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DANA PETROLEUMANNUAL REPORT

05

Creating value

Dana Petroleum plc A

nnual Report and A

ccounts 2005

RECORD OPERATING PERFORMANCE

Average production rose to a new record high of 19,683 boepd

Revenue increased 51% to £165.6 million (2004: £109.5 million)

Net profit increased 406% to £64.2 million (2004: £12.7 million)

A near four-fold advance in earnings per share to 80.1p (2004: 16.5p)

Cash generated from operations up 73% to £107.1 million (2004: £61.8 million)

Added net 24.8 million boe of proven and probable reserves in the North Sea, giving a 36% increase to 94.4 million boe, after allowing for production

North Sea now represents 85% of overall Group proven and probable reserves of 111.5 million boe following strategic exits from projects in Indonesia and Russia

EXTENSIVE FIELD DEVELOPMENT & ASSET TRADING CONTINUES PRODUCTION GROWTH

Asset swapping strategy delivered new North Sea reserves and production from the Hudson and Johnston fields

Accreditation by UK Government as a North Sea production operator

Successful year of infill drilling and well intervention activity, notably the re-activation of the Mallard oil field and the Johnston gas field extension project

Gadwall oil field and F16-E gas field developments completed and brought on stream

Developments approved for the Goosander and Enoch oil fields and the Cavendish gas field

Added significant value to portfolio, with new or incremental stakes acquired on attractive terms in five projects to be developed in the next few years

SUCCESSFUL EXPLORATION & APPRAISAL PROGRAMME WITH FOUR DISCOVERIES FROM SIX WELLS

Faucon gas discovery offshore Mauritania proved working petroleum system and provides impetus for further exploration of the region

New oil discovery at South Melville and significant extensions to the Barbara and Johnston gas fields

Won 20 blocks in the UKCS 23rd Licencing Round

Good progress in establishing two new business areas offshore Morocco and Egypt

Large 3D seismic surveys recently acquired offshore Morocco, in the Shetland-Faroe basin, in the Gulf of Suez and offshore South Australia

Highlights

| Dana Petroleum plc 2005 Annual Report

FAROEISLANDS

F16-E

CLAYMORE

VICTOR

ENOCH

HUDSON

OTTER

BARBARA

BANFF

CAVENDISH

CALEDONIA

GKA

MELVILLE

“The Company has driven forward its North Sea development programme

resulting in three new oil and gas fields due on stream later this year,

taking the Group’s total number of producing fields to 15. In addition, our

exploration and new business teams won attractive new licences in the UK

and agreed deals for strategic entries into offshore Egypt and Morocco.”

TOM CROSS, CEO

JOHNSTONANGLIA

2004 20052004 2005

Revenue + 51% Net profi t + 406%

£109.5m £165.6m £12.7m £64.2m

BLOCKS 7 & 8MAURITANIA

KENYA

BLOCKS 1 & 2

BLOCK L5

BLOCK L7

SENEGALST. LOUIS

SOUTH VAT-YOGAN

WA-226-P

EPP 28-31

05

PRODUCTION

DEVELOPMENT

EXPLORATION

MOROCCO EGYPT

NW SAFI WEST EL BURULLUS

SOUTH FEIRAN

RUSSIA

AUSTRALIA

Creating value

OUTLOOKOn target to increase production capacity to 40,000 boepd by the end of 2007

Development plans being actively progressed for seven new fields

Attractive infill drilling opportunities identified in a number of existing producing assets

Current unhedged position continues to provide full exposure to commodity price strength

Eleven exploration and appraisal wells planned for 2006, ten of which have rigs committed

Four 2006 exploration wells will target very large prospects offshore Mauritania and Kenya, each with company transforming potential

Up to 40 wells planned by end 2008, targeting potential reserves of 2.1 billion barrels net to Dana

“Dana is on track to increase production capacity to over 40,000 barrels per day by the end of 2007 and has forged an exciting exploration programme featuring up to 40 wells through 2008, which are targeting 2.1 billion barrels of potential reserves net to Dana”

COLIN GOODALL, CHAIRMAN

Dana Petroleum plc 2005 Annual Report | 1

2 | Dana Petroleum plc 2005 Annual Report

04 Chairman’s & Chief Executive’s Review

13 Review of Operations

20 Financial Review

22 Directors and Officers

23 Directors’ Report and Accounts

Contents


Chairman’s & Chief Executive’s Review


“2005 was the most successful year in

Dana’s history, delivering record

production and record earnings

per share.”

INTRODUCTIONWe are delighted to report on another year of record operating performance with new highs established in production, revenue, cash flow and profit. Dana has a strong and balanced asset base combining healthy cash reserves, a robust production portfolio delivering strong cashflow, a wide range of field development opportunities and an exciting 40 well exploration and appraisal drilling programme with the potential to deliver major upside over the next three years.

Throughout 2005, Dana’s active development programme and asset trading activities allowed the Company to continue its delivery of year on year production growth. The Group completed the acquisition of interests in the Johnston and Hudson fields, both delivered through its asset swapping strategy, and acquired, on very attractive terms, new or incremental stakes in no less than five new fields to be developed over the next few years. This commercial activity was complemented by significant progress on existing assets, with two additional oil and gas fields brought on stream, three new developments sanctioned and underway, and further infill drilling within already producing fields. Dana also achieved accreditation as a UK production operator on the Hudson field which in itself opens up new opportunities.

Alongside these production growth activities, Dana continued to pursue an ambitious exploration and appraisal programme. The 2005 drilling campaign delivered four successes from six wells, including the important Faucon gas discovery offshore Mauritania. Good progress was also made in building the portfolio of future exploration drilling opportunities. Following a comprehensive review of future exploration potential worldwide, the Company reached agreements to gain important new exploration areas offshore Morocco and Egypt and achieved excellent results in its bids in the UKCS 23rd Licensing Round. In addition, Dana accelerated the acquisition of extensive new 3D seismic surveys on existing acreage.

Looking ahead, 2006 production is expected to move ahead of 2005 levels and the Company remains on target to increase production capacity to 40,000 boepd by the end of 2007. Eleven exploration and appraisal wells are now planned for 2006, of which ten already have firm rig commitments. This includes four wells in the second half 2006 which will target very large prospects offshore Mauritania and Kenya, each of which has company transforming potential. A total of up to 40 wells are now being planned for the period to the end of 2008, targeting potential

reserves of 2.1 billion barrels net to Dana.

RESULTSThe 2005 results are Dana’s first full year figures prepared under International Financial Reporting Standards (IFRS). As part of the transition to IFRS, the Company has been required to revise its accounting policies and to restate previously reported UK GAAP results. All comparative figures have been restated for IFRS and the new accounting policies.

With average daily oil and gas production growing to 19,683 boepd (2004: 18,608 boepd) and an increased average realised price of $42.24 per boe during 2005 (2004: $29.45 per boe), revenue for the period increased by 51% to £165.6 million (2004: £109.5 million). Profit before tax grew by some 232% to £107.8 million (2004: £32.5 million). Profit after tax increased by 406% to £64.2 million (2004: £12.7 million) resulting in a near four-fold improvement in earnings per share to 80.1p (2004: 16.5p).

Cash generated from operations grew 73% to £107.1 million (2004: £61.8 million) and, including the proceeds of the share placing in November 2005, net cash increased by £71.3 million during the year, leaving the Company with a strong net cash position of £91.8 million at the end of 2005.

Having carefully considered the financing requirements for Dana’s exploration and development programme over the next few years, and recognising the Company’s plans to grow and add value through commercial transactions, the Directors believe that retaining profits at this time will lead to optimal returns from project investments. Therefore, in line with current strategy, the Directors do not recommend payment of a dividend, but will keep this under review as projects are delivered and exploration opportunities assessed.

Some 24.8 mmboe of proven and probable reserves were added in the North Sea during 2005 due to the net effect of discoveries, acquisitions, disposals and field revisions. This more than offset North Sea production of 6.6 mmboe. Net additions thus replaced 375% of North Sea production and North Sea proven and probable oil and gas reserves at 31 December 2005 increased to a record high of 94.4 mmboe. These reserve increases in the North Sea in large part mitigated the divestment of 30.8 mmboe of reserves which occurred when the Group completed its strategic exit from Indonesia and the Russian company Evikhon during the reporting period. Overall Group proven and probable oil and gas reserves at 31 December 2005 were 111.5 mmboe, of which 85% are now held in the North Sea. The Group’s best estimate of its end 2005 contingent resources (technically recoverable hydrocarbons not yet determined to be commercial) was a further 124.3 mmboe. Therefore the total recoverable hydrocarbon resources available to the Company at end 2005 were 235.8 mmboe, of which 47% are currently classed as proven and probable reserves.


“The Company has driven forward its North

Sea development programme resulting in

three new oil and gas fi elds due on stream

later this year.”

OPERATIONAL HIGHLIGHTS

PRODUCTION AND DEVELOPMENTGroup production averaged 16,613 bpd of oil and 17,810 mmscfpd of gas in 2005, giving a total of 19,683 boepd, some 84% of which was oil production. Approximately 91% of 2005 production came from Dana’s portfolio of eleven North Sea fields with the remainder from the South Vat-Yoganskoye field in Western Siberia. This overall increase in production levels was due to oil and gas output from new fields (Gadwall, Johnston and F16-E) and an increased stake in the Hudson field more than offsetting the natural decline in production elsewhere.

The continuing growth of Dana’s production and development business is being achieved through both commercial and development routes. The value of the Group’s strategy of exchanging international exploration success for production and development in the North Sea was clearly demonstrated in March when Dana exchanged its non-core, Indonesian pre-development gas interests for an additional 28% interest in the producing Hudson oil field and realised a substantial gain on completion of the deal. The Company was also appointed as operator of the Hudson field, thus providing increased commercial flexibility to take on operated as well as non-operated North Sea positions in the future.

A further exchange transaction saw Dana gain an interest in the Johnston gas field and new or incremental stakes were acquired, on very attractive terms, in five new fields to be developed in the near future, namely the

Monkwell, Barbara, Babbage and Gunn gas fields and the Melville oil field. An exchange transaction agreed with Gaz de France in November 2005 and a more recent agreement with Venture to acquire an interest adjacent to the Greater Kittiwake area (GKA) in Block 21/20 will, if successfully completed, also add the Anglia gas field and the Christian oil field to Dana’s production and development portfolio. The sale of the Company’s minority shareholding in Evikhon, the Russian joint stock company, was also completed during the year, at an attractive price of $28 million.

Investment in field development saw the Gadwall oil field and the F16-E gas field brought on stream in April and November respectively. Additionally, infill drilling and well intervention activity in the Mallard, Otter and Claymore oil fields and the Johnston gas field resulted in further North Sea production and reserves growth.

Development of the Goosander and Enoch oil fields and the Cavendish gas field is well advanced, with all three fields currently expected to deliver first oil and gas in the second half of 2006. With further infill drilling and well intervention work planned in the Otter, Gadwall, Mallard, Banff, Claymore and F16-E fields, average production in 2006 should see significant growth over 2005 levels.

Looking further ahead, development plans are being actively considered for seven new fields, namely the Monkwell, Barbara, Babbage and Gunn gas fields and the Melville, Grouse and Christian oil fields. It is anticipated that a number of these will be sanctioned for


development in 2006 with late 2007 first production targets. With attractive infill opportunities in the Hudson and Johnston fields also being targeted for execution in the near term, the Company remains on target to increase production capacity to 40,000 boepd by the end of 2007.

EXPLORATION AND APPRAISALDana’s 2005 exploration and appraisal drilling campaign delivered four successes from six wells. The most important of these was potentially the Faucon discovery made in Block 1 offshore Mauritania. Although the volume of gas encountered in this first well would not justify near term development on a stand alone basis, this discovery is significant, having demonstrated both that a working petroleum system exists in the vastly under-explored region of southern Mauritania and that sufficient reservoir sand is present to create the potential for major discoveries in this area. Faucon therefore provides enormous encouragement for the additional prospects already identified in Block 1 and also for the future exploration of Dana’s neighbouring licence interests including the St. Louis Block in Senegal which adjoins Block 1 to the south.

Dana’s North Sea programme also began well with the discovery in March of the South Melville oil field, located just six kilometres to the south of the Hudson field. The next two well results were also positive, proving significant extensions to the Barbara and Johnston gas fields. Although Dana’s last two North Sea exploration wells, drilled to test the Fiacre and

Clachnaben prospects, found only traces of hydrocarbons, pre-drill evaluation had identified both of these prospects to be of higher risk than the Company’s other 2005 North Sea wells, and Dana had therefore offset its costs on these wells through farm-out ahead of drilling.

Important progress was also made towards future exploration drilling. Agreements have been executed to contract the Atwood Hunter drilling rig for two further wells offshore northern Mauritania in 3Q 2006. The first well will target the very large ‘Flamant’ prospect in Block 8, with the potential for gas in place exceeding 6 trillion cubic feet. The second well will look for additional hydrocarbons near to the Pelican gas discovery already made by Dana in Block 7. The final location of this latter well will be based on detailed interpretation of the additional 3D seismic data acquired up-dip and inshore of the Pelican gas discovery during 2005.

High impact exploration drilling has also been firmed up offshore Kenya where plans are being finalised to drill two wells around the end of 2006 utilising the ‘Chikyu’ deepwater drillship. The first well is likely to target the ‘Pomboo’ prospect, in Block L5, and a second well the ‘Sokwe’ prospect, in Block L7. Both of these prospects have the potential to contain over one billion barrels of oil equivalent. Dana has built a valuable commercial position in Kenya, holding a 30% working interest but having two thirds of its costs carried by the operator, Woodside Energy.

Offshore southern Mauritania, success at Faucon has provided the impetus to extend 3D seismic coverage southwards into Senegalese waters. This is likely to commence later in 2006 with a view to drilling in 2008. With a similar timescale for drilling, a 3D seismic survey has also just been completed over the most promising leads in Dana’s exploration permits offshore South Australia.

Commercial activity was once again prominent in delivering future exploration opportunities. Dana created opportunities to enter two new countries in 2005, securing a 26.25% interest in the NW Safi exploration licence, offshore Morocco, and reaching agreement to acquire a 20% interest in the South Feiran block, in the Gulf of Suez, Egypt, subject to regulatory approval. With Dana’s support, large 3D seismic surveys have recently been acquired within both of these licences, with a view to drilling in 2007 or 2008, subject to rig availability.

Dana was also successful in growing its exploration portfolio in UK waters. The Company won 20 blocks in the UKCS 23rd Licencing Round, 18 in the Shetland-Faroe Basin and two in the southern North Sea. The Shetland-Faroe Basin licences complement Dana’s existing exposure to this highly prospective region gained through its 17.2% shareholding in Faroe Petroleum plc (FP) which holds an extensive licence position in both UK and Faroese waters. Dana is moving swiftly to


exploit its directly held licences, having already acquired a large volume of 3D seismic data to keep open the possibility of exploration drilling in summer 2007, subject to rig availability. As the largest shareholder, Dana will also benefit from any exploration success FP has in 2006 when it drills an exploration prospect to the north of the Claymore field and a large structure in Faroese waters named ‘Brugdan’.

A series of very low cost North Sea acquisitions have created, in a short period of time, an attractive acreage position around the Cleeton/Ravenspurn production infrastructure. These deals included the acquisition of a 40% interest in the Babbage gas field, where a key appraisal well will now be drilled in the first half of 2006, and a number of other exploration wells are expected to emerge from this area during 2007 and 2008. The 2005 acquisition of interests in northern North Sea Blocks 211/22 and 211/23 will also yield further exploration drilling in 2006 when a dual objective well will both appraise the 211/23-11 oil discovery and test the large ‘Causeway’ exploration prospect. The remaining firm well in the 2006 drilling programme will target the DF gas prospect in Block E18a, offshore the Netherlands. Depending on the outcome of ongoing development optimisation studies, a further appraisal well may also be drilled in the Barbara field later in 2006.

Beyond 2006, Dana’s exploration and appraisal drilling programme is set to continue at pace. In the period 2007-2008, the Company is currently planning on participating in up to a

further 29 wells at a rate of 10 to 15 per year with the final schedule depending on the timing of rig availability. Of this total, some 50% of the wells are expected to target high impact exploration prospects in the international arena and the Shetland-Faroe Basin.

BOARD AND CORPORATE GOVERNANCEAs planned, Charles Smith, who led the Board as Chairman with great skill, diligence and integrity during the formative years of Dana, retired as a Non-Executive director at the AGM on 28 July 2005. Prior to Charles’ departure, Ian Rawlinson was appointed as a Non-Executive director with effect from 31 March 2005 and became Chairman of the Audit Committee in December 2005. In recognition of Dana’s continuing development, Philip Dayer was appointed as a Non-Executive director with effect from 16 March 2006, and we look forward to the valuable input which both Ian and Philip will make to the Group during the next few years of growth.

STRATEGYDana’s strategy is to create significant asset value per share by delivering strong growth in hydrocarbon reserves, production and earnings over the medium-term. Dana’s strategy, based on the combined experience of the Board, has four key elements:

1. BALANCING INVESTMENT between a low risk acquisition and field development programme aimed at maintaining steady growth in production and reserves and a high-impact exploration drilling programme

which has the potential for company transforming step-change growth;

2. MAXIMISING THE PROBABILITY OF SUCCESS by reducing the technical risk associated with individual investments to a minimum and by ensuring the Company always holds a portfolio of attractive exploration prospects and development opportunities;

3. USING EXPLORATION AS LEVERAGE TO ACCELERATE GROWTH by trading long-term or higher risk discoveries or prospects for near-term production and gearing up these swap transactions with cash where possible; and

4. OPERATING A SOUND FINANCIAL FRAMEWORK which ensures that investment returns are robust to project variation and commodity price.

This strategy has served the Company well, delivering ten years of rising production and earnings and positioning the Group with an exceptional portfolio of future drilling opportunities.

OUTLOOKWith three new field developments well advanced and further infill drilling planned, average production in 2006 is expected to show strong growth over 2005 levels and will be influenced by the precise timing of production start-up from the new fields,


as well as the completion of ongoing commercial transactions. Dana continues not to hedge with respect to oil price, thereby providing full exposure to the continuing strength of commodity prices.

The Group is currently planning to drill 11 exploration and appraisal wells in 2006, 10 of which already have rigs contracted. Four of these wells, two offshore Mauritania and two offshore Kenya, will target very large prospects with company transforming potential. Overall in 2006, Dana expects to invest some £140 million within its existing fields and exploration licences. Approximately £100 million of this investment programme will be spent on North Sea development activity with the remaining £40 million targeting international exploration and appraisal drilling.

Looking further ahead, development plans are being considered for seven additional new fields, and the Group remains on target to increase its production capacity to 40,000 boepd by the end of 2007. The Company is also planning on participating in up to a further 29 wells by the end of 2008, some 50% of which will target high impact exploration prospects in the international arena or the Shetland-Faroe Basin. Overall, Dana’s 40 well exploration and appraisal programme is targeting a total of 2.1 billion barrels net to the Company on an unrisked basis.

To complement its organic growth programme, Dana will continue to pursue acquisition and trading opportunities which will further strengthen its asset base. In particular, the Group will focus on its proven strategy of using its exploration positions to create exclusive swap transactions which can then be geared up by investing its cash reserves to create larger value additions.

Following Dana’s strategic positioning offshore Morocco and Egypt during 2005, it is working hard to build further in both provinces. The exchange transaction agreed with Gaz de France (GdF) in November 2005 is one such opportunity which would deliver a further asset in Egypt, namely a 30% interest in the West El Burullus concession in the Nile Delta, upon completion. The related transaction, which would have seen Dana acquire a minority

interest in blocks onshore Algeria for a cash consideration of $93 million, is not now expected to complete as GdF has been unable to gain the necessary approvals within Algeria to divest. Notwithstanding this, discussions have commenced with GdF on how the existing commercial agreements could be adjusted to allow the exchange deal to continue towards completion. These discussions include the potential for GdF to assign to Dana other exploration and production assets in Dana’s core areas of business. As previously reported, the exchange deal itself would see Dana gain a free carry on a three well drilling campaign offshore Mauritania plus two new UK gas production interests at the Johnston and Anglia fields, in addition to the West El Burullus stake offshore Egypt.

In summary, the outlook is very bright. Dana has a strong asset base combining healthy cash reserves, a robust production portfolio delivering strong cashflow, an array of field development opportunities and an exciting 40 well exploration and appraisal drilling programme with the potential to deliver very significant upside over the next three years. The quality of Dana’s asset base, and the value being delivered from it, is a direct result of a sound strategy being implemented by a talented team of people. On behalf of the Board and Shareholders we would like to take this opportunity to formally thank all staff for their commitment and enthusiasm during 2005.

28 March 2006

Colin GoodallChairman

Tom Cross Chief Executive


“The quality of Dana’s asset base, and the value

being delivered from it, is a direct result of a sound

strategy being implemented by a talented team

of people.”

MarchDana trades Indonesian assets for a major stake in the UK’s producing Hudson oil field.Exchange agreed with CNR to gain a 24.2% interest in UK North Sea Block 211/22a, just east of Shell’s Cormorant oil field.

FebruaryDana completes acquisition of additional interest in Melville area of UK North Sea through transactions with Shell and ExxonMobil.

