Heritage Oil Plc Annual Report & Accounts 2009 · 2020-01-31 · Heritage Oil Plc Annual Report & Accounts 2009 SECURING OUR FUTURE Head Office and Directors’ Business Address:

Heritage Oil PlcAnnual Report & Accounts 2009

SECURING OUR FUTURE

www.heritageoilplc.com

Head Office and Directors’ Business Address:Fourth Floor, Windward House La Route de la Liberation JE2 3BQ Jersey Channel Islands

Tel +44 1534 835 400Fax +44 1534 835 412

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Heritage Oil Plc is an independent oil and gas exploration and production company with a Premium Listing on the London Stock Exchange (“LSE”) (symbol HOIL). The Company is a member of the FTSE 250 Index. The Company has Exchangeable Shares listed on the Toronto Stock Exchange (“TSX”) (symbol HOC) and the LSE (symbol HOX). The Company has core activity areas focused on Africa, the Middle East and Russia.

Overview

01 Highlights04 Company Overview08 Chairman’s Statement

Business Review

12 Chief Executive’s Statement

14 Chief Executive’s Q&A16 Strategy17 Reserves and Resources18 Operations Review20 Kurdistan22 Malta23 Pakistan24 Democratic Republic

of Congo25 Tanzania26 Mali27 Russia28 Uganda30 Financial Review34 Principal Risks38 Corporate Social

Responsibility

Corporate Governance

46 Board of Directors48 Corporate Governance

Report55 Remuneration Report62 Directors’ Report65 Responsibility Statement

of the Directors

Financial Statements

68 Independent Auditors’ Report to the Members of Heritage Oil Plc

70 Consolidated Income Statement

71 Consolidated Statement of Comprehensive Income

72 Consolidated Balance Sheet

73 Consolidated Statement of Changes in Equity

75 Consolidated Cash Flow Statement

76 Notes to Consolidated Financial Statements

Other

99 Glossary of Terms and Definitions

102 List of Advisers104 Financial Calendar

Front cover picture designed by Hawnaz Wahab, 5th Grade, Halgurd School, Kurdistan (for more information see page 43).

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FINANCIALProposed sale of Ugandan >interests for up to $1.5 billion. Expect transaction to complete within the first half of 2010

Intention to pay special dividend >of 75p to 100p following completion of the sale of the Ugandan interests

Sale of non-core holdings in Oman >realised cash of $28.4 million

Successful placing of 25.4 million >new shares raised gross proceeds of $217 million

Back costs of $6.7 million were >received on the exercise of third party back-in rights for 25% in the Miran Block, Kurdistan

Strong balance sheet; cash of >$208 million at 31 December 2009, which is stated before the sale of the Ugandan interests and potential payment of a special dividend

Net average daily production of >329 bopd

OPERATIONALDiscovered the Miran West Field >in the Kurdistan Region of Iraq (“Kurdistan”)

Tests on the Miran West-1 well, >Kurdistan, indicate potential for production from the well of 8,000-10,000 bopd

Miran West-2 well has intersected >significant hydrocarbon-bearing intervals over approximately 1,800 metres

The Miran West-2 well is drilling to >the deeper Jurassic and Triassic exploration targets which could add significantly to the hydrocarbon potential of the Miran structure

Three zones identified in the >Cretaceous, in the Miran West-2 well, also to be tested when exploration drilling is completed

Completed the successful Block 1 >drilling programme in Uganda with the discovery of the world-class Buffalo-Giraffe Field

Heritage’s most diverse work >programme ever planned in several core areas

High impact exploration well in >Malta planned for the fourth quarter of 2010

Exploration and appraisal drilling >on the Miran structure, Kurdistan, to continue in 2010

Exploration well planned in >Pakistan for the fourth quarter of 2010

Production expected to increase >in Russia with additional development drilling

Examine opportunities to >generate further value for shareholders

OUTLOOK

HIGHLIGHTS

All dollars are US dollars unless otherwise stated

02

OVERVIEW

04 Company Overview04 Our Assets04 Strategic Positioning04 Our Business Model05 Geographical Presence07 Track Record08 Chairman’s Statement

Fishermen on Lake Albert, Uganda

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Overview

COMPANYOVERVIEW

STRATEGIC POSITIONING

Focus on core areas where we >have technical understanding

First mover advantage – as >demonstrated in Uganda and Kurdistan

Focus on high impact exploration >targeting regions with significant hydrocarbon reserves potential, such as Kurdistan and Malta

Strong balance sheet giving >Heritage the ability to grow through acquisitions and farm-ins

OUR ASSETS

Kurdistan remains a core area of >focus with near-term exploration and appraisal drilling

High impact exploration drilling >to commence in Malta in 2010

Geographical diversification >across Africa, the Middle East and Russia

Diverse portfolio of assets >encompassing a mix of exploration, development and production

OUR BUSINESS MODELOur business model is underpinned by our core values

Business ModelProduction and Commerciality

Exploration and Development

Acquire and Invest

Vision and Identification

StrategyAccess to Capital

Balanced Portfolio

Strategic Positioning

Key Partnerships and Relationships

Responsible Business

Experience & Knowledge

Operational success has transformed Heritage dramatically but its strategy remains unchanged. The Company typically focuses on regions which may have been overlooked and where it can be an early entrant. Heritage will seek out opportunities for high impact exploration, targeting the potential for significant hydrocarbon reserves.

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GEOGRAPHICAL PRESENCE

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explorationproduction

Significant discovery announced in 2009 with the Miran West discovery well. Exploration and appraisal drilling continues in 2010. The Miran West-2 well has intersected hydrocarbon-bearing intervals over approximately 1,800 metres within the Cretaceous formations. The well is drilling to the deeper Jurassic and Triassic exploration targets with the potential to contain substantial volumes of additional hydrocarbons.

Planned to acquire 1,000 kilometres of seismic in 2010 with the first exploration well in the area planned for the fourth quarter. The well will target a structure with a potential 500 mmboe.

Production set to increase over the year with additional development drilling. The Zapadno Chumpasskoye Field development project was approved in 2009 to develop the field utilising horizontal drilling technology and expand the current production facilities.

Currently awaiting Presidential Decree. Management considers the DRC side of the Albert Basin to be potentially as prospective for significant oil accumulations as the Ugandan side.

Pioneering company with entry into Uganda in 1997. Six successful wells drilled. Proved up a multi-billion barrel basin. Commercial threshold for development achieved. Proposed sale of the assets for up to $1.5 billion expected to complete within the first half of 2010.

RUSSIA 7 uGanDa 8

Seismic data shows the presence of tilted fault blocks. Previous drilling in the region encountered oil and gas shows indicating the potential for a working hydrocarbon system. An infill seismic programme of approximately 1,000 kilometres is planned for this year to identify potential drilling targets.

Seismic data was acquired in 2009. The data is currently being analysed and will be used as the basis for a drilling programme.

4 TANzANIA MALI 6

DEMOCRaTIC REPUBLIC OF CONGO (“DRC”) 5

A number of structural leads have been mapped in the Zamzama North Block. Further seismic data is being acquired with the first exploration well planned for the fourth quarter of 2010.

KuRDISTan REGIOn OF IRaq (“KuRDISTan”) 1 MALTA 2 PAKISTAN 3

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Overview

COMPANYOVERVIEW continued

Experienced management and technical teams with a track record of finding world-class oilfields. The Company has long-established relationships and an extensive network of contacts in its core activity areas.

(top) from left to right

Gregory TurnbullNon-Executive Director

John McLeodNon-Executive Director

General Sir Michael WilkesNon-Executive Director and Senior Independent Director

Salim MackiNon-Executive Director

(bottom) from left to right

Paul AthertonChief Financial Officer

Anthony BuckinghamChief Executive Officer

Michael J. HibberdChairman

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TRaCK RECORDExceptional track record of >creating shareholder value and monetising assets

Expect to receive approval from >the Government of Uganda and complete the proposed disposal of the Ugandan interests for up to $1.5 billion within the first half of 2010

Sold Oman holdings in 2009 for >$28.4 million, including working capital adjustments

Raised approximately $100 >million from the sale of assets in the Republic of Congo between 2002 and 2006

Development expertise gained >from developing and operating the zapadno Chumpasskoye Field, Russia

February 2009Completed the successful Kingfisher-3A well, Uganda

First oil from West Bukha Field, Oman

June 2009 Successful equity placement raising

gross proceeds of $217 million

november 2009Commenced drilling Miran West-2

appraisal well

January 2010Tullow Uganda Limited exercised its

right to pre-empt the sale of the Ugandan interests

January 2009Discovered the Buffalo-Giraffe Field

in Block 1, Uganda

april 2009 Sale of Oman holdings

May 2009 Confirmation of a major oil discovery with the Miran West-1 well, Kurdistan

august 2009Successful production test of the Miran West-1 well, Kurdistan

December 2009 Executed a Sale and Purchase Agreement with ENI International B.V. to sell Ugandan interests for up to $1.5 billion

april 2010Letter received from the Government of Uganda stating it supports the sale and transfer of Heritage’s Ugandan interests

Miran West-2 well intersected significant hydrocarbon-bearing intervals over approximately 1,800 metres

Three zones identified for testing once drilling has completed

08

Overview

COMPANYOVERVIEW

Overview

CHAIRMAN’S STATEMENT

I am pleased to report that 2009 has been another momentous year for Heritage. We have crystallised value with the disposal of our Omani interests and the proposed disposal of our Ugandan interests. We are now moving forward into a new chapter of core area activities.

It is with some sadness that we prepare to leave Uganda, but this is countered with pride that we have left a lasting legacy which has benefited people in our concession areas and has established a hydrocarbon future capable of supporting infrastructure and industrial development. This will have lasting benefits for the people of Uganda. We have established a solid base for other companies to build upon and we fully expect new entrants into Uganda to continue with the numerous corporate social responsibility (“CSR”) programmes that we have initiated and pursued with enthusiastic support from Ugandans individually and from the Ugandan Government.

As we prepare to dispose of our interests in Uganda, which has been a core area of focus for us, it seems appropriate to reflect briefly on the evolution of Heritage. We listed on the Toronto Stock Exchange at the beginning of 1999 with a market capitalisation of less than $15 million and assets focused in Uganda and Congo. Through our own initiatives and technical expertise, combined with excellent strategic guidance, Heritage has evolved into a company with a market capitalisation at year end of $2.0bn with an extensive portfolio of core assets focused on Africa, the Middle East and Russia.

Heritage was the pioneering company in the Albert Basin. Entering Uganda in 1997, Heritage was the first company to explore for and operate Ugandan oil and gas interests in almost 60 years. Our entry into the region was exploration-led because we believed, from the geology, that it had the potential to be a significant oil basin. Our first licence covered the original Block 3. We were active on our licence for four years before Energy Africa farmed into our acreage. In 2004, part of Block 3 was relinquished and Block 3A, which covered most of the exploration acreage in the original Block 3, was re-licenced along with Block 1 at the northern end of the basin. Over the last 13 years we have carried out

extensive work in the basin. Since 2006, we have drilled six wells on our licences, all of which have found hydrocarbons. The two wells tested in our licence areas each produced at rates in excess of 12,000 bopd. In addition to new field discoveries, we also established many other leads and prospects in our licence areas which have confirmed the Albert Basin to have multi-billion barrel resource potential.

Our operations in Uganda have adhered consistently to CSR policies which we are now beginning to extend to our other core area holdings as work commences in these new areas. We expect to achieve significant value accretion for our shareholders in a work environment that benefits local populations and establishes legacy assets that sustain long-term benefits for the countries in which we are working.

OperationsUgandaIn 2009, in Uganda, we continued building on successes achieved in 2008. The Giraffe discovery in Block 1, at the beginning of 2009, allowed us to exceed comfortably the required commercial threshold for development. This enabled us to progress methodically with our work with the Government of Uganda to plan for an early phased development, based initially on our Kingfisher discovery in Block 3A and progressing to commercialisation of the Albert Basin.

KurdistanHeritage commenced drilling the Miran West-1 well in December 2008, less than 15 months after being awarded the licence, demonstrating both the Company’s operational efficiency and our commitment to the region. Initial testing operations concluded in May 2009. The Miran Field has been estimated to have oil-in-place of 3.4 billion barrels. Further testing on the Miran West-1 well indicated that it could produce at between 8,000–10,000 bopd.

Michael J. HibberdChairman

MARKET CAPITALISATION aT YEaR EnD, $m

CaSH aT YEaR EnD, 2009

$208m

1999

13752

2,025

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We announced in April 2010, that the Miran West-2 appraisal well had intersected significant hydrocarbon-bearing intervals over approximately 1,800 metres within the Cretaceous formations. The well is now drilling down to the deeper Jurassic and Triassic exploration targets with the potential to contain substantial volumes of additional hydrocarbons.

Combined Code of Corporate GovernanceWe recognise our responsibility to shareholders for the Company’s standard of governance and we also recognise the importance of maintaining responsible corporate governance practices. I am pleased to advise our shareholders that we have made further progress during the year to advance our adherence to the Combined Code on Corporate Governance published in 2008 (the “Combined Code”).

In 2009, General Sir Michael Wilkes was appointed Senior Independent Director to comply with the Combined Code. His chief responsibility is to maintain sufficient contact with major shareholders to help develop a balanced understanding of their issues and concerns. In this role, General Sir Michael Wilkes is available to shareholders who have concerns that have not been, or cannot be, resolved through discussion with the Chairman, Chief Executive Officer or Chief Financial Officer or where such contact is inappropriate.

Other significant developments during 2009 and early 2010 included establishing a performance evaluation process for the Board and Board committees and for the Chairman, developing a formal framework for remuneration policy across the Company, confirming no annual bonuses would be paid to the Non-Executive Directors, undertaking an independent review of Executive Directors’ remuneration, developing the Company’s processes for reviewing key risks, internal controls and assessments, initiating

processes for reviewing Director appointment and succession planning, establishing a Reserves Committee and establishing a CSR Committee.

Corporate Social ResponsibilityWe remain committed to adhering to our CSR policies and recognise the importance of engaging with local stakeholders at an early stage. The framework of our CSR policy has been refined through our experiences in Uganda where we have worked diligently with stakeholders to allay potential concerns arising from our activities and to address needs and requirements in a way that establishes a respected local reputation and identity for us. We believe that our active, ongoing involvement in community projects in Uganda and Kurdistan is fundamental in developing and maintaining strong relationships within these regions.

OutlookKurdistan remains a focus area for Heritage this year. As we continue with drilling on the Miran West structure and in the second half of the year plan to start exploration drilling on the Miran East structure, we expect to confirm the enormous potential of the Miran Block. 2010 will also bring to the fore a new set of projects and initiatives based on seismic and drilling campaigns in Malta and Pakistan scheduled for the second half of the year.

The Board believes that Heritage, with its technical and financial strengths, will continue to identify further attractive growth opportunities. The portfolio of assets within Heritage offers shareholders geographical diversification combined with a mix of exploration, development and production. This, together with a strong financial base, positions Heritage perfectly to pursue exciting opportunities.

Our management team has a track record of creating value for shareholders and holds a strong determination to continue that

Drilling operations, Kurdistan

successful track record. Development of our Company could not have been achieved without the determination, commitment and dedication of our management team and our staff, together with contractors and suppliers. The Board thanks them all for their continued efforts and professionalism.

Michael J.HibberdChairman

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BUSINESSREVIEW12 Chief Executive’s Statement14 Chief Executive’s Q&A16 Strategy17 Reserves and Resources18 Operations Overview20 Kurdistan22 Malta23 Pakistan24 Democratic Republic of Congo25 Tanzania26 Mali27 Russia28 Uganda30 Financial Review34 Principal Risks38 Corporate Social Responsibility

Kingfisher-2 well, Lake Albert, Uganda

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CHIEF EXECUTIVE’S STATEMENT

2009 saw further significant operational success and corporate developments in our core assets in Uganda and Kurdistan propelling Heritage forward into a new phase as we enter a new decade.

We are demonstrating the success of our strategy as a first-mover by the proposed monetisaton of our Ugandan interests and are considering many new opportunities with the potential to generate value for our shareholders.

After reaching five-year lows, equity markets saw a recovery during 2009. Brent Oil prices moved up from the low of $36.40 per barrel in January 2009 to a high of $79.20 per barrel in November 2009 and the outlook for the oil and gas markets remains positive. Leading figures around the world acknowledge that demand for hydrocarbons will continue to increase as both populations and economies grow. Since much of the “easy oil” has already been discovered, it is frontier exploration that will be required to satisfy this growth. These areas often come with their challenges which we consider we are well equipped to manage through our experienced management and technical teams and our proven operating capability.

UgandaAt the beginning of 2009, we announced the successful Giraffe discovery in Block 1, Uganda, adding to our previous discoveries in the block, Warthog and Buffalo. Pressure and seismic data indicate that the Giraffe discovery is structurally connected to the Buffalo Field, creating a combined Buffalo-Giraffe Field covering approximately 48 square kilometres with an oil column of approximately 140 metres. This was a pivotal discovery that confirmed the viability of the Albert Basin as a commercial oil basin. The success of our multi-well programme, which began in October 2008, is evident with net contingent resources that have been estimated at 250 million barrels.

In February 2009, we completed the drilling of the successful Kingfisher-3A sidetrack well which appraised the Kingfisher discovery in Block 3A. This well intersected all three Kingfisher reservoir intervals encountered in the Kingfisher-1A and -2 wells. All three Kingfisher wells have been suspended as future producers.

Since discovering the Kingfisher Field in 2007, net contingent resources in Heritage operated Blocks 1 and 3A have been estimated at 355 million barrels with a value of $1.126 billion, based on a discount rate of 10%.

KurdistanKurdistan remains a core area for Heritage. Since signing the licence in October 2007, we have shot seismic, drilled a discovery well on the Miran West structure and are currently drilling the Miran West-2 well. This is a huge achievement demonstrating our commitment to the region and confirming the high level of operational expertise within Heritage.

The Miran West-1 exploration well commenced drilling on 21 December 2008 and initial testing operations completed in May 2009. A gross oil bearing column of approximately 700 metres was discovered and the oil in place for the field has been estimated to be approximately 3.4 billion barrels with net combined contingent and prospective resources totalling approximately a billion barrels. Excellent recoveries, of between 50–70%, are expected from the fractured carbonate reservoirs, based on fracture porosity alone. During testing operations, concluded in August 2009, the Miran West-1 well flowed at a maximum rate of 3,640 bopd from a single reservoir interval.

We announced in April 2010 that the Miran West-2 appraisal well had intersected hydrocarbon-bearing intervals over approximately 1,800 metres within the Cretaceous formations. Three zones, determined from logging, within the Cretaceous formations have been identified for testing once drilling operations have completed.

The well is being deepened to approximately 4,600 metres to explore further potential in the underlying Jurassic and Triassic structures. These exploration targets have the potential to contain substantial volumes of additional hydrocarbons. We are planning to acquire 3D seismic over the Miran Block in the second


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half of 2010 to enable further appraisal drilling to encounter the fracture networks efficiently. The Miran West-1 well has previously demonstrated that where open fractures are encountered in wells the reservoir will support potential production rates of approximately 10,000 bopd.

Future plans for drilling of the Miran East-1 exploration well are progressing and we are looking to contract a rig for later this year.

RussiaThe Zapadno Chumpasskoye Field is located in Western Siberia. Approval was received at the end of 2009 for a Field Development Plan to enable us to commence horizontal drilling to improve the recovery efficiency and also to enhance the economics of the field. The field was shut in for most of the first quarter of 2009 following a temporary reduction in domestic oil prices in Russia. After production restarted, measures were undertaken to increase output to the current production rate of approximately 650 bopd.

Financial and CorporateWith the disposal of the Oman operations in April 2009, oil production and revenue is now generated from the Zapadno Chumpasskoye Field in Russia. Heritage’s net production decreased by 13% to an average of 329 bopd during 2009, compared to 2008, as a result of the field being shut in during 2009.

During 2009, our liquidity was enhanced through two initiatives. Firstly, in April 2009, $28.4 million was realised through the sale of Eagle Energy (Oman) Limited (“Eagle Energy”). Secondly, in June 2009, 25.4 million new Ordinary Shares were placed successfully at a price of £5.20 per share for total gross proceeds of $217 million.

In November 2009, we announced that a Letter of Intent (“LOI”) had been signed with ENI International B.V. (“Eni”) to sell our Ugandan interests for up to $1.5 billion. In December 2009 a Sale and Purchase Agreement (the “SPA”) was executived with Eni. Subsequently, Tullow Uganda Limited,

our partner in the blocks, exercised its right of pre-emption on the same terms and conditions as agreed with Eni. In April 2010, we announced that we had received a letter from the Ugandan Government stating that it supports Heritage’s sale and transfer of its Ugandan interests and that it will conclude its review of the transaction within eight weeks. Following this, Heritage expects to receive formal consent and to close the transaction shortly thereafter.

On completing the disposal we will have operations in seven countries and some of the disposal proceeds will be used to accelerate exploration, appraisal and development of these areas. Furthermore, Heritage will have the financial flexibility to participate in opportunities to generate further value for shareholders.

Other 2010 Operations Operations are planned to expand in Malta this year with the acquisition of 1,000 kilometres of seismic and the drilling of an exploration well. Heritage has already identified a number of large targets from over 3,500 kilometres of seismic acquired when the Company was awarded the Malta licences at the end of 2007.

In Pakistan, we are in the process of acquiring infill seismic in the Zamzama North Block. The current seismic database used to map the Zamzama North Block comprises some 750 kilometres of fair to good quality, 2D seismic. On the basis of this data we have mapped a number of structural leads. An exploration well is planned to be drilled in the second half of this year following interpretation of the current seismic programme.

Genel Enerji A.S.In June 2009, Heritage announced that it had entered into a non-binding Memorandum of Understanding with Genel Enerji A.S. (“Genel”) to acquire the entire share capital of Genel Energy International Limited (“Genel Energy”). In November 2009, after signing a LOI with Eni for the sale of our Ugandan interests, discussions with Genel were terminated before the terms of a definitive agreement had been settled.

Operating CapabilityWe are proud of both our environmental and safety records. We have continued our goal of pursuing operational excellence and have achieved the challenging goals set for last year. In addition, we have also maintained an excellent track record of no significant environmental issues. Last year’s lost time incident frequency rate was well below industry average and was achieved at a time when Heritage’s operational scope increased significantly.

Outlook2010 is set to be another significant year for Heritage. We have never been stronger financially and we believe that we have a very valuable and prospective portfolio which will see high impact drilling in Kurdistan, Malta and Pakistan. Capital expenditures in 2010 are expected to be approximately $155 million, of which approximately $100 million will be allocated to exploration and appraisal activities and approximately $55 million to production and development activities.

In summary, 2010 promises to be a year of significant change for Heritage as we increase production, continue with high impact exploration and look for further exciting opportunities for our portfolio. As always, I am very grateful to our talented management team and employees and supportive Board for their dedication and contribution to the remarkable progression made by Heritage this past year.

Finally, to our shareholders, thank you for your continued support and interest in Heritage.


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CHIEF EXECUTIVE’S Q&A

Anthony Buckingham, CEO, answers some frequently asked questions about the progress and future of Heritage.

What, for you, were the highlights of 2009?

A. 2009 was a remarkable year for Heritage and marked another milestone in our development. Operational success continued in Uganda where we concluded our successful drilling campaigns in both blocks and in Kurdistan where we announced the significant Miran West-1 discovery. From a corporate perspective, we are in the process of disposing of our Ugandan interests and we raised $217 million through a successful offering of Ordinary Shares last summer. The proposed sale of our Ugandan interests is a demonstration of our ability to seek an early opportunity, based on our strong technical capability and network of relationships, and to successfully operate, explore and monetise. Delivering on our promises in this respect has been a wonderful achievement.

What does 2010 hold for Heritage?

A. 2010 will continue to be a very interesting year for Heritage as we have a diversified drilling programme and the financial flexibility to accelerate programme execution in several of our core areas. In the near-term the main priorities for the Group are to continue to drive our current portfolio forward with drilling in Kurdistan, Malta and Pakistan. 2010 will be full of many exciting opportunities for our Company.

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What are the key components of your strategy?

A. We aim to continue to generate growth in shareholder value by focusing on high impact international plays with the potential to discover significant hydrocarbon reserves. We look to acquire and invest in exploration and early development opportunities throughout the world, with a particular emphasis on our core areas where we have a strong technical understanding. By entering into regions early we seek to obtain a large equity interest and operatorship.

How would you describe the culture at Heritage?

A. We have an excellent track record of attracting and retaining talented personnel. All staff are encouraged to participate in the development of the Company. Heritage is an ambitious company that is moving fast. We attract individuals, therefore, with the same ambitions who want to seek out high impact, value creating opportunities.

What is the Company’s approach to CSR and how has this developed?

A. Heritage has always recognised that our licence to operate is closely linked to our adoption of CSR concepts. A key element of this is our approach to the conduct of our business matters. It is an important management priority to ensure that our relationships in the countries in which we operate are conducted in a transparent and responsible manner. Our systems in this area are reviewed regularly and will be an important responsibility of our new CSR committee.

We work closely with a variety of local stakeholders in the areas where we operate. We aim to ensure that the economic value generated by our operations is applied to address important aspects of local need. We have worked closely with the local authorities in Uganda to develop important health, educational and economic infrastructure projects. For example, we have built a school and a potable water project for the local villagers. We aim to apply our experience in Uganda to the other parts of the world in which the company operates. This approach is already being reflected in a number of our activities in Kurdistan.

What distinguishes Heritage from its peers?

A. The Company has many competitive strengths including:

a strong balance sheet; >a proven management team; >strong and established technical >expertise;a geographically diversified portfolio of >high impact exploration plays; andwell-established connections in all areas >in which we operate.

How does the Company engage with shareholders?

A. The Chairman, with input from the Senior Independent Director, is responsible for ensuring effective communication of shareholders’ views to the Board as a whole and will update the Board accordingly. We employ an investor relations specialist and an investor relations programme is in place for Executive Directors and senior management to meet with institutional investors in European and North American cities. The website is updated continually to keep investors informed of our activities.

Do you have a message for shareholders?

A. The Company has an excellent track record built over many years, one that we continue to live up to. Since we listed in London in March 2008, we have enjoyed incredible success. We have delivered on our promise to generate shareholder value, expand analyst coverage and to increase liquidity and we are firm in the knowledge that we have the right people and the right assets to allow us to continue to deliver high impact results for our shareholders.

Drilling operations at the Kingfisher-2 well, Uganda

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STRATEGY

01First Mover Advantage

02Focus on Technical Expertise

03Strong Management Experience

AchievementsPioneering company in the Albert Basin, >uganda, entering in 1997One of the first companies to enter >Kurdistan in 2004 and one of the first to be awarded a licenceEarly entry into areas such as the >Democratic Republic of Congo, Malta and Mali Successful monetisation of holdings in >the Congo and OmanProposed sale of Ugandan interests >

Objectives 2010Complete the sale of our Ugandan >interestsIdentify significant hydrocarbon >accumulations in our core areasUtilise our strong balance sheet to >secure interests in new areas at the ground floor level

AchievementsDiscovered the M’Boundi field in the >Congo in 2001Proved up sufficient resources in the >Albert Basin to justify commercial development and unlocked a multi-billion barrel basinDiscovered the Miran West Field with >resources valued at $4.4 billion

Objectives 2010Extend that success with high impact >drilling scheduled in 2010 for Kurdistan, Malta and Pakistan

AchievementsManagement background grounded in >many aspects of the oil industry has enabled Heritage to create value for shareholdersExtensive network of well-established >contacts with Governments and local businesses

Objectives 2010Continue to draw upon the wealth of >experience in Heritage Examine opportunities to generate >further value for shareholders

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RESERVES anD RESOURCES

During the year an independent Mineral Expert’s Report including assets in Kurdistan and Russia was prepared by RPS Energy (“RPS”), an independent consultancy specialising in petroleum reservoir evaluation and economic analysis. The range of reserves and resources is as at 30 June 2009 and is based on the data and information available up until that date.

The table below shows Heritage’s working interest reserves following the proposed sale of the Ugandan interests.

Proved & Probable Contingent Prospective Total Proved & Probable & Possible Resources2 Resources3 Reserves and Reserves Additional Mean Mean Resources4,5

mmbbls mmbbls mmbbls mmbbls mmbbls

Kurdistan1 – – 53 850 1,014

Russia 61 103 – – 164

1 In the event of discovery and development, the Group’s net entitlement resources will be a function of the contract terms and will be less than the net working interest resources. The Kurdistan Regional Government (the “KRG”) has the right to back-in for up to 25% which could, if fully exercised, reduce the Group’s working interest to 56.25%.

2 Stochastic consolidation of contingent resources with Geological Probability of Success (“GPoS”) of 100%. 3 Stochastic consolidation of prospective resources with appropriate GPoS for each prospect. 4 Stochastic consolidation of contingent resources and risked prospective resources for Kurdistan.5 This information is not covered by the audit opinion of the independent registered public accounting firm that has audited and reported on the Consolidated Financial

Statements.

