 are 6.34 billion cubic feet (bcf) or 0.79 bcf net to Island Oil & Gas, based on the operator’s, Marathon Oil Corporation, estimates.
International Portfolio Development:
Island’s management team has been reviewing a number of new opportunities in Morocco, Albania, Eastern Europe and the Former Soviet Union. The company has built strong local partnerships and is confident that its efforts will be rewarded with exciting new licenses, in Morocco in particular, in the coming months.
Morocco:
Zag license
In the Zag basin Reconnaissance license, a recently completed aeromagnetic survey has defined a number of promising structures several tens of kilometers long that are analogous to producing structures in geologically similar basins in neighboring Algeria. The results of the survey, combined with the favorable Moroccan fiscal regime, which includes a ten year corporation tax holiday, have greatly encouraged a joint venture partnership.
Island Oil & Gas and the operator, San Leon Energy Plc (San Leon), are well advanced in negotiations with the Moroccan government authority, ONHYM to convert the reconnaissance license into an eight year exploration license, with seismic being planned at an early stage to firm up a potential drilling location on one of the most prospective structures defined by the aeromagnetic survey.
Tarfaya license:
Island Oil & Gas, the operator of the Tarfaya exploration license, is preparing to award the contract to reprocess 1,000 kilometers of existing 2D seismic data with the objective of better-imaging highly prospective Triassic reservoirs that are producing in a number of fields in Morocco. This will be followed up by 500 kilometers of new seismic acquisition to mature Jurassic and Triassic drilling targets. Island Oil & Gas is currently investigating the seismic contractor market with a view to awarding a 2D seismic acquisition contract later this year.
Island Oil & Gas ‘s progress in Morocco has created significant industry interest in its dominant acreage position in the highly prospective Tarfaya and Zag basins , which already contain oil and gas discoveries. The potential of the Tarfaya exploration license has been confirmed by a competent person report compiled by Netherland Sewell & Associates for San Leon’s AIM listing which states probable prospective oil in place for the tarfaya exploration leads of 2,511.5 million barrels (mmb) and gross probable prospective oil resources of 711.3 mmb. It quotes gross unrisked possible prospective oil resources of 3,878.6 mmb.
The company is actively negotiating to increase its acreage position in Morocco on prudent and favorable terms as it seeks to take advantage of the recent string of exploration successes announced in the Moroccan offshore and onshore and in geologically contiguous basins in Algeria. Morocco is set to become a cornerstone of the company’s strategy for business growth.
Albania:
Following the announcement of the new Royalty Tax in Albania in August 2008, Island Oil & Gas, operator of the offshore Durresi block, has been negotiating new fiscal terms for the Durresi production sharing contract prior to the recommencement of operations on the license.
We are confident that the new terms will be presented to the council of ministers for review shortly. On this basis, Island Oil & Gas is investigating the seismic contractor market with a view to awarding a 3D seismic acquisition contract later this year with seismic planned for early 2010.