Delivering future growth opportunities

JulyEight year exploration agreement signed for 6,540 sq. km. NW Safi licence, offshore Morocco.

Terms agreed with BP for 3 blocks directly east of existing gas transportation and production infrastructure, UK Southern North Sea.

Approval received for development of the Enoch oil field in the UK Central North Sea.

JuneDana increases stake in Barbara field area and confirms drilling of next 4 North Sea wells.


JanuaryAcquision of 27.78% interest in the producing Johnston gas field and associated UK North Sea Blocks 43/27a and 43/26a.

AugustUK Government approval received for development of the Cavendish gas field, Southern North Sea.

NovemberExpansion of Dana’s international business continues in North Africa, with 30% interest gained in West El Burullus concession, offshore Nile Delta.

Increase in North Sea producing gas fields with acquisition of 25% interest in Anglia and a further 22.11% of Johnston.September

Acquisition of 40% interest in the Babbage gas field in the UK’s Southern North Sea.

20 new offshore blocks awarded to Dana inUK 23rd Offshore Licensing Round, a record for the company.


DecemberStrategic entry into Egypt’s Gulf of Suez, acquiring 20% of South Feiran concession.


“North Sea operations are the Company’s

engine room, and are focused on low risk fi eld developments

scheduled to double the Company’s average annual

production within the next two years.”

Review of Operations North SeaNORTH SEA PRODUCTION AND DEVELOPMENTDana’s eleven producing North Sea fields accounted for some 91% of total Group production in 2005, delivering an average of 17,901 boepd, an increase of nearly 10% over the equivalent period in 2004 (16,338 boepd). Oil constituted approximately 83% of this volume averaged over the year.

In the Northern North Sea, Dana added high quality oil production and reserves through both commercial and organic routes in 2005. In March, the Company increased its interest in the Hudson oil field to 47.5% by exchanging its non-core, Indonesian pre-development gas interests for an additional 28% interest in Hudson. Dana was also appointed as operator of the Hudson field following approval by the joint venture group and the UK government. Since acquisition, production has been generally above expectations.

A detailed subsurface analysis of the Hudson field is now nearing completion and has yielded some attractive infill drilling targets, the first of which will be drilled once a drilling rig becomes available. A review of how the development of the recently discovered South Melville area can be integrated with future Hudson drilling is also underway.

A well workover and re-completion campaign was successfully completed on the Otter field (Dana 19.0%), opening up new reservoir sands and boosting oil production from the fourth quarter. As a result, further infield activity is now planned to commence in April 2006 with two well workovers and a sidetrack of a water injection well designed to increase sweep efficiency.

In the Central North Sea, the Greater Kittiwake Area (GKA) (Dana 50%) remains a key area of investment focus for Dana with three oil fields now in production and a fourth under development. The Kittiwake field itself continues to benefit from production optimisation initiatives to provide a solid foundation for the satellite fields. These include the Mallard field, where a new water injection well was drilled with spectacular success, re-energising the field to deliver at rates of up to 13,000 bopd. The Gadwall oil field was brought on stream in April 2005, and has performed well. A subsequent water injection well, designed to maintain production levels and boost reserves, was therefore drilled in the Gadwall field in early 2006 and is awaiting commissioning.

Development of the Goosander oil field as the third GKA satellite is underway, having achieved final development sanction in January 2006. First oil is targeted for the third quarter of 2006. A further water injection well designed to increase recovery efficiency in the northern area of the Mallard field is also under consideration for 2006. Development options for the remaining satellite fields, Grouse, Durward and Dauntless, are also under review for implementation in 2007/08 with further appraisal drilling at Grouse likely to be recommended prior to final commitment. The potential for tying back other fields currently outside of the GKA also exists. In particular this is likely to include the Christian field, located in Block 21/20 directly to the east of the GKA, in which Dana has recently agreed to acquire an interest.


TECHNICAL & COMMERCIAL DIRECTOR

STUART M PATON

Elsewhere in the Central North Sea, development of the trans-median Enoch field (Dana 8.8%) is progressing, having received approval from both the UK and Norwegian governments in 2005. First oil is expected to flow in the third quarter of 2006. Development planning for the Barbara gas field has also commenced following the recent drilling success to the east, with a view to commencing production in 2008. Factors under consideration include the benefits of further appraisal drilling in the Barbara area and the potential to undertake a larger joint development of Barbara with the neighbouring Phyllis gas field, operated by Shell.

Infill drilling and well workovers continue to produce positive results on the Claymore oil field (Dana 7.5%) and further workovers and a new infill well are planned in the Banff oil field (Dana 12.4%) with a target to maintain production at current levels.

In the Southern North Sea, Dana grew its gas production base in 2005 with the acquisition of a 27.8% interest in the Johnston gas field followed by the successful Johnston appraisal well. After sidetracking and completing this well as a horizontal gas producer it was brought on stream towards the end of November, initially more than doubling the total Johnston field production potential. In the Dutch sector, the F16-E gas field (Dana 1.2%) was also brought on stream in late November.

Looking forward, the UK Southern Basin is expected to become an increasingly important component of Dana’s North Sea business with

an intense development programme. The Cavendish gas field (Dana 25%) is on track to commence production in Q4 2006, having recently achieved partner and government development approval. The exchange transaction agreed with Gaz de France in November 2005 would, once completed, add further production from the Anglia and Johnston gas fields.

Further infill well locations in the Johnston field have been identified for drilling in late 2006/2007 alongside a potential development of the smaller Gunn gas field to the south of Johnston. If the forthcoming appraisal of the Babbage gas field (Dana 40%) is successful, it too could move forward to an early development sanction. Dana is also actively progressing engineering studies on the Monkwell gas field (Dana 100%) targeting near-term gas production as a subsea tie-back to the BP operated Cleeton gas processing and transportation infrastructure.

NORTH SEA EXPLORATION AND APPRAISALDana’s 2005 exploration and appraisal drilling campaign delivered three successes from five wells. The programme began positively with the discovery in March of the South Melville oil accumulation (Dana 26.6%), located just six kilometres to the south of the Hudson field, where Dana now operates the production infrastructure.

The next two wells in the programme were also successful. Firstly, a well situated one and a half kilometres to the east of the Barbara discovery well, confirmed


ASSET MANAGER, NORTH SEA

ALAN WALKER

UK EXPLORATION MANAGER

COLIN PERCIVAL

an extension of the field into neighbouring Block 23/16b and earned Dana a 40% stake in this block through a farm-in agreement. The Barbara field is now believed to extend over three Central North Sea blocks where, overall, Dana holds the majority stake (Dana approximately 65%) and is therefore well placed to drive the project forward as operator. Secondly, a well drilled nearly seven kilometres to the south-east of the currently producing area of the Johnston gas field (Dana 27.8%) also confirmed the presence of additional hydrocarbons and hence a significant new area of gas reserves. This well was sidetracked to become a horizontal producer which was brought on stream at high rates in the fourth quarter of 2005.

The fourth exploration well of 2005, Fiacre, tested an interesting, dual Jurassic/Forties play in Block 23/11 (Dana 80%), to the north of the Barbara field. The deeper Jurassic sandstone target was found to be present as predicted and of good reservoir quality, but water bearing. However, the shallower Forties sandstones were found to be hydrocarbon bearing and, whilst the recoverable volumes present at this location are estimated to be small and non-commercial, these results provide encouragement for further appraisal of the block.

The final well of 2005 was drilled to test the Clachnaben oil prospect (Dana 50%) in Block 211/22 in the Northern North Sea. Although some oil shows were observed, the reservoir sands were interpreted to be predominantly water bearing. Further exploration drilling in this area of the Northern North Sea is planned in 2006. A dual objective well will be drilled in neighbouring Block 211/23 (Dana 21%) to both

appraise the historic 211/23-11 discovery well, which tested at rates of nearly 9,000 bopd in 1992, and to test the eastern end of the large ‘Causeway’ prospect which extends across Blocks 211/22 and 211/23. Should this well be successful, it is planned to test the western end of the prospect, in Block 211/22, in 2007.

Further Northern North Sea exploration wells are also being planned for 2007 and 2008. These include the J1 prospect (Dana 25%), a potential satellite to the BP operated Magnus oil field, and satellite prospects to the Hudson oil field (Dana 47.5%) and Otter oil field (Dana 19%).

In the Central North Sea, further appraisal wells may be required ahead of finalising development plans for the Barbara field (Dana approximately 65%) and the Grouse field (Dana 50%) with these wells likely to occur in the second half of 2006 and 2007 respectively. As the largest shareholder in Faroe Petroleum plc (FP), Dana will also be interested in any success from the exploration well to be drilled by FP to test a prospect in the Halibut Horst area, to the north of the Claymore field.

In the Southern North Sea, Dana built a strong position in and around the Johnston gas field and related infrastructure in 2005 through a combination of acquisitions and the award of two blocks in this area in the UKCS 23rd Licencing Round. These deals included the acquisition of a 40% interest in the Babbage gas field which has the potential to contain up to 390 billion cubic feet of gas-in-place. Following Dana’s acquisition, a key appraisal well will now be drilled on Babbage in the first half of 2006, targeting the crestal area of the reservoir in order to confirm reservoir productivity ahead of a development decision. Dana also acquired a 100% interest in and around the Monkwell gas

field where two exploration wells are planned in 2007 to test the ‘Colden Parva’ and ‘Scolty’ gas prospects subject to rig availability. With the Cavendish gas field expected on stream towards the end of 2006, the first of a number of exploration wells in this area can also be anticipated in 2007. Offshore the Netherlands, an exploration well is planned in 2006 to test the DF gas prospect in Block E18a (Dana 5%) once development drilling activity is completed on the neighbouring F16-E gas field. A further prospect, FS, is expected to be drilled in 2007.

SHETLAND-FAROE BASINIn the UKCS 23rd Round, Dana was awarded licences covering a large area in the highly prospective West of Shetland region. The Group was awarded three licences comprising 18 blocks, of which 17 are in Quads 208 and 209 in the Faroe-Shetland Basin (Dana 30%) where a large volume of 3D seismic data has been recently acquired. Preliminary interpretation of this data is encouraging with a number of obvious leads identified as future drilling targets, possibly as early as 2007. Block 204/14b (Dana 30%) was also awarded to Dana and the Company has subsequently acquired a 30% interest in the neighbouring Block 204/13. Both these blocks lie in the prolific Foinaven Sub-Basin to the north of the producing Foinaven and Schiehallion oil fields and contain the large Tornado prospect which is also targeted for drilling in 2007.

These directly held licences complement Dana’s existing exposure to the Shetland-Faroe Basin through its 17.2% shareholding in Faroe Petroleum plc (FP). FP holds an extensive licence position in both UK and Faroese waters where it plans to drill the ‘Brugdan’ prospect in 2006.


SOUTHERN MAURITANIA AND SENEGALFollowing encouragement from the electromagnetic surveys conducted in Block 1 offshore Mauritania (Dana 60%) earlier in 2005, an exploration well to test the Faucon prospect was drilled in December. This well found 46 feet of net hydrocarbon bearing Cretaceous sandstone in two intervals above a further 270 feet of potential sandstone reservoir. Hydrocarbon fluid samples recovered from the well, together with an in-depth analysis of log data, currently suggest that Faucon has discovered a predominantly gas accumulation with gas in place volumes in the region of 200 billion cubic feet.

Although the volume of gas encountered in this first well would not justify near term development on a stand alone basis, this discovery is very important, having proven a working petroleum system in this greatly under-explored region of southern Mauritania. The gas encountered is believed to have been generated from a deeper source rock than that generating oil and gas further to the north and thermal modelling indicates that this new source is mature across most of this southern region of offshore Mauritania. The Cretaceous sands intersected at Faucon have also demonstrated that significant potential reservoir sand is available to facilitate much larger discoveries in this play fairway. The well results therefore provide enormous encouragement for the additional prospects already identified in Block 1, such as Petrel, and also for the future exploration of Dana’s neighbouring licence interests, namely Block 2 (Dana 6.25%) immediately to the north and the St. Louis Block in Senegal (Dana 30%) which adjoins Block 1 to the south.

Given this encouragement, Dana has entered the second exploration period for Block 1 thereby committing to drill one further exploration well, which will probably test the

Review of Operations International


Petrel prospect in 2007. A further well is also expected in Block 2 in 2007. Based on the interpretation of the Faucon-1 well results, it has been concluded that it will be beneficial to acquire 3D seismic in the St Louis Block before drilling an exploration well in Senegal. This survey is likely to commence in late 2006 probably in combination with an incremental survey covering the southern area of Block 1.

NORTHERN MAURITANIAIn 2005, Dana made good progress with the interpretation of the large 3D seismic surveys acquired in Block 7 (Dana 63.85%) and Block 8 (Dana 41.5%) offshore northern Mauritania with encouraging results. The Group has consequently elected to enter the second exploration period for Block 8 and agreements have been executed to contract the Atwood Hunter drilling rig to drill a well in each of these blocks in 3Q 2006. The first of these wells will test the very large ‘Flamant’ prospect in Block 8 which detailed seismic interpretation indicates has the potential for gas in place exceeding 6 trillion cubic feet. This will be followed by a further well in Block 7, which will utilise the additional 3D seismic data acquired up-dip and inshore of the Pelican gas discovery made by Dana with its first Block 7 well in late 2003.

Alongside this exploration activity, discussions have begun with companies able to assist Dana in establishing a route to commercialise the large volumes of gas being discovered offshore Mauritania, probably through a liquefied natural gas (‘LNG’) scheme. These plans will be reviewed and amended as necessary once the results of the aforementioned two exploration wells are known.

MOROCCODana gained entry to the Moroccan Atlantic Margin in 2005, by securing a 26.25% interest in a new eight year exploration licence, NW Safi Offshore. This block is in an area of offshore Morocco where preliminary indications from recently acquired 2D seismic are very encouraging, revealing numerous pronounced

structures. A large 3D seismic survey was therefore acquired in late 2005 / early 2006 with a view to firming up drilling targets from leads identified from the earlier 2D seismic. This data will allow Dana to make an informed decision on whether or not to enter the second exploration period in September 2007 and commit to an exploration well in 2008.

KENYAInterpretation of an infill 2D seismic survey acquired in early 2005 confirmed the presence of very attractive exploration prospects in Blocks L5 and L7 offshore Kenya, and preparations are now underway to drill a well in each of these Blocks around the end of 2006 utilising the ‘Chikyu’ deepwater drillship. The first well is likely to target the ‘Pemboo’ prospect, in Block L5, and the second well the ‘Sokwe’ prospect, in Block L7. Both of these prospects have the potential to contain over one billion barrels of oil equivalent. Dana holds an attractive commercial position in Blocks L5 and L7, with two thirds of the costs associated with its 30% interest being carried

by operator Woodside Energy.

“Four of the upcoming exploration wells will

target very large prospects offshore

Mauritania and Kenya, each with company

transforming potential.”


OPERATIONS MANAGER

PAUL GRIFFIN

MANAGER, INTERNATIONAL BUSINESS & NEW VENTURES

JOHN DOWNEY


EGYPTDana has recently taken a number of steps to commence building a material new business in Egypt. Subject to regulatory approval and partner and Government consent, Dana expects to acquire a 20% interest in the South Feiran block from CEPSA in the near future. The South Feiran block is located in the Gulf of Suez, which remains a highly prospective region with established production infrastructure. With Dana’s support, a significant 3D seismic survey was acquired over the block in early 2006 with a view to 2007 exploration drilling.

The exchange transaction agreed with Gaz de France in November 2005, if successfully completed, will deliver a further asset in Egypt in the form of a 30% interest in the West El Burullus concession in the Nile Delta. Dana also expects to be an active participant in bid groups in forthcoming Egyptian licencing rounds.

AUSTRALIAOffshore South Australia, Dana holds an interest in exploration permits EPP 28, EPP 29, EPP 30 and EPP 31 located in the Great Australian Bight. These cover a vast area of approximately 65,000 sq. km. in which a number of sizable leads have already been identified. Following a 2D seismic survey completed over EPP 31 in January 2005, acquisition of a large 3D seismic survey over the most promising leads has recently been completed. Exploration drilling in this area is currently targeted for 2008.

RUSSIAThe South Vat-Yoganskoye oil field (Dana 80%) is now Dana’s principal asset in Western Siberia following the sale of the Company’s minority investment in the Evikhon joint stock company in early 2005. Production from the field averaged 1,782 bopd in 2005, representing 9% of total Group production. These levels are in line with the forecast for the field in its natural decline and a review of opportunities to boost production at South Vat-Yoganskoye through infill drilling is ongoing.

“Dana has secured exciting new exploration prospects in Egypt and

Morocco where the opportunity exists for

our technical and commercial teams to

build a material new oil and gas asset base”


COMMERCIAL MANAGER

DAVID KNOWLES

FINANCIAL REVIEWDana delivered another year of record financial performance in 2005 through a combination of production growth and good capital discipline which together allowed the Group to maintain an unhedged exposure to the strong oil price environment. This was further enhanced by gains resulting from the Company’s commercial activities.

INTERNATIONAL FINANCIAL REPORTING STANDARDSIn accordance with European legislation, Dana has, for the first time, adopted International Financial Reporting Standards (IFRS) in preparing its financial statements from 1 January 2005. This required restating periods previously reported under UK GAAP in order to establish opening balances and comparative figures. In line with this requirement, Dana adopted IFRS as its accounting basis from the beginning of 2005, and this was first reflected in the Group’s 2005 Interim Report. It was highlighted that these results had been prepared on the basis of the then current interpretations of the existing standards and those pronouncements that were expected to be endorsed by 31 December 2005, and that such standards were subject to ongoing review and possible future amendment by interpretative guidance from the International Financial Reporting Interpretations Committee (IFRIC).

In November 2005, IFRIC did issue further guidance, which noted that the scope for IFRS 6 “Exploration and Evaluation of Mineral Resources” was to grant relief only to policies in respect of exploration and appraisal activities and that such relief did not extend to activities before or after the exploration and evaluation phase. Accordingly accounting policies for development and production activities were therefore to be based on the provisions of other existing IFRS.

Following this clarification, Dana has revised its oil and gas expenditure accounting policies. From the date of transition to IFRS (1 January 2004) for development and production activity, Dana will now apply its capitalisation, depletion and impairment policies primarily on an individual field basis. As a result, the accounting policies for exploration and appraisal activity have also been revised, and now once deemed unsuccessful, exploration will be written off to the income statement. This occurs in the period when either all appraisal activities have been completed and the technical feasibility or commercial viability has not been established, or when the legal right to explore expires, or when the Company decides to discontinue exploration activity.

As a consequence of these changes, Dana has revised its restatement of prior periods to reflect current IFRS interpretations and the new accounting policies. Full updated details of the Company’s conversion to IFRS, the restatement of 2004 UK GAAP financial information, and the Group’s revised accounting policies have been made available on the Company’s website at www.dana-petroleum.com.

The principal adjustments from adopting IFRS arise from the following standards:

• Share-based payments - IFRS 2

• Income taxes - IAS 12

• Financial instruments - IAS 32 & 39

• Oil & gas expenditures - IAS 16 & IFRS 6

These particular standards will continue to impact on the Group’s future financial reporting, however, these accounting changes have no impact on any of the fundamentals of the business including strategy, economic value or cash flow.

“2005 proved to be a record year of performance with a healthy improvement in all key metrics. Dana is in a strong position and looking forward to a period of unprecedented capital investment in our portfolio.”

Financial Review


FINANCE DIRECTOR

DAVID MACFARLANE

REVENUEAnnualised average production for the year was 19,683 boepd (2004: 18,608 boepd), with 91% delivered from the UKCS (2004: 88%). Oil accounted for 84% of production (2004: 86%).

The 2005 realised price for Dana’s UKCS crude sales was $55.39 per barrel (2004: $34.49 per barrel). This was ahead of the average Brent crude price in 2005 of $54.52 reflecting the premium typically secured by Dana’s commercial team for the Company’s crude. Including gas, the realised price for Dana’s overall North Sea production increased to $46.49 per boe (2004: $31.73 per boe). The realised price for the Group’s Russian crude sales in the period also improved to $22.38 per barrel (2004: $16.67 per barrel). Overall, the Group realised a revenue per boe of $42.24 during 2005 (2004: $29.45 per boe). Consequently, Revenue increased to a record level of £165.6 million (2004: £109.5 million), an increase of 51%.

OPERATING PROFITOverall, there was a significant (180%) improvement in operating profit to £105.7 million (2004: £37.8 million). This was principally due to the improved gross margin of 56.6% (2004: 46.8%) and was achieved despite the industry cost pressures previously highlighted in the 2005 Interim Report, which saw cost of sales increasing to £10.00 per boe (2004: £8.56 per boe). 2005 operating profit also included a credit relating to the revised accounting policies, and in particular, the fair value gain of £15.6 million arising on the Hudson – Pangkah exchange agreement. This more than offset pre-licence expenditure written off and the cost of unsuccessful exploration during 2005.

As expected, administrative expenses increased during the year as the Group developed to run its expanding operated portfolio, but this was offset by exchange gains on the Group’s increasing US dollar cash balances. As a result administrative expenses of £0.22 per boe for 2005 compares favourably with the 2004 outcome of £0.49 per boe.