Why did Heritage consider Uganda to be a potential oil basin?Several geological elements are necessary for oil and gas to accumulate in sufficient quantities to justify commercial production. These elements include a source rock to generate the oil (or gas), a porous reservoir rock to store the oil in and a trap to stop it leaking away.

The Heritage technical team were first attracted to the Albert Basin because surface geology maps indicated a large sedimentary basin with numerous oil seeps around the margin of the basin. Geologists determined that, over a period of time, the level of Lake Albert varied and developed a sequence of sand and shale. The source rock, shale, is where the hydrocarbons actually form and the reservoir rock, the sand, is where the hydrocarbons are held. Regional satellite data was suggestive of a strike-slip origin to the basin, thereby generating the traps. Analogous rift basins in Africa were reviewed because they were considered to be similar.

How did the work programme develop?

Seismic data is used to probe the structure of the subsurface. This is done by generating sound waves at the surface which are reflected back from the different rock layers in the sub-surface and are detected using geophones. This data is then converted into seismic lines which will be interpreted by geophysicists.

Early seismic surveys confirmed at least five kilometres of sediment in the basin and a number of drillable structures. Subsequent regional seismic surveys allowed detailed mapping of the Ugandan side of the basin confirming yet more drillable structures amongst which Kingfisher was evidently one of the largest structures in the Basin. In 2008, the large Buffalo-Giraffe Field was defined.

What are the results?

Heritage went to Uganda because of the potential for exploration elephants which could transform the Company and the results have been very successful. In Block 3A and Block 1 Heritage has drilled six wells and all have encountered hydrocarbons. Kingfisher, in Block 3A, was the first discovery in 2007, where three wells were drilled and two tested at over 12,000 bopd.

A five month drilling programme in Block 1 resulted in another three discoveries and opened up a new play type in the northern part of the Basin. In 2009, the Buffalo-Giraffe Field was discovered which management considers to be the largest onshore oil field to be discovered in Sub-Saharan Africa for more than two decades.

Heritage’s success in monetising assets stems from seeing an opportunity at an early stage and drawing on its knowledge and skills – both technical and managerial. The Company looked favourably at the balance of risk and reward in uganda in 1997 and was the first company to explore for and operate Ugandan oil and gas interests in almost sixty years. After establishing the potential for oil, the Company had to establish a work programme and deliver results.

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100% success rateSix wells drilled in Heritage operated Blocks 3A and 1

Kingfisher was the first discovery in Block 3A where two wells tested at over 12,000 bopd and Kingfisher 3 increased the areal extent of the field. Warthog was the first success in the Block 1 drilling campaign that began in 2008 followed by the Buffalo-Giraffe discovery.

100% SuCCESS RaTE

Consideration of up to

$1.5 billionRPS estimated the Ugandan assets to have:• mean working interest share of risked

resources of 543 million barrels of oil equivalent

• contingent resources, discounted at 10%, with a mean expected value of $1.1 billion

• risked prospective resources with a mean expected value, discounted at 10%, of $485 million

PROPOSED DISPOSaL OF uGanDan InTERESTS

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Business ReviewExploration

KuRDISTan

Heritage was one of the first companies to be awarded a Production Sharing Contract (“PSC”) in Kurdistan. Kurdistan is an autonomous region in federal Iraq bordering Syria, Iran and Turkey.

In October 2007, the Group signed a PSC with the Kurdistan Regional Government (“KRG”) and was appointed operator of the Miran Block in the southern part of Kurdistan. The licence area covers approximately 1,015 square kilometres. The Miran structure lies approximately 65 kilometres from the giant Kirkuk oilfield, which has remaining reserves thought to be in excess of 10 billion barrels, and 30 kilometres from the Taq Taq Field, which is on production. In April 2009, Heritage announced that Genel Energy had been nominated as the third party participant in the Miran Block. This right of appointing an additional party to the PSC is typically included as standard in contracts in Kurdistan.

As an early entrant in the Kurdistan region, the Group is strongly positioned to benefit from development of this significant hydrocarbon-prone region especially as the already stable security situation continues to improve.

It is generally acknowledged that there is huge potential in the Kurdistan region for as yet undiscovered hydrocarbons, estimated by the US Geological Survey at approximately 40 billion barrels of oil and 60 trillion cubic feet of gas. Additionally, it has been reported that 80% of all wells drilled in Iraq have encountered hydrocarbons.

The Miran Block contains two large structures, Miran West and Miran East, which have been mapped from the 332 kilometres of excellent quality 2D seismic data acquired by Heritage in the second quarter of 2008. The Miran West structure is believed to be one of the larger structures in Kurdistan, with an estimated areal extent of approximately 200 square kilometres. Miran East has an estimated areal extent of 130 square kilometres.

Upon completion of seismic interpretation, the Company decided to accelerate the Miran work programme. Consequently, drilling commenced on the Miran West-1 well in December 2008.

In March 2009, drilling of the Miran West-1 well was completed having reached a total depth of 2,935 metres. The well encountered oil shows over a 1,100 metre interval including the three principal proven reservoir formations in the region.

The initial test programme on the Miran West-1 well was completed in May 2009. Miran West-1 drilling operations were designed to cope with the potential for high reservoir pressures and this resulted in the loss of drilling fluid and lost circulation material in the highly permeable fractured reservoirs. The large volumes of lost fluids severely constrained initial testing operations. The second phase of testing on the Miran

Area Date Heritage Licence (sq km) Awarded Equity Partners Operator

Miran 1,015 Oct 2007 75%1 Genel Energy Heritage

1 Back-in rights exist which if exercised fully could result in a minimum holding of 56.25%

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West-1 discovery was completed in August 2009 with a flow rate of 3,640 bopd recorded from a single upper reservoir interval. The well was suspended as a future producer.

The Miran West-2 appraisal well, located approximately four kilometres north-west of the Miran West-1 discovery well, commenced drilling in November 2009.

In April 2010 it was announced that the Miran West-2 appraisal well had intersected significant hydrocarbon-bearing intervals over approximately 1,800 metres within the Cretaceous formations. Three zones, determined from logging within the Cretaceous formations have been identified for testing once drilling operations have been completed.

The well is currently being deepened to approximately 4,600 metres in order to explore further potential in the underlying Jurassic and Triassic structures. These targets have been identified from additional seismic data acquired in January 2010, after the Miran West-2 well had commenced drilling. These exploration targets have the potential to contain substantial volumes of additional hydrocarbons.

Heritage is planning to acquire 3D seismic data over the Miran Block to enable further appraisal drilling to encounter the fracture networks more efficiently. The Miran West-1 well has previously demonstrated that where open fractures are encountered in wells, the reservoir will support potential production rates of approximately 10,000 bopd.

Future plans for the drilling of the Miran East-1 exploration well are progressing and the Company is looking to contract a rig for later this year.

RPS Energy ReportA summary of RPS’ estimated net working interest contingent and prospective resources for Heritage as of 30 June 2009 is set out below:

Heritage Working Interest Share1

Low Best High Mean mmboe (P90) (P50) (P10)

Contingent Resources2 25 53 92 53

Prospective Resources3 87 849 2,248 850

Consolidated Total4 128 902 2,306 1,014

1 In the event of discovery and development, Heritage’s net entitlement resources will be a function of the contract terms and will be less than the net working interest resources. The KRG has the right to back-in for up to 25% which could, if fully exercised, reduce Heritage’s working interest to 56.25%.

2 Stochastic consolidation of contingent resources with GPoS of 100%.

3 Stochastic consolidation of prospective resources with appropriate GPoS for each prospect.

4 Stochastic consolidation of contingent resources and risked prospective resources.

A summary of RPS’ estimated expected value of Heritage’s assets in Kurdistan, discounted at 10%, as of 30 June 2009, is set out below:

Net Present Value ($ million in money of the day)

Miran West Miran East Miran Total Expected Expected Expected Value Value Value (Mean) (Mean) (Mean)

Contingent Resources 275 0 275

Prospective Resources 3,645 479 4,125

Total 3,920 479 4,400

Notes:The total expected value is the probability weighted mean of the value of all possible outcomes of the contingent resources plus the drilling of the prospective resources. This is also known as the Expected Mean Value (“EMV”).

The expected value of the contingent resources represents the probability weighted mean value of the resource volume range. This is sometimes known as the Expected Net Present Value (“ENPV”).

SYRIA

TURKEY

IRAQ

IRAN

Shaikan

Tawke

Chemchemal

Mosul

Erbil

Kirkuk

Miran

Suleimaniah

Oil Fields

Gas Fields

Gas Condensate Field

Prospect

Heritage Licence

Taq Taq

TUNISIA

SICILY

LIBYA

MALTA

Tarãbulus (Tripoli)

Stax

Tunis

Medina Bank-1

Area 2

Area 7

Siracusa

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MALTA

Area Date Heritage Licence (sq km) Awarded Equity

Area 2 9,190 December 2007 100%Area 7 8,778 December 2007 100%

In December 2007, the Group entered into a PSC with the Maltese Government for a 100% interest in areas 2 and 7 in the south-eastern offshore region of Malta.The licences cover almost 18,000 square kilometres and are situated approximately 80 kilometres and 140 kilometres, for Area 2 and Area 7 respectively, from the south-eastern Maltese coast in water depths of approximately 300 metres. The two Areas are close to a number of producing fields offshore Libya and Tunisia.

The licences are under-explored with only one well previously drilled in Area 2; the Medina Bank-1 well in 1980. The well was drilled to a depth of 1,225 metres but failed to reach the target horizons, estimated to be between 1,500 and 4,500 metres. The well did, however, encounter gas shows in porous, fractured carbonates.

Current seismic interpretation is based on an extensive data set of almost 3,500 kilometres of 2D seismic acquired in 2000. This data indicates the presence of a variety of potential prospects. Primary targets are Miocene, Lower Eocene and Cretaceous mounded carbonates that are recognised as major hydrocarbon producing zones in the central part of the Mediterranean. In addition, the Company has recognised the presence of a north-south trending shelf margin on the eastern margin of the blocks and a number of attractive reef prospects have been mapped.

Heritage will acquire a further 1,000 kilometres of 2D seismic this year and a high impact exploration well is planned for the second half of 2010 targeting approximately 500 mmboe.

Exploration Well

Oil and Gas ShowsOil FieldGas FieldCondensateMaltese Licences

Heritage Licence

PAKISTAN

INDIA

AFGHANISTAN

IRAN

Islamabad

Peshawar

Lahore

New Delhi

San Ragha-1

SanjawiQuetta

Zamzama North

Karachi

Oil Field

Gas Field

Condensate

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PAKISTAN


Sanjawi Permit 2,258 November 54% Hycarbex Heritage 2007 American Energy Sprint Energy Trakker Energy

Zamzama North 1,229 December 48% Hycarbex Heritage 2008 American Energy Sprint Energy Trakker Energy

The Sanjawi Block (number 3068-2) in zone II (Baluchistan) was awarded in November 2007. Heritage has a 54% interest and is operator. This onshore exploration licence covers a gross area of 2,258 square kilometres. The block is considered highly prospective due to the recent oil discovery to the west of the licence and a number of gas fields to the south-east of the licence as well as the presence of oil seeps. The block is dominated by a series of broad east-west trending surface features including the Dabbar and Warkan Shah anticlines. These are large structures, the Dabbar anticline being some 300 square kilometres in area.

In December 2008, Heritage obtained a 48% interest in the Zamzama North Block (number 2667-8) and was appointed operator. The Zamzama North Block is located in the south of Pakistan in the western part of the Sindh Province approximately 200 kilometres north-west of Hyderabad and comprises an area of 1,229 square kilometres.

Any discovered hydrocarbons could be readily connected to the existing infrastructure as one of the main pipelines runs through the block. To the south of, and adjacent to Zamzama North, is the Zamzama Gas Field, a major Upper Cretaceous gas accumulation.

The current seismic database used to map the Zamzama North Block comprises some 750 kilometres of fair to good quality, 2D seismic. On the basis of this data, Heritage has mapped a number of structural leads. Further seismic is being acquired with a well on the Zamzama North Block planned for the second half of 2010.

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DEMOCRaTIC REPUBLIC OF CONGO

Area Date Heritage Licence (sq km) Awarded Equity Partners

Block I 3,825 Signed July 2006 39.5% Tullow Oil (awaiting Presidential Decree) COHYDRO

Block II 2,634 Signed July 2006 39.5% Tullow Oil (awaiting Presidential Decree) COHYDRO

Heritage holds a 39.5% non-operating interest in two blocks in the Albert Basin on the DRC side of the border – Blocks I and II. These blocks, which include the entire DRC side of Lake Albert, cover more than 6,000 square kilometres and are adjacent to Block 3a and Block 2 in uganda.

BLOCK 1Heritage

BLOCK I

BLOCK II

BLOCK 3A Heritage

Democratic Republic of Congo

Buffalo-1Giraffe-1

Warthog-1

Kingfisher-1Kingfisher-2Kingfisher-3

The overall broad symmetry of the lake would indicate that the DRC side of the basin should potentially be as prospective as the Ugandan side. There are oil seeps around the basin indicating that oil has migrated throughout the basin in both the DRC and Uganda.

In 2006 the Group, with its partners in these licences, executed a Production Sharing Agreement (“PSA”) with the Government of the DRC. The initial exploration term is five years, during which seismic data will be acquired and exploration wells drilled. However, the programme only commences following receipt of a Presidential Decree, the timing of which is still uncertain. The validity of the licences has been disputed, however, Heritage is working closely with the operator and Government of the DRC and continues to be confident in the title granted through the PSA with the Government of the DRC.

Heritage Licence (DRC)

Heritage Licence (Uganda)

Exploration and appraisal well

TANZANIA

Dar es Salaam

Latham

Kimbiji

Mkuranga-1

Mafia Deep-1

Kisangire-1

KisangireLukuliro

Wingayongo oil seep

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TANzANIA


Kisangire 7,280 May 2005 55% Dominion/Maurel & Prom1 Heritage

Lukuliro 8,829 May 2005 55% Dominion/Maurel & Prom1 Heritage

Kimbiji 4,298 September 2006 70% Petrodel Heritage2

Latham 5,056 September 2006 29.9% Petrodel Heritage2

1 Announced on 15 February 2010, yet to be finalised.2 Operator of the work programme.

In april 2008, Heritage entered into farm-in agreements on two licences in eastern Tanzania, comprising four areas (Latham, Kimbiji, Kisangire and Lukuliro licence areas). The four areas have a total area of approximately 25,000 square kilometres. The Kimbiji and Latham licence areas cover approximately 9,300 square kilometres and are held under one PSA, whilst the Kisangire and Lukuliro licence areas cover approximately 16,100 square kilometres and are held under a second PSA.

The licence areas are close to the Mkuranga-1 gas discovery which was drilled in 2007 and reportedly flowed gas at a rate of 20 mmcf/d from an Upper Cretaceous reservoir. The large Songo Songo producing gas field is located to the south-east of the licence areas. The Wingayongo oil seep is present within the Kisangire licence area, indicating the presence in the region of a working hydrocarbon system that is generating both oil and gas. The recent Mafia Deep discovery has an estimated recoverable gas of 4 TCF and is close to the Latham licence area.

Latham and KimbijiThe Latham and Kimbiji licence areas, encompasses onshore (1,881 square kilometres), near shore (2,981 square kilometres) and deep water (4,491 square kilometres) areas. The PSA was awarded to Petrodel Resources Limited (“Petrodel”) by the Tanzanian Government in September 2006. In October 2009, the partnership was granted 12 month extensions on the exploration periods for both the Kimbiji and Latham licence areas

Under the terms of the farm-in agreement with Petrodel, the Group has the right to earn a 70% working interest in the Kimbiji licence area, and a 29.9% working interest in the Latham licence area, by funding all seismic costs of the required work programmes on both blocks. Heritage is acting initially as work programme operator, being responsible for all technical and operational aspects of the work programmes, and will be appointed operator of the licence upon drilling the second exploration well in the Kimbiji Area.

Kisangire and LukuliroThe PSA was originally awarded to Dominion Oil & Gas Limited (“Dominion”) in May 2005. An extension to the initial exploration period for the Kisangire and Lukuliro licence areas for 18 months was granted in 2009.

Under the terms of the farm-in agreement with Dominion, the Group has the right to earn a working interest of 55%, initially, in both the Kisangire and Lukuliro licence areas. The Group also has an option to earn an additional working interest of 15% thereby increasing its participating interest to 70%.

The acquisition of 207 kilometres of 2D seismic commenced in the onshore part of the Kimbiji licence area in September 2008 and was followed by the acquisition of 198 kilometres of 2D seismic in the Kisangire licence area. The data is currently being analysed and will be used as a basis for a drilling programme, which is expected to commence in 2011.

Gas shows

Oil andGas shows

Oil Fields

Heritage Licence

Gas Fields

MALI

ALGERIA

NIGERIA

MAURITANIA

BURKINO FASO

Timbuktu

Mopti

Segou

Sikasso

Ouagadougou

NiameyKoulikoro

Bamako

Gao

Tin Bergoui-1

Kidal

BLOCK 7

BLOCK 11

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MALI

Area Date Heritage Licence (sq km) Awarded Equity Partner Operator

Block 7 39,804 July 2006 75% Centric Energy Heritage

Block 11 32,810 June 2005 75% Centric Energy Heritage

Heritage announced in March 2008 that the Government of Mali had approved Heritage’s farm-in on two exploration licences. The two licences have a gross area of over 72,000 square kilometres in the Gao Graben. Heritage has been appointed operator with the right to earn a 75% working interest in each of Blocks 7 and 11 by financing 100% of the minimum work programme of seismic acquisition and the drilling of one exploration well. The Group’s partner is Mali Oil Developments SARL, a wholly owned subsidiary of Centric Energy Corporation (“Centric Energy”).

The two licences are located in the eastern part of the country that includes the Gao Graben; a Mesozoic basin that management considers geologically similar to other Mesozoic interior-rift basins within North Africa, such as the Muglad Basin of Sudan and the Doba Basin of Chad. The Gao Graben has been delineated by various surveys conducted since the early 1970’s, including over 2,000 kilometres of 2D seismic and a comprehensive gravity and magnetic survey. This data shows the presence of tilted fault-blocks and indicates the possible presence of up to 4,000 metres of sediments above basement.

Previous drilling in the Gao Graben has encountered oil and gas shows. The Tin Bergoui water well, which lies approximately 30 kilometres to the west of Block 11, was drilled to a depth of 350 metres and encountered oil and gas shows in a number of horizons, indicating the potential for a working hydrocarbon system.

A two year extension to the licences was awarded in January 2009 allowing the Group a better opportunity to refine the work programme. Over the next 12 months the Group will proceed with a programme of seismic acquisition, of approximately 1,000 kilometres, and reprocessing to support selection of initial drilling locations.

Exploration Well

Oil and Gas Shows

Heritage Licence

WESTERN SIBERIA

4

226

Oil pipeline

3

2

ZapadnoChumpasskoyelicence

Gas pipelineFields

Exploration and Appraisal Well

Heritage Licence

P14

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RUSSIA

Business ReviewProduction

Net Working and Entitlement Reserves Net Present Value mmbbls ($ million in money of the day)

Proved 23.4 60

Probable Additional 37.2 238

Total Proved + Probable 60.6 298

Total Proved + Probable + Possible 164.0 935

Since 2005, the Group has held a 95% equity interest in ChumpassnefteDobycha Limited, a Russian company whose sole asset is the zapadno Chumpasskoye licence.This licence, which expires in 2024, is in the hydrocarbon-rich West Siberian province of Khanty-Mansiysk, approximately 100 kilometres from the city of Nizhnevartovsk and in the area of the region’s prolific Samotlor oil field, which makes it accessible to existing development and production infrastructure and facilities. The licence covers an area of about 200 square kilometres and contains the Zapadno Chumpasskoye Field, discovered in 1997. A total of nine wells were drilled on the licence prior to 2005, and the Group has drilled a further three wells.

RPS, in an independent evaluation, estimated that Zapadno Chumpasskoye contains proved and probable reserves of 60.6 million barrels of oil net to the Group as at 30 June 2009. Net Present Value, discounted at 10%, is $298 million net to the Group.

Since 2006, the Group has acquired 2D seismic data covering an area of 200 kilometres, constructed pilot production facilities, drilled three wells and re-entered existing well #226. Production facilities were commissioned and production commenced in May 2007. In 2009, an electric submersible pump (“ESP”) was installed on well #226 to arrest the natural well production decline. Also, in 2009, a water shut-off was completed on well P4 which was concurrent with the installation of an ESP. The well is continuing to clean up and the oil rate is increasing.

At the end of 2009 the Zapadno Chumpasskoye Field Development Project was approved, enabling horizontal drilling which should improve the recovery efficiency and improve economics.

The plan calls for thirteen wells including six horizontal wells. One of these horizontal wells will be drilled in the second half of 2010. Production and testing results among the different type of wells will be compared to evaluate optimal effectiveness for improved productivity and drainage. Current production facilities will be expanded to handle increased volumes of fluid from the new wells and permanent water injection facilities will be added.

The crude is light, sweet, 42o API crude oil, with moderate gas-to-oil ratios. In 2009, production averaged 329 bopd, a decrease of approximately 13% from 2008 levels due to the field being shut in for most of the first quarter as a result of temporary lower

domestic oil prices in Russia. The current production rate is 650 bopd and is expected to increase further over the year as a result of drilling.

During March 2010, Heritage re-entered a suspended Russian oil well, P14, to investigate possible Cretaceous oil accumulations within the licence area. Cretaceous production is known in the adjacent licence to the east.

Independent Reserves at the zapadno Chumpasskoye A summary of RPS’ estimated net working interest reserves and their net present value of Heritage’s assets in Russia, based on forecast prices and costs, discounted at 10%, as of 30 June 2009, is detailed below.

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uGanDa

In 1997, Heritage became the first oil and gas company in almost 60 years to undertake exploration in Uganda after being awarded a licence in the Albert Basin of western Uganda.

In 2001, the Group farmed out 50% of the licence to Energy Africa, which was subsequently acquired by Tullow Oil plc (“Tullow”). 29 wells have been drilled in the Albert Basin since the beginning of 2006 with 28 finding hydrocarbons and three of the wells testing at over 12,000 bopd.

Blocks 1 and 3A are located in the Albert Basin which straddles the border with the DRC in the western arm of the East African Rift Valley. Approximately 80% of Block 3A is covered by the south-eastern part of Lake Albert and the remainder of the block comprises the Semliki flats to the south of the lake.

The Mineral Expert’s Report, prepared by RPS and included in the circular issued on 21 December 2009, estimated Heritage’s mean working interest share of contingent resources in Uganda of 355 mmbbls was valued at $1.126 billion, based on a discount rate of 10%.

Block 3a The original Block 3 licence was awarded in 1997. Most of the exploration acreage which previously constituted Block 3 was reconfigured and re-licenced as Block 3A in 2004 for a term of six years. Block 3A is located in the southern portion of the Albert Basin and covers an area of 2,024 square kilometres. All three wells drilled since 2006 on the Kingfisher field have been successful and found hydrocarbons. Energy Africa (now owned by Tullow) farmed-in to the licence in August 2001, acquiring 50% in return for funding a seismic survey and partly funding the costs of a well.

The discovered oil in Block 3A is good quality, light (between 30o and 32o API) and sweet with a low gas-oil ratio and some associated wax. The reservoirs are highly permeable sandstones with an estimated permeability of up to 3,000 milliDarcies. In February 2009, the successful Kingfisher-3A sidetrack completed drilling. The same three sandstone reservoir intervals were encountered in all of the Kingfisher wells highlighting the continuity and the lateral extent of the reservoirs. All three Kingfisher wells drilled to date have been suspended as future producers. A number of other prospects, including the large Pelican and Crane prospects, have been mapped in the lake from various seismic surveys acquired by Heritage.

Buffalo Buffalo East

Buffalo-1Giraffe-1

Hartebeest

Giraffe Crocodile

LeopardKobWarthog-1

Warthog

Paraa Oil Seep B

Paraa Oil Seep A

0 500 Miles

0 500

400300200100

600 700 Kilometres400300200100

UGANDA

BLOCK 3A

Kingfisher-2Kingfisher-1Kingfisher-3

HeronProspect

CraneProspect

PelicanProspect

RwenzoriMountains

Oil Field

Prospect

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Block 1 Block 1 is located at the northern end of Lake Albert, and encompasses an area of 3,659 square kilometres. A seismic survey comprising approximately 670 kilometres of 2D data was completed on Block 1 in February 2008 and identified many encouraging direct hydrocarbon indicators. A successful drilling campaign which began in 2008 discovered the Warthog and Buffalo-Giraffe Fields. The Buffalo-Giraffe Field covers approximately 48 square kilometres and has an oil column of approximately 140 metres.

All wells drilled in Block 1 are relatively shallow with total depths of between 600 and 920 metres. Downhole pressure testing and sampling and the recovery of oil to surface has confirmed the presence of moveable oil in the Block 1 discoveries. Log interpretation and core analysis has confirmed excellent reservoir quality with porosities of up to 35%. All three wells drilled to date in Block 1 have been suspended as future producers.

Potential DevelopmentDevelopment studies have been undertaken to optimise and fast-track the development of the basin. Options include local use, powerstations and refinery schemes, use of the existing rail infrastructure in Kenya or Tanzania or the building of an export pipeline to the east coast of Africa for crude oil export.

Proposed Disposal of ugandan InterestsOn 18 December 2009, Heritage announced that the Company, and its subsidiary Heritage Oil & Gas Limited, had entered into a SPA, with Eni for the sale of its 50% interests in Blocks 1 and 3A in Uganda (“the Disposed Assets”). On 17 January 2010, Tullow Uganda Limited exercised its right to pre-empt the sale of the Disposed Assets to Eni on the same terms and conditions as agreed in the SPA entered into between Heritage and Eni. The transaction was overwhelmingly approved by shareholders at the General Meeting on 25 January 2010.

In April 2010, Heritage announced that it had received a letter from the Ugandan Government stating that it supports Heritage’s sale and transfer of the Disposed Assets and that it will conclude its review of the transaction within eight weeks. Following this, Heritage expects to receive formal consent and to close the transaction shortly thereafter.

Heritage Licence (DRC)

Heritage Licence (Uganda)

BLOCK 1

SUDAN

DRC

UGANDA

BLOCK 3A

LakeEdward

LakeAlbert

Aru

Masaka

Kampala

Lake Victoria

BLOCK 1Heritage

The Company has changed its accounting policy in relation to the recognition of equity or financial liabilities arising from the issue of convertible bonds. As a result, the loss for the year ended 31 December 2008 has been restated to increase the previously reported net loss attributable to owners of the Company by $4.9 million to $46.2 million. Uganda and Oman operations have been classified as discontinued operations and therefore the 2008 numbers have been restated accordingly.

Corporate PerformanceProduction and Sales VolumesFollowing the disposal of our Oman operations, with effect from 1 January 2009, all production revenue from continuing operations is generated from the Zapadno Chumpasskoye Field in Russia. For the 2009 and 2008 statements Oman has been classified as discontinued operations following its sale in April 2009.

Average daily production from continuing operations decreased by 13% from 379 bopd in 2008 to 329 bopd in 2009. This decrease resulted from the shut in of the Zapadno Chumpasskoye Field between December 2008 and February 2009 due to unfavourable domestic market conditions in Russia. Crude production recommenced in March 2009 and averaged 420 bopd for the remainder of 2009.

Notwithstanding lower average daily production, average daily sales volumes increased by 9% year on year due to increased sales from inventories.

RevenuePetroleum revenue, from continuing operations, decreased 29% to $2.7 million, due to lower average realised prices mitigated by slightly higher volumes of crude oil sales. The average realised price per barrel in 2009 of $20.20 was 35% lower than in 2008, driven by lower average commodity prices in Russia in 2009.

Operating ResultsPetroleum operating costs, from continuing operations, decreased by 10% to $1.5 million in 2009, due to lower crude oil production.

Production tax in Russia decreased from $2.6 million in 2008 to $1.3 million in 2009 as a result of both lower volumes of oil production and decreased average commodity prices in 2009 used in the calculation of production tax.

General and administrative expenses decreased from $21.0 million in 2008 to $18.7 million in 2009. This is due, principally, to lower non-cash share-based compensation expenses. Share-based compensation expenses were lower as the fair value of a number of share options issued previously had been fully recognised by the end of 2008.

If share-based compensation expenses are excluded, net general and administrative expenses increased from $13.6 million in 2008 to $15.6 million in 2009. This 15% increase resulted mainly from an increase in the bonuses in 2009 in comparison with 2008. In 2009, the Group capitalised $3.5 million (2008 – $6.3 million) of general and administrative costs relating to exploration and development activities, including share-based compensation of $2.1 million (2008 – $4.6 million).