PROFIT FOR THE YEAROperating profit was supplemented by a £3.5 million gain on sale of the Group’s investment in Evikhon. The net interest charge of £1.4 million (2004: £2.4 million) was in line with expectations, with higher interest income offsetting the accretion for the Group’s decommissioning provisions for new producing field interests. Overall, pre-tax profit increased by over 230% to £107.8 million (2004: £32.5 million).

The effective tax rate for the year was 40.5% (2004: 61%). The taxation charge for the year was affected by several factors, principally the IFRS adjustments and the revised oil and gas expenditure accounting policies. Also the Group has now been able to avail itself of Substantial Shareholding Relief, such that the gain on sale of the Group’s investment in Evikhon is non-taxable. Going forward, the changes announced by the Chancellor increasing the rate of supplementary charge by 10%, is expected to correspondingly increase the Company’s future annual effective tax rate. In addition, once the change in legislation is ratified by parliament in 2006, there will be a one-time charge to adjust the Group’s current provision for UK deferred tax to the new rate of tax.

The resultant profit for the year increased by over 400% to £64.2 million (2004: £12.7 million) and earnings per share of 80.13p (2004: 16.48p) represents a near four-fold improvement over the previous year, and a record result for the Company.

BALANCE SHEETNet capital additions during 2005 were £116 million (2004: £32.1 million) with £85 million invested on development assets, primarily in the Greater Kittiwake area, Johnston and Hudson fields and £31 million on the 2005 exploration and appraisal programme. A significant number of these capital projects occurred at the end of 2005, and accordingly £34.4 million of this expenditure is accrued and accounts for the majority of the increase in Trade and Other Payables.

In November 2005, the Group raised approximately £34 million via the placing of 3,953,498 new ordinary shares of 15p each, representing approximately 5% of the issued share capital of the Company at that time.

Net assets at 31 December 2005 had grown considerably to £271 million (2004: £158 million).

CASH FLOWCash generated from Group operations rose by 73% to £107.1 million (2004: £61.8 million). After net interest and a significantly increased UK tax spend totalling £21.5 million, £53.9 million of cash was expended on capital projects (net of acquisitions and disposals), and a net £26 million was raised from the issue of shares less debt repayments. A total of £11.6 million of the Group’s bank debt remains outstanding at the end of the year (2004: £20.8 million). The Group closed 2005 with £91.8 million of net funds, a £71.3 million improvement from the position at the start of 2005.

Dana’s borrowing base capacity continues to substantially exceed its current Bank facility arrangements, retaining significant scope to finance further growth opportunities.

RISK MANAGEMENTThe Company was unhedged throughout 2005. Given the strength of the Company’s cash position, and continued high world oil prices, no further commodity hedging has been committed, ensuring Dana enjoys full exposure to current international commodity prices. The Board will however, continue to closely monitor the risks associated with commodity price, interest rate and currency fluctuations, and manage these with regard to the Company’s forward capital commitments.

28 March 2006

David MacFarlaneFinance Director

Dana Annual Report 2005 | 12Dana Petroleum plc 2005 Annual Report | 21

1. COLIN R GOODALL ‡Chairman & Non-Executive Director

Colin Goodall joined the Dana Board in 2002 following a successful 24 year upstream oil career with the BP group. A Chartered Accountant, Mr Goodall worked in Africa for a number of companies, including Anglo American Corporation, and became a partner at Touche Ross. He joined the finance team at BP in 1975, later becoming the first Chief of Staff within the BP group. From 1995 to 1999 he served as Chief Financial Officer of BP Europe and then as BP’s senior representative in Russia. Mr Goodall has been a lecturer and examiner for London University in the areas of management and finance. Mr Goodall is also a non-executive director of a

number of other companies. In January 2005, he was appointed Chairman of the Group.

2. THOMAS P CROSS ‡Chief Executive Officer

Tom Cross co-founded Dana Petroleum in 1994. Mr

Cross is a Chartered Director and Petroleum Engineer.

After graduating with a First Class Honours Degree in

Engineering, he went on to hold senior positions with

Conoco, Thomson North Sea and Louisiana Land and

Exploration. From 1990 to 1993 he was Director of

Engineering at the UK’s Petroleum Science and

Technology Institute. Mr Cross is a Fellow of the

Institute of Directors, a former Chairman of the Society

of Petroleum Engineers and an advisor to BBC Radio

on oil affairs. In February 2005 he was elected as

Chairman of BRINDEX, the Association of British

Independent Oil Companies. He is also non-executive

Chairman of AUPEC, a global advisory group on energy

policy and economics. `

3. DAVID A MACFARLANEFinance Director

David MacFarlane, a Chartered Accountant, joined Dana

in 2002. He has more than 20 years experience in

financial control and management in the upstream oil

and gas business. Between 1985 and 1993 he was

Finance Director of the MOM Group, later becoming

Finance Director for two key subsidiaries of the John

Wood Group plc. He joined Dana from Amerada Hess

where during the previous six years he headed finance

for its fast growing international exploration and

production group and latterly for its substantial N.W.

Europe production business.

4. STUART M PATONTechnical & Commercial Director

Dr Stuart Paton was appointed to the Dana Board as

Technical & Commercial Director in May 2006, having

joined the Company’s senior executive team in 2003 to

lead Dana’s Business Development and Commercial

activities. Dr Paton is a graduate of Cambridge University,

where he gained a First Class Honours Degree in Natural

Sciences (specialising in Earth Sciences), followed by a

PhD in Geology. At Shell International, in the Hague, he

worked on the quantitative assessment of exploration and

development opportunities world-wide. Later, at Shell in

the UK, he held senior technical and commercial roles as

well as being on the commercial leadership team of Shell

UK, before joining Dana.

5. ANGUS M PELHAM BURN *‡Non-Executive Director (and Senior Independent Director)

Angus Pelham Burn was appointed to the Dana Board

in 1999, bringing a wealth of experience in international

business development and financing, as well as

institutional fund management. Mr Pelham Burn served

as a main board Director of the Bank of Scotland from

1977 to 2000. From 1975 to 1998 he was a Director of

The Scottish Provident Institution, holding the offices of

Deputy Chairman and Chairman between 1991 and

1998. Mr Pelham Burn also held the post of Chairman

of Aberdeen Asset Management plc between 1992

and 1999. He chairs Dana’s Remuneration and

Nominations Committees.

6. D IAN RAWLINSON *‡Non-Executive Director

Ian Rawlinson joined Dana in 2005, bringing some 20

years’ experience in corporate finance and investment,

gained with Lazard Brothers and Robert Fleming & Co.

Ian read law at Cambridge University and was called to

the Bar in 1981. From 1995 he was based in

Johannesburg and became responsible for managing

Fleming’s Southern African corporate finance business,

advising on numerous major transactions including the

London listings of Billiton and South African Breweries.

In 2000, he became Chief Operating Officer of Fleming

Family & Partners and was later appointed Chief

Executive of The Highland Star Group, a business

representing certain members of the Fleming family and

investing principally in the resources sector. Mr

Rawlinson is a director of a number of private

companies, and is Chairman of the Tusk Trust, a charity

focused on conservation in Africa. He became Chairman

of the Audit Committee in December 2005.

7. PHILIP J DAYER *‡Non-Executive Director

Philip Dayer joined Dana in March 2006, bringing

20 years of public market and corporate finance

experience gained with a number of prominent city

institutions during which he has advised a wide range of

public companies across a variety of sectors including

UK and International groups active in the oil and gas

sector. After graduating in Law from King’s College,

London, Mr Dayer qualified as a Chartered Accountant

and went on to develop widespread experience as

Director or Head of Corporate Finance with Barclays

De Zoete Wedd, Citigoup Scrimgeour Vickers, ANZ

Grindlays and Societe Generale. Latterly whilst focusing

on the energy sector, Mr Dayer was Director of Corporate

Finance at Old Mutual Securities and Executive Director

at Hoare Govett Limited.

8. JOHN J ARNTONCompany Secretary & Group

Legal Manager

John Arnton joined Dana in 2000 as Group Legal

Manager and was appointed Company Secretary in the

same year. He began his legal career in private practice

and moved to Total Oil Marine as a staff lawyer in 1985.

Mr Arnton joined Occidental Petroleum in 1987 as Legal

Counsel, and continued with the Elf Group following its

acquisition of Occidental’s UK assets in 1991. He was

appointed Legal Manager of Elf Exploration UK in 1996

and became Company Secretary of the Elf Group’s UK

upstream companies. Mr Arnton is a qualified solicitor

and Notary Public. He also holds a post-graduate

Diploma in Petroleum Law.

Directors and Officers


* Independent Director and member of the Audit and Remuneration Committee

‡ Member of the Nominations Committee

Directors’ Report & Accounts 2005

24 Report of the Directors

29 Report on Directors’ Remuneration

35 Report of the Auditors

36 Group Income Statement

37 Group Balance Sheet

38 Group Statement of Changes in Equity

39 Group Cash Flow Statement

40 Notes to the Group Financial Statements

68 Dana Petroleum plc: Company only Accounts


Report of the Directors


The Directors submit their report together with the audited Group and Company financial statements for the year ended 31 December 2005.

Business Review and Future Activities The principal activities of the Group are oil and gas exploration and production. The Chairman’s and Chief Executive’s Review and the Review of Operations describe the significant developments in the business of the Group during 2005 and its future prospects.

Results, Dividends and RetentionsThe Group profit for the year after taxation and before minority interests amounted to £64,155,000 (2004: £12,676,000). The Directors do not recommend the payment of a dividend.

Events Since the Balance Sheet DateOn 13 April 2006, Faroe Petroleum plc announced a fund-raising of £25.0 million through a market placing. This was subsequently approved by the shareholders of the company at an extraordinary general meeting held on 8 May 2006. The Group participated in the placing and subscribed for a further 3,161,765 shares at a cost of £4,300,000, thereby maintaining a 17.2% interest in Faroe Petroleum plc.

Corporate GovernanceThe Company is committed to high standards of corporate governance and the Board is accountable to the Company’s shareholders for good corporate governance. This statement describes how the principles of corporate governance are applied to the Company and the Company’s compliance with the 2003 Revised Combined Code, which was adopted by the Financial Services Authority for reporting periods commencing on or after 1 November 2003. The Company will continue the ongoing development of its corporate governance practices to ensure high standards are maintained.

Statement by the Directors on Compliance with the Provisions of the Revised Combined CodeThe Company has been in compliance with the provisions of the Revised Combined Code throughout the year save as with respect to Revised Combined Code Provisions A 3.2 and B 1.6. Under the former provision, at least half the board, excluding the Chairman, should comprise non-executive directors determined by the Board to be independent, and a non-executive director, once elected Chairman, is no longer considered independent. Following the appointment of Mr C R Goodall, to the position of Chairman in January 2005, the Company technically could only be considered to have two independent non-executive directors. This position was resolved upon the appointment of Mr P J Dayer on 16 March 2006.

Revised Combined Code Provision B1.6 recommends that the contractual notice provision available to Directors should be no greater than 12 months. The Company is aware that the current notice period applying for Mr T P Cross is not in line with the provisions of the Revised Combined Code. However, the Board is currently reviewing contractual notice provisions in conjunction with a wider review of all elements of the Company’s current remuneration policy. Details of the proposed changes to the Company’s remuneration policy will be reviewed with shareholders at a forthcoming General Meeting of the Company.

The Board will continue to review and report on the effectiveness of the Group’s system of internal controls as detailed on pages 25 and 26 and the Audit Committee will review annually the need for an internal audit function.

The Workings of the Board and its Committees

THE BOARDAs planned, Charles Smith, who led the Board as Chairman with great skill, diligence and integrity during the formative years of Dana, retired as a Non-Executive director at the AGM on 28 July 2005. Prior to Charles’ departure, Ian Rawlinson was appointed as a Non-Executive director with effect from 31 March 2005 and became Chairman of the Audit Committee in December 2005. In recognition of Dana’s continuing development, Philip Dayer was appointed as a Non-Executive director with effect from 16 March 2006. On 29 May 2006, Dr Stuart Paton was appointed to the Board as the executive director responsible for Technical & Commercial activities for the Dana group and Andy Bostock left the Board in June 2006 after six successful years with the Company, due to a family relocation. We look forward to the valuable input which Ian, Philip and Stuart will make to the Group during the next few years of growth, and thank Charles and Andy for the contribution made and wish them every success for their respective futures.

The Board is responsible to shareholders for the proper management of the Group. The Boardcomprises the Non-Executive Chairman, the Chief Executive, the Finance Director, the Technical & Commercial Director and three further Non-Executive Directors. Brief biographies appear on page 22. These demonstrate a range of experience and sufficient calibre to bring independent judgments on issues of strategy, performance, resources and standards of conduct, which are vital to the continuing success of the Group. All Directors have access to the advice and services of the Company Secretary who is responsible to the Board for ensuring that Board procedures are followed and that applicable rules and regulations are


complied with. In addition, the Company Secretary will ensure that the Directors receive appropriate training as necessary. The appointment and removal of the Company Secretary is a matter for the Board as a whole.

The Board has a formal schedule of matters specifically referred to it for decision. In addition to those formal matters required by the Companies Act(s) to be set before a board of directors, the Board will also consider business strategy and policy, business plans, acquisition and divestment proposals, approval of major capital investment plans, risk management policy, significant financing matters and statutory shareholder reporting.

To comply with the provisions of the Revised Combined Code and in an effort to strive for continual improvement in the effectiveness of the Board, its committees, and the individual Board members, the Company has introduced an evaluation process.

The Board meets regularly during the year with additional meetings as dictated by matters arising. In addition, there is frequent dialogue between meetings to progress the Group’s business. During 2005, all of the Board members in office at the time of the Board meetings attended the Board meetings. To enable the Board to discharge its duties, all Directors receive appropriate and timely information and the Chairman ensures that the Directors take independent professional advice as required. The Non-Executive Directors have a particular responsibility to ensure that the strategies proposed by the Executive Directors are fully considered.

Statements of the Directors’ responsibilities in respect of the accounts are set out on page 28, as is a statement on going concern.

Where matters arose during the year which required the attention of the Audit, Nominations or Remuneration Committees, a separate meeting of the relevant committee was convened with full attendance by its members. These committees deal with the following specific aspects of the Group’s affairs.

AUDIT COMMITTEEThe Audit Committee, which was chaired by Mr C R Goodall until 8 December 2005 and by Mr D I Rawlinson thereafter, now comprises allthe Non-Executive Directors other than the Chairman, and meets not less than twice annually. The Committee provides a forum for reporting by the Group’s external auditors. If required, meetings are also attended by appropriate members of senior management at the specific request of the Committee.

The Audit Committee is responsible for reviewing a wide range of matters including the Interim Report and the Annual Report and Accounts before their respective submission to the Board and the monitoring of the controls that are in force to ensure the integrity of the information reported to the shareholders. The Audit Committee advises the Board on the appointment of external auditors and on their remuneration both for audit and non-audit work, and discusses the nature, scope and results of the audit with the external auditors. The Audit Committee keeps under review the cost effectiveness, independence and objectivity of the external auditors. In line with the Revised Combined Code, the Audit Committee is also responsible for reviewing annually the requirement for an internal audit function.

NOMINATIONS COMMITTEEThe Nominations Committee is responsible for appointments or re-appointments to the Board. This committee comprises the Non-Executive directors, and Mr T P Cross and is chaired by Mr A M Pelham Burn. It meets not less than once annually. The Nominations Committee is charged with ensuring the necessary balance of skills, knowledge and experience is maintained and represented on the Board. Members of the Nominations Committee are precluded from participating in the process to nominate their replacement.

REMUNERATION COMMITTEEFull details of the Remuneration Committee, the Company’s policies on remuneration, service contracts and compensation payments are given in the Report on Directors’ Remuneration on pages 29 to 34.

Relations with ShareholdersCommunications with shareholders are given high priority. Extensive information about the Group’s activities is provided in the Annual Report and the Interim Report which are sent to all shareholders.

There is regular dialogue with major institutional shareholders and meetings are offered following the Group’s preliminary announcement of the year end results and at the half year. The Company has its own web-site (www.dana-petroleum.com) for the purpose of improving information flow to shareholders as well as potential investors. Enquiries from individual shareholders on matters relating to their shareholdings and the business of the Group are welcomed.

The Board also uses the Annual General Meeting to communicate with private and institutional investors and welcomes their participation. The Board aims to ensure that the Chairmen of the Audit, Remuneration

Report of the Directors continued


and Nominations Committees are available at the Annual General Meeting to answer questions and explain details of resolutions to be proposed at the Annual General Meeting.

Internal ControlThe Board confirms that during 2005 it maintained the procedures necessary to implement the ‘Internal Control: Guidance for Directors on the Combined Code’ and that these procedures are still in place.

The Board is responsible for establishing and maintaining the Group’s system of internal control. Internal control systems are designed to meet the particular needs of the organisation concerned and manage or eliminate the risks to which it is exposed. By their nature such systems can provide reasonable, but not absolute, assurance against material mis-statement or loss. There is a continuous process for identifying, evaluating and managing the risks faced by the Group. The key procedures which the Directors have established with a view to providing effective internal control, are as follows:

Management structureThe Board has overall responsibility for the Group and there is a formal schedule of matters specifically reserved for decision by the Board. Each Executive Director has been given responsibility for specific aspects of the Group’s affairs. The Executive Directors together with key senior executives constitute the management committee, which meets regularly, to discuss day-to-day operational matters.

Quality and integrity of personnelThe integrity and competence of personnel is ensured through high recruitment standards and subsequent training courses. High quality personnel are seen as an essential part of the control environment.

Identification of business risksThe Board is responsible for identifying the major business risks faced by the Group and for determining the appropriate course of action to manage those risks. This includes performing or participating in audits of Joint Ventures (JV) to ensure JV expenditures have been committed with the necessary JV approval and in accordance with JV agreements.

Budgetary processEach year the Board approves the business plan and annual budget. Key risk areas are identified.

Performance is monitored and relevant action taken throughout the year through the regular reporting to the Board of changes to the business plan and variances from the budget and updated forecasts for the year together with information on the key risk areas.

Investment appraisalCapital expenditure is regulated by budgetary process and authorisation levels. For expenditure beyond specified levels, detailed proposals have to be submitted to the Board. Due diligence work is carried out if a business or significant assets are to be acquired.

Audit CommitteeThe Board has delegated periodic review of the system of financial internal control to the Audit Committee which has reported its conclusions to the Board during the year. The Board has also consulted the Audit Committee, during the year, on other internal control matters. The Audit Committee believes that the Company’s external auditors adopt an objective and impartial approach to the audit of the Group and that this is in no way influenced by the extent of non audit work undertaken by the Company’s external auditors during the year. Such work in 2005 largely related to advice in connection with a one-off transaction that was subsequently aborted. The Board will continue to carefully consider how such advice is sourced in future. The Audit Committee has considered the need for an internal audit function but has decided that, given the size of the Group and the system of controls in place, it is not required at present. The Audit Committee will continue to review this decision annually.

Annual review and assessment The Board undertakes an annual review of the effectiveness of the Group’s system of internal control. This includes a review of the Audit Committee’s assessment of the system of financial internal control. A review took place in December 2005 and addressed internal control issues generally and, more specifically, financial, operational and compliance controls and risk management. The review included reports from, and interviews with, key operating personnel.


Substantial ShareholdingsThe Company has been notified of the following shareholdings of 3% or more in the issued share capital of the Company as at 31 May 2006:

No. of % of issued shares share capital

Fidelity International (UK) 9,015,856 10.54

Aegon Asset Management 4,188,928 4.90

Schroder Investment 3,411,383 3.99Management

ABN AMRO Equities (MM) 3,096,826 3.62

Merrill Lynch 3,043,128 3.56Investment Managers

Legal & General 2,967,015 3.47Investment Management

Composition of GroupDetails concerning the principal subsidiary undertakings are given in note 38 to the Company financial statements.

Health, Safety, the Environment and the CommunityDana considers health, safety and environmental management to be an integral part of its business. Dana has a formal Health, Safety and Environmental (HS&E) Policy which is brought to the attention of every employee and contractor working on Dana business. The policy aims to achieve first class HS&E

performance by promoting a culture which encourages all employees, contractors and other stakeholders to contribute to its implementation. Responsibility for health, safety and environmental management begins with the Board of Directors and carries through to every employee and contractor engaged in Dana’s activities.

In Dana operated activities, the Group makes appropriate resources and training available to reduce health and safety risks to employees and contractors to a level which is as low as reasonably practicable and also strives for a neutral or positive impact on the physical and socio-cultural environment of the regions in which Dana does business. Dana aims to meet relevant regulatory and legislative requirements as a minimum and to apply Dana’s own responsible standards in those countries where appropriate laws and regulations are inadequate or do not exist. Recognising that a significant proportion of Dana’s activities are carried out by other companies, Dana also actively promotes and supports the application of equivalent health, safety and environmental standards by those suppliers, contractors and companies who operate on Dana’s behalf. This is particularly true of developing countries, and where the Company does not operate, Dana seeks to partner with large, well established upstream companies, with a track record of successfully working with host governments, and for promoting the highest standards of Corporate, Social and Environmental responsibility. Full details of the operators of all Dana’s licence interests are on pages

Directors’ Interest in Share CapitalThe beneficial interests of the current Directors and their families in the share capital of the Company were as follows:

Ordinary Shares Ordinary Shares Ordinary Shares at 31.05.06 at 31.12.05 at 31.12.04

15p shares 15p shares 15p shares

C R Goodall 46,133 46,133 36,133T P Cross 560,882 548,784 535,451D A MacFarlane 60,000 20,000 20,000A M Bostock (resigned 2 June 2006) 276,613 70,641 54,695S M Paton (appointed 29 May 2006) 278 N/A N/AA M Pelham Burn 47,665 47,665 147,665C M Smith (retired 28 July 2005) N/A N/A 148,009D I Rawlinson (appointed 31 March 2005) 38,440 38,440 N/AP J Dayer (appointed 16 March 2006) 2,000 N/A N/A

Report of the Directors continued


79 and 80. It is the policy of the Group to consider the health and welfare of employees by maintaining a safe place and system of work as required by the Safety, Health and Welfare at Work Act, 1989.

AuditorsA resolution to re-appoint Ernst & Young LLP as auditors of the Company is to be proposed at the Annual General Meeting.

Going ConcernThe Board’s review of the accounts, budgets and forward plans, lead the Directors to believe that the Group has sufficient resources to continue in operation for the foreseeable future. The financial statements are therefore prepared on a going concern basis.

DirectorsThe membership of the Board is set out on page 22.

Interests in ContractsThere have been no contracts or arrangements during the financial year in which a Director of the Company was materially interested and which were significant in relation to the Group’s business.

Creditors Payment PolicyThe Group’s policy is to agree payment terms with individual suppliers and to abide by these terms. The Company acts as a holding company for the Group and does not have any trade creditors.

Statement of Directors’ Responsibilities in Respect of the Group Financial StatementsThe Directors are responsible for preparing the Annual Report and the Group financial statements in accordance with applicable United Kingdom law and those International Financial Reporting Standards (IFRS) as adopted by the European Union.

The Directors are required to prepare financial statements for each financial year which present a true and fair view of the financial position of the Group, the Group financial performance and the Group cash flows for that period. In preparing those financial statements, the Directors are required to:• select suitable accounting policies and then apply

them consistently; • present information, including accounting policies,

in a manner that provides relevant, reliable, comparable and understandable information;

• provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions or other events

and conditions on the entity’s financial position and financial performance; and

• state that the Group has complied with IFRS, subject to any material departures disclosed and explained in the Group financial statements.

Statement of Directors’ Responsibilities in Respect of the Company Financial StatementsCompany law also requires the Directors to prepare financial statements for each financial year, which presents a true and fair view of the financial position of the Company. In preparing those financial statements, the Directors are required to: • select suitable accounting policies and then apply

them consistently; • present information, including accounting policies,

in a manner that provides relevant, reliable, comparable and understandable information; and

• state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements.

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and of the Group and enable them to ensure that the financial statements comply with the Companies Act 1985, as amended and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Signed on behalf of the Board by:

Thomas P CrossChief Executive

David A MacFarlaneFinance Director

12 June 2006

Report on Directors’ Remuneration


INFORMATION NOT SUBJECT TO AUDIT

Remuneration Committee and advisersThe Remuneration Committee comprises all the Non-Executive Directors other than the Chairman, and meets not less than once annually. Mr A M Pelham Burn is Chairman of the Committee. The Committee is responsible for making recommendations to the Board, within agreed terms of reference, on the Company’s overall framework of remuneration and its cost.

The Remuneration Committee uses independent external advisers to analyse and make recommendations on the remuneration of Executive and Non-Executive Directors and has done so since 1997. For 2005, the Remuneration Committee utilised advice from the independent remuneration experts, Deloitte & Touche to review the remuneration of the Directors of the Company and to assess the comparability to the marketplace in the oil and gas sector. The Committee used the findings of that independent advice and brought the remuneration of the Directors for 2005 into line with its recommendations. Deloitte & Touche were also retained, principally on behalf of the Mauritanian Joint Ventures which the Company operates, to advise on compliance with the Mauritanian Simplified Tax Regime.

In addition, the Remuneration Committee has used New Bridge Street Consultants, another leading independent firm of remuneration specialists, to advise on the share option arrangements currently in place.

Remuneration policyThe Company appointed Halliwell Consulting in 2006 to conduct an independent review of the compensation arrangements for the Company’s Executive Directors and senior employees. The result of this review is a new policy proposal contained in a separate shareholders’ circular, the resolutions from which will be subject to shareholder review at a forthcoming General Meeting of the Company. This current remuneration report summarises the arrangements in place for 2005 and previous years.

The Company’s current policy on Directors’ remuneration is that the overall remuneration package should be sufficiently competitive to attract, retain and motivate high quality executives capable of achieving the Group’s objectives and delivering growth in value. The objective of the remuneration policy is that individuals are remunerated on a basis that is appropriate to their position, experience and value to the Company. The Remuneration Committee determines the contract terms, basic salary, and other remuneration for each of the Executive Directors, including performance related share options, bonuses, pension contributions and compensation payments.

The Executive Directors have an obligation to inform the Board and specifically the Remuneration Committee of any non-executive positions held or being contemplated and of the associated remuneration package. The Remuneration Committee will consider the merits of each case and carefully consider the work and time commitment required to fulfil the non-executive duties and then determine whether the remuneration should be retained by the Executive or passed over to the Company. Mr T P Cross received and retained fees of £15,000 in 2005 through his position as Non-Executive Chairman of AUPEC Limited, the global advisory group on energy policy and economics, a position he has held since 1998.

Executive remuneration package: A key element of the existing executive remuneration package is the performance related criteria enshrined in the current share option schemes, which are directly linked to improvements in the Company’s share price over the three year vesting period, thereby ensuring alignment with shareholders’ objectives.

The details of individual components of the remuneration package and service and employment contracts are discussed below.

Basic salary and benefits: The policy is to review salary and benefits annually against competitive market data and analysis, provided by independent consultants, and adjust accordingly. When salaries and benefits are established as competitive and commensurate with the position, increases will be in line with the average increases for employees throughout the Group. In 2005, no market adjustments were made. All Executive Directors received a salary award consistent with the average employee award. Benefits typically comprise cash allowances in lieu of company car and private health care arrangements, in addition to life assurance cover and permanent health insurance.

Share options: The Company’s policy on the granting of share options is to make such awards as are necessary to recruit, retain, and motivate executives of sufficient calibre. There are two Company share option schemes in operation, the Dana Petroleum 1999 Share Option Scheme (which replaced the 1997 Share Option Scheme) and the Dana Petroleum Share Save Scheme. Since 31 December 1999 options have been awarded to Directors under the terms of the 1999 Share Option Scheme. Full details of awards and the respective schemes’ performance criteria are set out below.

In total the Company currently has outstanding options granted to Executive Directors and employees to subscribe for 2,647,870 ordinary shares, which are exercisable up to 2014, at prices between 157.5p and 413.5p. The Remuneration Committee believes the

Report on Directors’ Remuneration continued


Dana Petroleum 1999 Share Option Scheme closely aligned the interests of senior executives with those of shareholders. However, this scheme expired in December 2004 in relation to new awards and the Remuneration Committee has commissioned a review, by Halliwell Consulting, of alternative forms of Long Term Incentive Plan (“LTIP”) for senior executives, with the intention that a new incentive arrangement will be placed before a forthcoming General Meeting of the Company for approval. The details of the new LTIP will be contained in a separate shareholders’ circular.

Under the Share Save Scheme, the Company has outstanding options granted to employees to subscribe for 70,661 shares, which are exercisable up to 2010, at prices between 157.5p and 334.0p.

Annual bonuses: The Remuneration Committee, in awarding annual bonuses, considers the Group’s achievements against its strategic targets during the year, its operational and financial performance and the individual executive’s performance in his area of responsibility.

The executive team delivered a record year of performance in 2005, during which all of the Group’s strategic and financial targets were met. In addition, Dana’s strong growth achieved entry into the FTSE 250 Index of leading UK companies early in 2005 and, over the year, Dana was the ninth best performing share in both the FTSE 250 and FTSE 350 Indices. Award levels which could be achieved for delivering exceptional performance in 2005 were set at a maximum of 75%, 100% and 125% of base salary, respectively, for the three executive director positions of Finance Director, Technical Director and Chief Executive Officer. Actual bonuses paid for 2005 are shown in the table on page 32.

The Remuneration Committee decided that part of the 2005 bonus awarded to the position of Chief Executive Officer would be paid in shares, which will be retained by him for at least two years from the effective date of award. The intention behind this mechanism is to start developing the Company’s annual performance bonus scheme to encourage the building of shareholdings by key executives and to link the 2005 bonus payment to the new LTIP to be proposed to shareholders.

Pensions: The Company does not operate a pension scheme for Executive Directors but does, at the Directors’ option, contribute to the personal pension plans of each Executive Director, or pays cash in lieu of such contributions up to 20% of salary. Directors’ pension contributions are paid in advance of the pension year which starts in April each year. No pension contributions are made in respect of

Non-Executive Directors. In light of the pension legislation changes introduced in April 2006, the Remuneration Committee intends to adopt a flexible approach, albeit within the overall framework and cost of each Executive Director’s remuneration package, to allow for re-structuring between the separate components of the remuneration package in order to accommodate the relevant Executive Director’s desired level of future pension provision.

Fees: The fees for the Non-Executive Directors are determined by the Board as a whole having taken independent expert advice on appropriate levels. The fees recognise participation on the various Board committees and the respective responsibilities associated with those committees. The fees are reviewed on an annual basis.

Service Contracts: The service contracts of the Executive Directors are not of a fixed duration and therefore have no unexpired terms, but continuation in office as a Director is subject to re-election by shareholders as required under the Company’s Articles of Association and in accordance with the provisions of the Revised Combined Code. The Company’s policy is for Executive Directors to ultimately have service and employment contracts with provision for termination of no longer than twelve months’ notice. An exception to this however, is the two year provision for termination for Mr T P Cross which reflects his key role in the development of the Company. Mr D A MacFarlane is currently subject to a six month notice period. Following his recent appointment to the Board, Dr S M Paton will be entering into a service contract in due course, but meantime his letter of appointment to the Board provides for a six month notice period.

The Company is aware that the current notice period applying for Mr T P Cross is not in line with the provisions of the Revised Combined Code. However, the Board is currently reviewing contractual notice provisions in conjunction with a wider review of all elements of the Company’s current remuneration policy. Details of the proposed changes to the Company’s remuneration policy will be reviewed with shareholders at a forthcoming General Meeting of the Company.

The Non-Executive Directors do not have service contracts. Letters of Appointment provide for an initial period of one year, and are renewable annually at the Company’s discretion.

On a change of control of the Company resulting in the termination of employment, Mr T P Cross is currently entitled to compensation of a sum equal to twice his annual remuneration. In the case of Mr D A MacFarlane and Dr S M Paton, their notice periods


would increase from six to twelve months. There are currently no predetermined special provisions for the Non-Executive Directors with regard to change of control or for any Directors in respect of compensation for loss of office. The Remuneration Committee will consider the circumstances of individual cases of early termination and determine compensation payments accordingly.

Details of the current Directors’ contracts or appointment dates are as follows:

Effective Date of Service Contract/Executive Directors Letter of Appointment

T P Cross 1 May 1997D A MacFarlane 1 November 2003S M Paton 29 May 2006

Date of last renewal Non-Executive Directors of appointment

C R Goodall 14 June 2006A M Pelham Burn 1 November 2005D I Rawlinson 31 March 2006P J Dayer 16 March 2006

Mr P J Dayer was co-opted to the Board of Directors on 16 March 2006 and Dr S M Paton was co-opted to the Board on 29 May 2006. In accordance with the Articles of Association Mr P J Dayer and Dr S M Paton retire at the forthcoming Annual General Meeting and, being eligible, offer themselves for re-election.

Mr T P Cross, Mr D A MacFarlane and Mr A M Pelham Burn retire by rotation in accordance with the Revised Combined Code or by reason of three years having passed since their last re-election, and being eligible, offer themselves for re-election.

Biographical details of all Directors can be found on page 22.

Performance GraphsThe graphs adjacent show firstly the equivalent performance of the Company’s Total Shareholder Return (TSR) over the last five financial years, against the corresponding performance of the FTSE 250, which the company entered for the first time in February 2005. The Company was a constituent member of this index throughout the remainder of 2005 and continues to be so. Accordingly this provides a benchmark against which the Company’s TSR can be monitored. Secondly, the Company was formerly a member of the FTSE Small Cap index and the FTSE All Share Oil & Gas Producers index. The Company’s relative performance to these indices over the past 5 years has also been shown purely for illustrative purposes.

£500

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£350

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£250

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£0

DanaFTSE 250

Source : Thomson Financial Datastream

Comparison of 5 year cumulative TSR on an

investment of £100

2000 2001 2002 2003 2004 2005

£500

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DanaFTSE Small Cap index FTSE All Share Oil & Gas Producers index

Source : Thomson Financial Datastream

Comparison of 5 year cumulative TSR on an

investment of £100

2000 2001 2002 2003 2004 2005



Contributions in lieu of Executive Directors’ pensions were as follows:

2005 2004

£’000 £’000

T P Cross 85 77

D A MacFarlane 40 36

A M Bostock (resigned 2 June 2006) 37 36

S M Paton (appointed 29 May 2006) - -

Total 162 149

INFORMATION SUBJECT TO AUDIT

Directors’ RemunerationThe remuneration of the Directors was as follows:

Fees/basic 2005 bonus Benefits 2005 2004 salary in cash in shares in kind(3) Total Total

£’000 £’000 £’000 £’000 £’000 £’000

Executive

T P Cross 426 383 128(2) 47 984 714D A MacFarlane 200 144 - 22 366 305A M Bostock (resigned 2 June 2006) 187 165 - 21 373 305S M Paton (appointed 29 May 2006) - - - - - -

Non-Executive

C R Goodall (1) 50 - - - 50 30A M Pelham Burn 32 - - - 32 27D I Rawlinson (appointed 31 March 2005) 24 - - - 24 -C M Smith (retired 28 July 2005) 13 - - - 13 37P J Dayer (appointed 16 March 2006) - - - - - -

Aggregate remuneration 932 692 128 90 1,842 1,418

(1) Mr C R Goodall became Chairman of the Company on 1 January 2005.(2) Mr T P Cross was awarded £127,800 payable in shares which must be retained for 24 months from the effective date of award.(3) Benefits typically comprise cash allowances in lieu of company car and private health care arrangements, in addition to life

assurance cover and permanent health insurance, but exclude pension benefits which are detailed below.


Options Options Granted to Options held at 01.01.05 Lapsed Granted Exercised 31.12.05 Exercise Exercisable Expiry ‘000 ‘000 ‘000 ‘000 ‘000 price (p) from date

T P Cross 331(1) 331(1) 322.50 26.04.01 25.04.08 133(1) (133) - 127.50 15.05.02 14.05.09 552 552 236.25 31.12.02 30.12.09 429 429 206.25 27.07.03 26.07.10 834 (700) 134 157.50 28.12.04 27.12.11 857 857 183.75 16.01.06 15.01.13 617 617 413.50 15.12.07 14.12.14

3,753 0 0 (833) (2) 2,920

A M Bostock 127 (127) - 206.25 27.07.03 26.07.10(resigned 2.06.06) 52 (52) - 187.50 22.12.03 21.12.10 285 (137) 148 157.50 28.12.04 27.12.11 359 359 183.75 16.01.06 15.01.13 306 306 413.50 15.12.07 14.12.14

1,129 0 0 (316) (2) 813

D A MacFarlane 256 256 183.75 16.01.06 15.01.13 260 260 413.50 15.12.07 14.12.14

516 0 0 0 516

S M Paton - - - - - (appointed 29.05.06)

C M Smith - - - - - (retired 28.07.05)

A M Pelham Burn - - - - - C R Goodall - - - - - I Rawlinson - - - - -(appointed 31.03.05)

P J Dayer - - - - -(appointed 16.03.06)

Total Board 5,398 0 0 (1,149) 4,249

(1) Options granted under the Dana Petroleum 1997 Share Option Scheme.

(2) These were exercised in various tranches during the year. The corresponding weighted average exercise price and associated weightedaverage share price at the date of exercise for share options exercised during the year are shown in Note 24 Share based payments. The aggregate potential gain made by Directors in relation to the share options exercised during the year was £5,450,000.

Directors’ Share Options Aggregate emoluments disclosed above do not include any amounts for the value of options to acquire ordinary shares in the Company granted to or held by the Directors. Details of Directors’ interests in shares held under option are shown below. Unless otherwise indicated, the options were granted under the Dana Petroleum 1999 Share Option Scheme. This scheme expired in relation to new awards in December 2004.



Share options are awarded by the Remuneration Committee. There are two Company share option schemes in operation for Executive Directors and employees; the Dana Petroleum 1999 Share Option Scheme (which replaced the 1997 Share Option Scheme) and the Dana Petroleum Share Save Scheme. Since December 1999, options have been awarded to Directors under the terms of the 1999 Share Option Scheme. The 1999 Share Option Scheme provides for the grant of two types of options, “Basic Options” and “Investment Options”.

Basic Options are subject to performance criteria set out on a sliding scale dependent upon the increase in the Company’s share price, over and above the Retail Price Index (“RPI”), over a minimum three year period after the date of grant. 40% will be exercisable if the rate exceeds RPI plus 4% per annum and 100% will be exercisable if the rate exceeds RPI plus 10% per annum, with a pro-rata award between these levels. The options are tested after the expiry of the 3 year vesting period and then at six monthly intervals thereafter.

Investment Options are not subject to performance conditions, since these options are only awarded to participants who have agreed to invest their own funds in the Company’s shares. The value of ordinary shares purchased by a participant for this purpose in any financial year may not exceed 50 percent of the post tax annual remuneration of the participant. The individual must however, hold the shares purchased for a minimum period of two years from the award date in order for the Investment Options to become exercisable.

In any financial year a participant may not be awarded aggregate options (basic plus investment options), over ordinary shares with a value of more than three times annual remuneration. This is calculated by reference to the market value of the ordinary shares at the time of the grant.

The exercise of options granted under the previous 1997 Share Option Scheme, are subject to the achievement of appropriate conditions imposed by the Remuneration Committee at the time of the award. The criteria set by the Remuneration Committee for the awards made under this scheme were that the Company’s share price must increase over a three year period at a rate greater than the increase in RPI over the same three year period plus 4% per annum.

Mr A M Bostock left the Board in June 2006 due to his family’s planned relocation to South Wales. In recognition of his contribution to the Group’s progress, the Remuneration Committee decided to

allow Mr A M Bostock to retain 50% of his one remaining tranche of unexercised share options. This is in accordance with the Rules of the Dana 1999 Share Options Scheme approved by the Company’s shareholders at the Extraordinary General Meeting of 16 December 1999. This equates to a continuing option over 152,894 shares exercisable at 413.50p from 15 December 2007 onwards, up to and until 30 June 2008, and exercise remains subject to the satisfaction of the applicable performance conditions.

The Share Save Scheme is designed as a long term saving scheme for non-Director staff and has no performance criteria. Accordingly, the Executive Directors have elected not to participate. Dr S M Paton was, however, a participant in this scheme prior to his appointment as a director of the Company. Dr S M Paton has received two awards, and continues to hold options over 5,004 shares with a weighted average exercise price of 240.0p, with the first award exercisable in January 2008.

In addition, prior to his appointment to the Board, Dr S M Paton also participated in the Phantom Option incentive arrangements provided for senior management, details of which are provided in Note 24 to the Group financial statements. Dr S M Paton has received 2 awards and holds 100,000 Phantom Options, exercisable at a weighted average price of 408.20p, with the first award exercisable in July 2007.

The market price of the Company’s shares on Friday, 29 December 2005 was 897.0p per share and the high and low share prices during the year were 1020.0p and 417.5p respectively.

The agreements covering Directors’ options are available for inspection at the Company’s headquarters at 17 Carden Place, Aberdeen, AB10 1UR. The Company’s Register of Directors’ interests (which is also open to inspection) contains full details of the Directors’ shareholdings and options to subscribe.

Signed on behalf of the Board by:

Angus M Pelham BurnChairman of the Remuneration Committee

12 June 2006

Group Report of the Auditors


INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF DANA PETROLEUM PLCWe have audited the Group financial statements of Dana Petroleum plc for the year ended 31 December 2005 which comprise the Group Income Statement, the Group Balance Sheet, the Group Cash Flow Statement and the Group Statement of Changes in Equity and the related notes 1 to 33. These Group financial statements have been prepared under the accounting policies set out therein.

We have reported separately on the parent Company financial statements of Dana Petroleum plc for the year ended 31 December 2005 and on the information in the Directors’ Remuneration Report that is described as having been audited.

This report is made solely to the Company’s members, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditorsThe Directors are responsible for preparing the Annual Report and the Group financial statements in accordance with applicable United Kingdom law and International Financial Reporting Standards (IFRS) as adopted by the European Union as set out in the Statement of Directors’ Responsibilities.

Our responsibility is to audit the Group financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the Group financial statements give a true and fair view and whether the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation. We also report to you if, in our opinion, the Directors’ Report is not consistent with the Group financial statements, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Director’s remuneration and other transactions is not disclosed.

We review whether the Corporate Governance Statement reflects the company’s compliance with the nine provisions of the 2003 FRC Combined Code specified for our review by the Listing Rules of the Financial Services

Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures.