Corporate reorganisation and subsequent listing costs of $9.7 million incurred in 2008 represent a one-off expense relating to the Company’s re-domiciling to the LSE in March of that year.

Acquisition expenses of $7.1 million in 2009 represent one-off expenses relating to an aborted acquisition of Genel Energy. In November 2009, Heritage announced that the discussions with Genel had been terminated and consequently all expenses incurred with respect to the planned acquisition of Genel Energy were expensed.

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Business Review

FINANCIAL REVIEW

2009 saw several corporate developments leaving the Company with a strong balance sheet and financial flexibility for 2010.


Depletion, depreciation and amortisation expenses decreased by 18% to $1.7 million in 2009, primarily due to lower production volumes.

Exploration expenditures, expensed in the year and not capitalised, decreased from $0.8 million in 2008 to de minimis levels in 2009 due to the Group’s focus on its existing exploration portfolio.

In 2009, the Group recognised an impairment write-down of property, plant and equipment of $2.9 million (2008 – $0.7 million) relating to a reduction in the fair value of the corporate jet due to unfavourable economic conditions. The impairment loss of $0.7 million in 2008 related to the write-down of a drilling rig.

In 2009, interest income was $0.6 million (2008 – $4.0 million). Cash and cash equivalents are typically held in interest bearing treasury accounts. This reduction in interest income is primarily due to a reduction in average interest rates received in 2009.

decided to change accounting policy from the former option to the latter believing that the latter option better reflected the commercial terms of the financial instruments operative currently. Prior year results have been restated to reflect the new policy.

On the basis of the changed policy, on expiry of the Company’s call option in February 2008, the bondholders’ conversion option has been reclassified from a liability classification (with all changes in fair value being reflected in the income statement) to an equity classification. Consequently, the fair value of bondholders’ conversion option of $30.6 million has been transferred to equity at that date with no subsequent income statement impact; a gain of $6.1 million was recognised up to that date.

At 30 June 2009, the carrying value of investments in unlisted securities (shares of SeaDragon Offshore Limited (“SeaDragon”)) was written down to nil following completion of a financial reorganisation by SeaDragon and resulted in an impairment write-down of $2.4 million in 2009. It is not possible to determine whether any of the original investment will be recoverable in the near future.

Other finance costs decreased from $11.3 million in 2008 to $4.3 million 2009, due primarily to bondholders exercising their conversion rights in respect of $30.6 million of convertible bonds in 2009 and forgoing the right to earn any interest. Additionally, the level of interest costs capitalised was higher in 2009 compared to 2008 due to increased cumulative amounts of capital expenditures financed from interest bearing borrowings.

Convertible bonds are separated into equity, liability and derivative liability components (being the bondholders’ conversion option of the host bond contract and the bondholders’ put option) and each component is recognised separately. The Company had the right to redeem, in whole or part, the bonds for cash at any time on or before 16 February 2008, at 150% of par value (the “Company call option”).

Due to significant volatility that movements in the Company’s share price created in the income statement under its previous treatment, the Company reassessed its accounting policy in respect of its convertible debt. The Company previously assessed the debt/equity classification of each component of a compound financial instrument only on issue or where there was a change in contractual terms. However, an alternative policy is to make this assessment throughout the life of the instrument and, in particular, to treat changes in effective terms, such as the lapsing of the Company’s call option, in the same way as changes in contractual terms, i.e. as requiring reassessment. The Company

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Selected Operational and Financial Data Restated1

2009 2008 Change

Production from continuing operations bopd 329 379 (13%)

Sales volume from continuing operations bopd 368 339 9%

Average realised price $/bbl 20.2 31.0 (35%)

Petroleum revenue from continuing operations $ million 2.7 3.8 (29%)

Loss from continuing operations $ million (36.8) (43.3) 15%

Loss from discontinued operations $ million (2.5) (2.9) 14%

Net loss $ million (39.3) (46.2) 15%

Total cash capital expenditures $ million (104.1) (103.2)

Year end cash balance $ million 208.1 90.6

1 See basis of accounting and presentation and significant accounting policies (note 2 of the financial statements) and discontinued operations (note 6 of the financial statements).

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FINANCIAL REVIEW continued

The Group incurred foreign exchange losses of $1.0 million in 2009 (2008 — $5.6 million), primarily as a result of the strengthening of sterling against the US dollar, as the loan secured on an office in London is sterling-denominated. An office building in London is not revalued for exchange rate purposes, but acts as a natural hedge against adverse movements in exchange rates with this loan.

Heritage recognised an unrealised gain of $1.0 million in 2009 compared to a loss of $1.7 million in 2008, in the fair value of its investment in Afren plc (“Afren”) warrants. The gain or loss is determined by the performance of the share price of Afren. Heritage holds 1,500,000 warrants in Afren with an exercise price of £0.60 per warrant, received as partial consideration from the sale of Heritage Congo Limited in 2006. The warrants have a term until 22 December 2011. At 31 December 2009, Afren’s share price was £0.85 per share.

Heritage’s loss from continuing operations in 2009 was $36.8 million, compared to $43.3 million in 2008. The adjusted loss from continuing operations in 2009 was $21.2 million compared to $20.8 million in 2008 if certain non-cash items (share-based compensation expense, gain on derivative financial liability, property, plant and equipment impairment write-down, impairment of investment in unlisted securities, foreign exchange gains/losses and unrealised gain/loss on revaluation of Afren warrants) and the one-off aborted acquisition costs and reorganisation costs are excluded.

Disposals and Proposed DisposalOn 7 April 2009, the Company completed the sale of Eagle Energy, a wholly owned subsidiary of Heritage, to RAK Petroleum Oman Limited for $28 million, plus a working capital adjustment of $0.4 million, both of which were received in 2009. Eagle Energy, which had a 10% interest in Block 8 offshore Oman, was acquired by the Company in 1996. Block 8 contains the

Bukha field which has been producing since 1994 and the West Bukha field which commenced production in February 2009.

On 18 December 2009, Heritage announced it had entered into a SPA for the sale of its 50% interests in Blocks 1 and 3A in Uganda. The Disposed Assets consideration comprises cash of $1.35 billion and a further contingent, deferred consideration of either $150 million in cash or an interest in a mutually agreed producing oil field independently valued at a similar amount.

The results of operations in Uganda and Oman have been classified as discontinued operations. The loss on disposal of discontinued operations in Oman was $0.7 million in 2009. The loss from discontinued operations in Uganda was $1.8 million in 2009 compared to the loss from discontinued operations of $2.9 million in 2008 relating to discontinued operations in Oman.

In 2009, the basic and diluted loss per share from continuing operations was $0.13, compared to the basic and diluted loss per share from continuing operations of $0.17 in 2008.

Heritage’s net loss in 2009 was $39.3 million, compared to $46.2 million in 2008. The adjusted net loss in 2009 was $23.7 million, compared to $23.7 million in the previous year if certain non-cash items (share-based compensation expense, gain on derivative financial liability, property, plant and equipment impairment write-down, impairment of investment in unlisted securities, foreign exchange gains/losses and unrealised gain/loss on revaluation of Afren warrants) and one-off aborted acquisition costs and reorganisation costs are excluded.

In 2009, the basic and diluted loss per share was $0.14, compared to the basic and diluted loss per share of $0.18 in 2008.

Cash Flow and Capital ExpendituresCash used in operating activities was $20.7 million in 2009 compared to $32.8 million in 2008. Total cash capital expenditures in 2009 of $104.1 million were broadly in line with the previous year (2008 – $103.2 million). The following major work programmes were undertaken in 2009:

in March 2009, Heritage completed >drilling of the Miran West-1 well in Kurdistan. The Miran West-1 well reached target depth of 2,935 metres in March 2009. Testing completed in August 2009 and a flow rate of 3,640 bopd was recorded from a single reservoir interval. The well was suspended as a future producer, with an anticipated production rate of between 8,000 – 10,000 bopd for the well;the Miran West-2 well commenced drilling >in November 2009;in February 2009, Heritage completed >successful drilling of the Kingfisher-3A well in Block 3A, Uganda. The well reached a total measured depth of 2,712 metres (1,875 metres true vertical depth) and was suspended as a future production well, along with previously drilled and suspended Kingfisher-1A and Kingfisher-2 wells; andin February 2009, Heritage completed the >acquisition of 2D seismic in the Kimbiji and Kisangire licence areas in Tanzania.

Financial PositionLiquidityHeritage had a net increase in cash and cash equivalents in 2009 of $117.5 million. At 31 December 2009, Heritage had a working capital surplus of $337.8 million, including cash and cash equivalents of $208.1 million.

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Like most oil and gas exploration companies, Heritage raises financing for its activities from time to time using a variety of sources. Sources of funding for future exploration and development programmes will be derived from inter alia disposal proceeds from the sale of assets, such as the sale of the Company’s holdings in Oman in 2009 and the proposed disposal of its interests in Blocks 1 and 3A in Uganda (see disposals section of the Financial Review on page 32), using its existing treasury resources, new credit facilities, reinvesting its funds from operations, farm-outs and, when considered appropriate, issuing debt and additional equity. Accordingly, the Group has the ability to access a number of different sources of finance.

Capital StructureHeritage’s financial strategy has been to fund its capital expenditure programmes and any potential acquisitions by selling non-core assets, reinvesting funds from operations, using existing treasury resources, finding new credit facilities and, when considered appropriate, either issuing unsecured convertible bonds or equity.

On 7 April 2009, the Company completed the sale of Eagle Energy, a wholly owned subsidiary of Heritage, to RAK Petroleum Oman Limited for $28 million, plus a working capital adjustment of $0.4 million.

On 18 June 2009, the Company completed the placing of 25,400,000 new Ordinary Shares at a price of £5.20 per share for gross proceeds of $216,848,944 (£132,080,000). Share issue costs were $11,820,609 (£7,157,379).

Heritage had net cash of $41.7 million (cash and cash equivalents less total liabilities) and nil gearing (net debt as a percentage of total shareholders’ equity) at 31 December 2009 compared with net debt of $121.1 million (excess of total liabilities over cash and cash equivalents) and gearing of 39% at 31 December 2008.

Important Events Subsequent to the Year EndOn 18 December 2009, Heritage announced that the Company, and its subsidiary Heritage Oil & Gas Limited, had entered into a SPA, with Eni for the sale of its 50% interests in Blocks 1 and 3A in Uganda. On 17 January 2010, Tullow Uganda Limited exercised its right to pre-empt the sale of the Disposed Assets to Eni on the same terms and conditions as agreed in the SPA entered into between Heritage and Eni. The transaction was overwhelmingly approved by shareholders at the General Meeting on 25 January 2010.

In April 2010, Heritage announced that it had received a letter from the Ugandan Government stating that it supports Heritage’s sale and transfer of its Ugandan interests and that it will conclude its review of the transaction within eight weeks. Following this, Heritage expects to receive formal consent and to close the transaction shortly thereafter.

Risk and Internal Controls Heritage’s business, financial standing and reputation may be impacted by various risks, not all of which are within its control. The Group identifies and monitors the key risks and uncertainties affecting the Group and runs its business in a way that minimises the impact of such risks where possible. A summary of the Group’s key risks, as currently identified, is provided on pages 34 to 37.

There is further information on the risks facing the Company in the Directors’ Report on pages 62 to 64 and also in note 3 of the financial statements on pages 83 to 84.

Internal ControlsA system of internal controls was designed and tailored to ensure key risks are addressed appropriately and to provide assurance regarding the reliability of financial reporting and preparation of financial statements. Risk and internal controls are assessed continually. One

possible weakness has been identified, concerning accounting for complex transactions, although the Company seeks third party advice to mitigate against this weakness.

As part of the internal controls, all transactions with related parties are identified, scrutinised and disclosed in the financial statements appropriately.

Heritage maintains insurance policies in accordance with industry standards. Heritage believes that the level of insurance cover it maintains is adequate based on various factors such as the cost of the policies, industry standard practice and the risks associated with the exploration and development of oil and gas properties in the countries in which it operates. Heritage does not insure against political risk and, therefore, shareholders have full exposure to the risks and rewards of investing in its territories.

Heritage maintains detailed financial models which allows the Company to plan future operating and capital activities in an efficient manner.


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PRINCIPAL RISKS

Description of Risk Mitigation

Strategic Risks

Identification and Management of Risk The Group’s level of risk and its management approach is discussed and reviewed by the Board, Audit Committee and senior management. The Group maintains comprehensive risk management procedures.

Portfolio Mix The Group maintains a diverse portfolio of assets across a range of geographies and life cycles in order to minimise exposure to local geographical, political and cyclical market risk.

Business Model Our experienced management team and our highly knowledgeable advisers devised the Company’s business model at the outset and review it regularly in light of current economic and political circumstances.

Acquisitions and Disposals The Group and its advisers have considerable experience in the business environment in which the Group operates. This experience is applied regularly and carefully to assess potential merger, acquisition and disposal opportunities.

Political The Group recognises political risks and opportunities associated with parts of the globe where it conducts business. The Group’s management and advisory network have considerable experience in this area and apply this knowledge to regularly assess and monitor this aspect of activities.

Reputation The Group maintains strong and positive relationships with host country Governments, local communities, regulators and domestic industry partners. The Group’s operations are carried out to the highest industry standards.

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Operational Risks

Exploration and Development Expenditure and Success Rates The Group has experienced management and technical teams with a track record of finding attractive oil discoveries and has a diversified portfolio of exploration, development and production assets. Considerable technical work is undertaken to reduce related areas of risk and maximise opportunities.

Availability of Rigs and Services The Group applies its knowledge of the industry to devise structured planning processes which allow sufficient time for procurement of services.

Factors Associated with Operating in Developing Countries, The Group maintains close contact with Governments in the areas Political and Regulatory Instability within which it operates and, where appropriate, invests in

community projects. Considerable work is undertaken before commencing operations in any new territory.

Title Disputes Notwithstanding potential challenges in the DRC, Kurdistan and Malta, the Group believes that it has good title to its stated oil and gas properties. However, the Group cannot control or protect itself completely against the risk of title disputes or challenges and there can be no assurance that claims or challenges by third parties against the Group’s properties will not be asserted at a future date. Naturally the Group strives to employ the best internal and advisory knowledge available to help to minimise this risk associated with its activities.

Local Community Issues Continual dialogue exists between the Group and its stakeholders which is central to operations. Local labour is employed wherever possible and there is a transfer of skills.

Loss of Key Employees Remuneration packages are reviewed regularly to ensure key executives and senior management are properly remunerated. Long-term incentive programmes have been established.

Environmental Issues The Group undertakes operations to the high international environmental standards of the oil industry. Environmental impact assessments are prepared before any major capital expenditures are incurred.

Health and Safety The Group is aware of the local cultural issues that can impact its management of health and safety matters. It has devised a comprehensive policy framework as well as health and safety management and reporting systems. These are regularly monitored and reviewed by our CSR committee and senior management. The Group also works closely with the local authorities where it is based to manage this aspect of our activities.

CSR Detailed CSR policies and programmes are implemented across operations.

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PRINCIPAL RISKS continued


Financial Risks

Oil and Gas Sales Volumes and Prices Whilst not under the direct control of the Company, a material movement could have an impact on the Group. The Group did not hedge oil prices in 2009.

Interest Rate Risk Reviewed periodically by the Board. No hedges in 2009.

Foreign Exchange Exposure Generally, it is the Group’s policy to conduct and manage its business in US dollars, which is its reporting currency. Cash balances in Group subsidiaries are primarily held in US dollars but small amounts may be held in other currencies in order to meet immediate operating or administrative expenses or to comply with local currency regulations.

Liquidity Risk A formal budgeting and forecasting process is in place and cash forecasts identifying liquidity requirements of the Group are reviewed regularly to ensure compliance with the approved funding plans.

Credit Risk Trade debtors of the Company are subject to internal credit review to minimise risk of non-payment. Additionally, the Group monitors closely the funding position of joint venture partners and key contractors.

Compliance and Ethical Risks

Legal, Regulatory and Litigation The Group’s activities are subject to various laws and regulations around the world. Changes could affect the short, medium and long-term value of the Group. Risks are mitigated by employing skilled and experienced staff and advisers to conduct proactive assessment, contingency planning and, where necessary, the use of appropriate mitigation techniques.

Relations with Local Stakeholders The Group believes that maintenance of good relations with local communities is an important and integral part of its strategy. The Group therefore maintains regularly reviewed relationship protocols to ensure that this is the situation at all of its sites. More information is recorded within the CSR section of this report on pages 38 to 43, and in the separate CSR report.

Business Conduct Risks The Group recognises the importance of maintaining close, transparent and responsible relationships with a wide variety of stakeholders (including host Governments). The Group is developing its systems in this area continually to ensure that it is managing related areas of risk effectively.

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Other Risks

Investor Sentiment The Company maintains a regular dialogue with the Group’s shareholder base and the general public. A Senior Independent Director has been appointed and the Company employs an investor relations specialist.

Corporate Governance The Group recognises the importance of maintaining strong corporate governance procedures and processes. The Group is developing systems in this area continually and generally this is managed by employing the skill, expertise and resources of the Group and its advisers. The Board reviews compliance with the Combined Code and other regulatory guidelines regularly.

Forward-Looking StatementsThe Business Review (pages 12 to 43) contains forward-looking statements with respect to the financial condition, results and operations of the Group. By their nature, forward–looking statements involve a number of risks, uncertainties or assumptions that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. These risks, uncertainties or assumptions could adversely affect the outcome and financial effects of the plans and events described herein. The completion of

the sale of the Disposed Assets is subject to certain conditions, certain of which are beyond the control of the Company. Forward-looking statements contained in the Business Review regarding past trends or activities should not be taken as a representation that these will continue in the future. Heritage undertakes no obligation to update the forward-looking statements contained in this review or any other forward-looking statements made.

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CORPORATE SOCIAL RESPONSIBILITY

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Heritage has always recognised that its licence to operate is closely linked to adoption of CSR concepts. We work closely with stakeholders to ensure that the economic value generated by our operations is applied effectively to address important aspects of local need.

Establishing a LegacyOur investments in the communities around our Ugandan licences have been significant, but it is the legacy that we will leave there that will ultimately have the greatest impact on the lives of Ugandans locally and nationally.

Our presence and investment in Uganda have played a large part in uncovering vast oil resources which will, on development, generate revenues that will contribute significantly to the development of the domestic economy.

We are confident that our business partners will continue to work effectively with the local authorities within the country and carry on the process in which we have been closely involved in.

A Blueprint for our Future ActivitiesOur experiences in Uganda have enabled us to develop our CSR strategy, policies and performance.

In particular, we are now working in partnership with the local authorities in Kurdistan on a variety of social and educational projects and contributing towards the development of the local economy.

Our aim is to apply the knowledge base and skill set we acquired in Uganda to ensure that we contribute significantly and responsibly to the parts of the world where we operate. We wish to secure a sustainable future for the communities where we are based and to conduct our business responsibly and transparently in partnership with them.

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Key Elements of our CSR Policieswe strive to meet the challenges presented by climate change; >

safety is a natural priority and a core element of all of our activities; >

we strive to protect the physical health of all of our employees and contractors whilst they are in the workplace; >

we support human rights consistent with the stipulations contained within the Universal Declaration of >Human Rights;

we strive to ensure that our relationships with our neighbours and local communities are conducted sensitively >and with mutual respect;

we ensure that we receive the widest possible support for our proposals, throughout the life cycle of >our activities;

we strive to contribute positively to global sustainability; >

we are opposed to bribery and corruption in whatever forms they may take; >

we always aim to compete vigorously with our competitors, but in a fair and ethical way; >

we ensure that all of our suppliers are treated fairly and responsibly; >

we strive to construct, maintain and further develop world-class safety systems across all of our operations; and >

we comply fully with all relevant national and international laws and act in accordance with local guidelines >and regulations.

Lost Time Incidents (“LTIs”)Uganda 1Kurdistan 0Russia 0

Only one lost time incident was recorded during a very busy operational year.

Local Employment in Heritage Operated LicencesRussia 98%uganda 90%Kurdistan 65%Tanzania 90%Mali 100%Malta 100%Pakistan 100%

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CORPORATE SOCIALRESPONSIBILITY

StrategyOur CSR strategy is a key factor in securing long-term success. We have always understood that good relationships within the Company and good relationships with external stakeholders, are essential to our business. For Heritage, CSR is about

managing these relationships and developing a reputation for the Company as a trusted and favoured partner, one that takes care to respect and protect the people and environment in each area in which we operate.

We have identified six areas of impact and opportunity that form the CSR aspect of our business model. These are governed by a policy framework, approved and monitored by the Board, with implementation managed at a local level.

Our Vision

Our Areas of Impact & Opportunity

Our Approach

We aim to be a responsible and transparent business in all the areas of the world in which we operate.

Environment & Sustainability

Community & Human Rights

Health & Safety

Business Conduct

Employees


Set policiesDevise & maintain systems

Measure & monitor performance

Communicate & report to stakeholders

Apply stakeholder feedback

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Operations at Miran West-1, Kurdistan

Environment & SustainabilityWherever possible, Heritage prevents, mitigates and remediates the harmful effects of our operations on the environment. Recognising our Company’s contribution and exposure to climate change, we operate all our sites to the highest standards and promote environmental awareness and stewardship throughout our business.

Heritage had no environmental incidents >in 2009, continuing 2008’s record;environmental impact assessments are >conducted for all new projects; andour Russian production site is planning to >replace diesel powered gensets with associated gas powered gensets, saving costs and reducing greenhouse gas emissions.

Health & SafetyThe health and safety of our employees and other stakeholders is a natural priority and a core element of all our activities. Our goal is zero injuries and fatalities and to minimise exposure to health and safety risks.

training contractors and employees in >health and safety remained a priority in 2009. Our personnel receive training regularly in safety regulations, technical codes, field safety, handling dangerous materials, fire safety, and first aid; andsadly, in 2009 one sub-contractor at our >Uganda operations died in a motor vehicle accident. The accident was not related to drilling or camp operations. As a consequence we are taking every possible measure to improve the safety culture at all our operations to reduce the probability of this type of incident to an absolute minimum.

Malaria

malaria remains the biggest health >care risk for Heritage’s personnel in Uganda, as well as the local population;

a total of 36 workers were treated for >malaria in Block 1 and 89 in Block 3A during 2009, down from 2008’s figures, demonstrating that our preventative measures are effective;

in early 2009 Heritage sponsored the >UAE Charity Challenge to raise funds for worthy causes including supporting malaria control interventions near Lake Albert, Uganda. The UAE charity, with Heritage’s support, funded distribution of Long Life Insecticide treated Nets (“LLIN”) in the Buhuka parish. 100% coverage across the villages in the catchment area was achieved and Heritage also provided logistical support; and

Heritage operates clinics for its staff at >all operational sites. We make these available for public use, and treat a number of people who may not otherwise have access to health services in their areas.

Total Injuries, Blocks 1 and 3A, Uganda

Type of incident Block 1 Block 3A

First aid cases 11 9

Major medical treatment cases 0 3

Lost time incidents 1 0

Fatalities 1 0

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CORPORATE SOCIALRESPONSIBILITY

Heritage is committed to restore sites where we operate to their original state and to comply with conditions imposed by bodies such as the National Environmental Management Authority (“NEMA”) in Uganda. In this picture the suspended well is in the process of being covered. This is done so as to protect

both the infrastructure for future use and so that the local wildlife can return to the area in safety. We have worked closely with the relevant authorities to ensure this process fulfils all requirements. Consequently, our operations have the minimum impact on biodiversity in the area.

In 2009 Heritage engaged with four schools local to the Miran West-2 drilling site and ran a competition for the schoolchildren to draw a picture of the drilling rig. As part of this exercise donations were made to the schools that participated. These donations varied from school to school depending on the

requirements for various educational tools. The top three individuals from each school also won a personal prize and the overall winner was selected by Anthony Buckingham to appear on the cover of this year’s annual report. Congratulations to Hawnaz Wahab!

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EmployeesHeritage ensures that all employees understand and appreciate the business strategy, goals and values of the Company. It is important to Heritage that staff feel valued, safe and free to raise any concerns. There are equal opportunities in career development for all employees and with a geographically diversified portfolio we believe that the workforce should reflect the communities in which we operate.

we aim to attract and retain the best >employees and maximise our investment in them;we recruit locally wherever possible; >Heritage offers training to develop >employees;Heritage does not discriminate; >Heritage supports the four fundamental >principles contained within the International Labour Organisation (“ILO”) Declaration; andHeritage recognises achievement, and >creates opportunities for employees at all levels of our business.

Community & Human RightsWe ensure that our relationships with our neighbours and local communities are conducted sensitively and with mutual respect. These relationships will apply active and enduring partnerships as a central and fundamental element. We aim to promote the sharing of the economic value created by our activities, through the conduct of our community relationships.

through our investment in local >communities, local hiring and excellent relationships built with host Governments, we have developed a reputation as a trusted partner, bringing better access to new growth opportunities;in Uganda, we drilled several new water >wells to provide locals with access to clean, safe water. In 2009, we also began a potable water project which will provide 6,000 people with running fresh water; andwe have had no incidents of breaches in >our human rights policies or local laws at any of our sites, and aim to continue this record in 2010.

Human Rights Commitments

we do not employ forced or >child labour;

we will take strong measures should >any breach of our human rights policies occur;

we pay fair and competitive wages; >and

we work closely with stakeholders to >ensure that their rights are respected, that they can monitor our activities and have access to grievance processes should they be needed.

Business ConductWe uphold the highest standards of business conduct across our Group. We are resolutely opposed to bribery and corruption in whatever forms they may take, do not participate in, or finance party politics, and support the Universal Declaration of Human Rights.

Heritage recorded no breaches of our >business conduct policies in 2009;Heritage has a robust whistle-blowing >policy in place that gives employees access to senior executives, with whom they can raise any concerns; andHeritage ensures all contractors perform >according to our safety and environmental standards.

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CORPORATE GOVERNANCE46 Board of Directors48 Corporate Governance Report55 Remuneration Report62 Directors’ Report65 Responsibility Statement of the Directors

Drilling rig at the Buffalo–1 well, Uganda

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BOaRD OF DIRECTORS

n Audit Committee

l Remuneration Committee

sNomination Committee

tReserves Committee

u CSR Committee

1. Michael J. Hibberd nstuChairman and non-Executive DirectorMr Hibberd has extensive international energy project planning and capital markets experience. Mr Hibberd has been president and chief executive officer of MJH Services Inc., a corporate finance advisory company, since 1995, prior to which he spent 12 years with ScotiaMcLeod in corporate finance and held the position of director and senior vice-president, corporate finance. He is chairman of Canacol Energy Ltd., co-chairman of Sunshine Oilsands Ltd. and currently serves on the boards of directors of AltaCanada Energy Corp., Avalite Inc., Iteration Energy Ltd., Pan Orient Energy Corp. and Zapata Energy Corporation. Mr Hibberd also served as a director of Rally Energy Corp. until October 2007 and as a director of Deer Creek Energy Limited until December 2005. Mr Hibberd joined Heritage in March 2006.

2. anthony Buckingham su Chief Executive OfficerMr Buckingham is the founder of Heritage. Mr Buckingham commenced his involvement in the oil industry as a North Sea diver and subsequently became a concession negotiator acting for several companies including Ranger and Premier Oil plc. He was previously a security adviser to various Governments.

3. Paul atherton tuChief Financial OfficerMr Atherton is a qualified accountant, having qualified with Deloitte & Touche, and holds a degree in geology from Imperial College London. He has a corporate finance background with specific experience in the international mining and resource sectors. He joined Heritage in 2000 and subsequently joined the Board of Directors in 2005.

4. Gregory Turnbull non-Executive Director Mr Turnbull is the Regional Managing Partner of the Calgary office of the law firm of McCarthy Tétrault LLP. Mr Turnbull has extensive knowledge of corporate governance issues and has acted for many boards of directors and special committees in that regard. Mr Turnbull started his career with the law firm of MacKimmie Matthews in 1979. From 1987 to 2001, he was a partner with Gowlings LLP (formerly Code Hunter LLP). In 2001 and 2002, he was a partner with the law firm of Donahue LLP. Mr Turnbull has been a partner with the law firm of McCarthy Tétrault LLP since July 2002. He is a non-executive director of Crescent Point Energy Corp., Storm Exploration Inc, Seaview Energy Inc., Hawk Exploration Inc., Canadian Superior Energy Inc., BNP Resources Inc. and Sunshine Oilsands Ltd. He joined Heritage in 1997.

5. John McLeod nltnon-Executive DirectorMr McLeod is a Professional Engineer with nearly 40 years of varied resources extraction experience. He is the president of McLeod Petroleum Consulting Limited, the president, chief executive officer and a director of Tuscany Energy Ltd., Paris Energy Inc. and California Oil and Gas Corporation. He has held positions and has served on various boards including Constellation Oil & Gas Ltd. and CanArgo Energy Inc., as president and chief executive officer of Arakis Energy Company, as vp, operations of Pengrowth Gas Company, chief executive officer and director of Rally Energy Corp. and Canoro Resources. Currently, Mr McLeod serves as a director of Diaz Resources Ltd., Ranger Energy Ltd and Ralliste Energy Corp. He is a Past-President of the Association of Professional Engineers, Geologists and Geophysicists of Alberta. He joined Heritage in 1998.

6. General Sir Michael Wilkes nlsnon-Executive Director and Senior Independent Director General Sir Michael Wilkes KCB, CBE, retired from the British Army in 1995 as Adjutant General and Middle East Adviser to the British Government. As Adjutant General, Sir Michael was the most senior administrative officer within the Army and a member of the Army Board. During his distinguished career, he has seen active service across the world while also commanding at every level from Platoon to Field Army including commanding 22 Special Air Service Regiment and serving as the Director of Special Forces. Sir Michael is a non-executive director of the AIM listed companies Stanley Gibbons Group and Blue Star Capital plc. In addition, he holds non-executive positions on a number of private companies including Britam Defence. He joined Heritage in 2008.

7. Salim Macki nlnon-Executive DirectorMr Macki was a Member of the State Council, Former Ambassador, Government of Sultanate of Oman and has been a director of Oman Oil (a wholly owned Government company) since 1996. Mr Macki holds a master’s degree in petrochemical engineering and has spent most of his working life in the oil industry, where he is highly regarded internationally. He holds, or has previously held, many senior executive positions in various private and state-owned entities in Oman and internationally. He joined Heritage in 2008.

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Corporate Governance Report

The Directors recognise the importance of maintaining good corporate governance practices. This report demonstrates the commitment to applying the highest industry standards of business ethics, health and safety, environment, risk management and corporate social responsibility throughout the Group.

Board of DirectorsThe Board is currently comprised of seven Directors, five of whom are Non-Executive Directors. The Chairman and three of the Non-Executive Directors are deemed to be independent under the terms of the Combined Code.

ChairmanThe Chairman’s role is to ensure the effective running of the Board on all aspects of its roles and setting its agenda. His other key responsibilities include leading the Board, ensuring effective communication with shareholders, ensuring constructive relations between all Directors and that all Directors are encouraged to participate fully in the activities and decision-making process of the Board.

Chief ExecutiveThe Chief Executive Officer is responsible for managing the Group’s business, proposing and developing the Group’s strategy and overall commercial objectives in consultation with the Board and, as leader of the executive team, implementing the decisions of the Board and its Committees.

The Company is incorporated in Jersey where there is no formal code relating to corporate governance. However, the Board recognises that it has a responsibility to ensure good governance of the Company in order to help it fulfil its obligations to all its stakeholders, not just shareholders. It is, therefore, strongly committed to the highest standards of corporate governance and has decided to adhere, wherever possible, to the provisions of the Combined Code on Corporate Governance published in 2008 (the “Combined Code”), in the same way as if the Company was incorporated in the United Kingdom. A copy of the Combined Code is publicly available on the website of the UK Financial Reporting Council (www.frc.org.uk). The Board continues its commitment to work towards voluntary compliance with the Combined Code in all material respects.

The Directors recognise the importance of maintaining good corporate governance practices. This report demonstrates the commitment to applying the highest industry standards of business ethics, health and safety, environment, risk management and CSR throughout the Group.

The Company maintains a Premium Listing on the Main Market of the LSE and is a member of the FTSE 250 Index. As such, the Directors recognise their responsibility as guardians of the interests of a broad range of investors and stakeholders and are determined to continually review and develop the corporate governance framework in which the Company operates. To this end, the Board has made significant progress in adopting policies and procedures to conduct and monitor its activities, along with working practices, and to establish a business culture that ensures openness and full accountability. Developments and initiatives during 2009 and early 2010 include:

appointing General Sir Michael Wilkes as the Senior Independent >Director;establishing a performance evaluation process for the Board and >Board Committees and for the Chairman; developing a formal framework for remuneration policy across the >Company; confirming that no annual bonuses would be paid to the >Non-Executive Directors;undertaking an independent review of the Chief Executive >Officer’s and Chief Financial Officer’s remuneration;developing the Company’s processes for reviewing the key risks, >internal controls and assessments, which are subject to annual review;

initiating processes for reviewing Director appointment and >succession planning; establishing a Reserves Committee; and >establishing a CSR Committee. >

Compliance with the Combined Code on Corporate GovernanceThis report describes the extent to which the Company is in compliance with the principles set out in Section 1 of the Combined Code and how it intends to work towards voluntary compliance with those principles going forward. At the year end, the Board considers that the Company has complied with Section 1 of the Combined Code, save in the following respects. The Board has addressed one area of non-compliance, but believes that implementing the remaining changes would be inappropriate at this stage in the Company’s strategic development:

Code Provision A.3.3: > Until June 2009, the Company was not compliant with the requirement to have a Senior Independent Director. In June 2009, General Sir Michael Wilkes was appointed as the Senior Independent Director. Code Provision B.1.6: > Notice periods for the Executive Directors are 24 months. The Company has discussed the Executive Directors’ employment contracts with external advisers and internally within the remuneration committee. After taking these views into consideration, the Company has decided, for

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Heritage Oil Governance Structure

SHAREHOLDERS BOARDChairman

Audit Committee4 members =All independentNon-ExecutiveDirectors

Remuneration Committee3 members =All independentNon-ExecutiveDirectors

Nomination Committee3 members =2 independentNon-ExecutiveDirectors + CEO

Reserves Committee4 members =2 independent Non-Executive Directors + CFO + VP Exploration

CSR Committee3 members =CEO, CFO + 1 Non-ExecutiveDirector

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commercial reasons, to retain the existing Executive Director notice period structure because of their importance to the business at this stage in its development. We believe that this policy best protects the interests of our shareholders.Code Provision C.3.1: > The Chairman of the Company is a member of, and chairs, the Audit Committee. The Board believes the Chairman is the most appropriate person to be a member of, and chair, the Audit Committee given his extensive financial experience. The Chairman is also considered by the Board to have maintained his independent status.

Board of DirectorsRole of the BoardThe Board recognises the importance of creating and delivering strong sustainable financial performance and long-term shareholder value. The Board is responsible for ensuring the effectiveness of the Company’s system of internal controls including managing and considering the commercial risks and financing needs, the disposal of businesses and assessing the most appropriate balance between acquisition-led growth and organic growth. Individual Directors evaluate and challenge the Company’s business strategy constantly to ensure they identify areas where improvements can be made or where new opportunities exist so that strategies remain appropriate and relevant to the Company’s business. In order to ensure the Company complies with its obligations as a company with a Premium Listing on the Main Market of the LSE, the Board also has responsibility for communications with shareholders, health and safety policy and review of the Company’s management and financial performance. Further details of compliance with these obligations are set out below.

CompositionThe Board is currently comprised of seven Directors, five of whom are Non-Executive Directors. The Chairman and three of the Non-Executive Directors are deemed to be independent under the terms of the Combined Code. All of the Directors bring either extensive experience of the oil industry, or a broad range of business, commercial and corporate governance experience, to the

Board. The Executive Directors have close involvement with the operations of the business through their operational roles. The Directors are aware of their responsibilities and feel able to raise any concerns at Board meetings which are minuted accurately in the Board meeting minutes. The Board is supported by a strong and experienced senior management team. The biographies of the Board are set out on page 47.

Chairman, Chief Executive Officer and Senior Independent DirectorThere is a clear division of responsibility between the roles of the Chairman, Michael Hibberd, and the Chief Executive Officer, Anthony Buckingham, to ensure an appropriate balance of responsibility and accountability. These responsibilities have been formalised in writing and approved by the Board.

The Chairman’s role is to ensure the effective running of the Board in all aspects of its roles and setting its agenda. His other key responsibilities include leading the Board, ensuring effective communication with shareholders, ensuring that Board Committees function effectively within their terms of reference, ensuring constructive relations between all Directors and that all Directors are encouraged to participate fully in the activities and decision-making process of the Board. The Chairman also ensures that the Directors receive accurate, timely and clear information with all Board and Committee meeting information being issued to members in advance. At each meeting there is an update on operational and financial performance including a review of the performance and future potential of all material assets. The Chairman’s other significant appointments are disclosed to the Board and may be found in the Directors’ biographies on page 47.

The Chief Executive Officer is responsible for managing the Group’s business, proposing and developing the Group’s strategy and overall commercial objectives in consultation with the Board and, as leader of the executive team, implementing the decisions of the Board and its Committees.

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As part of the Company’s commitment to comply with the Combined Code, General Sir Michael Wilkes was elected as the Senior Independent Director with the chief responsibility of maintaining sufficient contact with major shareholders to help develop a balanced understanding of their issues and concerns. In this role General Sir Michael Wilkes is available to shareholders who have concerns that have not been, or cannot be resolved through discussion with the Chairman, Chief Executive Officer or Chief Financial Officer or where such contact is inappropriate. The Senior Independent Director is also responsible for leading the Non-Executive Directors in reviewing the performance of the Chairman for the year.

Board Balance and IndependenceThe Board comprises the following Directors:

Michael Hibberd Chairman and Non-Executive Director

Anthony Buckingham Chief Executive Officer

Paul Atherton Chief Financial Officer

Salim Macki Non-Executive Director

John McLeod Non-Executive Director

Gregory Turnbull Non-Executive Director

General Sir Michael Wilkes Non-Executive Director and Senior Independent Director

The Board is satisfied that its composition will ensure that no individual or group of individuals will dominate the decision-making process and that there is a strong presence on the Board of both Executive and Non-Executive Directors.

The Board considers that John McLeod, Salim Macki, General Sir Michael Wilkes and Michael Hibberd are independent in character and judgement and free from relationships or circumstances which may affect their judgement. The Board acknowledges that John McLeod does not meet the independence criteria set out in the Combined Code as he has served on the Board for more than nine years and was previously granted options. John McLeod’s performance as Board member and Chairman of the Remuneration Committee was assessed by the other Directors as part of the Board’s evaluation process undertaken during the year. Following this exercise, the Board has satisfied itself that neither of the factors described above impact on John McLeod’s independence in character and judgement. His length of service on the Board enhances his ability to perform his duties effectively and helps maintain an appropriate balance between experienced Non-Executive Directors and those more recently appointed to the Board. On appointment, the Chairman was also considered to be independent and continues to be so.

Gregory Turnbull does not meet the independence criteria set out by the Combined Code as he is a partner of McCarthy Tétrault LLP, the Canadian legal advisers to the Company.

In addition to the requirements of the Combined Code, the Board’s assessment of independence and effectiveness includes their total number of commitments, relationships with major suppliers or with charities receiving material support from the Company.

Albion Energy Limited (“Albion”), the Company’s largest shareholder and Anthony Buckingham entered into a relationship agreement with the Company on 28 March 2008 (the “Relationship Agreement”) as part of the process to list the Company on the Main Market in 2008. The purpose of the Relationship Agreement is to

ensure that transactions and relationships between the Group, Albion and Anthony Buckingham are at arm’s length and on normal commercial terms. The Relationship Agreement prescribes that at all times, the Board shall comprise of a majority of Directors who are all independent of Anthony Buckingham.

How the Board OperatesBoard Meetings The Board met in formal meetings nine times during the year and also engaged informally in numerous ad-hoc information calls which were not minuted as properly called formal meetings. The Board will continue to meet sufficiently regularly to discharge its duties by way of formal Board meetings as well as through ad-hoc meetings as required. The Board intends to meet at least four times a year. A formal schedule detailing matters specifically reserved for its decision has been agreed. The attendance record of each Director at formal Board and committee meetings is shown in the table below. In addition to the formal meetings of the Board, the Chairman, Chief Executive Officer and Chief Financial Officer maintain frequent contact with the other Directors to discuss any issues of concern they may have relating to the Group or as regards their areas of responsibility and to keep them fully briefed on the Group’s operations and initiatives. Additionally, the Chairman and/or the Non-Executive Directors met and spoke regularly during the year, and on an ad-hoc basis, without the Executive Directors being present.

CommitteesThe Board has delegated some of its responsibilities to certain committees in line with recommendations of the Combined Code and to facilitate the business of the Company. These are the Audit, Remuneration, Nomination, Reserves and CSR Committees. The Reserves Committee was established in 2009 and met for the first time in January 2010. The CSR Committee was established in April 2010. Further details of these committees and their activities can be found later in this report on pages 51 to 53 and also in the Remuneration Report on pages 55 to 61.

A table of attendance of members of the Board and the main Board Committees at meetings during the year is set out below:

Audit Remuneration Nomination Board Committee Committee Committee (9 meetings) (5 meetings) (1 meeting) (2 meetings)

Michael Hibberd 9/9 5/5 – 2/2

Anthony Buckingham 9/9 – – 2/2

Paul Atherton 9/9 – – –

John McLeod 9/9 5/5 1/1 –

Salim Macki1 9/9 3/3 1/1 –

Gregory Turnbull 9/9 – – –

General Sir Michael Wilkes 8/9 5/5 1/1 2/2

1 Appointed to the Audit Committee in April 2009.

Given the size of the Company, the Board feels that it is in the shareholders best interests not to employ a Company Secretary at this time. The current Company Secretary is a corporate entity based in Jersey that deals with the normal statutory compliance for the Company. The Board and its committees are, therefore, serviced by the Company Secretary or its nominee. The other duties that would normally be carried out by the Company Secretary, such as the provision of information flows to the Board, are dealt with by either the Chairman or Chief Financial Officer or

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their nominee. In terms of corporate governance issues, the Board is advised by McCarthy Tétrault, a firm of registered foreign lawyers & solicitors in London. The Board monitors the provision of Company secretarial duties and takes any action as appropriate to ensure its requirements are met. The appointment or removal of the Company Secretary is a matter for the Board as a whole.

Independent Professional AdviceThe Board ensures, in line with Board policy, that all Directors and Committees have access to independent professional advice whenever it is required and at the Company’s expense.

Appointment of Non-Executive DirectorsNon-Executive Directors have executed letters of appointment setting out their respective terms of appointment including the expected time commitment which has been agreed and confirmed with them. Further details can be found in the Remuneration Report on pages 55 to 61.

Insurance CoverAs required by the Combined Code, the Company maintains Directors’ and Officers’ Liability insurance cover, in respect of any legal action taken against the Directors. This is reviewed annually.

Induction and Continuing Professional DevelopmentThe Board believes that the Directors possess a wealth of diverse experience and business skills. Non-Executive Directors are actively encouraged to take up opportunities for questioning, examining and reviewing the Group’s businesses and to undertake training applicable to their roles.

Upon joining the Board, if considered appropriate, a Director will participate in an induction programme which helps establish them in their role covering the principles and legal and regulatory duties required of them. This training is tailored to an individual’s needs, taking into account their qualifications and experience. In addition, meetings are arranged with senior management to enable Non-Executive Directors to develop a detailed understanding of the Company’s business and of its strategy, and the key risks and challenges the Company faces.

All Directors have the opportunity to update their skills and knowledge on a regular basis, for example through further briefings on issues, including changes in law and regulation, corporate governance, financial reporting and operational matters. To build on the formal induction programme, Directors are encouraged to make site visits to the Group’s operations, and are offered access to company secretarial services or independent professional advice at the Company’s expense, should this be necessary for them to discharge their responsibilities.

Furthermore, Directors are in regular communication with senior executives through both formal and informal ad-hoc meetings, to ensure the regular exchange of knowledge and experience between management and Non-Executive Directors.

Board Assessment and EffectivenessDuring the year the Chairman led a review and assessment of the Board and its effectiveness. This exercise, in which all of the Directors were involved, considered the processes around how the Board works, as described above; the effectiveness of Board Committees and their chairmen; and areas such as Board composition, dynamics and leadership.

The assessment concluded that the Board and its Committees remain effective in terms of operations, decision-making and leadership. During the year the Board has built on the review; in particular by reviewing the succession planning process and by making the changes described in the Induction and Continuing Professional Development part of this report.

Re-electionAll Directors’ appointed other than by shareholders are subject to re-election by shareholders at the first Annual General Meeting (“AGM”) following their appointment.

It is the Company’s policy that all Directors should retire and stand for re-election at least once every three years. Details of Directors retiring at the forthcoming AGM are shown in the Directors’ Report on page 62.

Board CommitteesAs mentioned above, the Board has five committees, being the Audit, Remuneration, Nomination, Reserves and CSR Committees. The duties of these Committees are set out in formal terms of reference, approved by the Board, that are available on the Company’s website www.heritageoilplc.com. Membership of the committees was reviewed and confirmed during the year.

Audit Committee Report

Audit Committee n

Michael Hibberd, ChairmanSalim Macki (appointed April 2009)John McLeodGeneral Sir Michael Wilkes

Main Responsibilitiesmonitoring the integrity of the financial statements, including >annual and interim reports and any other formal announcement relating to the Group’s financial performance;reporting to the Board, identifying any matters in respect of >which it considers that action or improvement is needed and making recommendations as to the steps to be taken;considering the establishment of an internal audit function; >reviewing the Group’s internal control procedures and risk >management systems;making recommendations to the Board on the appointment, >review and removal of external auditors;establishing the external auditors remuneration; >monitoring external auditors independence; and >monitoring the policy on external auditors’ non-audit services. >

All members, including the Chairman, are independent Non-Executive Directors. Other members of the Board may also be invited to attend as and when appropriate. The auditors are also invited to attend regularly.

The Chairman of the Company, Michael Hibberd, is a member of the Audit Committee which is not in line with the recommendations made in the Smith Guidance on the Combined Code. However, the Board continues to believe that his recent and relevant financial experience, including his experience on corporate financial matters is invaluable in supporting the Audit Committee to perform its role.

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The Audit Committee engages in numerous ad-hoc discussions and meets formally at least twice a year to discharge its responsibilities which are set out in its Terms of Reference. The Audit Committee also oversees the Company’s relationship with its external auditors and reviews the effectiveness of the external audit process. The Audit Committee pre-approves all audit and non-audit services undertaken by the external auditor, to ensure independence of the external auditors is not impaired.

In fulfilling its responsibility to monitor the integrity of financial reports to shareholders, the Audit Committee reviews the accounting principles, policies and practices adopted in the preparation of public financial information and will examine documentation in relation to the Annual Report and annual financial report announcements. The ultimate responsibility for reviewing and approving the interim and annual financial statements remains with the Board.

During the year the Audit Committee considered the following main items of business:

review of operations; >review of the integrity of the financial statements and formal >announcements relating to the Group’s financial performance;report of the external auditors, KPMG; >review of the financial statements; >update on internal controls; >review of whistle-blowing policy; >management representation letter and auditor independence; >audit engagement letter; >2009 audit plan and key audit risks; >review of the committee’s Terms of Reference; >2010 budget; and >potential asset sales and business combinations. >

At present there is no internal audit function established. The Committee reviewed the need for an internal audit function in 2009 and again in March 2010 and concurred with the opinion of the Board, which maintains that the current control systems in place and management oversight are sufficient to highlight any areas of weaknesses in the financial reporting systems. The need for an internal audit function is kept under review at least annually.

The Terms of Reference of the Audit Committee were reviewed during the year, and part of that review involved consideration of matters considered to be good practice in other listed companies.

Remuneration Committee Report

Remuneration Committee l

John McLeod, ChairmanSalim MackiGeneral Sir Michael Wilkes

Main Responsibilitiessetting the remuneration policy for the Chairman, Executive >Directors and senior executives;assessing and determining total compensation packages >available to the Executive and Non-Executive Directors;monitoring the remuneration of senior management other than >the Executive Directors whose remuneration it sets; determining policy and scope for pension rights and any >compensation payments and ensuring compliance with the Combined Code in this respect; andmaking recommendations to the Board for its approval, and that >of shareholders, on the design of long-term incentive plans and making recommendations for the grant of awards to executives under such plans.

All members, including the Chairman, are independent Non-Executive Directors. The Chairman of the Board, Chief Executive Officer, Chief Financial Officer and external advisers may also be invited to attend as and when appropriate.

The Remuneration Committee engages in numerous ad-hoc discussions and meets formally at least once a year. The Terms of Reference of the Remuneration Committee comply fully with the requirements of the Combined Code. These were reviewed during the year using the Hay Group, and part of that review involved consideration of what was considered to be good practice in other listed companies.

Further information on the Committee can be found in the Remuneration Report on pages 55 to 61.

Nomination Committee Report

Nomination Committee s

Michael Hibberd, ChairmanAnthony BuckinghamGeneral Sir Michael Wilkes

Main Responsibilitiesformalising succession planning and the process for new >Director appointments;identifying, evaluating and recommending candidates for >appointment or reappointment as Directors or Company Secretary taking into account the challenges and opportunities facing the Company;reviewing the structure, size and composition (including the >balance of knowledge, skills and experience) of the Board in order to recommend changes to the Board and to ensure the orderly succession of directors; andreviewing the outside directorships/commitments of >Non-Executive Directors.

The majority of the members are independent Non-Executive Directors. External advisers may also be invited to attend as and when appropriate. The Committee has the power to request the attendance of any other Director or member of management, for all or part of any meeting, as may be considered appropriate by the Chairman of the Committee.

The Nomination Committee engages in numerous ad-hoc discussions and meets formally at least once a year. The Nomination Committee ensures, amongst other things, that there is a formal, rigorous and transparent procedure for the appointment of new directors. Recommendations are made objectively. The activities that the Nomination Committee are responsible for are set out in its Terms of Reference.

During the year the Nomination Committee considered the following items of business:

the appointment of General Sir Michael Wilkes as Senior >Independent Director;induction and professional development policy; >succession planning; and >independent evaluation of the Board, Board Committees and the >Chairman.

The Terms of Reference of the Committee were reviewed during the year, and part of that review involved consideration of what was considered to be good practice in other listed companies.


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Reserves Committee Report

Reserves Committee t

John McLeod, ChairmanMichael HibberdPaul AthertonBrian Smith, VP Exploration

Main Responsibilitiesassist the Board in fulfilling its oversight responsibilities generally >with respect to the oil and natural gas reserves evaluation process and public disclosure of reserves data and related information in connection with oil and gas activities;review, at least annually, the Company’s procedures relating to >disclosure of information with respect to the oil and gas activities of the Company, including its procedures for complying with any disclosure requirements and restrictions;review annually the qualifications and independence of an >independent qualified reserves evaluator(s) to be appointed or re-appointed by the Board and in the case of any proposed change in the independent qualified reserves evaluator(s), determine the reasons for the proposed change and whether there have been any disputes between the appointed qualified reserves evaluator(s) and management of the Company; andreview any public disclosure or regulatory filings with respect to >any reserves evaluation and oil and gas activities.

It was felt appropriate at this stage of development of the Company to establish a Reserves Committee to fulfil the duties above. The Reserves Committee engages in numerous ad-hoc discussions and will formally meet at least once a year. External advisers may also be invited to attend meetings as and when required.

Corporate Social Responsibility Committee Report

Corporate Social Responsibility Committee u

Paul Atherton, ChairmanAnthony BuckinghamMichael Hibberd

Main Responsibilitiesmaintain the Company’s CSR policy framework in line with best >practice and appropriate international standards and guidelines;develop a framework for submission, assessment and approval >of discretionary and obligatory community, social, educational and charitable expenditures undertaken by the Company worldwide;to prepare the Annual Group CSR Report and ensure that it is >a fair reflection of the Company’s CSR approach, policies, systems and performance, is coherent and published in a timely manner; andto review the internal CSR programme of the Company and >ensure it has the appropriate standing within the Company.

It was considered appropriate as the Company grows and operates in more areas to establish a CSR Committee to fulfil the duties above. The CSR Committee engages in numerous ad-hoc discussions and will formally meet at least once a year. External advisers may also be invited to attend meetings as and when required.

Accountability and AuditAudit Committee ReportDetails of the Audit Committee and the Audit Committee Report were discussed on pages 51 to 52.

Internal ControlsThe Audit Committee has responsibility for reviewing the effectiveness of the Company’s system of internal controls and risk management systems. The Board has taken into account the relevant provisions of the Combined Code in formulating the systems and procedures in operation in the Company. The Audit Committee considers the system to be effective.

The Company’s system of internal controls is designed to manage, rather than eliminate, the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. The Board will continue to review and improve its system of internal controls.

The Board recognises the need for effective internal controls and for evaluating and managing the risks of the Company. Such matters are brought to the attention of the Board at its formal Board meetings, ad-hoc discussions or via the whistle-blowing policy.

High level controls in operation include:review of management accounts with comparison of actual >performance against prior periods and budget;approval of orders, authorisation of invoices and two signatories >required to make a transfer from the principal bank accounts;quarterly reconciliation of all control accounts; >prior approval by the Board for major investments; and >segregation of duties between relevant functions and >departments.

The Board is aware of the need to conduct regular risk assessments to identify any deficiencies in the controls currently operating over all aspects of the Company. A formal risk assessment is conducted periodically during the year on internal controls to cover material controls, both financial and operational, and risk management systems.

The risk assessment and a review of the effectiveness of the Group’s system of internal controls are performed in accordance with the Turnbull guidance and they were in place for the year end review process.

Financial reporting procedures were reviewed as part of the process to become listed on the Main Market of the LSE and a Board memorandum was prepared. Having considered the findings, the Directors were able to confirm that the financial reporting procedures established provided them with a reasonable basis on which to make proper judgements on the financial position and prospects of the Company on an ongoing basis. However, one main weakness was noted, concerning accounting for complex transactions, although the Company seeks third party advice to mitigate this weakness.

The Directors recognise the need to maintain financial reporting procedures, to review them on an ongoing basis and to adapt them to changing circumstances and will use the Board memorandum as a basis for further developing the Board processes.

Details of principal risks and uncertainties are discussed in the Financial Review on pages 34 to 37.

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The Company has a whistle-blowing policy in place and information is available to all employees advising them that they can raise concerns in confidence about possible wrong doing by contacting the Chairman of the Audit Committee. In addition, whistle-blowing is an agenda item at Board and Audit Committee meetings with appropriate action taken as required.

Auditor IndependenceThe Audit Committee and Board recognise the importance of the independence and objectivity of the Group’s external auditors, KPMG Audit Plc, when performing their role in the Group’s reporting to shareholders. The external auditors are expected to provide the Audit Committee with information about policies and processes for maintaining independence and monitoring compliance with current regulatory requirements, including those regarding the rotation of audit partners and staff.

The overall performance, independence and objectivity of the auditors is reviewed regularly by the Audit Committee. The Audit Committee has a policy in place in respect of the provision of non-audit services to the Company by the external auditor. Fees billed by KPMG Audit Plc, the Company’s auditors and its associates, during 2008 and 2009, may be summarised as follows:

2009 2008 US$ US$

Audit and audit related services: Group audit of annual statements and review of interim statements 259,744 276,900 Prospectus and information circular – 97,087

259,744 373,987

Non-audit services: Tax compliance and advisory 43,744 110,124 Transaction services1 1,274,820 537,900

1,318,564 648,024

1 The majority of the 2009 transaction services costs relate to an aborted acquisition (see Operating Results section of the Financial Review, pages 30 to 32)

Going ConcernA statement on the Directors’ position regarding the Company as a going concern is contained in the Directors’ Report on page 64.

Shareholder RelationsThe Chairman, with input from the Senior Independent Director, is responsible for ensuring effective communication of shareholders’ views to the Board as a whole and will update the rest of the Board accordingly. Board Members are expected to use their best endeavours to attend meetings with a broad range of shareholders or otherwise keep in touch with shareholder opinion and discuss strategy and governance issues with them as time progresses. In addition, the Company employs an investor relations specialist and an investor relations programme is in place for the Company to meet major shareholders and analysts.

As part of the Company’s commitment to comply with the Combined Code, General Sir Michael Wilkes was elected as the Senior Independent Director with the chief responsibility of maintaining sufficient contact with major shareholders to help develop a balanced understanding of their issues and concerns. In this role General Sir Michael Wilkes is available to shareholders who have concerns that have not been, or cannot be resolved through discussion with the Chairman, Chief Executive Officer or Chief Financial Officer or where such contact is inappropriate.

Throughout 2009, Executive Directors and senior management met with institutional investors in London and across the UK as well as other European and North American cities. These roadshows, combined with the attendance of various Directors and/or senior management at several conferences, provided for comprehensive and engaging dialogue with shareholders.

The Group issues its results and other news releases promptly and publishes them on the Company’s website at www.heritageoilplc.com. Other corporate information, including the Annual Report, any circulars issued during the year and other financial presentations is also available on the website. Shareholders and other interested parties can subscribe to receive news updates by email by registering online on the website.

Analysis of the Company’s shareholder base indicates that there has been a small change in the profile of those holding shares in Heritage in 2009. There has been an increase in shareholders who classify their investment style as growth offset by declines in hedge funds. These are shown on the following two graphs.