We read other information contained in the Annual Report and consider whether it is consistent with the audited Group financial statements. The other information comprises only the Highlights, Chairman’s and Chief Executive’s Review, Review of Operations, Financial Review, Report of the Directors, unaudited part of the Report on Directors’ Remuneration, Proven and Probable Reserves and Resources, and Exploration and Production Interests. We consider the implications for our report if we become aware of any apparent mis-statements or material inconsistencies with the Group financial statements. Our responsibilities do not extend to any other information.

Basis of audit opinionWe conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Group financial statements. It also includes an assessment of the significant estimates and judgments made by the Directors in the preparation of the Group financial statements, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Group financial statements are free from material mis-statement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the Group financial statements.

OpinionIn our opinion the Group financial statements:

• give a true and fair view, in accordance with IFRS as adopted by the European Union, of the state of the Group’s affairs as at 31 December 2005 and of its profit for the year then ended; and

• have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation.

Ernst & Young LLP 12 June 2006Registered Auditor1 More London Place,London SE1 2AF

Group Income StatementFor the year ended 31 December 2005

Note 2005 2004 £’000 £’000

Revenue 3 165,625 109,476Cost of Sales (71,836) (58,294)

Gross Profit 93,789 51,182Exploration & Evaluation 5 13,550 (10,065)Administrative Expenses (1,600) (3,363)

Operating Profit 5 105,739 37,754Gain on Sale of Available-for-Sale Investment 13 3,456 -Provision for Impairment of Associated Company (16) (2,851)

Profit on Ordinary Activities before Interest and Taxation 109,179 34,903Interest Income 3 1,642 778 Finance Costs 7 (3,053) (3,200)

Profit on Ordinary Activities before Taxation 107,768 32,481Taxation 9 (43,613) (19,805)

Profit for the Financial Year 64,155 12,676

Attributable to:Equity Holders of the Company 63,785 12,228Minority Interests 370 448

64,155 12,676

Earnings per Share - basic 10 80.13p 16.48p Earnings per Share - diluted 10 78.87p 16.17p

The results are derived solely from continuing operations.


Group Balance SheetAs at 31 December 2005

Note 2005 2004

£’000 £’000

Non-Current AssetsIntangible Assets 11 106,797 81,094Property, Plant and Equipment 11 158,681 94,544 Deferred PRT 9 1,466 -Available-for-Sale Financial Assets 13 13,082 13,367Derivative Financial Instruments 14 3,485 -

283,511 189,005

Current AssetsInventories 480 372Trade and Other Receivables 15 46,887 22,688Derivative Financial Instruments 14 1,246 - Cash and Cash Equivalents 16 103,415 41,330

152,028 64,390

Total Assets 435,539 253,395

Current LiabilitiesTrade and Other Payables 17 69,416 25,491Current Tax 18 4,631 10,987

74,047 36,478

Non-current LiabilitiesBorrowings Financial Liabilities 19 11,588 20,833Provision for Deferred Taxation 9 43,199 13,959 Provision for Liabilities and Charges 20 32,918 20,793 Accruals and Deferred Income 21 3,112 3,507

90,817 59,092

Net Assets 270,675 157,825

EquityEquity Attributable to Equity HoldersCalled-up Share Capital 23 12,574 11,729 Share Premium 75,246 39,531 Other Reserves 104,604 97,679Cumulative Translation Reserve 449 (457)Retained earnings 75,563 7,647

268,436 156,129Minority Interests 2,239 1,696Total Equity 270,675 157,825

The financial statements were approved by the Board of Directors on 12 June 2006 and signed on its behalf by:

Thomas P Cross David A MacFarlaneDirector Director


Group Statement of Changes in EquityFor the year ended 31 December 2005

(all figures in £’000)

Share Share Other Cumulative Retained Minority Total Capital Premium Reserves Translation Earnings Interests Equity Reserve

Opening Equity at 1 January 2004 11,098 30,740 97,679 - (5,472) 1,407 135,452

Currency Translation Adjustments - - - (457) - (159) (616) Total Expense Recognised - - - (457) - (159) (616)Direct in Equity

Profit for the Financial Year - - - - 12,228 448 12,676

Total Recognised Income and (Expense) for the Year - - - (457) 12,228 289 12,060

Employee Share Scheme Credits - - - - 891 - 891

New Shares Issued 631 8,791 - - - - 9,422

Equity at 31 December 2004 and 1 January 2005 11,729 39,531 97,679 (457) 7,647 1,696 157,825

Transitional Adjustment on First Time Adoption of IAS 39 - - 6,771 - - - 6,771

Equity at 1 January 2005 as Restated 11,729 39,531 104,450 (457) 7,647 1,696 164,596

Currency Translation Adjustments - - - 906 - 173 1,079

Total Expense Recognised Direct in - - - 906 - 173 1,079Equity

Profit for the Financial Year - - - - 63,785 370 64,155

Total Recognised Income and (Expense) for the Year - - - 906 63,785 543 65,234

Employee Share Scheme Credits - - - - 4,131 - 4,131

Derivative Financial Instruments - - (449) - - - (449)

New Shares Issued 845 35,715 - - - - 36,560

Fair Value Movements on Available-for-Sale Financial Assets, net of

Taxation - - 603 - - - 603

Equity at 31 December 2005 12,574 75,246 104,604 449 75,563 2,239 270,675


Group Cash Flow StatementFor the year ended 31 December 2005

Note 2005 2004

£’000 £’000

Operating Activities Cash Generated from Operations 26 107,052 61,752Taxation Paid (22,049) (6,928) Interest Received 1,642 778Interest Paid (1,105) (1,843)

Net Cash from Operating Activities 85,540 53,759

Investing Activities Expenditure on Intangible and Tangible Assets (63,872) (32,782)Receipts on Sale of Investments 13,968 - Payments to Acquire Investments (4,016) (44)

Net Cash Invested in Investing Activities (53,920) (32,826) Financing ActivitiesIssue of Ordinary Share Capital 36,560 587Repayment of Short Term Borrowings (10,584) (18,245)

Net Cash Flow from / (used in) Financing Activities 25,976 (17,658)

Currency Translation Differences 4,489 (2,625)

Net Increase in Cash and Cash Equivalents 62,085 650Cash and Cash Equivalents at the Beginning of the Year 16 41,330 40,680

Cash and Cash Equivalents at the End of the Year 16 103,415 41,330


Notes to the Group Financial Statements

1. Authorisation of Financial Statements and Statement of Compliance with IFRSThe Group’s financial statements of Dana Petroleum plc for the year ended 31 December 2005 were authorised for issue by the Board of Directors on 12June 2006 and the balance sheet was signed on the Board’s behalf by Thomas P Cross and David A MacFarlane. Dana Petroleum plc is a public limited company incorporated in England and Wales and domiciled in Scotland. The company’s ordinary shares are traded on the London Stock Exchange.

The Group’s financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU as they apply to the financial statements of the Group for the year ended 31 December 2005. The principal accounting policies adopted by the Group are set out in note 2.

2. Accounting Policies for the Group Financial StatementsThe following accounting policies are applied consistently in dealing with items which are considered material in relation to the Group’s financial statements. See note 33 for details of the initial application of IFRS, including IAS 32 and IAS 39 and the early adoption of IFRS 6.

BASIS OF ACCOUNTING The financial information has been prepared using accounting policies consistent with IFRS and IFRIC Interpretations adopted by the European Union and those parts of the Companies Act 1985 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention, except for certain fair value adjustments required by those accounting policies.

BASIS OF CONSOLIDATIONThe consolidated financial statements include the financial statements of the Company and each of its subsidiary undertakings having eliminated all inter-company transactions and balances.

AcquisitionsBusiness combinations are dealt with on the basis of the purchase method of accounting. The cost of an acquisition is measured as the fair value of the assets acquired (or assets given up in the case of swap transactions), equity instruments issued and liabilities incurred or assumed at the date of completion of the acquisition, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business

combination are measured initially at their fair values at the acquisition date irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of the acquisition is less than the fair value of the Group’s share of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement.

The results of subsidiaries acquired or disposed of are included/excluded in the consolidated income statement from the date on which control legally passes.

Joint Ventures The Group is engaged in oil and gas exploration, development and production through unincorporated joint ventures. The Group accounts for its share of the results and net assets of these joint ventures as jointly controlled assets. In addition, where Dana acts as operator to the joint venture, the gross liabilities and receivables (including amounts due to or from non-operating partners) of the joint venture are included in the Group balance sheet.

REVENUERevenue reflects actual sales value, net of VAT and overriding royalties, in respect of liftings sold. Due to the fact that the Group follows the entitlement basis, adjustments in respect of overlift (liftings greater than production entitlement) and underlift (production entitlement greater than liftings) are recorded in /against cost of sales at market value.

Interest income is recognised on an accruals basis and is disclosed separately on the face of the income statement.

FOREIGN CURRENCIESThe functional currency for material subsidiaries is pounds sterling.

Transactions in foreign currencies during the year are recorded in the functional currency at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the rates ruling at the balance sheet date.

Exchange differences resulting from the translation of assets and liabilities of foreign currency denominated subsidiaries into pounds sterling at year-end rates of exchange, together with those differences resulting


from the restatement of profits and losses from average to year-end rates, are taken directly to the cumulative translation reserve. All other exchange differences are taken to the income statement.

Transactions denominated in local currencies are re-measured into the functional currency at the rate ruling on the date that they arose.

OIL AND GAS EXPENDITUREThe Group accounts for oil and gas expenditure as follows:

Intangible Assets - Exploration and Evaluation Assets CapitalisationCertain costs (other than payments to acquire the legal right to explore) incurred prior to acquiring the rights to explore are charged directly to the income statement. All costs incurred after the rights to explore an area have been obtained, such as geological and geophysical costs and other direct costs of exploration (drilling, trenching, sampling and technical feasibility and commercial viability activities) and appraisal are accumulated and capitalised as intangible exploration and evaluation (E&E) assets.

E&E costs are not amortised prior to the conclusion of appraisal activities. At completion of appraisal activities if technical feasibility is demonstrated and commercial reserves are discovered, then, following development sanction, the carrying value of the relevant E&E asset will be reclassified as a development and production asset, but only after the carrying value of the relevant E&E asset has been assessed for impairment, and where appropriate, its carrying value adjusted. If after completion of appraisal activities in an area, it is not possible to determine technical feasibility and commercial viability or if the legal right to explore expires or if the Company decides not to continue exploration and evaluation activity, then the costs of such unsuccessful exploration and evaluation is written off to the income statement in the period the relevant events occur.

ImpairmentIf and when facts and circumstances indicate that the carrying value of an E&E asset may exceed its recoverable amount an impairment review is performed.

For E&E assets when there are such indications, an impairment test is carried out by grouping the E&E assets with the development & production assets belonging to the same geographic segment to form the Cash Generating Unit (“CGU”) for impairment testing.

The equivalent combined carrying value of the CGU is compared against the CGU’s recoverable amount and any resulting impairment loss is written off to the income statement. The recoverable amount of the CGU is determined as the higher of its fair value less costs to sell and its value in use.

Property, Plant and Equipment - Development and Production AssetsCapitalisationDevelopment and production (D&P) assets are accumulated into single field cost centres and represent the cost of developing the commercial reserves and bringing them into production together with the E&E expenditures incurred in finding commercial reserves previously transferred from E&E assets as outlined in the policy above.

DepreciationCosts relating to each single field cost centre are depleted on a unit of production method based on the commercial proven and probable reserves for that cost centre. Development assets are not depreciated until production commences. The amortisation calculation takes account of the estimated future costs of development of recognised proven and probable reserves, based on current price levels. Changes in reserve quantities and cost estimates are recognised prospectively from the last reporting date.

Currently there are no significant items of property, plant and equipment deemed to have different useful lives.

ImpairmentA review is performed for any indication that the value of the Group’s D&P assets may be impaired.

For D&P assets when there are such indications, an impairment test is carried out on the cash generating unit. Each cash generating unit is identified in accordance with IAS 36. Dana’s cash generating units are those assets which generate largely independent cash flows and are normally, but not always, single development or production areas. If necessary, additional depletion is charged through the income statement if the capitalised costs of the cash generating unit exceed the associated estimated future discounted cash flows of the related commercial oil and gas reserves.

Asset Purchases and DisposalsWhen a commercial transaction involves the purchase of a D&P asset in exchange for an E&E asset, the transaction is accounted for at fair value with the


Notes to the Group Financial Statements continued

difference between fair value and cost being taken to the income statement. When a commercial transaction involves the exchange of E&E assets of similar size and characteristics, no fair value calculation is performed. The capitalised costs of the asset being sold are transferred to the asset being acquired. However, where the size and characteristics of the E&E assets significantly differ, the transaction is accounted for at fair value with the difference between fair value and cost being taken to the income statement.

Proceeds from the entire disposal of an E&E asset are deducted from the capitalised costs of the asset with any surplus/deficit taken to the income statement as a gain or loss on sale. Proceeds from a part disposal of an E&E asset are deducted from the capitalised cost of the asset with any surplus taken to the income statement as a gain on sale.

Proceeds from the entire disposal of a D&P asset, or any part thereof, are taken to the income statement together with the requisite proportional net book value of the asset, or part thereof, being sold.

DECOMMISSIONINGThe Group recognises the full discounted cost of decommissioning when the obligation to rectify environmental damage arises, principally on development sanction. The amount recognised is the present value of the estimated future expenditure determined in accordance with local conditions and requirements. A corresponding D&P asset of an amount equivalent to the provision is also created. This is subsequently depreciated as part of the capital costs of the D&P asset. Any change in the present value of the estimated expenditure is reflected as an adjustment to the provision and the D&P asset. The unwinding of the discount on the decommissioning provision is included as a finance cost.

PROPERTY, PLANT AND EQUIPMENT OTHER THAN D&P ASSETS Property, plant and equipment other than D&P assets are stated in the balance sheet at cost less accumulated depreciation. Depreciation is provided at rates calculated to write off the cost less estimated residual value of each asset on a straight-line basis at the following annual rates:• Equipment 10% - 25%• Computer equipment 33%

FINANCE COSTS AND DEBTFinance costs which are directly attributable to the construction of D&P assets are capitalised as part of the cost of those assets. The commencement of capitalisation begins when both finance costs and expenditures in respect of the asset are incurred and activities that are necessary to develop an asset are in progress. Capitalisation ceases when the development is substantially complete.

Finance costs of debt are allocated to periods over the term of the related debt at a constant rate on the carrying amount. Arrangement fees and issue costs are amortised and charged to the income statement as finance costs over the term of the debt.

INVENTORIESInventories comprise materials and equipment, which are stated at the lower of cost and net realisable value.

TRADE AND OTHER RECEIVABLESTrade receivables are recognised and carried at the original invoiced amount. Other receivables, excluding underlifted amounts, are measured at nominal value. Underlifted amounts are measured at market value in accordance with industry practice.

TRADE AND OTHER PAYABLESTrade and other payables, excluding overlifted amounts, are measured at cost. Overlifted amounts are measured at market value in accordance with industry practice.

SHARE ISSUE EXPENSES AND SHARE PREMIUM ACCOUNT Costs of share issues are written off against the premium arising on the issue of share capital.

TAXATION Current TaxCurrent tax is recognised as a liability to the extent unpaid or if the amount paid exceeds the amount due it is recognised as an asset. Current tax assets and liabilities are measured at the amount expected to be paid / recovered from the taxation authorities, using tax rates and laws that have been enacted or substantively enacted by the reporting date.

Deferred TaxDeferred income tax is recognised on temporary differences arising between the tax base of assets and liabilities and their carrying amounts in the Group financial statements.


Deferred income tax is not accounted for if it arises from the initial recognition of an asset or liability in a transaction (other than a business combination), that at the time of the transaction affects neither accounting nor taxable profit or loss.

Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the reporting date.

Deferred income tax assets are recognised to the extent that it is probable that future income tax profit will be available against which the temporary differences can be utilised.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries, joint ventures and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

Petroleum Revenue Tax UK Petroleum Revenue Tax (PRT) is treated as an income tax and deferred PRT is calculated and provided for. Current UK PRT is charged as a tax expense on chargeable field profits included in the income statement and is deductible for UK corporation tax.

PENSIONSThe Group contributes to the personal pension arrangements of Executive Directors and employees up to a specified percentage of salary in lieu of a formal corporate scheme. Contributions in lieu of pensions are charged to the income statement as incurred.

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGINGThe Group uses derivative financial instruments to manage its exposure to fluctuations in foreign exchange rates, interest rates and movements in oil and gas prices.

Group Policy up to 31 December 2004 (UK GAAP)When derivative instruments are used, then the following definitions and accounting treatments apply.

Forward Foreign Currency ContractsThe criteria for forward foreign currency contracts are:• the instrument must be related to a foreign

currency asset or liability that is probable and whose characteristics have been identified;

• it must involve the same currency as the hedged item; and

• it must reduce the risk of foreign currency exchange movements on the Group’s operations.

The rates under such contracts are used to record the hedged item. As a result, gains and losses are offset against the foreign exchange gains and losses on the related financial assets and liabilities, or where the instrument is used to hedge a committed or probable future transaction, are deferred until the transaction occurs.

Interest Rate SwapsThe Group’s criteria for interest rate swaps are:• the instrument must be related to an asset

or a liability; and• it must change the character of the interest rate

by converting a variable rate to a fixed rate or vice versa.

Interest differentials are recognised by accruing the net interest payable. Interest rate swaps are not revalued to fair value or shown on the Group balance sheet at the year end. If they are terminated early, without settling the underlying liability, the gain / loss is spread over the remaining maturity of the original instrument.

Commodity Contracts Gains and losses arising on commodity contracts are recognised in revenues from oil production when hedged volumes are sold.

Group Policy Applied Prospectively from

1 January 2005 (IFRS) Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are remeasured at their fair value at each subsequent reporting date. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either: hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedge); hedges of highly probable forecast transactions (cash flow hedges); or hedges of net investments in foreign operations (net investment hedge).

Fair value hedge : changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.



Cash flow hedge : the effective portion of changes in the fair value of derivatives that are designated and qualify as hedges are recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the income statement.

Amounts accumulated in equity are recycled to the income statement in the periods when the hedged item will affect profit and loss (for instance when the forecast sale that is hedged takes place). However, when the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, project costs or a major business investment) or a liability, the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset or liability.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement.

Net investment hedge : hedges for net investments in foreign operations are delivered through derivatives and / or foreign currency borrowings. Any gain or loss on a derivative hedging instrument relating to the effective portion of the hedge is recognised in equity; the gain or loss relating to the ineffective portion of the hedge is recognised immediately in the income statement. Any gains or losses on foreign currency borrowings used as a hedge are recognised in equity. Gains and losses accumulated in equity are included in the income statement on disposal of the foreign operation.

Derivatives not Qualifying for Hedge Accounting Certain other derivative instruments, while providing effective economic hedges under the Group’s policies, may not be designated as hedges at the Group’s discretion or if the required documentation standards have not been achieved. Changes in the fair value of such derivative instruments are recognised immediately in the income statement. The Group does not hold or issue derivative financial instruments for speculative purposes.

Derivatives embedded in other financial instruments or non-derivative host contracts are treated as

separate derivatives when their risks and characteristics are not closely related to those host contracts and the host contracts are not carried at fair value with unrealised gains or losses reported in the income statement.

Fair value estimation of financial instruments traded in active markets (such as available-for-sale securities) is based on quoted market prices at the reporting date. The fair value of foreign exchange contracts is determined using forward exchange market rates at the balance sheet date. Other financial instruments are valued using standard pricing models or discounted cash flow techniques.

OPERATING LEASES Rentals under operating leases are charged to the income statement on a straight line basis over the period of the lease.

MAINTENANCE EXPENDITUREExpenditure on major maintenance, refits or repairs is capitalised where it enhances the life or performance of an asset above its originally assessed standard of performance; replaces an asset or part of an asset which was separately depreciated and which is then written off, or restores the economic benefits of an asset which has been fully depreciated. All other maintenance expenditure is charged to the income statement as incurred.

CASH AND CASH EQUIVALENTS Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet.

SHARE BASED PAYMENTSThe Group has applied the requirements of IFRS 2 Share-based Payments. In accordance with the transitional provisions, IFRS 2 has been applied to all grants of equity instruments after 7 November 2002 that had not vested as of 1 January 2005.

The Group issues both equity-settled and cash-settled share-based payments as an incentive to certain key management and staff. Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based


on the Group’s estimate of the number of shares that will eventually vest.

Fair value is measured by use of an actuarial binomial model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioral considerations.

For cash-settled share-based payments, a liability is recognised based on the current fair value determined at each reporting date and that portion of the employees’ services to which the payment relates that has been received by the reporting date.

NEW STANDARDS AND INTERPRETATIONS NOT APPLIEDDuring the year, the IASB and IFRIC have issued the following standards and interpretations with an effective date after the date of these financial statements:

International Accounting Standards (IAS/IFRS)IFRS 7 Financial Instruments: Disclosures Effective Date: 1 January 2006

International Financial Reporting Interpretations Committee (IFRIC)IFRIC 4 Determining whether an arrangement contains a lease Effective Date: 1 January 2006

The Directors do not anticipate that the adoption of this standard and interpretation will have a material impact on the Group’s financial statements in the period of initial application.