December 2008

1 Management 34% 2 Multiple 24.9% 3 Hedge Fund 17.1% 4 Retail 9% 5 Growth 8% 6 Index 3.7% 7 Other 2.5% 8 Value 1.1%

1

2

3

4

5

6 7 8

Source: J.P. Morgan Securities Ltd. Other consists of arbitrage, corporate, emerging markets, trading positions and custody.

December 2009

1 Management 30%1 2 Multiple 29.5% 3 Hedge Fund 12.8% 4 Growth 10.25% 5 Retail 9% 6 Index 3.6% 7 Other 3.9% 8 Value 0.9%

1

2

3

4

5

67 8

Source: J.P. Morgan Securities Ltd. Other consists of arbitrage, corporate, emerging markets, trading positions and custody.1 Management decline is due to the increase in shares through the share placing in

June 2009.

At the AGM, a business presentation is provided for the benefit of shareholders. The Chairman ensures, and will continue to ensure, that the respective chairmen of the Remuneration, Audit, Nomination, Reserves and CSR Committees attend the AGM to answer questions and that the other Directors also attend.


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Remuneration ReportRemuneration Committee Chairman’s Introduction

Dear Shareholder,

I am pleased to present Heritage’s Remuneration Report for the year ended 31 December 2009 for which we will be seeking approval from shareholders at our AGM in June. As you will see, we have enhanced the level of disclosure included in the Remuneration Report to reflect evolving best practice and to facilitate continued dialogue with our shareholders.

The past year has been an exciting one for Heritage as we crystallised value with the disposal of our Omani interests and prepare to dispose of our Ugandan interests. We also experienced continued operational success with the discovery of the Miran West Field in Kurdistan. In addition, the past year saw a number of corporate governance developments in response to the global financial turmoil, with a particular emphasis on executive reward policies and practice, which the Committee has considered.

Against this background, the Remuneration Committee has continued to monitor the executive reward policy first established during 2008, and its application, to ensure that both remain appropriate. As part of this process, the Remuneration Committee has:

reviewed the operation and structure of the annual bonus plan; >decided to enhance the level of disclosure provided in the Remuneration Report; >had its performance and effectiveness assessed as part of the wider Board evaluation process described in the >corporate governance section of our annual report; andconsidered the likely behavioural impact of the remuneration policy and, in particular, the short and long-term >incentive structures, on the risk taking attitude of senior executives.

We believe that our executive reward policy remains appropriate and as a result have made no fundamental changes, other than those described above.

As per last year’s Remuneration Report, salaries remained frozen during the year and no further awards of shares under the Long Term Incentive Plan (“LTIP”) were made to the Executive Directors. The Terms of the LTIP were not changed. Pension and benefit provisions also remained unchanged.

We will keep our policy under review throughout 2010 as our business evolves and new corporate governance developments occur.

The rest of the report provides more detail on our remuneration arrangements.

John McLeodChairman of the Remuneration Committee29 April 2010

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IntroductionThis report has been prepared with reference to the UK Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (“the regulations”) and meets the relevant requirements of the Financial Services Authority’s Listing Rules. The report has, therefore, been divided into different parts for unaudited and audited information.

In preparing this report, consideration has also been given to the Combined Code and the Guidelines of the Association of British Insurers on Executive Remuneration Policies and Practices. Advice has been sought from Hay Group which is a founder member of the Remuneration Consultants Group and is committed to upholding its principles.

A resolution to approve the report will be put to shareholders at the Annual General Meeting on 17 June 2010.

Remuneration Committee The members of the Remuneration Committee during the year were John McLeod (Chairman), General Sir Michael Wilkes and Salim Macki. The Committee met once during 2009 with all members in attendance.

All members of the Remuneration Committee are considered by the Board to be independent as explained in the corporate governance section of the annual report on page 50.

The Remuneration Committee’s main responsibilities are to:set the remuneration policy for the Chairman, Executive Directors >and senior executives;assess and determine total compensation packages available to >the Executive and Non-Executive Directors;monitor the remuneration of senior management other than the >Executive Directors whose remuneration it sets; determine policy and scope for pension rights and any >compensation payments and ensure compliance with the Combined Code in this respect; andmake recommendations to the Board for its approval, and that of >shareholders, on the design of long-term incentive plans and make recommendations for the grant of awards to executives under such plans.

In setting the remuneration policy and total compensation package levels for Executive Directors and other senior executives, the Remuneration Committee gives consideration to remuneration policy and levels for the wider employee population. In particular, the Remuneration Committee considers how pay levels in the wider employee population compare against the market and is mindful of the pay differentials between top executives and roles at different levels in the structure.

The Remuneration Committee has clearly defined terms of reference which conform with the requirements of the Combined Code and are available on the Company’s website.

Advice to the Remuneration Committee The Chairman of the Board, Chief Executive Officer and Chief Financial Officer provide internal support to the Remuneration Committee and attend meetings at the Committee’s invitation except where matters associated with their own remuneration are being discussed.

In addition, the Remuneration Committee has access to external advice as required. During the year, the Committee continued to receive independent advice from external executive reward consultants, the Hay Group, on matters under consideration by the Committee. In addition, the Hay Group facilitated the Board’s assessment process as described in the corporate governance section of the annual report and provided updates on best market practice. No other services were provided to the Company by the Hay Group during the year.

Remuneration Committee Assessment As part of the overall Board assessment process described in the corporate governance section of the annual report, the operation, structure and performance of the Remuneration Committee and its members were assessed during the year. This process, which was facilitated by the Committee’s external advisers, the Hay Group, took into account the views of both member and non-member Directors of the Committee.

The outcome of the review confirmed that the Remuneration Committee discharges its responsibilities effectively.

Executive Reward Policy During the year, the Remuneration Committee has continued to monitor the executive reward policy and principles which were put in place in 2008 to ensure that they remain appropriate. These broad principles, which the Remuneration Committee believes remain appropriate in the current climate, are designed to ensure that the Company:

has an executive reward framework to help drive future value >growth; retains and, when necessary, recruits management talent of the >required ability and experience;provides overall levels of reward that are appropriate for the >Company given its Premium Listing in London, international operations and the global nature of the oil and gas industry; follows, insofar as possible, both UK as well as Canadian >standards of corporate governance in so far as that such standards support and enhance the Company’s ability to generate value for shareholders; and maintains a balance between fixed (base package and benefits) >and variable reward (short and long-term incentives) that is appropriate and motivates the right behaviours (see chart on page 57).

It remains the Remuneration Committee’s opinion that, in light of the areas where the Company operates, the relatively small number of Executive Directors at the Company and the roles conducted by the Executive Directors that an upper quartile level of total reward is appropriate. However, upper quartile levels of reward are only available (mainly through participation in the LTIP) for truly exceptional levels of performance.

Overall levels of reward are benchmarked against three relevant comparator groups:

UK Oil & Gas companies (excluding those significantly larger than >the Company); an international comparator group comprising companies of a >similar size and scale to Heritage; andthe FTSE 250. >

Within this overall reward policy, the manner in which each component of executive reward is aligned to the overall business strategy is shown in the following table.

Remuneration Report continued

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Component of Executive Reward

Policy for Executive Directors

Alignment to Corporate Strategy

Base Package Typically reviewed –annuallyTwo year freeze –implemented in 2008Benchmarked against –UK & International Oil & Gas companies and the FTSE 250

Market competitive –pay levels enable us to recruit and retain the best available talent for Heritage

Annual Bonus Maximum of 300% of –base packageBased on corporate –targets (no individual element)

Promotes a high- –performance cultureEnsures that the –Executive Directors are focused on the goals of the Company

Long-term Incentive

One-off award –covering a three year period of annual grantsThree year –performance periodRelative Total –Shareholder Return (“TSR”) performance targets underpinned by requirement for 20% share price growthNone of the awards –vest unless TSR performance is close to the upper quartile

Aligns our Executive –Directors with our shareholdersAbsolute growth –requirement ensures rewards are only available if the share price increasesUpper quartile –rewards are available only for exceptional levels of performance

Pension Allowance of 10% of –base package

Below market lower –quartile and in line with our performance-driven culture

Balance Between Fixed and Performance-Related Reward The charts below show the balance between fixed (base package and benefits) and variable (bonus and long-term incentives) elements of reward for each of the Executive Directors.

Components of Executive Directors’ Reward

CEO 72%28%

CFO 66%34%

Fixed Reward Variable Reward

Fixed Reward includes base package and value of benefits (including pension).

Variable Reward includes 2009 bonus and the annualised fair value of long-term incentive awards (apportioned over the life of the LTIP).

Base PackageThe table below shows the annual base packages of the Executive Directors during 2009. Following the introduction of the LTIP in 2008, the Remuneration Committee implemented a two year base package freeze for the Executive Directors and, therefore, salaries did not increase in 2009.

Name 2009 Base Package

Anthony Buckingham £675,000Paul Atherton £500,000

The Remuneration Committee reviewed the salaries of the Executive Directors during 2010 and a 5% increase was granted effective 1 April 2010.

Annual Bonus The annual bonus, payable wholly in cash, has a maximum limit of 300% of base package and is payable to Executive Directors solely for the achievement of corporate targets. There are no individual targets for Executive Directors. At other levels in the Company, targets which relate to performance in an individual’s geographical area of operation or function are utilised but, for any bonus to be paid out at all, a minimum level of Company performance must be achieved.

The Remuneration Committee recommends the level of annual bonuses paid to the Executive Directors. The level of annual bonuses is based on corporate targets. Based upon the achievements of the Company during the year, including the successful drilling campaigns in Uganda and Kurdistan, increase in the share price, sale of the Omani assets and potential sale of the Ugandan interests, the bonus awards for the Executive Directors in 2009 is 150% of base package, reflecting another year of excellent performance.

During the year the Company achieved its targets. Consequently it has been agreed that a payment of 150% of base package will be paid to the Executive Directors.

Long-term Incentives 2008 Long Term Incentive PlanThe LTIP was approved by shareholders in June 2008. The main features of the awards to Executive Directors are:

one-off awards of performance shares reflecting the equivalent of >three years of award; a face value of 1,200% of base package for the Chief Executive >Officer and 800% of base package for the Chief Financial Officer, reflecting the equivalent of annual awards for three years;the performance conditions, measured over the three year period >starting with the date of the award, are relative TSR versus a group of international oil companies and a requirement for the share price to increase by at least 20% between the date of the award and the end of the vesting period; none of the awards will vest unless comparative TSR performance >is close to the upper quartile level of the comparator group; andthere is an additional holding period of one year following the >vesting of the awards.

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Awards vest according to the following schedule:

Proportion of Award Vesting

Typical UK TSR Performance vs. comparator group of 18 companies Heritage practice

3rd place (the Upper Decile) and above 100% 100%4th place 80% 100%5th place (the Upper Quartile) 50% 100%6th place 30% 85%7th place 0% 70%8th place 0% 55%9th place 0% 40%10th place (the Median) 0% 25%Below 10th place 0% 0%

Long-term incentive award levels have been set with reference to the upper quartile of the Company’s comparator groups. However, the vesting schedule is designed to only deliver the whole value of the award for truly exceptional performance, at a standard higher than that which is normal for the UK. The additional performance condition, requiring the share price to increase by 20% or more, is also above and beyond what is common in both the UK and Canada.

In the light of the performance conditions described above, the Remuneration Committee believes that the award levels, which reflect the equivalent of annual awards for three years, are appropriate for the Executive Directors because:

a one-off award provides better alignment of the Executive >Directors with current and potential shareholders following the Company’s reorganisation and listing on the Main Market of the LSE than would annual rolling awards;a one-off award encourages sustained performance over the first >three key years following the Company’s listing in London. Annual awards can have the effect of encouraging “staggered” or “delayed” performance, e.g. not maximising investments and performance as soon as possible in any given year so as to ensure that new awards benefit from any uplift such investments and performance will create. The Remuneration Committee believes that it is in the best interest of shareholders for maximum value to be accrued as soon as possible;a one-off award covering three years of annual grant provides a >greater retentive effect than annual grants and ensures continuity in management following the Company’s listing in London; andwhilst the Remuneration Committee is keen to move to UK >standard annual grant patterns as soon as practicable, provided to do so is in the best interests of shareholders, providing a one-off award equivalent to three years of annual awards counterbalances the Remuneration Committee’s decision to remove annual vesting for long-term incentives, replacing it with a three year vesting period and an additional one year holding period.

The comparator group companies were selected on the basis of their size and scale of operations, market capitalisation and geographic spread. The original comparator group comprised the following companies:

Aminex plc Imperial Energy plc Premier Oil plc Bowleven plc JKX Oil and Gas plc SOCO International plc Dana Petroleum plc Mariner Energy Inc. Stone Energy Corp.Dominion Resources McMoran Exploration Swift Energy Co.Inc. Co.Gulf Keystone Melrose Resources Tullow Oil plcPetroleum Ltd. plcHunting plc Oilexco Inc. Venture Production plc

It is not planned to make any further awards to existing members of the LTIP scheme before 2011, although awards may be made to new senior members of staff between 2009 and 2011.

2008 Replacement Share Option SchemeHeritage Oil Corporation (“HOC”) implemented The Heritage Oil Corporation Plan (“the Original Plan”) following approval by its shareholders in 2004 and granted options under the Original Plan to its Executive and Non-Executive Directors and other employees and consultants at that time. The grant of options included all the then current Executive and Non-Executive Board members and so excluded General Sir Michael Wilkes and Salim Macki. As a result of the Group reorganisation and subsequent listing on the Main Market of the LSE, all the Board members were entitled to retain their options under the Original Plan and exchange them for options to acquire ten Ordinary Shares of the Company for every one Common Share they held under option. The Original Plan was then cancelled and on 18 March 2008, the Company adopted The Heritage Oil Limited 2008 Replacement Share Option Scheme (“Replacement Scheme”) which is substantially in the same form as the Original Plan. The purpose of the Replacement Scheme is to act as a replacement to the Original Plan and to honour the options granted under it by granting holders the option to purchase Ordinary Shares. The Replacement Scheme is administered by the Board and no further options will be granted under it.

The maximum number of Ordinary Shares which may be issued under the Replacement Scheme was 24,545,340, being the equivalent number of shares required to replace the options granted under the Original Plan that were still in existence prior to their cancellation.

All options under the Replacement Scheme have now vested and the Company will not grant any further options under this scheme.

Pensions Executive Directors receive pension contributions of an annual amount equal to 10% of their base package into a personal pension scheme nominated by the executive.

Other Benefits The Company’s policy is to provide Executive Directors with private medical insurance, life insurance and school fees for dependents but no other benefits in kind which would be typical in the UK. In addition, both Executive Directors are entitled to allowances of £100,000 (Anthony Buckingham) and £77,500 (Paul Atherton) to cover their living expenses.


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Shareholding Guidelines At present the Committee has not established formal Executive Director shareholding guidelines as, in the opinion of the Committee, these would be superfluous at this time. The Executive Directors hold a substantial number of shares in the Company and have interests in shares under various share incentive arrangements as shown in the table below:

Anthony Buckingham Paul Atherton

Shares held 84,540,340 1,140,000Shares vested under the 2008Replacement Scheme yet to be exercised 10,129,510 2,875,000

Interest in shares under the 2008 LTIP 2,347,826 1,159,420

Total 97,017,676 5,174,420

Notional value of shares at year end, £1 422,997,067 22,560,471

Total value as a multiple of base package 626 times 45 times

1 The full vesting of 2008 LTIP and share options is assumed. Cost of exercise is £14,520,199 for Anthony Buckingham and £3,433,750 for Paul Atherton.

Service AgreementsThe Executive Directors’ service agreements with the Company are for no fixed term. In normal circumstances, the agreements may be terminated by the Company giving no less than 24 months notice and the Director giving six months’ notice. These arrangements were in place during their time as Executive Directors of HOC and were inherited by the Company. The Board feels that these notice periods were appropriate to recruit and retain the Executive Directors. The Board recognises that these arrangements are not in line with current UK market practice. The Company has discussed the Executive Director employment contracts with external advisers and internally within the Remuneration Committee. After taking these views into consideration, the Company has decided, for commercial reasons, to retain the existing Executive Director notice period structure because of their importance to the business at this stage in its development. We believe that this policy protects the interests of our shareholders.

Executive Director Date of Unexpired Notice Period Notice Period Contract Term by Company by Director

Anthony 28 March Rolling 24 months 6 monthsBuckingham 2008 Contract

Paul Atherton 28 March Rolling 24 months 6 months 2008 Contract

In the event of a change of control of the Company, if the Executive Directors resign or the Company terminates their appointment within 24 months of such an event, they will each be entitled to an immediate payment in lieu of notice of a sum equivalent to three times their annual base package. In addition, they will be entitled to a payment of Cdn$75,000 in the event they are asked to resign from the Board of HOC in any event other than as a result of a change of control. The Company also may terminate the agreements and make payments in lieu of notice.

Currently the Executive Directors’ service contracts do not provide for mitigation in the event of early termination. The Executive Directors do not have service contracts with any Group subsidiary.

Non-Executive Directors The Non-Executive Directors do not have service contracts but their terms are set out in a letter of appointment. Their terms of appointment may be terminated by each party giving three months notice in writing. Michael Hibberd and Gregory Turnbull will be entitled to a change of control bonus of Cdn$75,000 plus a pro-rata amount of their previous year’s bonus multiplied by a share price performance factor in the event that HOC changes control.

The remuneration of Non-Executive Directors is a matter for the Chairman and the Executive members of the Board. The Company’s policy is to set levels for Non-Executive Directors’ remuneration so as to ensure that they are sufficient to attract, retain and motivate high quality directors.

Non-Executive Directors’ annual basic fee levels for 2009 and 2010 are set out below. Actual fees paid for the year ended 31 December 2009 are shown in the Directors’ Emoluments table on page 60.

2010 2009

Michael Hibberd £120,000 £80,000Salim Macki £80,000 £80,000General Sir Michael Wilkes £80,000 £80,000Gregory Turnbull £80,000 £50,000John McLeod £80,000 £50,000Additional fee for each day worked in excess of the agreed 20 days per annum1 £2,000 £2,000

1 In 2009 each Non-Executive Director received further fees in respect of an additional ten days worked due to the aborted transaction.

With the exception of General Sir Michael Wilkes and Salim Macki, all of the Non-Executive Directors will be entitled to a payment of Cdn$75,000 in the event they are asked to resign from the Board of HOC in any event other than as a result of a change of control. General Sir Michael Wilkes received a payment of £50,000 on joining the Board of the Company. No other Director received this form of payment on joining the Board of the Company.

During 2009, Michael Hibberd, Gregory Turnbull and John McLeod received fees of Cdn$22,500 per annum from HOC for acting as Directors of that company. From 2010, the annual fees paid by Heritage Oil Plc are reduced by the monthly fees paid by HOC.

Terms of appointment and re-appointment are set out below:

Subsequent Date of Notice Initial Term of term of Non-Executive Director Contract Period Appointment appointment

Michael Hibberd 28 March 2008 3 months 2010 AGM 3 yearsGregory Turnbull 28 March 2008 3 months 2009 AGM 3 yearsJohn McLeod 28 March 2008 3 months 2009 AGM 3 yearsGeneral Sir Michael Wilkes 28 March 2008 3 months 2011 AGM 3 years

Salim Macki 12 August 2008 3 months 2009 AGM 3 years

Non-Executive Directors do not participate in the Company’s pension arrangements. Although they have previously received grants of options, they will not receive any further grants or participate in any other long-term incentive arrangements.

0

50

100

150

200

250

31/12/200931/03/200931/03/2008

—— Heritage Oil —— FTSE 250

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Performance GraphThe following graph shows the Company’s TSR since trading of the Company’s shares began on the LSE on 31 March 2008 against the FTSE 250 Index. The Remuneration Committee has selected the FTSE 250 Index as it represents a broad equity market index of which the Company forms a part of and therefore provides a good indication of the Company’s general performance.

Directors’ Emoluments for the year ended 31 December 2009

Annual 2009 2009 20082 2008 Base Package/Fees Benefits1 Bonus Total Pensions Total Pensions £000 £000 £000 £000 £000 £000 £000

Executive Directors Anthony Buckingham 675.0 141.3 1,012.5 1,828.8 67.5 1,109.8 50.6Paul Atherton 500.0 152.7 750.0 1,402.7 50.0 877.4 37.5Non-Executive DirectorsMichael Hibberd3 112.6 – – 112.6 – 94.9 –Gregory Turnbull3 82.6 – – 82.6 – 66.4 –John McLeod3, 4 82.6 – – 82.6 – 67.4 –General Sir Michael Wilkes 100.0 – – 100.0 – 116.7 –Salim Macki 100.0 – – 100.0 – 31.8 –

Total 1,652.8 294.0 1,762.5 3,709.3 117.5 2,364.4 88.1

1 Shows the taxable value of benefits, comprising private medical insurance, life insurance and school fees. The figures also include living allowances of £100,000 (Anthony Buckingham) and £77,500 (Paul Atherton) but exclude pension contributions.

2 The Directors became entitled to emoluments payable by the Company from 28 March 2008. Prior to this date, the Directors were only entitled to emoluments payable by HOC which was then the parent company of the Group.

3 During 2009 Michael Hibberd, Gregory Turnbull and John McLeod also received fees of Cdn$22,500 paid by HOC as Directors of that company. These fees have been included in the above table.

4 The Non-Executive Directors charged an additional ten days time in 2009 for additional work incurred in connection with an aborted transaction.

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Performance Shares Conditional awards of performance shares were granted to Executive Directors on 19 June 2008 under the LTIP, subsequent to the Plan’s approval at the Company’s AGM that year, as shown below.

Executive Directors’ Interests in Performance Shares

As at 31 December 2009

Earliest Share price Number of vesting at date Director shares date of grant

Anthony Buckingham 2,347,826 18 June 2011 345pPaul Atherton 1,159,420 18 June 2011 345p

The table below sets out the direct and indirect interests of the Directors in the share capital of the Company as at 29 April 2010:

Percentage of Number of Voting ShareDirector Ordinary Shares1 Capital

Michael Hibberd 125,000 0.04%Anthony Buckingham2 84,540,340 29.4%Paul Atherton 1,140,000 0.4%Gregory Turnbull 350,070 0.12%John McLeod 20,000 0.01%General Sir Michael Wilkes 0 0%Salim Macki 138,752 0.05%

1 Includes Exchangeable Shares.2 Anthony Buckingham’s Ordinary Shares include the Ordinary Shares held by Albion as at the date of this document, a company owned and controlled by Anthony Buckingham.

Directors’ Interests in Share Options held under the Replacement SchemeAs at 31 December 2009

At December Options At December Director At Date of Grant 2008 Exercised 2009 Exercise Prices Vesting Periods Expiry Date

Michael Hibberd 150,000 150,000 150,000 £0.81 23 Jun 06–23 Jun 08 23 Jun 11 750,000 750,000 750,000 £1.43 14 Dec 06–14 Dec 08 14 Dec 11 250,000 250,000 250,000 £2.45 21 Dec 07–21 Dec 09 21 Dec 12Anthony Buckingham 500,000 500,000 500,000 £0.48 30 May 05–30 May 07 30 May 10 9,129,510 9,129,510 9,129,510 £1.43 14 Dec 06–14 Dec 08 14 Dec 11 500,000 500,000 500,000 £2.45 21 Dec 07–21 Dec 09 21 Dec 12Paul Atherton 1,250,000 1,250,000 1,250,000 £0.48 20 May 05–20 May 07 20 May 10 1,125,000 1,125,000 1,125,000 £1.43 14 Dec 06–14 Dec 08 14 Dec 11 500,000 500,000 500,000 £2.45 21 Dec 07–21 Dec 09 21 Dec 12Gregory Turnbull 150,000 150,000 150,000 £0.48 20 May 05–20 May 07 20 May 10 300,000 300,000 300,000 £1.43 14 Dec 06–14 Dec 08 14 Dec 11 150,000 150,000 150,000 £2.45 21 Dec 07–21 Dec 09 21 Dec 12John McLeod 100,000 – – £0.48 20 May 05–20 May 07 20 May 10 300,000 300,000 50,000 250,000 £1.43 14 Dec 06–14 Dec 08 14 Dec 11 150,000 150,000 150,000 £2.45 21 Dec 07–21 Dec 09 21 Dec 12

Note: The final exercise prices were converted into pounds sterling on the Company’s reorganisation and listing on the Main Market of the LSE using the exchange rate in effect on that date.

No options were granted or lapsed during the year, but 50,000 options were exercised at a price of £1.43 per Ordinary Share.

The closing share price on 31 December 2009 was £4.36. During the year the highest closing share price was £6.03 and the lowest was £1.62.

This report was approved by the Board on 29 April 2010 and signed on its behalf by:

John McLeodChairman of the Remuneration Committee29 April 2010

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Directors’ Report

Corporate Governance StatementIn accordance with the Financial Services Authority’s Disclosure and Transparency Rules (“DTR”) 7.2.1, the disclosures required by DTR 7.2.2R to DTR 7.2.7 may be found in the Corporate Governance Report on pages 48 to 54.

Results and Dividends The Group’s financial statements for the year ended 31 December 2009 are set out on pages 68 to 98.

The proposed disposal of the Ugandan interests is expected to complete within the first half of 2010. After completion of the transaction, Heritage will have the financial flexibility to consider various options to create further shareholder value and will also consider returning a portion of the transaction proceeds to shareholders via a special dividend, which could be in the range of £0.75 to £1.00 per share. The Company has not declared or paid any other dividends since incorporation and the Company does not have any current intentions to pay further dividends in the foreseeable future. Future payments of dividends are expected to depend on the earnings and financial condition of the Company and such other factors as the Board of Directors of the Company consider appropriate.

DirectorsThe Directors of the Company as at 31 December 2009 are listed below. They all served as Directors throughout 2009 and up to the date of signing the financial statements.

Appointment Dates

Michael Hibberd (Chairman) 18 March 2008

Anthony Buckingham (Chief Executive Officer) 25 February 2008

Paul Atherton (Chief Financial Officer) 6 February 2008

Gregory Turnbull 18 March 2008

Salim Macki 12 August 2008

John McLeod 18 March 2008

General Sir Michael Wilkes 18 March 2008

Biographical details of all Directors can be found on page 47.

With the exception of General Sir Michael Wilkes and Salim Macki, all the Directors were previously, and continue to be, Directors of HOC.

Directors’ Election and RotationWith regard to retirement and re-election of Directors, the Company is governed by its Articles of Association (the “Articles”), the Combined Code and the Jersey Companies Law. Directors have the power to appoint a Director during the year but any person so appointed must stand for election at the next AGM. It is the Company’s policy that all Directors should retire and stand for re-election at least once every three years. A retiring Director is eligible to stand for re-election.

In accordance with the above provisions, Michael Hibberd and Paul Atherton will retire and, being eligible, offer themselves for re-election at the next AGM.

Powers of the DirectorsSubject to the Company’s Articles, relevant statutory law and any direction that may be given by the Company in general meeting, the business of the Company is managed by the Directors who may exercise all powers of the Company.

The Directors of the Company submit their report together with the consolidated audited financial statements for the year ended 31 December 2009 for the Company and the Group.

The Company was incorporated as Heritage Oil Limited on 6 February 2008 in Jersey under the Companies (Jersey) Law 1991, as amended (the “Jersey Companies Law”) to become the ultimate holding company of the Group. Heritage Oil Limited changed its name to Heritage Oil Plc on 18 June 2009. HOC is a wholly owned subsidiary of the Company.

The Company has had a Premium Listing on the Main Market of the LSE since March 2008. The Group has two share classes traded; Ordinary Shares issued by the Company which trade on the Main Market of the LSE and Exchangeable Shares issued by HOC which trade both on the Main Market of the LSE and on the TSX. The Company is a member of the FTSE 250 Index.

Principal ActivitiesThe Group is an independent, international oil and gas exploration, development and production company with a focus on Africa, the Middle East and Russia. It has exploration projects in Kurdistan, the DRC, Malta, Pakistan, Tanzania and Mali, and a producing property in Russia. The Group operates through a number of subsidiaries which are set out on page 76.

Business ReviewThe Business Review includes the financial performance during the financial year, future developments, performance of the Group and principal risks and uncertainties. A review of the business is incorporated by reference, forming part of this Directors’ Report, and further information can be found in the pages below:

Chairman’s Statement on pages 8 to 9; >The Chief Executive’s Statement on pages 12 to 13; >Operations Review on pages 18 to 29; >Financial Review on pages 30 to 37; and >Corporate Social Responsibility Review on pages 38 to 43. >

The cautionary statement concerning “forward-looking statements” on page 33 of this Annual Report forms part of this Annual Report and is incorporated by reference into the Business Review.

In addition, the Company has published a separate CSR report to be sent to shareholders with this Annual Report.

Key Performance IndicatorsHeritage uses a number of financial and operating Key Performance Indicators (“KPIs”) against which it monitors performance. These KPIs will continue to be developed as the Company’s operations evolve.

2009 2008

LTIFR1 0.00 0.03

Staff turnover 3% 3%

Production from continuing operations2 -13% +80%

Reserves and Resources additions3 +103% +272%

Average realised price -35% +5%

1 Lost Time Injury Frequency Rate per 10,000 hours worked.2 Excludes production from Block 8, Oman which was sold in April 2009.3 Management estimates.

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Directors’ Indemnity ProvisionsUnder the Company’s Articles, Directors are indemnified out of the assets of the Company against any loss or liability incurred by reasons of having been a Director of the Company.

Share CapitalCapital Structure The Company has two classes of shares, namely the Ordinary Shares and the special voting share (the “Special Voting Share”).

The Ordinary Shares and the Special Voting Share carry no right to fixed income. The Ordinary Shares have a right to one vote for every share at general meetings whilst the holders of Exchangeable Shares have rights through the Special Voting Share held by the trustee of the Voting and Exchange Trust to one vote at general meetings for every Exchangeable Share on the same basis as if they had exchanged them for Ordinary Shares. For clarity, the Voting and Exchange Trust is a Canadian Trust that holds the Special Voting Share for the benefit of the registered holders of the Exchangeable Shares pursuant to the terms of a Voting and Exchange Trust Agreement dated 27 February 2008 as amended 24 April 2008.

Details of how to vote and deadlines for exercising voting rights are set out in the Notice of AGM.

Subject to the Articles, any member may transfer certificated shares by an instrument of transfer in writing in any usual form or in any other form acceptable to the Directors. Directors may refuse to register any transfer of certificated shares which are not fully paid or where the register of transfer is not in the acceptable form.

The issued share capital of the Company and total voting rights of the Company as at 29 April 2010 are as follows:

284,842,830 Ordinary Shares of the Company are issued and >outstanding, which constitutes 98.9% of the total voting rights of the Company; and3,024,108 Exchangeable Shares of HOC each carrying one voting >right in the Company, are issued and outstanding, which constitutes 1.1% of the total voting rights of the Company.

The Executive Directors’ interests in the Ordinary Shares, Exchangeable Shares, options granted under the employee share scheme and interests in the LTIP are set out in the Directors’ Remuneration Report on page 59.

Repurchase of SharesAs approved at the General Meeting held on 25 January 2010, the Company may make market purchases of its own shares. Any shares which have been so purchased may be held as treasury shares or cancelled immediately upon completion of the purchase.

The Company did not purchase any of its own shares during 2009 or in 2010 up to 29 April 2010, being the date of this report.

Major ShareholdersIn accordance with DTR 5, the shareholders listed on the following table have notified the Company of their interests in the Ordinary Shares of the Company as at 29 April 2010:

OrdinaryName Shares held % Held1

Albion Energy Limited2 84,540,340 29.4

Capital Research and Management Company 31,920,045 11.1

Lansdowne Partners Limited 28,776,161 10.0

Harrier Holdings Ltd re LCAM 9,903,861 3.44

1 Includes voting rights attaching to the Special Voting Share as well as the Ordinary Shares.

2 Number of Ordinary Shares held by both Albion Energy Limited and Anthony Buckingham.

Albion and Anthony Buckingham entered into the Relationship Agreement as part of the listing on the Main Market of the LSE. The purpose of the Relationship Agreement is to ensure that transactions and relationships between the Group, Albion and Anthony Buckingham are at arm’s length and on normal commercial terms.

Annual General MeetingThe AGM will be held at 22 Grenville Street, St Helier, JE4 8PX, Jersey, Channel Islands on 17 June 2010. Formal notice of the AGM including details of special business will be set out in the Notice of AGM and will be available on the Company’s website at www.heritageoilplc.com.

RegistrarThe Company’s share registrar is Computershare Investor Services (Channel Islands) Limited of Ordnance House, 31 Pier Road, St Helier, JE4 8PW, Jersey, Channel Islands.

Creditors’ Payment PolicyIt is the Company and Group’s policy to settle all debts with creditors on a timely basis and in accordance with the terms of credit agreed with each supplier. Average creditor payment days for the period under review were approximately 45 days.

Employees The Company is committed to equal opportunity in recruitment, promotion and employment. During 2009, the average number of employees for the Group (including full-time contractors, consultants and Directors) based in the following locations was:

Jersey 3

Canada 5

Russia 40

Europe 27

Uganda 48

Kurdistan 23

Tanzania 10

South Africa 8

Total 164

Political and Charitable DonationsThe Company made charitable, social and community-related donations during the year totalling $334,526 (2008 – $355,997). The Group has undertaken a wide range of community schemes, including public health, education, environment, public facility and community relations based programmes further details of which can be found on pages 38 to 43 and also in the separate CSR

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report accompanying this Annual Report. In line with Group policy, no political donations were made during 2009.

Change of Control AgreementsThe Company confirms that there are no significant agreements to which it is party that would take effect, alter or terminate upon a change of control following a takeover bid except those disclosed below:

the Executive Directors’ service contracts contain certain >provisions in relation to change of control as disclosed in the Remuneration Report;the LTIP rules contain a provision whereby in the event of a >change of control all awards will vest in their entirety subject to the achievement or otherwise of the performance conditions;on 16 February 2007, HOC issued 1,650 $100,000 convertible >bonds at par to raise $165,000,000 by way of a private placement. Issue costs amounted to $6,979,268 resulting in net proceeds of $158,020,732. The bonds at par have a maturity of five years and one day and an annual coupon of 8.00%. The bondholders had the right to convert the bonds into Ordinary Shares at a price of $4.70 per share. As at 29 April 2010, $37,900,000 of bonds have converted, leaving 1,271 $100,000 convertible bonds outstanding; andbondholders have a put option requiring the Company to redeem >the bonds at par, plus accrued interest, in the event of a change of control of the Company, together with an additional cash payment of up to $19,700 on each $100,000 bond. The amount of additional payment depends upon the date of redemption and market value of the Company’s Ordinary Shares at the date of any change of control event.

Important Events Subsequent to the Year EndEvents since the balance sheet date are summarised in note 25 to the financial statements on page 98.

Audit and Auditors Directors who held office at the date of approval of this Directors’ Report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s Auditors are unaware; and each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Company’s Auditors are aware of that information.

Having reviewed the independence and effectiveness of the Auditors, the Audit Committee has recommended to the Board that the existing Auditors, KPMG Audit Plc be reappointed. KPMG Audit Plc has expressed their willingness to continue as Auditors. An ordinary resolution to reappoint KPMG Audit Plc as auditors of the Company and authorising the Directors to set their remuneration will be proposed at the forthcoming AGM.

Financial Risks and Financial InstrumentsInformation on financial risk management, including credit and liquidity risks and information about financial instruments is set out in the financial review on pages 34 to 36 and the notes to the financial statements on pages 83 to 84 respectively.

Going Concern After making due enquiries, the Directors have made an informed judgement at the time of approving the Financial Statements, that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. In making this assessment they have considered the Company

and Group budgets, the cash flow forecasts and reviewed the availability of banking facilities. For this reason, the Directors continue to adopt the going concern basis in preparing the Financial Statements.

Statement of Directors’ ResponsibilitiesThe Directors are responsible for preparing the Annual Report and the financial statements for the Group in accordance with applicable Jersey law and regulations.

Company law requires the Directors to prepare Group financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”) and applicable law.

The Group financial statements are required by law and IFRS as adopted by the EU to present fairly the financial position of the Group and the performance for that period.

In preparing the 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, other events and conditions on the entity’s financial position and financial performance;state whether they have been prepared in accordance with IFRS >as adopted by the EU; andprepare the financial statements on a going concern basis unless, >having assessed the ability of the Company to continue as a going concern, it is inappropriate to presume the Company will continue in business.

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that its financial statements comply with the Companies (Jersey) Law 1991. They have general responsibility for taking such steps as are reasonably open to them for safeguarding the assets of the Group and to prevent and detect fraud and other irregularities.

Under applicable law, regulations and listing rule requirements, the Directors are also responsible for the preparation of a Directors’ Report, Remuneration Report and Corporate Governance Statement.

The Directors are responsible for the maintenance and integrity of the statutory and audited information on the Company’s website. Jersey legislation and United Kingdom regulation, governing the preparation and dissemination of financial statements, may differ from requirements in other jurisdictions.

Approved by the Board on 29 April 2010

Anthony BuckinghamChief Executive Officer29 April 2010

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Responsibility Statement of the Directors

We confirm on behalf of the Board that to the best of our knowledge:

(a) the financial statements prepared in accordance with the applicable accounting standards give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

(b) the management report (which is incorporated within the Chairman’s statement, Chief Executive’s Review, Operations Review, Financial Review and CSR report on pages 8 to 43) includes a fair review of the development and performance of the business, the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

For and on behalf of the Board

Michael J. Hibberd Paul AthertonChairman Chief Financial Officer29 April 2010 29 April 2010

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FINANCIAL STATEMENTS68 Independent Auditors’ Report to

the Members of Heritage Oil Plc70 Consolidated Income Statement71 Consolidated Statement of

Comprehensive Income72 Consolidated Balance Sheet73 Consolidated Statement of

Changes in Equity – 200974 Consolidated Statement of

Changes in Equity – 200875 Consolidated Cash Flow Statement76 Notes to Consolidated Financial

Statements

Drilling rig at Miran West-1, Kurdistan

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Independent Auditors’ Report to the Members of Heritage Oil Plc

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We have audited the Group financial statements of Heritage Oil Plc for the year ended 31 December 2009 which comprise the consolidated income statement, consolidated statement of comprehensive income, consolidated balance sheet, consolidated statement of changes in equity, consolidated cash flow statement and the related notes. These financial statements have been prepared under the accounting policies set out therein.

This report is made solely to the Company’s members, as a body, in accordance with Article 110 of the Companies (Jersey) Law 1991, and in respect of reporting on the Corporate Governance Report, on terms that have been agreed. 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 auditor’s report and, in respect of reporting on the Corporate Governance Report, those matters that we have agreed to state to them in our 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 auditorsAs described in the Statement of Directors’ Responsibilities on page 64, the Company’s Directors are responsible for preparation of the financial statements in accordance with applicable law and International Financial Reporting Standards (“IFRS”) as adopted by the European Union.

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

We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies (Jersey) Law 1991. We also report to you if, in our opinion, the Company has not kept proper accounting records or if we have not received all the information and explanations we require for our audit.

In addition to our audit of the financial statements, the Directors have engaged us to review their Corporate Governance Statement as if the Company were required to comply with the Listing Rules of the Financial Services Authority applicable to companies incorporated in the UK in relation to those matters. We review whether the Corporate Governance Statement reflects the Company’s compliance with the nine provisions of the Combined Code on Corporate Governance published in 2008 specified for our review by those rules, and we report if it does not. We are not required by the terms of our engagement to consider whether the Board’s statements on internal control cover all risks and controls, or to form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures.

We read the Directors’ Report and other information accompanying the financial statements and consider the implications for our report if we become aware of any apparent misstatements within it.

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 financial statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the 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 financial statements are free from material misstatement, 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 financial statements.

OpinionIn our opinion:

the Group financial statements give a true and fair view, in accordance with International Financial Reporting Standards as adopted by >the European Union, of the state of the Group’s affairs as at 31 December 2009 and of its loss for the year then ended; andthe financial statements have been properly prepared in accordance with the Companies (Jersey) Law 1991. >

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Matters on which we are required to report by exception under the terms of our engagementWe have nothing to report in respect of the following:

In addition to our audit of the financial statements, the Directors have engaged us to review their Corporate Governance Statement as if the Company were required to comply with the Listing Rules applicable to companies incorporated in the UK in relation to those matters. Under the terms of our engagement we are required to review:

the Directors’ statement, set out on page 64, in relation to going concern; and >the part of the Corporate Governance Statement on pages 48 to 54 relating to the Company’s compliance with the nine provisions of the >Combined Code on Corporate Governance published in 2008 specified for our review.

Jimmy Daboofor and on behalf of KPMG Audit PlcChartered Accountants

29 April 2010

Consolidated Income StatementYears ended 31 December 2009 and 2008

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Restated1 2009 2008 $ $

Revenue

Petroleum 2,704,987 3,836,991ExpensesPetroleum operating (1,492,597) (1,652,766)Production tax (1,304,255) (2,618,806)General and administrative (18,676,326) (21,032,142)Corporate reorganisation and subsequent listing costs – (9,654,622)Aborted acquisition expenses (7,142,335) –Depletion, depreciation and amortisation (1,710,123) (2,085,481)Exploration expenditures (note 2f) (201,571) (786,398)Impairment of property, plant and equipment (note 11) (2,933,374) (749,955)

Operating loss (30,755,594) (34,743,179)

Finance income (costs)Interest income 563,633 3,954,749Gain on derivative financial liability relating to convertible bonds (note 2b) – 6,098,240Other finance costs (note 7) (4,329,065) (11,257,187)Impairment of investment in unlisted securities (note 12) (2,352,825) –Foreign exchange losses (1,009,783) (5,648,179)Unrealised gain/(loss) on other financial assets (note 12) 1,046,724 (1,713,700)

(6,081,316) (8,566,077)

Loss from continuing operations (36,836,910) (43,309,256)

Loss on disposal of discontinued operations (note 6) (2,509,977) –Loss from discontinued operations (note 6) – (2,850,270)

Loss from discontinued operations (2,509,977) (2,850,270)

Net loss for the year attributable to owners of the Company (39,346,887) (46,159,526)

1 See change in accounting policies (note 2b) and discontinued operations (note 6).

The notes are an integral part of these consolidated financial statements.

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Restated1 2009 2008 $ $

Loss for the year (39,346,887) (46,159,526)Other comprehensive lossExchange differences on translation of foreign operations (note 19) (594,962) (651,365)Cumulative gains on available for sale investments transferred to income statement on impairment

of investments (168,000) –

Other comprehensive loss, net of income tax (762,962) (651,365)

Total comprehensive loss for the year (40,109,849) (46,810,891)

Attributable to:Owners of the Company (40,109,849) (46,810,891)

Net loss per share from continuing operationsBasic and diluted (0.13) (0.17)

Net loss per share from discontinued operationsBasic and diluted (0.01) (0.01)

Net loss per shareBasic and diluted (0.14) (0.18)

The total comprehensive loss for the year of $40,109,849 (2008 – $46,810,891) includes a loss of $2,509,977 (2008 – $2,850,270) from discontinued operations (note 6).



Consolidated Balance SheetAs at 31 December 2009 and 2008

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Restated1 2009 2008 $ $

ASSETSNon-current assetsIntangible exploration assets (note 10) 121,278,468 211,346,037Property, plant and equipment (note 11) 59,297,735 88,039,218Other financial assets (note 12) 1,154,225 3,330,501

181,730,428 302,715,756

Current assetsInventories 12,969 395,109Prepaid expenses 568,166 664,759Assets of a disposal group classified as held for sale (note 6) 163,414,518 –Trade and other receivables (note 13) 2,203,707 6,901,511Cash and cash equivalents (note 14) 208,094,355 90,620,385

374,293,715 98,581,764

556,024,143 401,297,520

LIABILITIESCurrent liabilitiesLiabilities of a disposal group classified as held for sale (note 6) 12,558,727 –Trade and other payables (note 15) 23,278,030 54,751,768Borrowings (note 16) 615,892 595,418

36,452,649 55,347,186

Non-current liabilitiesBorrowings (note 16) 129,553,752 155,609,982Provisions (note 17) 355,073 719,808

129,908,825 156,329,790

166,361,474 211,676,976

Net Assets 389,662,669 189,620,544

SHAREHOLDERS’ EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANYShare capital (note 18) 460,279,555 218,283,881Reserves 82,546,697 85,153,359Retained deficit (153,163,583) (113,816,696)

389,662,669 189,620,544

1 See change in accounting policies (note 2b).


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Available- Foreign for-sale currency investments Share-based Equity portion translation revaluation payments Retained of convertible Share Capital reserve reserve reserve deficit debt Total equity $ $ $ $ $ $ $

Balance at 1 January 2009(as restated1) 218,283,881 (220,784) 168,000 54,564,393 (113,816,696) 30,641,750 189,620,544

Total comprehensive income for the year

Loss for the year – – – – (39,346,887) – (39,346,887)Other comprehensive lossExchange differences on

translation of foreign operations – (594,962) – – – – (594,962)Cumulative gains on available

for sale investments transferred to income statement on impairment of investments – – (168,000) – – – (168,000)

Total other comprehensive loss – (594,962) (168,000) – – – (762,962)

Total comprehensive loss for the year – (594,962) (168,000) – (39,346,887) – (40,109,849)

Transactions with owners, recorded directly in equity

Contributions by and distributions to owners

Issue of shares, net 205,028,335 – – – – – 205,028,335Issue of shares on conversion

of bonds 34,199,616 – – – – (5,992,595) 28,207,021Share-based payment

transactions and exercise of share options (note 18) 2,767,723 – – 4,148,895 – – 6,916,618

Total transactions withowners 241,995,674 – – 4,148,895 – (5,992,595) 240,151,974

Balance at 31 December 2009 460,279,555 (815,746) – 58,713,288 (153,163,583) 24,649,155 389,662,669

1 See change in accounting policies (note 2b) and discontinued operations (note 6). As at 31 December 2008, the equity portion of convertible debt was previously stated as nil and retained deficit was previously stated at $108,960,421.


Consolidated Statement of Changes in EquityYear ended 31 December 2008

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Available- Foreign for-sale currency investments Share-based Equity portion translation revaluation payments Retained of convertible Share Capital reserve reserve reserve deficit debt Total equity $ $ $ $ $ $ $

Balance at 1 January 2008 217,672,243 430,580 168,000 42,579,779 (67,657,170) – 193,193,432Total comprehensive

income for the yearLoss for the year – – – – (46,159,526) – (46,159,526)Other comprehensive lossExchange differences on

translation of foreign operations – (651,364) – – – – (651,364)Net change in fair value of

available for sale financial assets – – – – – – –Total other comprehensive loss – (651,364) – – – – (651,364)

Total comprehensive loss for the year – (651,364) – – (46,159,526) – (46,810,890)

Transactions with owners, recorded directly in equity

Contributions by and distributions to owners

Issue of shares, net 83 – – – – – 83Share-based payment

transactions and exercise of share options (note 18) 611,555 – – 11,984,614 – – 12,596,169

Recognition of equity portion of convertible bonds – – – – – 30,641,750 30,641,750

Total transactions with owners 611,638 – – 11,984,614 – 30,641,750 43,238,002

Balance at 31 December 2008 (as restated1) 218,283,881 (220,784) 168,000 54,564,393 (113,816,696) 30,641,750 189,620,544

1 See change in accounting policies (note 2b) and discontinued operations (note 6). As at 31 December 2008, the equity portion of convertible debt was previously stated as nil and retained deficit was previously stated at $108,960,421.


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Restated1 2009 2008 $ $

Cash Provided by (used in) Operating ActivitiesNet loss from continuing operations for the year (36,836,910) (43,309,256)Items not affecting cash Depletion, depreciation and amortisation 1,710,123 2,085,481 Finance costs – accretion expenses 4,163,407 4,183,874 Foreign exchange (gains)/losses (1,333,051) 320,580 Share-based compensation 3,206,848 7,595,542 Gains on derivative financial liability – (6,098,240) Gain on other financial assets (1,046,724) 1,713,700 Impairment of property, plant and equipment 2,933,374 749,955 Impairment of investment in unlisted securities 2,352,825 – (Increase)/decrease in trade and other receivables (333,817) 1,003,352 (Increase)/decrease in prepaid expenses 96,593 (217,488) (Increase)/decrease in inventory 316,858 (330,283) Increase/(decrease) in trade and other payables 4,092,413 (1,432,138)

Continuing operations (20,678,061) (33,734,921) Discontinued operations – 928,722

(20,678,061) (32,806,199)

InvestingExercise of third party back-in rights for Miran (note 10) 6,737,635 –Property, plant and equipment expenditures (3,889,675) (14,588,292)Intangible exploration expenditures (49,642,876) (40,403,265)

(46,794,916) (54,991,557)Discontinued operationsNet consideration on disposal 28,198,780 –Property, plant and equipment expenditures and intangible exploration expenditures (50,613,067) (48,227,622)

(69,209,203) (103,219,179)

FinancingShares issued for cash 216,848,944 83Shares issued for cash, proceeds from exercise of options 1,647,110 361,454Shares issue costs (11,820,609) –Repayment of long-term debt (604,483) (616,118)

206,070,962 (254,581)

Increase/(decrease) in cash and cash equivalents 116,183,698 (136,279,959)Cash and cash equivalents – beginning of year 90,620,385 230,089,323Foreign exchange gain/(loss) on cash held in foreign currency 1,290,272 (3,188,979)

Cash and cash equivalents – end of year 208,094,355 90,620,385

Non-Cash Investing and Financing Activities (note 24)Supplementary informationThe following have been included within cash flows for the year under operating and investing activities Interest received 593,244 3,152,480 Interest paid 11,737,678 6,876,764 Corporate reorganisation and subsequent listing costs – 9,654,622 Aborted acquisition expenses 6,342,335 –



Notes to Consolidated Financial Statements

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1 Reporting EntityHeritage Oil Plc (the “Company”) was incorporated under the Companies (Jersey) Law 1991 (as amended) on 6 February 2008 as Heritage Oil Limited. The Company changed its name to Heritage Oil Plc on 18 June 2009. Its primary business activity is the exploration, development and production of petroleum and natural gas in Africa, the Middle East and Russia. The Company was established in order to implement a corporate reorganisation of Heritage Oil Corporation (“HOC”, the “Corporation”).

These consolidated financial statements include the results of the Company and all subsidiaries over which the Company exercises control. The Company together with its subsidiaries are referred to as the Group. The key subsidiaries consolidated within these financial statements include inter alia Heritage Oil Corporation, Heritage Oil & Gas Limited, Eagle Energy (Oman) Limited (disposed in 2009 (note 6)), Heritage Oil and Gas (U) Limited, Heritage Energy Middle East Limited, Heritage DRC Limited, Coatbridge Estates Limited, ChumpassNefteDobycha, Neftyanaya Geologicheskaya Kompaniya, Heritage Oil & Gas (Austria) GesmbH, Heritage Mali Block 7 Limited, Heritage Mali Block 11 Limited, Heritage Energy Holding GesmbH, Heritage Oil & Gas (Gibraltar) Limited, TISE‑Heritage Neftegaz, Begal Air Limited, Heritage International Holding GesmbH, Heritage Oil & Gas Holdings Limited, Eagle Drill Limited, Heritage Oil (Barbados) Limited, Heritage Oil & Gas (Switzerland) SA, Heritage Oil International Malta Limited, 1381890 Alberta ULC, Heritage Oil Cooperatief U.A., Heritage Oil Holdings Limited, Heritage International VOF, Heritage (International) Holding (Gibraltar) Limited, Heritage Tanzania Kimbiji‑Latham Limited, Heritage Tanzania Kisangire Limited and Heritage Oil Tanzania Limited.

The financial statements were approved by the Board and authorised for issuance on 29 April 2010.

2 Significant Accounting PoliciesThe principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

a) Basis of PreparationThe consolidated financial statements have been prepared in accordance with IFRS as adopted by the EU.

The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of certain financial assets and liabilities at fair value.

The Company’s consolidated financial statements are presented in US dollars, which is the Company’s functional and presentation currency.

The Group had available cash of $208 million at 31 December 2009. Based on its current plans and knowledge, its projected capital expenditure and operating cash requirements, the Group has sufficient cash to finance its operations for more than 12 months from the date of this report. As for most oil and gas exploration companies, Heritage raises financing for its activities from time to time using a variety of sources. Sources of funding for future exploration and development programmes will be derived from inter alia disposal proceeds from the sale of assets, such as the sale of the Company’s holdings in Oman in 2009 and the proposed disposal of its 50% interests in Blocks 1 and 3A, Uganda (note 6), using its existing treasury resources, new credit facilities, reinvesting its funds from operations, farm‑outs and, when considered appropriate, issuing debt and additional equity. Accordingly, the Group has a number of different sources of finance available and the Directors are confident that additional finance will be raised as and when needed.

After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.

The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Operations Review of the Annual Report on pages 18 to 29. The financial position of the Group, its cash flows and liquidity position are described in the Financial Review on pages 30 to 37. In addition, note 3 to the financial statements includes the Group’s policies and processes for managing its capital; its financial risk management; and its exposure to foreign exchange risk, commodity price risk, credit risk and liquidity risk.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 4.

b) Change in Accounting Policies(i) Presentation of Financial StatementsIn 2009, the Group has applied IAS 1 Presentation of Financial Statements (revised 2007) which has introduced a number of terminology changes and has resulted in a number of changes in presentation and disclosure. The revised standard has had no impact on the reported results or financial position of the Group.

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2 Significant Accounting Policies continued(ii) Determination and Presentation of Operating Segments (Also see note 2d)As of January 2009, the Group determines and presents operating segments based on the information that internally is provided to the Chief Executive Officer (“CEO”), who is the Group’s chief operating decision maker. This change in accounting policy is due to the adoption of IFRS 8 Operating Segments. Previously operating segments were determined and presented in accordance with IAS 14 Segment Reporting. The new accounting policy in respect of segment operating disclosures is presented as follows.

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components.

An operating segment’s operating results, for which discrete financial information is available, are reviewed regularly by the CEO and Chief Financial Officer (“CFO”) to make decisions about resources to be allocated to the segment and assess its performance.

Segment results that are reported to the CEO and CFO include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate assets, corporate offices expenses and liabilities.

Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment, and intangible assets other than goodwill.

(iii) BorrowingsIn 2009, the Company changed its accounting policy in relation to the recognition of equity or financial liabilities arising from the issue of convertible bonds. Previously the Company made the assessment of whether the conversion feature is a derivative liability or an equity instrument on initial recognition only and did not revisit that assessment, absent any actual change in the contractual terms. It is now the Company’s policy to reassess the classification during the life of the convertible bond and reclassify between liabilities and equity when appropriate. In particular, the Company now adopts a policy of reassessing the initial classification when there has been a change in the effective terms of the contract. It was the existence of the Company call option that resulted in derivative treatment for the conversion option in the convertible bond issued on 16 February 2007. Following the expiry of that option the Company has under this new policy reclassified the conversion option as an equity instrument from that date. The Company believes this new policy provides reliable and more relevant information as it bases the classification of such instruments on the terms that are currently operative.

In accordance with the requirements of IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors) the change has been made retrospectively and the comparatives have been restated accordingly.

As a result, the loss for continuing operations for the year ended 31 December 2008 has been restated to increase the previously reported net loss attributable to owners of the Company by $4.9 million to $46.2 million. These adjustments have been taken up in finance income (costs). In addition, non-current derivative financial liabilities were reduced by $25.8 million to nil at 31 December 2008 and the fair value of the conversion feature as at 16 February 2008 of $30.6 million was transferred to equity through the Statement of Changes in Equity. If the accounting policy had not changed then an additional loss of $63.5 million would have been recognised in the income statement for the year ended 31 December 2009 and a non-current derivative financial liability of $89.2 million would have been recognised in the balance sheet at 31 December 2009. The change in accounting policy had no impact on the cash flow statement. No consolidated balance sheet as at 1 January 2008 has been presented because the change in accounting policy had no impact at that date.

c) ConsolidationThe consolidated financial statements incorporate the assets and liabilities of all subsidiaries of the Company as at 31 December 2009 and 2008 and the results of all subsidiaries for the years then ended.

Subsidiaries are all entities (including special purpose entities) over which the Company has the power to govern the financial and operating policies, so as to obtain benefits from its activities, generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Company controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are de-consolidated from the date that control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, 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 net fair value of the identifiable assets, liabilities and contingent liabilities acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised immediately in the income statement.

Inter-company transactions, balances and unrealised gains on transactions between Group entities (the Company and its subsidiaries) are eliminated. For the purposes of consolidation, the accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Company.

Notes to Consolidated Financial Statements continued

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2 Significant Accounting Policies continuedd) Segment ReportingAs of January 2009, the Group determines and presents operating segments based on the information that internally is provided to the CEO, who is the Group’s chief operating decision maker. This change in accounting policy is due to the adoption of IFRS 8 Operating Segments. Previously operating segments were determined and presented in accordance with IAS 14 Segment Reporting. The new accounting policy in respect of segment operating disclosures is presented as follows.

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. An operating segment’s operating results are reviewed regularly by the CEO and CFO to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

Segment results that are reported to the CEO and CFO include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate assets, corporate offices expenses and liabilities.

Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment, and intangible assets other than goodwill.

e) Joint ArrangementsThe majority of exploration, development and production activities are conducted jointly with others under contractual arrangement and, accordingly, the Group only reflects its proportionate interest in such assets, liabilities, revenues and expenses.

f) Exploration and Evaluation ExpendituresThe Group applies a modified full cost method of accounting for exploration and evaluation (“E&E”) costs, having regard to the requirements of IFRS 6 “Exploration for and Evaluation of Mineral Resources”. Under the modified full cost method of accounting, costs of exploring for and evaluating oil and gas properties are capitalised on a licence or prospect basis and the resulting assets are tested for impairment by reference to appropriate cost pools. Such cost pools are based on geographic areas and are not larger than a segment. The Group had eight cost pools in 2009, (2008 – nine cost pools, including Oman) Uganda, Kurdistan, Russia, DRC, Pakistan, Malta, Mali and Tanzania.

E&E costs related to each licence/prospect are initially capitalised within “Intangible exploration assets”. Such E&E costs may include costs of licence acquisition, technical services and studies, seismic acquisition, exploration drilling and testing, the projected costs of retiring the assets (if any) and directly attributable general and administrative expenses, but do not include costs incurred prior to having obtained the legal rights to explore an area, which are expensed directly to the income statement as they are incurred.

Where the Company farms-in to licences and incurs costs in excess of its own share of licence costs as consideration, these costs are capitalised as its own share.

Tangible assets acquired for use in E&E activities are classified as property, plant and equipment; however, to the extent that such a tangible asset is consumed in developing an intangible E&E asset, the amount reflecting that consumption is recorded as part of the cost of the intangible asset.

Intangible E&E assets related to each exploration licence/prospect are not depreciated and are carried forward until the existence (or otherwise) of commercial reserves has been determined. The Group’s definition of commercial reserves for such purpose is proved and probable reserves on an entitlement basis.

Proved and probable reserves are the estimated quantities of crude oil, natural gas and natural gas liquids which geological, geophysical and engineering data demonstrate with a specified degree of certainty (see below) to be recoverable in future years from known reservoirs and which are considered commercially producible. There should be a 50% statistical probability that the actual quantity of recoverable reserves will be more than the amount estimated as proved and probable and a 50% statistical probability that it will be less. The equivalent statistical probabilities for the proven component of proved and probable reserves are 90% and 10%, respectively.

Such reserves may be considered commercially producible if management has the intention of developing and producing them and such intention is based upon:

a reasonable assessment of the future economics of such production; > a reasonable expectation that there is a market for all or substantially all the expected hydrocarbon production; and > evidence that the necessary production, transmission and transportation facilities are available or can be made available. >

Furthermore:(i) Reserves may only be considered proved and probable if producibility is supported by either actual production or a conclusive

formation test. The area of reservoir considered proved includes (a) that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any, or both, and (b) the immediately adjoining portions not yet drilled, but which can be reasonably judged as economically productive on the basis of available geophysical, geological and engineering data. In the absence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir.

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2 Significant Accounting Policies continued(ii) Reserves which can be produced economically through application of improved recovery techniques (such as fluid injection) are only

included in the proved and probable classification when successful testing by a pilot project, the operation of an installed programme in the reservoir, or other reasonable evidence (such as, experience of the same techniques on similar reservoirs or reservoir simulation studies) provides support for the engineering analysis on which the project or programme was based.

If commercial reserves have been discovered, the related E&E assets are assessed for impairment on a cost pool basis as set out below and any impairment loss is recognised in the income statement. The carrying value, after any impairment loss, of the relevant E&E assets is then reclassified as development and production assets within property, plant and equipment.

E&E assets are assessed for impairment when facts and circumstances suggest that the carrying amount may exceed its recoverable amount. Such indicators include the point at which a determination is made as to whether or not commercial reserves exist. Where the E&E assets concerned fall within the scope of an established full cost pool, the E&E assets are tested for impairment together with all development and production assets associated with that cost pool, as a single cash generating unit. The aggregate carrying value is compared against the expected recoverable amount of the pool, generally by reference to the present value of the future net cash flows expected to be derived from production of commercial reserves. Where the E&E assets to be tested fall outside the scope of any established cost pool, there will generally be no commercial reserves and the E&E assets concerned will be written off in full.

g) Property, Plant and Equipmenti) Development and Production AssetsThe Group had one interest at the development and production stage during the years covered by these financial statements; Russia. (2008 – Russia and Oman which was disposed in 2009 (note 6)).

Development and production assets are accumulated on a field-by-field basis and represent the cost of developing the commercial reserves discovered and bringing them into production, together with the E&E expenditures incurred in finding commercial reserves transferred from intangible E&E assets as outlined above, the projected cost of retiring the assets and directly attributable general and administrative expenses.

The net book values of producing assets are depleted on a field-by-field basis using the unit of production method by reference to the ratio of production in the year to the related proved plus probable reserves of the field, taking into account estimated future development expenditures necessary to bring those reserves into production.

An impairment test is performed whenever events and circumstances arising during the development or production phase indicate that the carrying value of a development or production asset may exceed its recoverable amount. The aggregate carrying value is compared against the expected recoverable amount of the cash generating unit, generally by reference to the present value of the future net cash flows expected to be derived from the production of commercial reserves. The cash generating unit applied for impairment test purposes is generally the field, except that a number of field interests may be grouped as a single cash generating unit where the cash flows generated by the fields are interdependent.

ii) Other AssetsOther property, plant and equipment are stated at cost less accumulated depreciation and any impairment in value. The assets’ useful lives and residual values are assessed on an annual basis. Furniture and fittings are depreciated using the reducing balance method at 20% per year.

Land is not subject to depreciation.

The corporate jet is depreciated over its expected useful life of 69 months. Depreciation is charged so as to write-off the cost, less estimated residual value of the corporate jet on a straight-line basis.

Corporate capital assets are depreciated on a straight-line basis over their estimated useful lives. The building is depreciated on a straight-line basis over 40 years with nil residual value. The land is not depreciated.

h) Cash and Cash EquivalentsCash and cash equivalents include cash on hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less. Cash and cash equivalents are stated at amortised cost using the effective interest rate method.

i) Trade and Other ReceivablesTrade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables.

j) InventoriesInventories consist of petroleum, condensate, liquid petroleum gas and materials that are recorded at the lower of weighted average cost and net realisable value. Cost comprises direct materials, direct labour, depletion and those overheads that have been incurred in bringing the inventories to their present location and condition. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Provision is made for obsolete, slow-moving or defective items where appropriate.


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2 Significant Accounting Policies continuedk) InvestmentsThe Group classifies its investments in the following categories: financial assets at fair value through the income statement, and available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition. During the years covered by these financial statements the Group did not have any investments classified as “loans and receivables” or “held to maturity investments”.

i) Financial Assets at Fair Value Through the Income StatementFinancial assets held for trading are carried at fair value with changes in fair value recognised in the income statement. A financial asset is classified in this category if acquired principally for the purpose of selling in the short-term. Derivatives are classified as held for trading unless they are designated as hedges.

Gains or losses arising from changes in the fair value of the “financial assets at fair value through the income statement” category are presented in the income statement within “Unrealised gain/(loss) on other financial assets” in the year in which they arise.

ii) Available-for-Sale Financial AssetsAvailable-for-sale financial assets, comprising principally marketable equity securities, are non-derivatives that are either designated in this category or not classified. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date.

Changes in the fair value of monetary securities classified as available-for-sale (other than impairment losses and foreign exchange gains and losses which are recognised in the income statement) are recognised in equity. Upon sale of a security classified as available-for-sale, the cumulative gain or loss previously recognised in equity is recognised in the income statement.

The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. Measurement is assessed by reference to the fair value of the financial asset or group of financial assets.

l) Non‑Current Assets Held for Sale and Discontinued OperationsNon-current assets (or disposal groups) are classified as assets held for sale and stated at the lower of their carrying amount and fair value less costs to sell if their carrying amount will be recovered principally through a sale transaction rather than through continuing use.

Non-current assets (including those that are part of a disposal group) are not depreciated or amortised while they are classified as held for sale. Interest and other expenses attributable to the liabilities of a disposal group classified as held for sale continue to be recognised.

Non-current assets classified as held for sale and the assets of a disposal group classified as assets held for sale are presented separately, as current assets, from the other assets in the balance sheet. The liabilities of a disposal group classified as held for sale are presented separately, as current liabilities, from other liabilities in the balance sheet.

A discontinued operation is a component of the Group’s business that represents a separate major line of business or geographical area of operations that has been disposed of or is held for sale, or is a subsidiary acquired exclusively with a view to resale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, from the comparative income statement is re-presented as if the operation had been discontinued from the start of the comparative period.

m) Trade and Other PayablesThese amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year which are unpaid.

n) BorrowingsBorrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the income statement over the period of the borrowings using the effective interest method.

Convertible bonds are separated into liability and derivative liability components (being the bondholders’ conversion option) and each component is recognised separately. On initial recognition, the fair value of the liability component of a convertible bond is determined using a market interest rate for an equivalent non convertible bond. This amount is recorded as a liability on an amortised cost basis using the effective interest method until extinguished on conversion or maturity of the bonds. The Company reassesses the classification during the life of the convertible bond and reclassifies between liabilities and equity when appropriate (note 2b(iii)).

Borrowings are removed from the balance sheet when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in finance income or costs.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

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2 Significant Accounting Policies continuedo) Borrowing CostsBorrowing costs incurred for the construction of any qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use or sale. Other borrowing costs are expensed.

The capitalisation rate used to determine the amount of borrowing costs to be capitalised is the weighted average interest rate applicable to the Group’s outstanding borrowings during the year. For the year ended 31 December 2009, this was 12.10% (31 December 2008 – 12.01%).

p) ProvisionsAsset Retirement ObligationsProvision is made for the estimated cost of any asset retirement obligations when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Asset retirement obligation expense is capitalised in the relevant asset category unless it arises from the normal course of production activities.

Provisions are measured at the present value of management’s best estimate of expenditure required to settle the present obligation at the balance sheet date. The discount rate used to determine the present value reflects current market assessments of the time value of money and the risks specific to the liability.

Subsequent to the initial measurement of the asset retirement obligation, the obligation is adjusted at the end of each year to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The increase in the provision due to the passage of time is recognised as finance costs whereas changes in the estimated future cash flows are added to or deducted from the related asset in the current period.

q) Revenue RecognitionRevenue from the sale of petroleum and natural gas is recognised at the fair value received or receivable and is recorded when the significant risks and rewards of ownership of the product are transferred to the buyer. For sales of oil and gas this is usually when legal title passes to the external party which occurs on shipment of oil and gas to the buyer. Interest income is recognised on a time proportion basis using the effective interest method.

r) Income TaxesCurrent income tax is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement because it excludes items that are never taxable or deductible. The Group’s current tax assets and liabilities are calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred income tax is provided in full, using the balance sheet method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority.

s) Foreign Currency TranslationItems included in the financial statements of each of the Company’s consolidated subsidiaries are measured using the currency of the primary economic environment in which the subsidiary operates (“the functional currency”). The Company’s consolidated financial statements are presented in US dollars, which is the Company’s functional and presentation currency.

Foreign currency transactions are translated into the respective functional currencies of Group entities using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.

The results and financial position of all the Company’s consolidated subsidiaries (none of which has a functional currency that is the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;ii) income and expenses for each year are translated at average exchange rates (unless this is not a reasonable approximation of the

cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and

iii) all resulting exchange differences are recognised as either income or expense in a separate component of equity.


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2 Significant Accounting Policies continuedForeign currency loans and overdrafts are designated as, and are considered to be, hedges of the exchange rate exposure inherent in foreign currency net investments and, to the extent that the hedge is effective, exchange differences giving rise to changes in the carrying value of foreign currency loans are also recognised as income or expense directly in equity. All other exchange differences giving rise to changes in the carrying value of foreign currency loans and overdrafts are recognised in the income statement.

When a foreign operation is sold, a proportionate share of the cumulative exchange differences previously recognised in equity are recognised in the income statement, as part of the gain or loss on sale where applicable.

t) Share‑Based Compensation PlansThe Group applies the fair value method of accounting to all equity-classified share-based compensation arrangements for both employees and non-employees. Compensation costs of equity-classified awards to employees are measured at fair value of the awards at the time when the services are rendered at the grant date and recognised over the periods during which the employees become unconditionally entitled to the options. The compensation cost is charged to the income statement with a corresponding increase in equity. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest.

The compensation cost of equity-classified awards to non-employees is initially measured at fair value of the awards at the time when the services are rendered, and periodically remeasured to fair value until the non-employees’ performance is complete, and recognised over the periods during which the employees become unconditionally entitled to the options. The compensation cost is charged to income with a corresponding increase to share-based payment reserve.

Upon the exercise of the award, consideration received is recognised in equity (notes 18 and 19).

u) Share CapitalOrdinary and Exchangeable Shares are classified as share capital. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

If the Company reacquires its own equity instruments the cost is deducted from equity and the associated shares are cancelled.

v) Earnings per ShareBasic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of Ordinary Shares outstanding during the financial period. The rights of different classes of shares are the same and therefore economically equivalent. As such, Ordinary and Exchangeable Shares are treated as one class of shares for the earnings per share calculation.

Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential Ordinary Shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential Ordinary Shares.

The if-converted method used in the calculation of diluted earnings per share assumes the conversion of convertible securities at the later of the beginning of the reported period or issuance date, if dilutive.

w) New Accounting Standards and InterpretationsCertain new accounting standards and interpretations have been published that are not mandatory for the year ended 31 December 2009. The Company’s assessment of the impact of these new standards and interpretations which have not been adopted is set out below.i) IFRS 9 Financial Instruments: effective for accounting periods commencing 1 January 2013. Not yet endorsed for use in the EU. The

expected impact is still being assessed by management, but is expected to only impact disclosures of the Group.ii) IFRS 5 (Amendment), Non-current Assets Held for Sale and Discounted Operations: requires that assets and liabilities of a subsidiary

should be classified as held for sale if the Parent is committed to making a plan involving loss of control of the subsidiary, regardless of whether the entity will retain a non-controlling interest after the sale. Effective for accounting periods commencing on or after 1 January 2010. It has not yet been endorsed for use in the EU. The expected impact is still being assessed by management, but is expected to only impact disclosures of the Group.

iii) IAS 17 (Amendment), Leases: amended to require classification of land and buildings leases based on an assessment of transfer of risks and rewards. Effective for accounting periods commencing on or after 1 January 2010. It has not yet been endorsed for use in the EU. The expected impact is still being assessed by management, but is expected to only impact disclosures of the Group.

iv) IAS 1 (Amendment), Presentation of Financial Statements: amended to confirm that the classification of a convertible instrument is not affected by terms that allow its settlement, at any time, by the issuance of equity instruments at the option of the counterparty. Effective for accounting periods commencing on or after 1 January 2010. The expected impact is still being assessed by management, but is expected to only impact disclosures of the Group.

The following amendments are assessed not to have any impact on the Company’s financial statements:i) IFRS 3 (2008) Business Combinations: effective for accounting periods commencing on or after 1 July 2009. ii) IAS 27 (Amendment), Consolidated and Separate Financial Statements: effective for accounting periods commencing on or after 1 July 2009. iii) IFRS 1 (Revised), First time Adoption of International Financial Reporting Standards.

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2 Significant Accounting Policies continuediv) IAS 39 (Amendment) Financial Instruments: Recognition and Measurement – Eligible Hedged Items provides clarification where

differences in practice exists on the designation of inflation as a hedged risk and the treatment of “one-sided” risks on hedged items. Effective for accounting periods commencing on or after 1 July 2009.

v) IFRS 2 (Amendment) Share Based Payments: amended to require subsidiary who receives employee services when another group entity or shareholder grants a cash-settled share-based payment to recognise that transaction in its own accounts. Effective for accounting periods commencing on or after 1 January 2010. Not yet endorsed for use in the EU.

vi) IAS 36 (Amendment), Impairment of Assets: amended to clarify that for the purposes of impairment testing, goodwill is allocated to operating segments as defined in paragraph 5 of IFRS 8 Operating Segments, i.e. before aggregation. Effective for accounting periods commencing on or after 1 January 2010. Not yet endorsed for use in the EU. The expected impact is still being assessed by management, but is expected to only impact the disclosures of the Group.

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

3 Risk ManagementThe Group’s activities expose it to a variety of financial risks that arise as a result of its exploration, development, production, and financing activities. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance.

a) Financial Risk Managementi) Foreign Exchange RiskForeign exchange risk arises when transactions and recognised assets and liabilities of the Group entity concerned are denominated in a currency that is not the Company’s functional currency. The Group operates internationally and is exposed to foreign exchange risk arising from currency exposures to the US dollar.

There are no forward exchange rate contracts in place at, or subsequent to, 31 December 2009.

At 31 December 2009, if the Canadian dollar had strengthened/weakened by 10% against the US dollar with all other variables held constant, the loss for the year would have been $535,558 (31 December 2008 – $122,403) higher/(lower), mainly as a result of foreign exchange gains/losses on translation of Canadian dollar-denominated general and administrative expenses and cash in bank.

At 31 December 2009, if the Russian rouble had strengthened/weakened by 10% against the US dollar with all other variables held constant, the loss for the year would have been $(556,600) (31 December 2008 – $(513,633)) higher/(lower), mainly as a result of foreign exchange gains/losses on translation of Russian rouble-denominated cash in bank and monetary assets and liabilities.

At 31 December 2009, if the GB pound sterling had strengthened/weakened by 10% against the US dollar with all other variables held constant, the loss for the year would have been $2,309,160 (31 December 2008 – $605,907) higher/(lower), mainly as a result of GB pound sterling- denominated general and administrative expenses and foreign exchange gains/losses on translation of GB pound sterling-denominated long-term loan.

At 31 December 2009, if the Swiss franc had strengthened/weakened by 10% against the US dollar with all other variables held constant, the loss for the year would have been $(300,238) (31 December 2008 – $(299,806)) higher/(lower), mainly as a result of foreign exchange gains/losses on translation of Swiss franc-denominated cash at bank.

ii) Commodity Price RiskThe Company is exposed to commodity price risk to the extent that it sells its entitlement to petroleum, condensate and liquid petroleum gas production on a floating price basis. The Company may consider partly mitigating this risk in the future.

The table below summarises the impact of increases/decreases of the relevant oil/condensate/LPG benchmark on the Company’s loss for the year. The analysis is based on the assumption that commodity prices had increased/decreased by 5% with all other variables held constant:

Year ended 31 December

2009 2008 $ $

Brent light crude 70,037 191,850

70,037 191,850

The loss for the year would increase/decrease as a result of commodity revenues received.


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3 Risk Management continuediii) Interest Rate RiskThe Group had fixed rate long‑term debt and fixed rate convertible bonds in the years under review, therefore, it was not exposed to interest rate risk with respect to these fixed rate borrowings. In October 2007, a wholly owned subsidiary of the Company received a long‑term loan of $9,450,000 with a variable rate of LIBOR plus 1.6% (note 16). An increase/(decrease) of LIBOR by 1% would result in an increase/(decrease) of the Company’s loss for the year by $85,246 (31 December 2008 – $73,375).

iv) Credit RiskAll of the Company’s production from continuing operations was derived from Russia. In 2008 and 2009 sales were to a maximum of six customers.

Trade debtors of the Company are subject to internal credit review to minimise the risk of non‑payment. The Company does not anticipate any default as it transacts with creditworthy counterparties. No credit limits were exceeded during the reporting years and management does not expect any losses from non‑performance by these counterparties.

The Company is also exposed to credit risk in relation to regular joint venture billings which are typically outstanding for one month and in relation to its cash balances held with the reputable banks.

v) Liquidity RiskLiquidity risk is the risk that the Group will not have sufficient funds to meet liabilities. Cash forecasts identifying liquidity requirements of the Group are produced quarterly. These are reviewed regularly to ensure sufficient funds exist to finance the Company’s current operational and investment cash flow requirements.

Management monitors rolling forecasts of the Company’s cash position on the basis of expected cash flow.

The Group had available cash of $208 million at 31 December 2009. Based on its current plans and knowledge, its projected capital expenditure and operating cash requirements, the Group has sufficient cash to finance its operations for more than 12 months from the date of this report.

The Company’s financial liabilities consist of trade and other payables and borrowings. Trade and other payables are due within 12 months, and borrowings fall due as outlined in notes 15 and 16.

b) Capital Risk ManagementThe Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern in order to provide returns for shareholders, benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

The Company monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including “borrowings”, “trade and other payables”, “liabilities of a disposal group classified as held for sale” and “provisions” as shown in the consolidated balance sheet) less cash and cash equivalents. Total capital is calculated as “equity” as shown in the consolidated balance sheet plus net debt.

As at 31 December

2009 2008 $ $

Total borrowings 166,361,474 211,676,976Less cash and cash equivalents (note 14) (208,094,355) (90,620,385)

Net (cash) debt (41,732,881) 121,056,591

Total equity 389,662,669 189,620,544

Total capital 389,662,669 310,677,135

Gearing ratio 0% 39%

This decrease in the gearing ratio during 2009 resulted primarily from an equity financing raised in 2009 (note 18).

4 Critical Accounting Estimates, Assumptions and JudgementsIn the process of applying the Company’s accounting policies, which are described in note 2, management makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:

a) Recoverability of Exploration and Evaluation CostsUnder the modified full cost method of accounting for E&E costs, certain costs are capitalised as intangible assets by reference to appropriate cost pools, and are assessed for impairment when circumstances suggest that the carrying amount may exceed its recoverable value.

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4 Critical Accounting Estimates, Assumptions and Judgements continuedSuch circumstances include, but are not limited to:i) the period for which the entity has the right to explore in the specific area has expired during the period, or will expire in the near future,

and is not expected to be renewed;ii) substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is neither budgeted

nor planned;iii) exploration for, and evaluation, of mineral resources in the specific area have not led to the discovery of commercially viable quantities

of mineral resources and the entity has decided to discontinue such activities in the specific area; andiv) sufficient data exist to indicate that, although a development in the specific area is likely to proceed, the carrying amount of the

exploration and evaluation asset is unlikely to be recovered in full from successful development or by sale.

This assessment involves judgement as to (i) the likely future commerciality of the asset and when such commerciality should be determined, and (ii) future revenues and costs pertaining to any wider cost pool with which the asset in question is associated, and (iii) the discount rate to be applied to such revenues and costs for the purpose of deriving a recoverable value. Note 10 discloses the carrying amounts of the Group’s E&E assets. Consequently, major uncertainties affect the recoverability of these costs which is dependent on the Group achieving commercial production or the sale of the assets. Note 23 discloses contingencies relating to title risks. The Company assessed whether these risks are contingencies or indicators of impairment and concluded that they are contingencies.

b) Reserve EstimatesEstimates of recoverable quantities of proved and probable reserves include assumptions regarding commodity prices, exchange rates, discount rates, production and transportation costs for future cash flows. It also requires interpretation of complex and difficult geological and geophysical models in order to make an assessment of the size, shape, depth, and quality of reservoirs and their anticipated recoveries. The economic, geological and technical factors used to estimate reserves may change from period to period. Changes in reported reserves can impact asset carrying values and the asset retirement obligation due to changes in expected future cash flows. Reserves are integral to the amount of depletion charged to the income statement and the calculation of inventory.

The level of estimated commercial reserves is also a key determinant in assessing whether the carrying value of any of the Group’s development and production assets has been impaired.

c) Fair Value of Financial InstrumentsThe Group’s accounting policies and disclosures require the determination of the fair value of financial instruments. Fair values have been determined for measurement and/or disclosure purposes based on the following methods:

i) Non-Derivative Financial InstrumentsThese comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and borrowings and trade and other payables. Non-derivative financial instruments are recognised initially at fair value plus, for instruments not at fair value through the income statement, any directly attributable transaction costs.

Fair value is calculated based on the present value of future principal and interest cash flows, discounted at the applicable market rate of interest at the reporting date.

ii) DerivativesDerivatives are recognised initially at fair value; attributable transaction costs are recognised in the income statement when incurred. Subsequent to initial recognition, derivatives are measured at fair value. Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value through the income statement.

The fair value of derivative financial instruments is based on their listed market prices, if available. If a listed market price is not available, then fair value is estimated by discounting the difference between the contractual forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate (based on Government bonds).

5 Segment InformationThe Group has a single class of business which is international exploration, development and production of petroleum oil and natural gas. The geographical areas are defined by the Company as operating segments in accordance with IFRS 8 Operating Segments. The Group operates in a number of geographical areas based on location of operations and assets, being Russia, Uganda (discontinued), DRC, Kurdistan, Pakistan, Tanzania, Malta, Mali and Oman (discontinued). The Group’s reporting segments comprise each separate geographical area in which it operates.


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5 Segment Information continued Year ended 31 December 2009

Depreciation, External Segment Total Total Capital depletion and revenue result assets liabilities additions amortisation $ $ $ $ $ $

Russia 2,704,987 (1,776,429) 48,958,518 572,081 3,264,979 761,911DRC – – 1,687,617 – 80,852 –Kurdistan – (6,828) 80,611,911 6,660,587 37,119,614 –Pakistan – – 1,734,090 – 52,670 –Tanzania – – 20,402,386 198,658 6,904,501 –Mali – – 2,018,449 – 768,851 –Malta – – 11,111,097 44,105 2,457,548 –Uganda – discontinued operations – (1,811,214) 163,414,518 12,558,727 28,486,513 –Oman – discontinued operations – (698,763) – – 500,000 –

Total for reportable segments 2,704,987 (4,293,234) 329,938,586 20,034,158 79,635,528 761,911Corporate – (35,053,653) 226,085,557 146,327,316 631,740 948,212Elimination of discontinued operations – 2,509,977 (163,414,518) (12,558,727) (28,986,513) –

Total from continuing operations 2,704,987 (36,836,910) 392,609,625 153,802,747 51,280,755 1,710,123

Year ended 31 December 2008 (Restated1)

Depreciation, External Segment Total Total Capital depletion and revenue result assets liabilities additions amortisation $ $ $ $ $ $

Russia 3,836,991 (7,643,812) 48,123,180 446,935 9,550,153 1,070,410DRC – – 1,606,765 – 760,545 –Kurdistan – – 43,774,646 6,467,567 41,781,416 –Pakistan – – 1,560,330 – 607,924 –Tanzania – (204,515) 13,785,019 659,604 13,129,738 –Mali – – 1,682,381 – 1,012,320 –Malta – (14,831) 8,685,637 3,469 2,052,831 –Uganda – discontinued operations – – 154,684,138 30,485,069 55,791,804 –Oman – discontinued operations 1,258,817 (2,850,270) 28,065,282 3,279,402 17,983,358 264,003

Total for reportable segments 5,095,808 (10,713,428) 301,967,378 41,342,046 142,670,089 1,334,413Corporate – (35,446,098) 99,330,143 170,334,930 870,924 1,015,071Elimination of discontinued operations (1,258,817) 2,850,270 (182,749,420) (33,764,471) (73,775,162) (264,003)

Total from continuing operations 3,836,991 (43,309,256) 218,548,101 177,912,505 69,765,851 2,085,481

1 See change in accounting policies (note 2b) and discontinued operations (note 6). The loss for continuing operations for the year ended 31 December 2008 has been restated to increase the previously reported net loss attributable to owners of the Company by $4.9 million to $46.2 million. Oman and Uganda were classified as discontinued operations (note 6). Corporate activities include the financing activities of the Group and is not an operating segment.

There have been no changes to the basis of segmentation or the measurement basis for the segment result since 31 December 2008.

6 Discontinued OperationsUgandaOn 18 December 2009, Heritage announced that the Company, and its subsidiary Heritage Oil & Gas Limited, had entered into a SPA, with Eni for the sale of its 50% interests in Blocks 1 and 3A in Uganda. On 17 January 2010, Tullow Uganda Limited exercised its right to pre-empt the sale of the Disposed Assets to Eni on the same terms and conditions as agreed in the SPA entered into between Heritage and Eni. The transaction was overwhelmingly approved by shareholders at the General Meeting on 25 January 2010.


The results of the Uganda operations have been classified as discontinued operations. The segment was not classified as held for sale or discontinued operations at 31 December 2008 and the comparative income statement has been restated to show the discontinued operations separately from continuing operations.

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6 Discontinued Operations continuedExpenses incurred by the Company as at 31 December 2009 in respect of this disposal are included within loss on disposal of discontinued operations as follows: Year ended 31 December

2009 2008 $ $

Loss on disposal of discontinued operations (1,811,214) –

(1,811,214) –

The following table provides additional information with respect to the assets held for sale in the balance sheet at 31 December 2009. 31 December 2009 $

AssetsNon-current assetsIntangible exploration assets 158,518,547

158,518,547

Current assetsAccounts receivable 4,895,971

4,895,971

Total Assets 163,414,518

Current liabilitiesTrade and other payables 12,301,188

12,301,188

Current liabilitiesProvisions 257,539

257,539

Total Liabilities 12,558,727

Net assets 150,855,791

OmanOn 7 April 2009, the Company completed the sale of Eagle Energy, a wholly owned subsidiary of Heritage, to RAK Petroleum Oman Limited for $28 million, plus a working capital adjustment of $0.4 million. Eagle Energy held a 10% interest in Block 8, Oman. The segment was not classified as held for sale or discontinued operations at 31 December 2008 and the comparative income statement has been restated to show the discontinued operations separately from continuing operations.