Upon adoption of IFRS 7, the Group will have to disclose additional information about its financial instruments, their significance and the nature and extent of risks that they give rise to. More specifically the Group will need to disclose the fair value of its financial instruments and its risk exposure in greater detail. There will be no effect on reported income or net assets.



3. Revenue

Revenue disclosed in the income statement is analysed as follows: 2005 2004£’000 £’000

Oil, gas and condensate sales 165,625 109,476

Revenue 165,625 109,476

Interest income 1,642 778

Total revenue 167,267 110,254 No revenue was derived from the exchange of goods and services (2004: £Nil).

Included in oil, gas and condensate sales are amounts relating to deferred income (note 21) and embedded derivative income (note 14) arising on the Victor gas sales contract. These amounts are £395,000 (2004: £602,000) and £454,000 (2004: £Nil) respectively.

4. Segment InformationFor the purposes of segmental information the primary segment reporting format is determined to be the business segment. The Group has one class of business, the exploration for and production of hydrocarbon liquids and gas. No further disclosure is required in relation to primary segment reporting in this note as all the relevant disclosure is already detailed throughout the Group financial statements.

Secondary segment information is reported geographically. The Group’s geographical segments are ‘Europe’ and ‘International’. Sales to external customers do not differ between origin and destination.

The following tables present revenue, expenditure and certain asset information regarding the Group’s geographical segments for the years ended 31 December 2005 and 2004.

Segment Revenue: 2005 2004£’000 £’000

Europe 157,632 101,986International 7,993 7,490

165,625 109,476

Revenue in 2005 and 2004 arises solely from oil, gas and condensate sales.

Segment Assets: 2005 2004£’000 £’000


435,539 253,395

Capital Expenditure: 2005 2004£’000 £’000


131,018 31,921


5. Operating Profit

Operating Profit is stated after charging / (crediting): 2005 2004 £’000 £’000

Depreciation (note 11) 26,354 19,417Net (under) / over lifted production movement (4,990) 757 Insurance claim receipt(1) (601) (2,500) Net foreign exchange difference (4,627) 238Operating lease rentals 98 87

Exploration and Evaluation- Costs of licences expired / relinquished 818 9,491- Pre licence expenditure 1,186 574- Fair value gain on exploration and evaluation asset exchange (15,554) - (13,550) 10,065

(1) Provision / Receipts for settlement of the Mallard field business interruption insurance claim in relation to lost production from

the Mallard field in 2004.

6. Auditors’ RemunerationNew requirements for the disclosure of remuneration paid by the Group to the auditors were introduced in the Companies (Audit, Investigations and Community Enterprise) Act 2004 and regulations specifying these requirements were issued in 2005, and are mandatory for accounting periods beginning on or after 1 October 2005.

Notwithstanding this, the Group has elected to give disclosures that comply with these requirements, in particular regarding fees other than for the audit of the financial statements, as well as disclosing the total of non-audit fees for the Company and its UK subsidiary undertakings, in accordance with the extant legislation.

2005 2004 £’000 £’000

Audit of the financial statements(1) 145 126

Other fees to auditors: - Taxation services 37 50 - Corporate finance services: transaction costs 212 95- Audit of IFRS restatement 67 - 316 145

(1) £24,000 (2004: £26,000) of this relates to the Company.

Included in other fees to auditors is £316,000 (2004: £144,000) relating to the Company and its UK subsidiaries.



7. Finance Costs 2005 2004£’000 £’000

Bank and other loans 1,315 1,848 Unwinding of decommissioning discount (note 20) 1,738 1,352

3,053 3,200

8. Employment Costs 2005 2004£’000 £’000

Wages and salaries 5,732 3,404 Pension costs 255 237 Social security costs 1,265 334

7,252 3,975

Included in wages and salaries is a total expense of share-based payments of £2,302,000 (2004: £435,000)of which £408,000 (2004: £165,000) arises from transactions accounted for as equity settled share-based payment transactions. The carrying amount of the liability at the end of the year for cash settled share-based payment transactions is £2,164,000 (2004: £270,000).

The weighted average number of employees (including Executive Directors) during the year was:

2005 2004

Management 16 14 Technical and administration 41 43

57 57

Of the total number of employees, 36 are employed by the Group’s subsidiary Yoganoil, which operates the South Vat-Yoganskoye field.

No employees other than the Directors are determined to be Key Management personnel.

Details for each Director, of remuneration, pension entitlements and interests in share options are set out in pages 32 to 34.


9. Taxation

a) Analysis of tax on profit on ordinary activities 2005 2004 £’000 £’000

Current TaxationPRT 5,696 3,841 UK corporation tax 8,876 11,839 Overseas tax 726 838

Current tax charge 15,298 16,518Amounts under provided in previous years 397 -Total current tax charge 15,695 16,518

Deferred taxationUK deferred corporation tax 29,768 4,447

UK deferred PRT (1,850) (1,160)

Total deferred tax charge 27,918 3,287

Total tax charge in the income statement 43,613 19,805

Tax relating to items charged or credited to equityDeferred tax:Unrealised gain on available-for-sale financial assets 1,254 -Provision for deferred tax on embedded derivative (300) -Provision for deferred tax on share option awards (3,723) (804)Tax (credit) / charge in the Group statement of changes in equity (2,769) (804)

b) Reconciliation of the total tax charge

The tax charge for the year is higher than the weighted average rate for the year. The difference is explained below:

2005 2004 £’000 £’000

Accounting profit before tax 107,768 32,481

Tax at the weighted average rate of corporation tax of 34.26% (2004: 45.84%) 36,918 14,888

Disallowed expenses and non-taxable income (3,315) 3,374 Supplementary charge differences 1,108 77 Tax losses utilised not previously recognised 39 (1,360) Tax losses not utilised 6 129PRT 3,846 2,681Allowable deduction for PRT (1,538) (1,072)Foreign tax calculation differences 141 97Adjustment in respect of prior years 4,756 (1,149)Non qualifying depreciation 1,652 2,140

Total tax expense reported in the income statement 43,613 19,805

The weighted average rate of corporation tax of 34.26% (2004: 45.84%) is calculated using the following methodology. Tax charges are calculated by applying the statutory tax rate in each tax jurisdiction to the accounting profit before tax for each entity. The sum of the tax charges for each entity is then divided by the Group accounting profit before tax to derive the weighted average rate of corporation tax for the year.

The weighted average rate of corporation tax has changed from the previous accounting period due to the differences in the weighted average mix of profits in each tax jurisdiction.



c) Unrecognised tax losses

The Group has tax losses which arose in the UK of £41,101,000 (2004: £27,437,000) in respect of ‘outside the ring-fence’ activities, that are available indefinitely for offset against future taxable profits of the companies in which the losses arose. Deferred tax assets have not been recognised as there is uncertainty whether the asset is recoverable. The asset is recoverable if there were future suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.

d) Temporary differences associated with group investments

At 31 December 2005, there was no recognised deferred tax liability (2004: Nil) for taxes that would be payable on the unremitted earnings of certain of the Group’s subsidiaries as the Group has determined that undistributed profits of its subsidiaries will not be distributed in the near future.

The temporary differences associated with investments in subsidiaries for which deferred tax has not been recognised aggregate to £985,000 (2004: £825,000).

e) Deferred taxation

2005 2004 £’000 £’000

Deferred tax included in the Group balance sheet is as follows:

Deferred tax liabilityAccelerated capital allowances 65,101 31,659 Revaluation of available-for-sale financial assets 1,868 - Share based payment (4,897) (1,051) Tax on deferred PRT 586 (154) PRT - 384 Tax on provision for embedded derivative 1,893 - Other timing differences (12,673) (9,698) Tax losses (8,679) (7,181) Deferred tax liability 43,199 13,959

Deferred tax asset PRT 1,466 -

Deferred tax asset 1,466 -

The deferred tax included in the Group income statement is as follows:

Deferred tax in the income statementAccelerated capital allowances 33,451 5,153Share based payment (123) (49)Embedded derivative 182 - PRT (1,110) (696)Other timing differences (2,983) (249)Tax losses (1,499) (872)Deferred tax expense 27,918 3,287


10. Earnings per Share

The basic earnings per ordinary share of 80.13p (2004: 16.48p) is calculated on the profit for the year attributable to equity holders of the parent of £63,785,000 (2004: £12,228,000) and divided by the weighted average of 79,606,852 ordinary shares (2004: 74,181,328).

The diluted earnings per share of 78.87p (2004: 16.17p) is calculated on the diluted profit for the year attributable to equity holders of the parent of £64,071,000 (2004: £12,855,000), being profit for the year attributable to equity holders of the parent of £63,785,000 (2004: £12,228,000) plus the convertible loan note interest (net of tax) of Nil (2004: £512,000) and share option expenses of £286,000 (2004: £115,000) and divided by 81,235,241 dilutive potential ordinary shares (2004: 79,503,445), calculated as follows:

2005 2004 ‘000’ ‘000’

Basic weighted average number of shares 79,607 74,181

Dilutive potential ordinary shares:

- Share options schemes 1,628 1,498 - Convertible loan notes - 3,824 81,235 79,503 There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of completion of these financial statements which require to be disclosed.



11. Intangible Assets and Property, Plant and Equipment

The movements during the year were as follows: Intangible Assets Property, Plant

& Equipment Exploration & Development Evaluation & Production Assets Assets Other Total

£’000 £’000 £’000 £’000

Cost:At 1 January 2004 78,246 157,588 951 236,785

Exchange adjustments - (1,130) - (1,130)Additions 14,739 17,036 146 31,921Transfers and reclassifications (2,548) 2,548 - -Unsuccessful exploration and evaluation (9,343) - - (9,343)

At 31 December 2004 81,094 176,042 1,097 258,233

Exchange adjustments - 950 - 950Additions 45,527 85,356 135 131,018Transfers and reclassifications (3,860) 3,860 - -Unsuccessful exploration and evaluation (829) 11 - (818)Disposals (15,135) - - (15,135)

At 31 December 2005 106,797 266,219 1,232 374,248

Depreciation:

At 1 January 2004 - 62,767 793 63,560Exchange adjustments - (382) - (382)Provided in year - 19,287 130 19,417

At 31 December 2004 - 81,672 923 82,595

Exchange adjustments - (179) - (179)Provided in year (note 5) - 26,243 111 26,354

At 31 December 2005 - 107,736 1,034 108,770

Net Book Value

At 31 December 2005 106,797 158,483 198 265,478

At 31 December 2004 81,094 94,370 174 175,638

At 1 January 2004(1) 78,246 94,821 158 173,225

(1) Included in the development and production assets at 1 January 2004 are assets valued using fair value as deemed cost.

The fair value of these assets at 1 January 2004 is £31,290,000. The carrying amount of these assets at 1 January 2004

reported under UK GAAP was £36,733,000. Therefore, the aggregate adjustment to the carrying amounts of these assets

using fair value as deemed cost was £5,443,000.


12. Investment in Associate 2005 2004 £’000 £’000

Investment in associate - -

The group holds a 30% interest in associate Yuganskoil Joint Stock Company, a company incorporated in the Russian Federation to operate the Sortymskoye oil field. A full provision for the impairment of the investment was made in 2004 and the Group discontinued the recognition of its share of losses. Costs of £16,000 in relation to the investment were incurred by the Group in 2005. A provision for impairment has been recognised in relation to these costs. No summarised financial information has been disclosed in this note as it is not significant to the Group.

13. Available-for-Sale Financial Assets 2005 2004 £’000 £’000

Available-for-sale investments 13,082 13,367

The number reported in 2004 above was classified in the 2004 Annual Report as “Investments” at cost. The requirement to fair value these investments and classify them as available-for-sale financial assets was effective from 1 January 2005 under IAS 32 and 39. The impact at 1 January 2005 was to increase the value of the investments by £3,754,000.

Subsequent to this date, the 10% shareholding in Evikhon, a Russian Joint Stock company was sold on 9 March 2005. A gain on sale of £3,456,000 was realised on sale of this available-for-sale investment.

The remaining available-for-sale investment consists of investments in the shares of Faroe Petroleum plc which are listed on the London AIM market, and which by their nature have no fixed maturity date or coupon rate. During the year, the Group participated in a fund-raising by Faroe Petroleum plc at a cost of £4,000,000; increasing its shareholding to 17.2%, and as a result becoming the largest shareholder in the company.

On 13 April 2006, Faroe Petroleum plc announced a further fund-raising of £25.0 million through a market placing. This was subsequently approved by the shareholders of the company at an extraordinary general meeting held on 8 May 2006. The Group participated in the placing and subscribed for a further 3,161,765 shares at a cost of £4,300,000, thereby maintaining a 17.2% interest in Faroe Petroleum plc.

14. Derivative Financial Instruments

Non-Current 2005 2004 £’000 £’000

Embedded derivative 3,485 -

Current 2005 2004 £’000 £’000

Embedded derivative 1,246 -

The Group has reviewed its contracts and has identified an embedded derivative within the Victor gas contract. In compliance with IAS 39 the embedded derivative has been recognised at its fair value in the financial statements from 1 January 2005. Fair value represents the discounted value of the anticipated future cash flows generated by the embedded derivative components. The discount rate applied is 7%.The maturity date of the Victor gas contract is 30 September 2009.



15. Trade and Other Receivables

2005 2004 £’000 £’000

Trade receivables 26,352 15,104 Other receivables and prepayments 19,713 7,146 Other related parties 822 438

46,887 22,688

16. Cash and Cash Equivalents 2005 2004 £’000 £’000

Cash at bank and in hand 49,445 33,155

Short-term deposits 53,970 8,175

103,415 41,330

Cash at bank earns interest at floating rates based on a discount to US$ / GBP LIBOR. Short-term deposits are made for varying periods of between one day and one month depending on the future cash requirements of the Group, and earn interest at the respective short-term fixed deposit rates. The fair value of cash and cash equivalents is £103,415,000 (2004: £41,330,000).

17. Trade and Other Payables 2005 2004 £’000 £’000

Russian state credit 868 781 Trade payables 9,813 2,490 Accruals and other payables 58,735 22,220 69,416 25,491

18. Current Tax 2005 2004 £’000 £’000

PRT 2,695 1,055UK corporation tax 1,936 9,932 4,631 10,987


19. Borrowings Financial Liabilities 2005 2004 £’000 £’000

Bank loan 11,588 20,833

The maturity of the loans disclosed above is as follows:

2005 2004

(a) Amounts falling due £’000 £’000

- in one year or less or on demand - - - in more than one year but not more than two years 10,112 1,658 - in more than two years but not more than five years 1,476 19,175

11,588 20,833

(b) At 31 December 2005 the Group’s committed borrowing facility under its revolving credit arrangement is US$45,000,000. The maximum amount under the facility that may be drawn down is determined by reference to the net present value of the assets comprising the underlying borrowing base as well as certain other financial tests. The maximum drawdown available under the facility is reviewed and adjusted at six monthly intervals. At 31 December 2005, the Group’s borrowing base capacity considerably exceeds the current agreedborrowing facility.

At 31 December 2005 US$20,000,000 (2004: US$40,000,000) was drawn under the facility, and under the terms of that facility will be repayable in full by 30 June 2008.

The bank loan is secured by fixed and floating charges over the assets of certain Group companies. Interest is charged at US$ LIBOR + 1.35%.

20. Provisions for Liabilities and Charges

Decommissioningprovision

£’000

At 1 January 2005 20,793 New provisions and changes in estimates 10,387 Unwinding of discount (note 7) 1,738

At 31 December 2005 32,918

The decommissioning provision of £32,918,000 relates to the Group’s production and development facilities. These costs are expected to be incurred at various intervals over the next 22 years. The provision has been estimated using existing technology at current prices, escalated at 2.5%, and discounted at 7%. The economic life and the timing of the decommissioning liabilities are dependent on Government legislation, commodity price and the future production profiles of the respective production and development facilities. In addition, the costs of decommissioning are subject to inflationary/deflationary pressures in the cost of third party service provision.



21. Accruals and Deferred IncomeIn 1999, Dana Petroleum (E&P) Limited re-negotiated its gas sales contract with British Gas Trading Limited in respect of the Victor gas field which resulted in the receipt of a lump sum compensation payment to Dana. This income is released to the income statement in proportion to the amount produced annually over the field’s remaining reserves, and is included in revenue.

22. Financial InstrumentsAn outline of the objectives, policies and strategies pursued by the Group in relation to financial instruments is set out in the financial review on page 21 of this report, and in Note 2 on pages 43 and 44.

Interest rate risk profile of financial assets and liabilitiesThe interest rate profile of the financial assets and liabilities of the Group as at 31 December is as follows:

Fixed Floating rate rate financial financial assets < assets < 1 year 1 year Total Financial assets £’000 £’000 £’000

2005

Cash and short term deposits 53,970 49,445 103,415

2004

Cash and short term deposits - 41,330 41,330 Short-term deposits were earning interest at a weighted average fixed deposit rate of 4.39%. Cash at bank earnsinterest at floating rates based on a discount to US$ / GBP LIBOR.

Floating rate financial liabilities

Financial liabilities £’000

2005

Bank loan 11,588

2004

Bank loan 20,833

The floating rate liabilities comprise the bank borrowings which bear interest based on US$ LIBOR plus 1.35% (2004: US$ LIBOR plus 1.35%). The other financial instruments of the Group that are not included in the above tables are non-interest bearing and are therefore not subject to interest rate risk.

Maturity of financial liabilitiesThe maturity profile of the Group’s financial liabilities at 31 December is shown in Note 19.

Credit riskThere are no significant concentrations of credit risk within the Group. The maximum credit risk exposure relating to financial assets is represented by the carrying value as at the balance sheet date.


Fair values of financial assets and financial liabilitiesSet out below is a comparison by category of carrying amounts and fair values of all of the Group’s financial

assets and liabilities as at 31 December.

2005 2004 2005 2004 Book value Book value Fair value Fair value

£’000 £’000 £’000 £’000Financial assets

Cash and short term deposits 103,415 41,330 103,415 41,330Available-for-sale financial assets 13,082 13,367 13,082 18,715Embedded derivative financial instrument 4,731 - 4,731 -Trade and other receivables 46,887 22,688 46,887 22,688

Financial liabilitiesTrade and other payables 69,416 25,491 69,416 25,491Long term borrowings (11,588) (20,833) (11,588) (20,833)

The fair value of the available-for-sale financial assets and the embedded derivative are detailed in note 13 and note 14 respectively.

23. Called-up Share Capital Number of 15p OrdinaryAuthorised ordinary shares ‘000’ £’000

At 1 January 2005 110,000 16,500Increase in authorised shares 10,000 1,500At 31 December 2005 120,000 18,000

Number of

15p Ordinary

Allotted, called up and fully paid ordinary shares ‘000’ £’000

At 1 January 2004 73,987 11,098Issued and fully paid for share option scheme exercises 287 43Issued and fully paid for convertible loan notes 3,920 588

At 31 December 2004 78,194 11,729Issued and fully paid for share option scheme exercises 1,635 246 Issued and fully paid on equity placing 3,953 593Issued and fully paid on intangible asset acquisition 43 6At 31 December 2005 83,825 12,574

During the year a total of 1,617,000 ordinary shares of 15p each were issued at a weighted average exercise price of £1.656 to various employees, pursuant to the exercise of share options, and a further 18,000 ordinary shares of 15p each were issued to various employees pursuant to the maturity of a share save scheme award at a weighted average exercise price of £1.685.

On 10 November 2005, the Group placed 3,953,498 new ordinary shares of 15p each, representing 5% of the current issued share capital of the Group. The net proceeds from the placing will be used to provide additional flexibility in funding the acquisitions from Gaz de France and the enhanced exploration and appraisal work programme which results therefrom.

At 31 December 2005 the issued share capital of the Company was represented by 83,825,008 ordinary shares

of 15p each (2004: 78,193,576).



24. Share-based payment arrangementsDuring the year the following share-based payment arrangements were in operation by the Company:

The Share Option Scheme The extent, nature, term and general terms and conditions, (including vesting), relating to this arrangement, are detailed in the Report on Directors’ Remuneration on pages 29, 30, 33 and 34.

The Share Save SchemeThe extent, nature, term and general terms and conditions, (including vesting), relating to this arrangement, are also detailed in the Report on Directors’ Remuneration on pages 29 and 30.

The Share Option and Share Save Scheme are considered to be “equity-settled” transactions, and for all awards post 7 November 2002, require to be fair valued at the date of award. The fair value process and the underlying assumptions used are described below. Based on the results of this actuarial review, the Share Save Scheme was demonstrated to be immaterial and accordingly the requirements of IFRS 2 – Share-based Payments, are not applied to this arrangement.

The “Phantom” Option SchemeSenior managers (excluding Directors), participate in this arrangement, which mirrors the terms and conditionality of the Share Option Scheme, except that on exercise they are “cash-settled” transactions. As such, these transactions also require to be fair valued, but at each reporting date.

The expense recognised for share-based payments in respect of employee services during the year to 31 December 2005 is £2,302,000 (2004: £435,000). The portion of that expense arising from equity-settled share-based payment transactions is £408,000 (2004: £165,000).

The following table illustrates the number and weighted average exercise prices (WAEP) of, movements in the respective schemes.

Options Options Granted to Options held at Of which 01.01.05 Lapsed Granted Exercised 31.12.05 Exercisable

‘000 ‘000 ‘000 ‘000 ‘000 ‘000

Share Option Scheme 5,974 (1) - - 1,617 4,357 (1) 1,684 (1)

WAEP £2.377 - - £1.656(2) £2.645 £2.287

Phantom Option Scheme 480 - 300 - 780 -

WAEP £2.365 - £6.455 - £3.938 -

(1) Included within this balance are options over 1,684,000 (2004: 2,797,000) shares that have not been recognised in

accordance with IFRS 2 as the options were granted before 7 November 2002. These options have not been subsequently

modified and therefore do not need to be accounted for in accordance with IFRS 2.

(2) The weighted average share price at the date of exercise for the options exercised was £6.441 (2004: £3.517)


For the share options outstanding as at 31 December 2005, the weighted average remaining contractual life is 6.52 years (2004: 7.02 years).

The range of exercise prices for options outstanding at the end of the year was £1.575 - £4.135 (2004: £1.275 - £4.135).

For the two awards of share options post 7 November 2002 (January 2003 and December 2004), the Company was assisted in the process of establishing the fair value at the date of the grant of the awards by CPRM, a professional actuarial firm, and part of the Cavanagh group. CPRM estimated the fair value using a binomial model, taking into account the terms and conditions upon which the options were granted, and also the performance conditions that were required to be satisfied before vesting.

CPRM were provided with the detailed rules of each scheme and all the objective data relating to historic awards (grants, exercises, lapses, withdrawals etc) as well the Company’s historic daily share price and staff turnover analysis. In addition, the following assumptions were also made with respect to the expected volatility of the Company’s share price and the expected life of an option.

For volatility, the Company used share price data from 2002 onwards. This was the year the Company acquired 4 new producing / development assets in the North Sea, which were transforming to the Company, and which significantly reduced the influence of the historic Russian activity on the Company. This geographical shift has lead to a lower volatility in the Company’s share price which is expected to continue into the future. CPRM were able to corroborate this fact by establishing that the standard deviation of the Company’s share price (the measure of volatility) from the FTSE All Share Index throughout the historic period, reduced considerably from 2002 onwards. Accordingly, an annual volatility assumption of 34% was utilised.

The life of the option depends on the trigger levels at which employees decide to exercise before they expire and the extent to which option holders withdraw from the schemes due to staff turnover.

Due to the small number of members included in the Dana schemes, the results of any historic analysis are very sensitive to personal circumstances at the time of exercise and therefore the results are not representative nor an appropriate profile to extrapolate into the future.

Accordingly, on CPRM’s recommendation, a profile was used which was consistent with their wider actuarial experience of actual member exercise rates but still aligned with the specific history for the Dana Scheme.

The staff turnover assumption is based on the Company’s historic rate of staff turnover amongst all share option holders. This was established from factual historic data at 8% pa.

The fair value of the Phantom (cash-settled) options was established in exactly the same way, and until the liability is ultimately settled, it is required to be remeasured at each reporting date, with changes to fair value recognised in the income statement.

The carrying amount of the liability relating to the cash-settled options at 31 December 2005 is £2,164,000 (2004: £270,000).



25. Reconciliation of Movements in Equity

The reconciliation of movements in equity is detailed in the statement of changes in equity on page 38. The following is a description of the nature and purpose of each reserve:

Share capitalThe balance classified as share capital is the nominal value on issue of the Group’s equity share capital, comprising 15p ordinary shares.

Share premiumThe balance classified as share premium is the premium on issue of the Group’s equity share capital, comprising 15p ordinary shares less any costs of issuing the shares.

Cumulative translation reserveThe cumulative translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries.

Other reservesOther reserves records the fair value changes on available-for-sale investments and other reserves relating to the Group’s transition to a UK listing from an Irish listing in 1997.

26. Net Cash Flows from Operating Activities

Year to Year to31 December 31 December

2005 2004

£’000 £’000

Profi t for the Financial Year 64,155 12,676Depreciation 26,354 19,424Deferred income (395) (602)Interest income (1,642) (778)Interest expense 3,053 3,200Taxation 43,613 19,805Employee share scheme charge 408 165Translation differences (3,200) 662Impairment of associate 16 2,851Exploration and evaluation (13,550) 10,065Share of losses of associate - 9Gain on sale of investment (3,456) -Fair value movements on derivatives (454) -Movements In Working Capital:Inventory movement (108) (49)Receivables movement (22,461) (4,084)Payables movement 14,719 (1,592)

Cash Generated from Operating Activities 107,052 61,752


27. Analysis of Net Debt

At At 31 1 January Exchange December 2005 Cash flows Other differences 2005

2005 £’000 £’000 £’000 £’000 £’000

Cash at bank and in hand 33,155 11,801 - 4,489 49,445Short term deposits 8,175 45,795 - - 53,970 41,330 57,596 - 4,489 103,415Debt due after one year (20,833) 10,584 - (1,339) (11,588)Net Funds 20,497 68,180 - 3,150 91,827

At At 31

1 January Exchange December 2004 Cash flows Other differences 2004

2004 £’000 £’000 £’000 £’000 £’000

Cash at bank and in hand 32,852 2,928 - (2,625) 33,155Short term deposits 7,828 347 - - 8,175 40,680 3,275 - (2,625) 41,330Debt due within one year (19,478) 18,245 1,073 160 -Debt due after one year (21,195) - (1,073) 1,435 (20,833)Convertible loan notes (9,556) - 8,835 721 -

Net (Debt) / Funds (9,549) 21,520 8,835 (309) 20,497

28. Capital Commitments

Exploration and Approved Development CommitmentsThe Group has commitments for future capital expenditure of £92.9m (2004: £34.7m) which represent the Group’s share of obligations under existing Sale and Purchase Contracts, Production Sharing Contracts and Joint Operating Agreements.

29. Obligations under Operating Leases

Minimum lease payments under operating leases are as follows: Land and Land and Buildings Buildings 2005 2004

£’000 £’000

Amounts payable on leases due:within one year 98 98

in two to five years 294 -

After five years 392 -

Rentals due under operating leases are charged against income on a straight line basis over the term of the lease.



30. Contingent Liabilities

Banff Contingent PaymentThe Exchange Agreement which the Group completed with ENI-Agip on 20 March 2002, states that the Group will make a payment to ENI-Agip of £3,000,000 upon production and sale of an aggregate total of 30,000,000 barrels of crude oil from the Banff field, post the effective date of the acquisition of 1 July 2001. On current projections the payment would be due sufficiently far into the future, as to raise doubt over its likelihood. The Group will, however, continue to monitor the field and will provide for the payment if it becomes probable that the production target will be reached.

31. Other Related Party TransactionsSales of US$15,255,000 (2004: US$13,666,000) were made by the Group through Lukoil, the other significant shareholder in Yoganoil. All sales were on an arms-length basis at prevailing domestic market prices. At 31 December 2005 US$1,419,000 was owed by Lukoil to Yoganoil (2004: US$784,000) in respect of such sales.

32. PensionsThe Group contributes to the personal pension arrangements of Executive Directors and employees up to a specified percentage of salary in lieu of a formal corporate scheme. Total pension contributions in lieu amounted to £255,000 (2004: £237,000) for the year ended 31 December 2005.

33. Transition to IFRSFor all periods up to and including the year ended 31 December 2004, the Group prepared its financial statements in accordance with UK GAAP. These financial statements, for the year ended 31 December 2005, are the first the Group is required to prepare in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) as they apply to the financial statements of the Group for the year ended 31 December 2005.

Accordingly, the Group has prepared financial statements which comply with IFRS applicable for periods beginning on or after 1 January 2005 and the significant accounting policies meeting those requirements are described in Note 2. In preparing these financial statements, the Group has started from an opening balance sheet as at 1 January 2004, the Group’s date of transition to IFRS, and made those changes in accounting policies and other restatements required by IFRS 1 for the first time adoption of IFRS. This note explains the principal adjustments made by the Group in restating its UK GAAP balance sheet as at 1 January 2004 and its previously published UK GAAP financial statements for the year ended 31 December 2004.

Where the Group’s UK GAAP financial information was based on estimates, the same estimates have been applied in preparing the IFRS financial information. Where IFRS requires estimates that were not previously required under UK GAAP, they have been based only on those factors existing on the relevant balance sheet date. This is consistent with treating information received after the balance sheet date as non-adjusting events under IAS 10 – Events after the Balance Sheet Date. Estimates not previously required under UK GAAP primarily relate to financial instruments, embedded derivatives and share based payments.


IFRS 1 permits certain mandatory exemptions and also allows optional exemptions from the application of certain IFRS in order to assist companies with the transition process. Dana Petroleum has applied all the mandatory exceptions and in addition made the following significant decisions in implementing IFRS:

• IFRS 2 – Share based payments is applied to all share based awards granted after 7 November 2002 that did not vest before 1 January 2005

• IFRS 3 – Business combinations prior to 1 January 2004 have not been restated • IAS 21 – Cumulative translation differences have been set to zero at 1 January 2004• IAS 32 – Financial Instruments: Disclosure and Presentation and IAS 39 – Financial Instruments: Recognition

and Measurement will be applied prospectively from 1 January 2005 and as such the associated 2004 comparatives are presented under UK GAAP

• To measure certain development and production assets at the transition date to IFRS at fair value and use this fair value as their deemed cost

In addition, as a first time adopter, the Group has early adopted IFRS 6 – Exploration for and Evaluation of Mineral Resources which is not mandatory as at 31 December 2005, the reporting date of the Group’s first IFRS financial statements. This Standard has been adopted with effect from 1 January 2004.

The Group initially published on its website (www.dana-petroleum.com), full details of its conversion to IFRS, on the 28th September 2005, coinciding with the release of the Group’s Interim Report for 2005. As a result of subsequent clarifications from the International Financial Reporting Interpretations Committee (IFRIC), the Group further revised its accounting policies, and updated its restatement of prior periods to reflect these new policies. Once again, full details are available on the Group’s website, on 28th March 2006, coinciding with the release of the Group’s Preliminary Results for 2005.

The adjustments to the previously reported UK GAAP financial statements and the reconciliations to the IFRS financial statements are summarised below.

a) Reconciliation from UK GAAP to IFRS of the Profit for the year ended 31 December 2004

2004

£’000

UK GAAP Profi t for the Financial Year 22,367

IFRS adjustments:

1) Share-based payments (115)

2) Income taxes 694

3) Oil & gas expenditures (10,718)

IFRS Profi t for the Financial Year 12,228

1) Share-based paymentsThe Dana Petroleum 1999 Share Option Scheme is an equity settled share incentive scheme and under UK GAAP no adjustment was made to the financial statements when options were granted under this arrangement. Two awards have been made under this scheme since 7 November 2002.

IFRS 2 requires such awards to be fair valued at the grant date using an option pricing model and amortised through the income statement over the 3 year vesting period of the relevant awards.

This has reduced profit for the year ended 31 December 2004 by £115,000, net of the corresponding deferred corporation tax adjustment.



2) Income taxes

PRTUnder UK GAAP there is no definitive guidance on the accounting treatment for UK PRT. Historically the Group has charged PRT due on chargeable field profits as a tax expense in the income statement. Dana’s charge to PRT arises from its interest in the Victor and Claymore fields. No deferred PRT was previously provided for under UK GAAP.

IAS 12 supports the treatment of recognising PRT as an income tax and hence deferred PRT should be accounted and provided for. The effect of this revision is to align the charge to PRT with the anticipated life of field profitability. This has no impact on the economics of the assets or the life of field PRT charge.

This has increased profit for the year ended 31 December 2004 by £694,000, net of the corresponding deferred corporation tax adjustment.

3) Oil & gas expendituresAs stated in the introduction to this document, Dana has revisited its oil and gas expenditure accounting policies. From the date of transition, development and production activity will now be accounted for under IAS 16 – Property, Plant & Equipment, and Dana will now, apply its capitalisation, depletion and impairment policy primarily on an individual asset basis. As a result, only exploration and appraisal activity will be accounted for under IFRS 6 – Exploration for and Evaluation of Mineral Resources. Once deemed unsuccessful, exploration and appraisal activity will now be written off to the income statement in the period the relevant indicators occur.

As a consequence of this, Dana has updated its restatement of prior periods to reflect these changes to policy.

This has reduced profit for the year ended 31 December 2004 by £10,718,000, net of the corresponding deferred corporation tax adjustment; being the additional depletion charge for development and production activity for the year and the carrying value of the exploration licences, expiring during the year.

b) Reconciliations from UK GAAP to IFRS of Shareholders’ Equity at 31 December 2004 and 31 December 2003

2004 2003£’000 £’000

Shareholders’ Funds UK GAAP 187,753 156,421Minority interest 1,696 1,407Total Equity UK GAAP 189,449 157,828

IFRS adjustments:1) Share-based payments 1,051 2752) Income taxes (232) (926)3) Oil & gas expenditures (32,443) (21,725)

Shareholders’ Funds IFRS 157,825 135,452


1) Share-based paymentsThe Dana Petroleum 1999 Share Option Scheme is an equity settled share incentive scheme and under UK GAAP no adjustment was made to the financial statements when options were granted under this arrangement. Two awards have been made under this scheme since 7 November 2002.

IFRS 2 requires for such awards, that provision be made for any future share based pay out and for this to be presented within equity. Under IFRS this is based on the fair value of all share-based awards at the grant date calculated using an option pricing model.

In addition, IFRS 2 requires that provision also be made for the deferred corporation tax adjustment arising on the intrinsic value of the option awards at the reporting date, and for this also to be represented in equity until the current tax adjustment arises.

The net increase to equity of these adjustments at 31 December 2004 and 31 December 2003 is £1,051,000 and £275,000 respectively.

2) Income taxes

PRTUnder UK GAAP there is no definitive guidance on the accounting treatment for UK PRT. Historically the Group has charged PRT due on chargeable field profits as a tax expense in the income statement. Dana’s charge to PRT arises from its interest in the Victor and Claymore fields. No deferred PRT was previously provided for under UK GAAP.

IAS 12 supports the treatment of recognising PRT as an income tax and hence deferred PRT should be accounted and provided for. The effect of this revision is to align the charge to PRT with the anticipated life of field profitability. This has no impact on the economics of the assets or the life of field PRT charge.

The cumulative impact on Shareholders’ funds at 31 December 2004 and 31 December 2003 is (£232,000) and (£926,000) respectively.

3) Oil & gas expendituresAs stated in the introduction to this document, Dana has revisited its oil and gas expenditure accounting policies. From the date of transition, development and production activity will now be accounted for under IAS 16 – Property, Plant & Equipment, and Dana will now, apply its capitalisation, depletion and impairment policy primarily on an individual asset basis. As a result, only exploration and appraisal activity will be accounted for under IFRS 6 – Exploration for and Evaluation of Mineral Resources. Once deemed unsuccessful, exploration and appraisal activity will now be written off to the income statement in the period the relevant indicators occur.

As a consequence of this, Dana has updated its restatement of prior periods to reflect these changes to policy.

The cumulative impact on Shareholders’ funds at 31 December 2004 and 31 December 2003 is (£32,443,000) and (£21,725,000) respectively. The 2004 movement is explained in section a) 3) on page 64. The 2003 movement relates to UK exploration activity previously written off to the UK development and production pool, under UK GAAP accounting; adjustments to the depreciation basis of certain development and producing assets; and due to other exploration activity in the former Rest of the World segment, where the new policy indicators of unsuccessful exploration, had occurred prior to this date.



c) Other Adjustments with a Presentation only Impact to the Balance Sheet at 31 December 2004

UK GAAP IAS 16/IFRS 6 Presentation IFRS 2004 Adjustment (1) Adjustments 2004

Balance Sheet at 31 December 2004 £’000 £’000 £’000 £’000

Intangible assets 99,254 (15,474) (2,686) 81,094

Property, plant & equipment 107,574 (15,716) 2,686 94,544

(1) These are the adjustments to intangible assets and property, plant & equipment corresponding to the changes to the oil and gas

expenditure policies detailed in Note 2.

The Presentation Adjustments also reflect the new oil and gas expenditure capitalisation policy detailed in Note 2, whereby the carrying value of E&E assets are reclassified as D&P assets following development sanction. This adjustment reflects the status of the F16-E asset at the above dates.

d) Reconciliation of Shareholders’ Equity at 1 January 2005 for impact of IAS 32 and IAS 39

£’000

Shareholders’ Funds IFRS at 31 December 2004 157,825

1) Available-for-sale financial assets 3,754

2) Embedded derivative 3,016

Shareholders’ Funds IFRS at 1 January 2005 164,595

The Group adopted IAS 32 and IAS 39 ‘Financial Instruments: Recognition and Measurement’ at the effective date of 1 January 2005. IAS 39 covers the recognition, measurement and derecognition of financial instruments for which there is no UK equivalent standard. The Group decided to take the exemption afforded by IFRS 1 which removed the requirement to produce 2004 comparatives. The background to the above adjustments is as follows:

1) Available-for-sale Financial Assets

Under UK GAAP, Group investments were included in the financial statements at cost less provision for diminution. At 1 January 2005, Group investments comprise Dana Petroleum’s holding in Faroe Petroleum plc and the Group’s interest in Evikhon, a Russian joint stock company.

The Group has reviewed its financial assets and liabilities and in compliance with IAS 32 & 39 has reclassified these investments as available-for-sale financial assets and restated these in the financial statements at fair value. At 1 January 2005 fair value for the investment in Faroe Petroleum plc was based on that company’s share price on the London AIM market at that date. For Evikhon, fair value was taken as the value for which the investment was subsequently sold in March 2005.

These fair values are then adjusted for the associated deferred corporation tax adjustment. At 1 January 2005, the aggregate effect of these adjustments was to increase equity by £3,754,000.


2) Embedded Derivative

Under UK GAAP there was no requirement to provide for the fair value of embedded derivatives. The Group has reviewed its contracts and has identified an embedded derivative within the Victor Gas contract. In compliance with IAS 39 the embedded derivative has been recognised at its fair value in the financial statements. Fair value represents the discounted value of the anticipated future cash flows generated by the embedded derivative components, net of the corresponding deferred corporation tax adjustment.

The impact on equity from the introduction of this accounting policy is an increase of £3,016,000 net of the associated deferred corporation tax adjustment.

e) Restatement of Cash Flow Statement from UK GAAP to IFRS

The transition from UK GAAP to IFRS has no effect upon reported cash flows generated by the Group. The IFRS cash flow statement is presented in a different format from that required under UK GAAP with cash flows split into three categories of activities – operating activities, investing activities and financing activities. The reconciling items between the UK GAAP presentation and the IFRS presentation have no net impact on the cash flows generated.

In preparing the cash flow statement under IFRS, cash and cash equivalents include cash at bank and in hand, highly liquid interest bearing deposits with original maturities of three months or less. Under UK GAAP, such deposits were not classified as cash equivalents.


Dana Petroleum plc:Company onlyAccounts 2005

69 Company Report of the Auditors

70 Company Balance Sheet

71 Notes to the Company Financial Statements


We have audited the parent Company financial statements of Dana Petroleum plc for the year ended 31 December 2005 which comprise the Balance Sheet and the related notes 34 to 49. These parent Company financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors’ Remuneration Report that is described as having been audited.

We have reported separately on the Group financial statements of Dana Petroleum plc for the year ended 31 December 2005.

This report is made solely to the Company’s members, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose.To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditorsThe Directors are responsible for preparing the Annual Report, the Directors’ Remuneration Report and the parent Company financial statements in accordance with applicable United Kingdom law and Accounting Standards (United Kingdom Generally Accepted Accounting Practice) as set out in the Statement of Directors’ Responsibilities.

Our responsibility is to audit the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the parent Company financial statements give a true and fair view and whether the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the Directors’ Report is not consistent with the parent Company financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors’ remuneration and other transactions is not disclosed.

We read other information contained in the Annual Report and consider whether it is consistent with the audited parent Company financial statements.The other information comprises only the Highlights, Chairman’s and Chief Executive’s Review, Review of Operations, Financial Review, Report of the Directors, unaudited part of the Report on Directors’ Remuneration, Proven and Probable Reserves Resources, and Exploration and Production Interests.We consider the implications for our report if we become aware of any apparent mis-statements or material inconsistencies with the parent company financial statements. Our responsibilities do not extend to any other information.

Basis of audit opinionWe conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the parent Company financial statements, and of whether the accounting policies are appropriate to the Company’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are free from material mis-statement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited.

OpinionIn our opinion:• the parent Company financial statements give a true

and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the company’s affairs as at 31 December 2005; and

• the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985.

Ernst & Young LLP 12 June 2006Registered AuditorAberdeen

Company Report of the Auditors


Company Report of the Auditors

Note 2005 2004 £’000 £’000

Fixed Assets

Tangible Assets 37 200 187Investments 38 91,278 99,933Available-for-Sale Financial Assets 39 13,080 2,855 104,558 102,975Current AssetsDebtors 40 72,096 28,141Cash at Bank and in Hand 56,903 20,411 128,999 48,552

Creditors : Amounts Falling Due Within One Year 41 (111,084) (107,010)

Net Current Assets / (Liabilities) 17,915 (58,458)

Total Net Assets 122,473 44,517

Capital and ReservesCalled-up Share Capital 44 12,574 11,729Share Premium Account 46 75,246 39,531Other Reserves 46 6,225 -Profit and Loss Account 46 28,428 (6,743)

Shareholders’ Funds 122,473 44,517

The financial statements were approved by the Board of Directors on 12 June 2006 and signed on its behalf by:

Thomas P Cross David A MacFarlaneDirector Director

Company Balance SheetAs at 31 December 2005


Notes to the Company Financial Statements

34. Accounting Policies

These financial statements have been prepared in pounds sterling under the historical cost convention, as modified by the revaluation of certain Investments and financial Instruments in accordance with the Companies Act 1985 and applicable accounting standards.

The principal accounting policies adopted by the Company are set out below together with an explanation of where changes have been made to previous policies on the adoption of new accounting standards in the year.

The following accounting policies are applied consistently in dealing with items which are considered material in relation to the Company’s financial statements.

CHANGES IN ACCOUNTING POLICIESThe Company has adopted FRS 20, ‘Share-based payment’, FRS 21, ‘Events after the balance sheet date’, FRS 22, ‘Earnings per share’, FRS 23 ‘The effects of changes in foreign exchange rates’, FRS 25, ‘Financial instruments: Disclosure and presentation’, FRS 26, ‘Financial instruments: Measurement’, and FRS 28 ‘Corresponding amounts’, in these financial statements. The adoption of each of these standards represents a change in accounting policy and the comparative figures have been restated accordingly except where the exemption to restate comparatives has been taken. Details of the effect of the prior year adjustments are given in note 46.

DIVIDENDSDividends received are included in the accounts in the period the related dividends are actually received.

TANGIBLE ASSETS AND DEPRECIATIONTangible assets are stated in the balance sheet at cost less accumulated depreciation.

Depreciation is provided on tangible assets to write off the cost less estimated residual value of each asset over its expected useful economic life on a straight-line basis at the following annual rates:

• Equipment 10% - 25%

• Computer equipment 33%

INVESTMENTSFixed asset investments in subsidiaries are included in the financial statements at cost less provisions for impairment.

DEFERRED TAXATIONDeferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events have occurred at that date that will result in an obligation to pay more (or a right to pay less or to receive more) tax, with the following exceptions:

• provision is made for tax on gains arising from the revaluation (and similar fair value adjustments) of fixed assets, and gains on disposal of fixed assets that have been rolled over into replacement assets, only to the extent that, at the balance sheet date, there is a binding agreement to dispose of the assets concerned. However, no provision is made where, on the basis of all available evidence at the balance sheet date, it is more likely than not that the taxable gain will be rolled over into replacement assets and charged to tax only where the replacement assets are sold;

• provision is made for tax that would arise on remittance of the retained earnings of overseas subsidiaries, associates and joint ventures only to the extent that, at the balance sheet date, dividends have been accrued as receivable;

• deferred tax assets are recognised only to the extent that the Directors consider that it is more likely than not that there will be suitable taxable profits from which future reversal of the underlying timing differences can be deducted.

Deferred tax is measured on an undiscounted basis at tax rates that are expected to apply in the periods in which timing differences reverse, based on tax rates and laws enacted or substantively enacted at the balance sheet date.


Notes to the Company Financial StatementsNotes to the Company Financial Statements continued

ISSUE EXPENSES AND SHARE PREMIUM ACCOUNTCost of share issues are written off against the premium arising on the issue of share capital.

FOREIGN CURRENCIES The functional currency for the Company is pounds sterling.

Transactions in foreign currencies during the year are recorded in the functional currency at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the rates ruling at the balance sheet date.

DERIVATIVE INSTRUMENTSThe Company uses derivative financial instruments to manage its exposure to fluctuations in foreign exchange rates and interest rates.

The Company policy in relation to these instruments up to 31 December 2004 is identical to the Group policy up to 31 December 2004 as detailed in note 2 to the Group financial statements.

The Company policy for derivative financial instruments applied prospectively from 1 January 2005 is identical to the Group policy applied prospectively from 1 January 2005 as detailed in note 2 to the Group financial statements.

PENSIONSThe Company contributes to the personal pension arrangements of Executive Directors and employees up to a specified percentage of salary in lieu of a formal corporate scheme. Contributions in lieu of pensions are charged to the profit and loss account as incurred.

OPERATING LEASESRentals under operating leases are charged to the profit and loss account as incurred.

SHARE-BASED PAYMENTSThe Company issues both equity-settled and cash-settled share-based payments as an incentive to certain key management and staff. Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Company’s estimate of the number of shares that will eventually vest.

Fair value is measured by use of an actuarial binomial model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations.


35. Employment Costs

2005 2004 £’000 £’000

Wages and salaries 5,222 2,988 Pension costs 238 226 Social security costs 1,224 297 6,684 3,511

Included in wages and salaries is a total expense of share-based payments of £2,302,000 (2004: £435,000) of which £408,000 (2004: £165,000) arises from transactions accounted for as equity-settled share-based payment transactions. The carrying amount of the liability at the end of the year for cash-settled share-based payment transactions is £2,164,000 (2004: £270,000).

The weighted average number of employees (including Executive Directors) during the year was:

2005 2004

Management 12 10 Technical and administration 9 10

21 20

Details for each Director, of remuneration, pension entitlements and interests in share options are set out on pages 32 to 34.

36. Auditors’ Remuneration 2005 2004 £’000 £’000

Audit of the financial statements 24 26

Other fees to auditors: - Taxation services 8 10- Corporate finance services: abortive transaction costs 212 -- Audit of IFRS restatement 8 - 228 10

37. Tangible Assets

The movements during the year were as follows: Total Office and Computer Equipment £’000

Cost:

At 1 January 2005 1,097 Additions 156At 31 December 2005 1,253

Depreciation:

At 1 January 2005 910 Provided in year 143 At 31 December 2005 1,053

Net Book Value

At 31 December 2005 200At 31 December 2004 187



38. Investments

Subsidiary Undertakings £’000

At 1 January 2005 99,933Additions 511 Impairment (9,166)At 31 December 2005 91,278

Subsidiary Undertakings

At 31 December 2005, the principal subsidiary undertakings of the Company were:

Country ofName of Company Incorporation Main Activity and Operation

Dana Petroleum (E&P) Limited UK Oil & gas exploration & production

Dana Petroleum (North Sea) Limited* UK Oil & gas exploration & production

Yoganoil Joint Stock Company* Russian Federation Oil production

*Held by subsidiary undertaking.

With the exception of Yoganoil in which an 80% interest is held, all of the above companies are wholly owned. Further details of subsidiary undertakings are available at the headquarters of Dana Petroleum plc.

39. Available-for-Sale Financial Assets 2005 2004 £’000 £’000

Available-for-sale investments 13,080 2,855

The number reported in 2004 above was classified in the 2004 Annual Report as “Investments” at cost. The requirement to fair value these investments and classify them as available-for-sale financial assets was effective from 1 January 2005 under FRS 25 and FRS 26. The impact at 1 January 2005 was to increase the value of the investments by £2,045,000.

The available-for-sale investment consists of investments in the shares of Faroe Petroleum plc which are listed on the London AIM market, and which by their nature have no fixed maturity date or coupon rate. During the year, the Group participated in a fund-raising by Faroe Petroleum plc at a cost of £4,000,000; increasing its shareholding to 17.2%, and as a result becoming the largest shareholder in the company.

On 13 April 2006, Faroe Petroleum plc announced a further fund-raising of £25.0 million through a market placing. This was subsequently approved by the shareholders of the company at an extraordinary general meeting held on 8 May 2006. The Group participated in the placing and subscribed for a further 3,161,765 shares at a cost of £4,300,000, thereby maintaining a 17.2% interest in Faroe Petroleum plc.


40. Debtors 2005 2004 £’000 £’000 Other debtors and prepayments 364 97 Due from subsidiary undertakings 71,732 28,044 72,096 28,141

41. Creditors : Amounts Falling Due Within One Year 2005 2004 £’000 £’000Amounts owed to subsidiary companies 106,973 105,630Accruals and other payables 4,111 1,380 111,084 107,010

42. Deferred Taxation A deferred UK corporation tax asset of £3,088,000 (2004: £1,407,000), in relation to losses not utilised has not been recognised as there is uncertainty whether the asset is recoverable. The asset would be recoverable if there are future suitable taxable profits from which the future reversal of the underlying timing differences would be deducted.

43. Financial Instruments

An outline of the objectives, policies and strategies pursued by the Group and Company in relation to financial instruments is set out in the financial review on page 21 of this report, and in Note 34 on page 72.

44. Called-up Share CapitalSee note 23, page 57 for details of the share capital of the Company.

45. Share-based paymentsSee note 24, pages 58 and 59 for details of the share-based payments for the Company.



46. Reserves

Share Profit premium and loss Other account account Reserves £’000 £’000 £’000At 31 December 2004 as previously reported 39,531 (6,743) -Prior year adjustment FRS 20 (I) - - -At 31 December 2004 as restated 39,531 (6,743) -Impact of applying FRS 25 and FRS 26 (I) - (322) 2,045At 1 January 2005 - restated 39,531 (7,065) 2,045

Arising on share issue 36,549 - -Transaction cost of share issues (834) - -Retained profit for the year - 33,195 -Employee share scheme credits - 2,298 -Fair value movements on available-for-sale financial assets, net of taxation - - 4,180

At 31 December 2005 75,246 28,428 6,225

(i) The profit and loss account as at 31 December 2004 has been restated for the adoption of FRS 20 (see below) and 1 January 2005 has been restated for the adoption of FRS 25 and FRS 26 (see below).

Prior Year RestatementsThe adoption of FRS 20, FRS 25 and FRS 26 has resulted in the restatement of prior periods as follows:

FRS 20

The Dana Petroleum 1999 Share Option Scheme is an equity-settled share incentive scheme and under previous UK GAAP no adjustment was made to the financial statements when options were granted under this arrangement. Two awards have been made under this scheme since 7 November 2002.

FRS 20 requires for such awards, that provision be made for any future share-based pay out and for this to be presented within equity. Under FRS this is based on the fair value of all share-based awards at the grant date calculated using an option pricing model.

In addition, FRS 20 requires that provision also be made for the deferred corporation tax adjustment arising on the intrinsic value of the option awards at the reporting date, and for this also to be represented in equity until the current tax adjustment arises.

The net increase to equity of these adjustments at 31 December 2004 was Nil due to the fact that the deferred tax asset of £1,051,000 has not been recognised (see note 42 on page 75).

FRS 25 and 26

Under previous UK GAAP, Group investments were included in the financial statements at cost less provision for diminution. At 1 January 2005, Company investments comprise Dana Petroleum’s holding in Faroe Petroleum plc.

The Company has reviewed its financial assets and liabilities and in compliance with FRS 25 & 26 has reclassified these investments as available-for-sale financial assets and restated these in the financial statements at fair value. At 1 January 2005 fair value for the investment in Faroe Petroleum plc was based on that company’s share price on the London AIM market at that date.

At 1 January 2005, the effect of the adjustments was to increase equity by £2,045,000.


47. PensionsThe Company contributes to the personal pension arrangements of Executive Directors and employees up to a specified percentage of salary in lieu of a formal corporate scheme. Total pension contributions in lieu amounted to £238,000 (2004: £226,000) for the year ended 31 December 2005.

48. Company Profit and Loss AccountIn accordance with the provisions of the Companies (Amendment) Act 1986, the Company has not presented a profit and loss account. A profit for the year of £33,195,000 (2004: £15,471,000) has been dealt with in the profit and loss account of the Company.

49. Obligations under Operating Leases

Annual commitments under operating leases are as follows: Land and Land and Buildings Buildings 2005 2004 £’000 £’000

Payable on leases which expire:

within one year - 98in two to five years - -after five years 98 -

Rentals due under operating leases are charged against income on a straight line basis over the term of the lease.


Proven and Probable Reserves and ResourcesReserve quantities have been estimated by the Group’s petroleum engineers in accordance with the definition of proven and probable reserves contained in Chapter 19 of the UKLA Listing Rules governing Mineral Companies

GROUP RESERVES North Sea International Total Oil Gas Petroleum Oil Gas Petroleum Oil Gas Petroleum mmbbls bcf mmboe mmbbls bcf mmboe mmbbs bcf mmboe At 1 January 2005 47.9 164.3 76.2 33.9 85.2 48.5 81.7 249.5 124.8Revisions of previous estimates 6.1 (10.6) 4.3 - - - 6.1 (10.6) 4.3Discoveries & extensions 3.6 13.2 5.9 - - - 3.6 13.2 5.9Acquisitions 7.4 82.0 21.5 - - - 7.4 82.0 21.5Divestments (6.5) (2.2) (6.9) (16.1) (85.2) (30.8) (22.7) (87.4) (37.7)Production (5.4) (6.5) (6.6) (0.6) - (0.6) (6.1) (6.5) (7.2)

At 31 December 2005 53.1 240.3 94.4 17.1 - 17.1 70.1 240.3 111.5

CONTINGENT RESOURCES North Sea International Total Oil Gas Petroleum Oil Gas Petroleum Oil Gas Petroleum mmbbls bcf mmboe mmbbls bcf mmboe mmbbls bcf mmboe At 1 January 2005 11.3 37.7 17.8 11.9 517.2 101.1 23.2 554.8 118.9Revisions of previous estimates (8.8) (26.2) (13.3) (8.8) (26.2) (13.3)Discoveries & extensions - 90.0 15.5 - 90.0 15.5Acquisitions 2.4 8.1 3.8 2.4 8.1 3.8Divestments (0.6) - (0.6) - - - (0.6) - (0.6)

At 31 December 2005 4.3 19.6 7.7 11.9 607.2 116.6 16.2 626.8 124.3

TOTAL RESOURCES North Sea International Total Oil Gas Petroleum Oil Gas Petroleum Oil Gas Petroleum mmbbls bcf mmboe mmbbls bcf mmboe mmbbls bcf mmboe At 1 January 2005 59.2 202.0 94.0 45.8 602.4 149.6 105.0 804.4 243.7Revisions of previous estimates (2.7) (36.7) (9.1) - - - (2.7) (36.7) (9.1)Discoveries & extensions 3.6 13.2 5.9 - 90.0 15.5 3.6 103.2 21.4Acquisitions 9.8 90.1 25.3 - - - 9.8 90.1 25.3Divestments (7.1) (2.2) (7.5) (16.1) (85.2) (30.8) (23.3) (87.4) (38.3)Production (5.4) (6.5) (6.6) (0.6) - (0.6) (6.1) (6.5) (7.2)

At 31 December 2005 57.4 259.9 102.1 29.0 607.2 133.6 86.3 867.1 235.8 NOTES 1. Contingent resources relate to technically recoverable hydrocarbons for which commerciality has not yet been determined and are stated on a best estimate basis

2. Proven and probable reserves and contingent resources have been independently reviewed by a recognised Competent Person as defined in chapter 19 of the UKLA

Listing Rules governing Mineral Companies

3. International reserves include 17.1 mmbbls in respect of the South Vat-Yoganskoye oil field, in which there is a 20% minority interest

4. Quantities of oil equivalent are calculated using a gas-to-oil conversion factor of 5,800 standard cubic feet of gas per barrel of oil equivalent


Exploration and Production Interests as at 31 March 2006

Country Licence/Block Designation Field/Discovery Name Operator Net % Interest

Fields in Production & Under DevelopmentUK Lic. P.224/Block 29/2a Banff CNR 12.40UK Lic. P.213/Block 16/26 (Area P) Caledonia ChevronTexaco 25.78UK Lic. P.607/Block 43/19a Cavendish RWE 25.00UK Lic. P.249/Block 14/19 Claymore Talisman 7.52UK Lic. P.219/Block 16/13a Enoch Talisman 8.80UK Lic. P.238/Block 21/19 Gadwall Venture 50.00UK Lic. P.073/Block 21/12 Goosander Venture 50.00UK Lic. P.472/Block 210/24b Hudson Dana 47.50UK Lic. P.686/Block 43/27a Johnston Caledonia 27.78UK Lic. P.351/Block 21/18a Kittiwake Venture 50.00UK Lic. P.238/Block 21/19 Mallard Venture 50.00UK Lic. P.226/Block 210/15a Otter Total 19.00UK Lic. P.025/Block 49/22 (Victor) Victor ConocoPhillips 10.00Netherlands Prod. Licences F16-E, E15a, F13a F16-E Wintershall 1.18Russia Vat-Yoganskoye South Vat-Yoganskoye Yoganoil 80.00

North Sea Exploration Acreage and Discoveries

UK Lic. P.1190/Block 204/13 - OMV 30.00UK Lic. P.1262/Block 204/14b - OMV 30.00UK Lic. P.1373/Quad 208 208/19-1 DONG 30.00UK Lic. P.1374/Quad 209 - DONG 30.00UK Lic. P.226/Block 210/15a - Total 19.00UK Lic. P.1021/Block 210/20d - Total 26.00UK Lic. P.472/Block 210/24a Melville Amerada Hess 26.61UK Lic. P.570/Block 210/24b - Dana 47.50UK Lic. P.212/Block 211/8a 211/8a-2 CNR 50.07UK Lic. P.188/Block 211/11a - BP 25.00UK Lic. P.201/Block 211/22a 211/22a-1, 211/22a-3 Dana 24.21UK Lic. P.1383/Block 211/23d 211/23b-11 Antrim 21.00UK Lic. P.090/Block 3/25a (Deep) 3/25a-2 Total 15.00UK Lic. P.219/Block 16/13a J1 Talisman 11.00UK Lic. P.883/Block 21/11a Dauntless Venture 50.00UK Lic. P.073/Block 21/12 & 21/13a - Venture 50.00UK Lic. P.743/Block 21/16a Durward Venture 50.00UK Lic. P.351/Block 21/18a - Venture 50.00UK Lic. P.238/Block 21/19 Grouse Venture 50.00UK Lic. P.1051/Block 23/11 (N) - Dana 80.00UK Lic. P.1051/Block 23/11 (S) Barbara Dana 100.00UK Lic. P.749/Blocks 23/16c, d & 17 Barbara, Mortimer Dana 50.00UK Lic. P.224/Block 29/2a 29/2a-2 CNR 13.50UK Lic. P.607/Block 43/19a - RWE 25.00UK Lic. P.1134/Blocks 43/13b & 18 Browney RWE 25.00UK Lic. P.1135/Blocks 43/14a & 19b - RWE 25.00UK Lic. P.1136/Blocks 43/20e - RWE 25.00UK Lic. P.380/Block 43/26a - Eon Ruhrgas 27.78UK Lic. P.686/Block 43/27a Gunn Eon Ruhrgas 27.78UK Lic. P.1330/Blocks 42/28d & 29b - Dana 100.00UK Lic. P.001/Blocks 42/29a & 30a Monkwell Dana 100.00UK Lic. P.028/Block 47/5c - Dana 81.28UK Lic. P.456/Block 48/2a Babbage Eon Ruhrgas 40.00Netherlands Expl. Licence A15 A15-3 Wintershall 9.00Netherlands Expl. Licence E18a - Wintershall 5.00Netherlands Expl. Licence B17a B17a-6 Wintershall 8.83



Exploration and Production Interests as at 31 March 2006 continued

Country Licence/Block Designation Field/Discovery Name Operator Net % Interest

International Exploration Acreage and Discoveries

Australia WA-226-P - Origin 20.00 Australia EPP 28-31 - Woodside 10.00Kenya Block L5 PSC - Woodside 30.00Kenya Block L7 PSC - Woodside 30.00Mauritania Block 1 PSC Faucon Dana 60.00Mauritania Block 2 PSC - Woodside 6.25Mauritania Block 7 PSC Pelican Dana 63.85Mauritania Block 8 PSC - Dana 41.50Morocco NW Safi - Norsk Hydro 26.25Senegal St. Louis PSC - Tullow 30.00

DIRECTORS Colin R Goodall, Non-Executive Chairman Thomas P Cross, Chief Executive David A MacFarlane, Finance Director Stuart M Paton, Technical and Commercial Director Angus M Pelham Burn, Non-Executive Director* D Ian Rawlinson, Non-Executive Director* Philip J Dayer, Non-Executive Director *

* Independent Non-Executive Director and member of Audit and Remuneration Committees.

GROUP HEADQUARTERS 17 Carden Place, Aberdeen AB10 1UR

SECRETARY AND REGISTERED OFFICE John J Arnton, LLB Becket House, 1 Lambeth Palace Road London SE1 7EU

AUDITORS Ernst & Young LLP 1 More London Place, London SE1 2AF

BANKERS Bank of Scotland 39 Albyn Place Aberdeen AB10 1YN

SOLICITORS McGrigors Allen & Overy 52-54 Rose Street One New Change Aberdeen AB10 1UD London EC4M 9QQ

FINANCIAL ADVISERS & STOCKBROKERS ABN AMRO Hoare Govett Limited 250 Bishopsgate, London EC2M 4AA

REGISTRARS Capita IRG plc Beckenham Road, Beckenham, Kent BR3 4TU

DIRECTORS, ADVISERS AND OTHER INFORMATION

Designed and produced by Communiqué Associates Limited www.communique-associates.co.uk

Tel: +44 (0) 1224 652400 Fax: +44 (0) 1224 652401 www.dana-petroleum.com

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57326 Dana P1 22 - Home - Dana · PDF filenet to Dana “Dana is on track to increase production capacity to over 40,000 barrels per day by the end of 2007 and has forged an