The effective date of the transaction is 1 January 2009. The cash consideration of $28 million and a working capital adjustment of $0.4 million have been received. The Company acquired Eagle Energy, which had a 10% interest in Block 8 offshore Oman, in 1996. Block 8 contains the Bukha field which has been producing since 1994 and the West Bukha field which commenced production in February 2009.

The results of operations of Eagle Energy have been classified as losses from discontinued operations. The following table provides additional information with respect to the amounts included in loss from discontinued operations.

Year ended 31 December 2008 $

RevenuePetroleum and natural gas 1,258,817ExpensesPetroleum and natural gas operating (598,006)Depletion, depreciation and amortisation (264,003)Impairment (3,247,078)

(4,109,087)

(2,850,270)


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6 Discontinued Operations continuedThe following table provides additional information with respect to the net assets sold as at 7 April 2009. 7 April 2009 $

AssetsNon-current assetsIntangible exploration assets 1,051,083Property, plant and equipment 27,448,917

28,500,000

Current assetsAccounts receivable 246,783Inventories 65,282

312,065

Net assets 28,812,065

The loss on disposal of discontinued operations has been derived as follows: 7 April 2009 $

Consideration received Sales proceeds 28,000,000 Working capital adjustments 390,242

Total disposal consideration 28,390,242

Less: Carrying amount of net assets sold (28,812,065) Other expenses (276,940)

Loss on disposal of discontinued operations (698,763)

7 Other Finance Costs Year ended 31 December

2009 2008 $ $

Interest on long-term debt 656,076 963,965Interest on convertible bonds 11,023,123 12,640,000Accretion of convertible debt 4,111,197 4,161,215Accretion of asset retirement obligation 52,210 22,659

15,842,606 17,787,839Amount capitalised (11,513,541) (6,530,652)

Finance costs expensed 4,329,065 11,257,187

Finance costs are capitalised in various balance sheet categories.

8 Income Tax ExpenseThe Group is subject to income taxes in certain territories in which it owns licences. All of the Group’s operating activities are outside of Jersey. In Oman, the tax rate applicable to the Group’s operations is considered to be nil as in this jurisdiction the Group is subject to a production sharing agreement.

The Group has available tax deductions of $23,856,528 (31 December 2008 – $31,438,808) and tax losses of $125,768,090 (31 December 2008 – $93,531,776), of which $80,639,778 expires from 2010 to 2029, and the remaining $45,128,312 (31 December 2008 – $42,615,907) does not have an expiry period. No deferred tax assets have been recognised for the benefit of tax deductions and tax losses because realisation of the deferred tax assets in the foreseeable future is not sufficiently likely.

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8 Income Tax Expense continuedFactors affecting current tax charge for the year: Year ended 31 December

Restated1 2009 2008 $ $

Net loss before tax (39,346,887) (46,159,526)Standard tax rate 0% 0%Tax on loss at standard rate – –Effect of higher tax rates in foreign jurisdiction (5,912,041) (5,436,526)Effective weighted average tax rate 15.03% 11.78%Change in statutory tax rate 603,989 626,190Expenses not deductible for tax purposes 1,489,022 117,112Foreign exchange (losses)/gains (685,867) 2,055,325Effect of tax losses not recognised 4,504,897 2,637,899

Current tax charge – –

2009 2008 $ $

The balance comprises temporary differences attributable to: Available tax losses and deductions 31,154,451 26,649,554

Deferred tax asset (unrecognised) 31,154,451 26,649,554

1 See change in accounting policies (note 2b)

9 Staff CostsThe average number of employees (including Directors) and consultants employed/contracted by the Group during the year, analysed by category, was: Year ended 31 December

2009 2008

Jersey 3 2Canada 5 5Russia 40 40Europe 27 27Uganda 48 28Kurdistan 23 14Tanzania 10 10South Africa 8 6

Total 164 132

The aggregate payroll expenses of those employees (including Executive Directors) and consultants was as follows:


2009 2008 $ $

Salaries and other short-term benefits 19,759,339 15,573,451Share-based compensation 5,269,508 12,080,813

Total employee remuneration 25,028,847 27,654,264

Capitalised portion of total remuneration 10,751,590 11,435,283

Key management compensation was: Year ended 31 December

2009 2008 $ $

Salaries and other short-term benefits 6,350,221 4,448,302Share-based compensation 3,354,833 7,498,703

9,705,054 11,947,005


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10 Intangible Exploration Assets 31 December

2009 2008 $ $

At 1 January 211,346,037 102,862,754Effect of movement in exchange rates (130,853) (1,448,654)Exercise of third party back-in rights for Miran (6,737,635) –Additions 76,370,549 115,136,798Assets transferred to property, plant and equipment (note 11) – (5,204,861)Disposal of Oman assets (1,051,083) –Transfer of assets held for sale (Uganda (note 6)) (158,518,547) –

At 31 December 121,278,468 211,346,037

No assets have been pledged as security. No exploration asset has been subject to impairment.

The balances at the end of the years are as follows: 31 December

2009 2008 $ $

Russia 11,234,809 11,365,662Oman – 551,083Uganda – 130,032,034DRC 1,587,616 1,506,765Kurdistan 73,786,329 43,404,350Pakistan 1,613,000 1,560,330Malta 11,028,152 8,570,610Mali 1,994,317 1,225,465Tanzania 20,034,245 13,129,738

Balance – end of year 121,278,468 211,346,037

In many of the countries in which the Group operates, land title systems are not developed to the extent found in many industrial countries and there may be no concept of registered title. The risk of title disputes associated with Kurdistan, DRC and Malta is described in note 23.

Exercise of Third Party Back‑in RightsIn April 2009, in accordance with the option outlined in the PSC in Kurdistan, the KRG nominated a third party participant in the Miran Block. The Company remains the operator with a 75% working interest in the Miran Block and has received the pro-rata share of 25% of all past work programme expenditures and the third party will be responsible for paying its share of future costs. The transaction was completed upon the receipt of approximately $6.7 million in costs incurred by the Group to 31 January 2009. No gain/loss resulted from this transaction and intangible exploration assets reduced by $6.7 million. The KRG and the Group have agreed to replace the agreement under which they had agreed in principle (subject to certain conditions which had not been satisfied) to jointly develop a refinery with an agreement under which the Group has agreed to make payments of up to $35 million from future oil and gas sales from the licence.

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11 Property, Plant and Equipment Petroleum & natural Drilling and barge gas interests equipment Land & buildings Other Total $ $ $ $ $

CostAt 1 January 2008 42,056,745 3,544,969 11,984,701 14,452,933 72,039,348Additions 27,533,291 – – 870,924 28,404,215Assets transferred from intangible exploration 5,204,861 – – – 5,204,861Effect of movements in exchange rates (3,426,524) – – – (3,426,524)

At 31 December 2008 71,368,373 3,544, 969 11,984,701 15,323,857 102,221,900Additions 3,264,979 – – 631,740 3,896,719Disposals (31,092,333) – – – (31,092,333)Effect of movements in exchange rates (545,788) – – – (545,788)

At 31 December 2009 42,995,231 3,544, 969 11,984,701 15,955,597 74,480,498

Depletion, depreciation, amortisation and impairment lossesAt 1 January 2008 (3,981,438) (2,147,503) (452,329) (1,232,160) (7,813,430)Charge for the year (1,290,992) – (139,178) (942,049) (2,372,219)Impairment losses (3,247,078) (749,955) – – (3,997,033)

At 31 December 2008 (8,519,508) (2,897,458) (591,507) (2,174,209) (14,182,682)Charge for the year (761,911) – (139,178) (809,034) (1,710,123)Impairment losses – – – (2,933,374) (2,933,374)Disposals 3,643,416 – – – 3,643,416

At 31 December 2009 (5,638,003) (2,897,458) (730,685) (5,916,617) (15,182,763)

Net book value: At 31 December 2008 62,848,865 647,511 11,393,194 13,149,648 88,039,218

At 31 December 2009 37,357,228 647,511 11,254,016 10,038,980 59,297,735

The corporate office which represents the land and building category and the corporate jet serve as security for long-term loans (note 16).

The carrying value of the corporate jet was written down to $8,064,350 because of reduction of fair value of the corporate jet due to unfavourable economic conditions. This resulted in an impairment write-down of $2,933,374 recognised in the income statement during the year ended 31 December 2009. An impairment loss of $749,955 was incurred in 2008, which related to the write-down of a drilling rig.

The carrying value of the petroleum and natural gas interest in Oman was written down to its fair value, resulting in an impairment write-down of $3,247,078 in 2008 due to a decline in oil and gas prices.

12 Other Financial Assets 31 December

2009 2008 $ $

Investment in warrants 1,154,225 107,501Investment in unlisted securities – 3,223,000

1,154,225 3,330,501

The investment in Afren Plc warrants is classified as held for trading. The investment in unlisted securities represents common shares in a private company, SeaDragon, which is classified as available-for-sale. The estimate of the fair value of the warrants is determined using the Black-Scholes model and relevant market inputs.

The Company owns 805,832 of the unlisted shares of SeaDragon, approximately 15% of the shares outstanding. At 31 December 2008, these shares were carried at a value of $4 per share, which were valued based on the most recent private placement of SeaDragon on 26 October 2006.

At 30 June 2009, the carrying value of the investments in the shares of SeaDragon was written down to nil following the completion of a financial reorganisation by SeaDragon and the Company does not expect that the cost of the investment will be recoverable in the near future. This resulted in an impairment write-down of $2,352,825 (2008 – nil).


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13 Trade and Other Receivables 31 December

2009 2008 $ $

Trade receivables 404 3,087Other receivables 2,203,303 6,898,424

2,203,707 6,901,511

Trade receivables are due within 30 days from the invoice date. Joint ventures billings are typically paid within 30 days from the invoice date. No interest is charged on the receivables. The carrying amount of trade and other receivables approximates to their fair value.

The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable.

As of 31 December 2009, trade and other receivables of $2,203,707 (31 December 2008 – $6,901,511) were neither past due nor impaired. Trade and receivables relate to a number of independent customers and joint ventures partners for whom there is no recent history of default. The ageing analysis of these trade and other receivables is as follows: 31 December

2009 2008 $ $

Up to 3 months 1,799,488 5,978,4683 to 6 months 133,077 704,5886 to 12 months 271,142 218,455

2,203,707 6,901,511

Trade and other receivables analysed by category are as follows: 31 December

2009 2008 $ $

US dollars 1,816,056 6,185,267Russian roubles 48,898 567,052Swiss francs 63,090 109,968Canadian dollars 213,513 5,073GB pounds sterling – 9,987Euros 62,150 24,164

2,203,707 6,901,511

14 Cash and Cash Equivalents 31 December

2009 2008 $ $

Cash at bank and in hand 208,094,355 90,620,385

Cash at bank and in hand includes cash held in interest-bearing accounts.

15 Trade and Other Payables Due within One Year 31 December

2009 2008 $ $

Trade payables 11,329,632 45,714,400Other payables and accrued liabilities 11,948,398 9,037,368

23,278,030 54,751,768

Trade and other payables and accrued liabilities comprise current amounts outstanding for trade purchases and ongoing costs. The carrying amount of trade and other payables approximates to their fair value.

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16 Borrowings 31 December

2009 2008 $ $

Non-current borrowingsConvertible bonds – unsecured 115,276,942 141,319,489Non-current portion of long-term debt 14,276,810 14,290,493

129,553,752 155,609,982

Long-term debt-securedCurrent 615,892 595,418Non-current 14,276,810 14,290,493

14,892,702 14,885,911

2007 Convertible BondsOn 16 February 2007, the Company raised $165,000,000 by completing the private placement of convertible bonds. Issue costs amounted to $6,979,268 resulting in net proceeds of $158,020,732. The Company issued 1,650, $100,000 unsecured convertible bonds at par, which have a maturity of five years and one day and an annual coupon of 8% payable semi-annually on 17 August and 17 February of each year. Bondholders have the right to convert the bonds into Ordinary Shares at a price of $4.70 per share at any time. The number of Ordinary Shares receivable on conversion of the bonds is fixed. The Company had the right to redeem, in whole or part, the bonds for cash at any time on or before 16 February 2008, at 150% of par value. This right was not exercised.

The fair value of the host liability component of the bonds (net of issue costs) was estimated at $140,154,215 on 16 February 2007. The difference between the $165,000,000 due on maturity and the initial liability component is accreted using the effective interest rate method and is recorded as finance costs. As the Company call option meant that conversion feature could be settled in cash in accordance with IAS 32 the conversion was treated as a derivative liability. The fair value of this derivative liability (estimated using the Black-Scholes option pricing model) was $17,866,517 at 16 February 2007 and subsequent gains and losses have been recorded in finance income and costs up to the expiry of the Company call option on 17 February 2008. As a result of the expiry of this option, and hence the cash settlement feature, the Company has reassessed the classification of the conversion option and determined that it qualifies to be treated as equity under IAS 32, being an option to convert a fixed amount of cash for a fixed number of shares. Therefore, the fair value of the conversion option was reclassified to equity at that date.

Bondholders have a put option requiring the Company to redeem the bonds at par, plus accrued interest, in the event of a change of control of the Company or revocation or surrender of the Zapadno Chumpasskoye licence in Russia (the “contingent put option”). In the event of a change of control and redemption of the bonds or exercise of the conversion rights, a cash payment of up to $19,700 on each $100,000 bond will be made to a bondholder, the amount of which depends upon the date of redemption and market value of shares at the date of any change of control event. The contingent put option has been valued separately.

The fair value of the contingent put option has been estimated de minimis by the Company at 31 December 2009 (31 December 2008 – de minimis).

During 2009, bondholders with $30.9 million of bonds gave notices of the exercise of 309 bonds. These bondholders received 6,574,456 Ordinary Shares (note 18). As a result of this conversion, $28,207,021 was transferred to share capital from convertible bonds and accrued liabilities and $5,992,595 was transferred from the equity portion of convertible debt to share capital.

On 18 December 2009, the Company announced it had entered into a SPA for the sale of its 50% interests in Blocks 1 and 3A in Uganda (note 6). The Company also announced that it would consider returning a portion of the disposal proceeds to shareholders through a special dividend on completion of the proposed transaction. Under the terms and conditions of the bonds, the Company was restricted from making or declaring a dividend or making any other distributions to its shareholders which constitutes on a consolidated basis more than 30% of its earnings for the immediately preceding financial year.

In December 2009, the Company approached bondholders with the proposal to agree to remove this restriction and to make some other changes in the terms and condition of the bonds. In consideration the Company proposed to pay to those bondholders who vote on the proposal the sum of $2,000.00 per $100,000 of bonds held by such bondholders. The majority of bondholders voted in favour of this proposal at a meeting on 31 December 2009 and the restriction of making or declaring a dividend or making any other distributions to shareholders has been removed. On 15 January 2010, the Company paid $2,378,000 to the bondholders who voted. In accordance with IAS 39, this amendment to the terms and conditions of the bonds does not constitute a redemption and therefore this amount was offset against the convertible bonds liability and will be recognised in the income statement over the period of the borrowings using the effective interest method.


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16 Borrowings continuedLong-Term DebtIn January 2005, a wholly owned subsidiary of the Company received a sterling denominated loan of £4.5 million to refinance the acquisition of a corporate office. Interest on the loan was fixed at 6.515% for the first five years and is then variable at a rate of Bank of Scotland base rate plus 1.4%. The loan, which is secured on the property, is scheduled to be repaid by 240 instalments of capital and interest at monthly intervals, subject to a residual debt at the end of the term of the loan of $3.5 million (£1,860,000). The principal balance outstanding as at 31 December 2009 was $6,573,584 (£4.1million) (31 December 2008 – $6,155,882 (£4.2 million)).

In October 2007, a wholly owned subsidiary of the Company received a loan of $9,450,000 to refinance the acquisition of the corporate jet. Interest on the loan is variable at a rate of LIBOR plus 1.6% The loan, which is secured on the corporate jet, is scheduled to be repaid by 19 consecutive quarterly instalments of principal. Each instalment equals to $117,500 with the final instalment being $7,217,500. The Corporation provided a corporate guarantee to the lender. The additional security of $2,454,000 was paid to the bank on 19 January 2010 to maintain the loan to value ratio specified in the loan agreement.

Fair ValuesAt 31 December 2009, the fair values of borrowings are approximately $115.3 million (31 December 2008 – $141.3 million) for the convertible bonds, $89.2 million (31 December 2008 – $25.8 million) for the equity/convertible element of the convertible bonds and $14.9 million (31 December 2008 – $14.9 million) for the long-term debt.

17 ProvisionsThe Group’s asset retirement obligation results from net ownership interests in petroleum and natural gas assets including well sites and gathering systems. The Group estimates the total undiscounted inflation-adjusted amount of cash flows required to settle its asset retirement obligation to be approximately $1,331,359, which is expected to be incurred in the period between 2012 and 2024. A cost pool specific discount rate, related to the liability, of 9% was used to calculate the fair value of the asset retirement obligation in Uganda and Russia (2008 – 9%) and 10% was used in Kurdistan in 2008 (2008 – 10%).

A reconciliation of the asset retirement obligation is provided below: 31 December

2009 2008 $ $

At 1 January 719,808 170,899Additions 117,250 526,250Settlement (239,067) –Revision (due to farm-in, Kurdistan) (37,589) –Accretion expense (note 7) 52,210 22,659Transferred to disposal group held for sale (note 6) (257,539) –

At 31 December 355,073 719,808

18 Share CapitalThe Company was incorporated under the Companies (Jersey) Law 1991 (as amended) on 6 February 2008. The Company’s authorised share capital is an unlimited number of Ordinary Shares without par value. At incorporation, there was one Ordinary Share issued at $42. On 22 February 2008, a second Ordinary Share was issued at $41.

As part of the Reorganisation described in 2008 Annual Report, the Corporation split its stock such that each existing Common Share of the Corporation was exchanged for either ten Ordinary Shares or ten Exchangeable Shares. The Corporation was a US dollar functional currency entity as is the Company and therefore the balance of Share Capital was carried forward at its historical amount into the financial statements of the Company. The rights of different classes of shares are the same and therefore economically equivalent. As such, Ordinary and Exchangeable Shares were treated as one class of shares for loss per share calculation.

Information about movements in share capital issued before the Reorganisation is presented in the table overleaf on the after split basis, i.e. taking into account, the one for ten split.

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18 Share Capital continuedOrdinary Shares Year ended Year ended 31 December 2009 31 December 2008

Number Amount Number Amount $ $

At 1 January 251,858,374 215,509,055 254,877,480 217,672,243Issue of shares 25,400,000 205,028,335 2 83Exchange of Common Shares for Exchangeable Shares – – (4,431,120) (3,784,296)Exchange of Exchangeable Shares for Ordinary Shares 225,000 192,150 1,182,012 1,009,470Issued on exercise of share options (note 21) 785,000 2,767,723 230,000 611,555Issued on conversion of bonds 6,574,456 34,199,616 – –

At 31 December 284,842,830 457,696,879 251,858,374 215,509,055

Special Voting Share Year ended Year ended 31 December 2009 31 December 2008


At 1 January 1 – – –Issued during the year – – 1 –

At 31 December 1 – 1 –

Exchangeable Shares of Heritage Oil Corporation Each Carrying One Voting Right in the Company

Year ended Year ended 31 December 2009 31 December 2008


At 1 January 3,249,108 2,774,826 – –Exchange of Common Shares for Exchangeable Shares – – 4,431,120 3,784,296Exchange of Exchangeable Shares for Ordinary Shares (225,000) (192,150) (1,182,012) (1,009,470)

At 31 December 3,024,108 2,582,676 3,249,108 2,774,826

Balance of Ordinary Shares of the Company and Exchangeable Shares of HOC – at 31 December 287,866,938 460,279,555 255,107,482 218,283,881

On 18 June 2009, the Company completed the placing of 25,400,000 new Ordinary Shares at a price of £5.20 per share for gross proceeds of $216,848,944 (£132,080,000) to the Company. Share issue costs were $11,820,609 (£7,157,379).

19 ReservesA) Available‑For‑Sale Investments Revaluation ReserveChanges in the fair value and exchange differences arising on translation of available-for-sale investments such as equities, classified as available-for-sale financial assets, are taken to the available-for-sale investments revaluation reserve (note 2k). Amounts are recognised in the income statement when the associated assets are sold or impaired.

B) Foreign Currency Translation ReserveExchange differences arising on translation of a foreign controlled entity are included in the foreign currency translation reserve (note 2s). The reserve will be recognised in the income statement when the net investment is disposed.

C) Share‑Based Payments ReserveThe share-based payments reserve (note 2t), is used to recognise the fair value of options and LTIP awards issued, but not exercised, to employees.

D) Equity Portion of Convertible DebtThe fair value of the conversion feature of the convertible bonds is classified as equity portion of convertible debt (note 2b(iii)) which is included in the reserves in the balance sheet.


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20 Loss Per ShareThe following table summarises the weighted average Ordinary and Exchangeable Shares used in calculating net earnings per share:


2009 2008

Weighted average Ordinary and Exchangeable SharesBasic 273,117,649 254,969,021

Diluted 289,643,434 256,257,622

The weighted average number of shares has been adjusted to reflect the effective one for 10 share split that took place as part of the corporate reorganisation described in note 18. The reconciling item between basic and diluted weighted average number of Ordinary Shares is the dilutive effect of share options and LTIP awards. A total of nil options (31 December 2008 – 22,232,010), nil shares relating to the LTIP (31 December 2008 – 4,926,429) and 27,042,553 of shares relating to the convertible bonds (31 December 2008 – 33,617,020) were excluded from the above calculation, as they were anti-dilutive. However, since the Company has made a loss in each year for the purposes of calculating diluted loss per share, all potential Ordinary Shares have been treated as anti-dilutive.

21 Share‑Based PaymentsShare OptionsThe Company had a share option plan whereby certain directors, officers, employees and consultants of the Group have been granted options to purchase Ordinary Shares. Under the terms of the plan, options granted normally vest one third immediately and one third in each of the years following the date granted and have a life of five years.

Ordinary Share options outstanding and exercisable: Year ended 31 December 2009 Year ended 31 December 2008

Average Average Number exercise price Number exercise price of options £ of options £

At 1 January 24,382,010 1.51 24,612,010 1.51Exercised (note 18) (785,000) 1.29 (230,000) 0.89Balance – end of year 23,597,010 1.52 24,382,010 1.51

Exercisable – at 31 December 23,597,010 1.52 23,040,343 1.45

Number of options

Remaining Exercise price Outstanding Exercisable life (years)

£0.48 2,000,000 2,000,000 0.39£0.81 150,000 150,000 1.48£1.08 – £1.43 17,447,010 17,447,010 1.95£2.45 – £2.51 4,000,000 4,000,000 2.93

23,597,010 23,597,010 1.98

Long Term Incentive PlanOn 19 June 2008, shareholders at the AGM of the Company approved the 2008 LTIP. Under the terms of the plan, the LTIP awards will be in the form of full-value shares (Performance Shares), subject to performance and time-vesting conditions. Eligible employees will normally be considered by the Remuneration Committee for an award once each year. Awards made to the Executive Directors of the Company under the LTIP are called First Awards. Participants in the First Award, however, will not be entitled to any further awards until the 2011 financial year. Awards will normally be made during the period of 42 days following the announcement of year end or half-year financial results. Exceptionally, the First Awards under the plan on 19 June 2008, were permitted to be made within 42 days following approval of the LTIP at the June 2008 AGM.

The plan is intended to apply to Executive Directors and other employees in senior management or leadership roles. By exception, other higher performing and high potential employees may be considered for awards. Participants in the LTIP will not be entitled to any further awards under the 2008 Scheme.

The vesting of shares under award are subject to performance conditions agreed by the Remuneration Committee when the award is made. For the First Awards made in 2008 the performance conditions are the relative TSR (capital gain plus dividends) performance of the Company versus that of a comparator group of international oil companies and a requirement for the share price of the Company to have increased by 20% over the vesting period of three years. Furthermore is an additional holding period of one year following the awards vesting.

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21 Share‑Based Payments continuedThe Remuneration Committee, in consultation with executive reward consultants, approved grants of shares to Executive Directors, senior management and other employees in leadership roles under the LTIP. The maximum annual, individual award for participants who are not Executive Directors is 250% of base package (expressed as the “face value” of the shares). The First Award to Executive Directors is 1,200% of base package for the CEO and 800% of base package for the CFO.

The First Awards vest after three years provided that the performance conditions are met. The awards granted to senior management and other employees in leadership roles are in three tranches that vest after three, four and five years respectively, provided that the performance condition is met at that time.

The awards will vest in line with the following schedule:

Senior management and other employees in leadership First Awards role awards TSR Performance vs Comparator Group of 18 Companies proportion vesting proportion vesting

3rd place and above 100% of the award 100% of the award4th place 80% 100%5th place 50% 100%6th place 30% 100%7th place and below 0% 100%9th place (median) 0% 100%10th place and below 0% 0%

TSR is measured in comparison to a peer group of 18 oil companies selected based on one of or a combination of size (market capitalisation, revenue, turnover, cash expenditure or a combination thereof), area of operations and country of domicile. The TSR measurement is conducted by independent consultants in discussion with the Remuneration Committee.

Since there are market-related conditions the awards of the shares under LTIP were fair valued using the Monte Carlo model which takes into account the market-based performance conditions which effectively estimate the number of shares expected to vest. No subsequent adjustment is made to the fair value charge for shares that do not vest in the event that these performance conditions are not met. Adjustments are, however, made for leavers. The fair value of the awards is recognised as an employee expense with the corresponding increase in equity. The total amount to be expensed is spread over the vesting period during which the employees become unconditionally entitled to the shares and options.

The table below summarises the main assumptions used to fair value the awards made under the above LTIP and the fair values of the shares granted.

First Awards Award date 19 June 2008 19 June 2008 19 June 2008 19 June 2008

Vesting period 3 3 4 5Exercise price nil nil nil nilShare price at date of grant £3.45 £3.45 £3.45 £3.45Expected volatility 40% 40% 40% 40%Expected dividend yield 0% 0% 0% 0%Fair value as at grant date £1.55 £2.49 £2.61 £2.70Number of shares granted 3,507,246 473,061 473,061 473,061

The share-based payment recognised with respect to share options and LTIP awards previously granted, in the year ended 31 December 2009 was $5,269,508 out of which $2,062,661 was capitalised.

22 Related Party TransactionsDuring the year ended 31 December 2009, the Company incurred transportation costs of $269,522 (31 December 2008 – $134,978) with respect to the services provided by a company indirectly owned by Mr. Anthony Buckingham, CEO and a Director of the Company.


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23 Commitments and ContingenciesHeritage’s net share of outstanding contractual commitments at 31 December 2009 was estimated at:

Less than After Total 1 year 1–3 years 4–5 years 5 years $’000 $’000 $’000 $’000 $’000

Long-term debt, including interest 17,160 1,005 9,073 616 6,466Convertible bonds, including interest 156,849 13,957 142,892 – – 174,009 14,962 151,965 616 6,466Effect of interest (31,826) (14,306) (16,442) (219) (859)Total repayments of borrowings 142,183 656 135,523 397 5,607

Operating leases 7,623 417 635 635 5,936Work programme obligations1,2 118,216 60,182 36,634 21,400 –Total contractual obligations 125,839 60,599 37,269 22,035 5,936

1 Work programme obligation includes minimum required financial commitments for the Group to fulfil the requirements of licences and production sharing contracts. 2 In April 2009, in accordance with the option outlined in the PSC in Kurdistan, the KRG nominated a third party participant in the Miran Block. The Company remains the operator

with a 75% working interest in the Miran Block and has received the pro-rata share of 25% of all past work programme expenditures and the third party will be responsible for paying its share of future costs. The KRG and the Group have agreed to replace the agreement under which they had agreed in principle (subject to certain conditions which had not been satisfied) to jointly develop a refinery with an agreement under which the Group has agreed to make payments of up to $35 million from future oil and gas sales from the licence.

The Company may have a potential residual obligation to satisfy any shortfall in officers’ and former officers’ secured real estate borrowings in the event of default, a shortfall on the proceeds from the disposal of the properties and the individuals being unable to repay the balance. The value of the residual obligation was estimated as insignificant.

In many of the countries in which the Group operates, land title systems are not developed to the extent found in many industrial countries and there may be no concept of registered title. Although the Group believes that it has title to its oil and gas properties, it cannot control or completely protect itself against the risk of title disputes or challenges. There can be no assurance that claims or challenges by third parties against the Group’s properties will not be asserted at a future date.

The Group received a letter from the Iraq Ministry of Oil dated 17 December 2007 stating that the PSC signed with the KRG without the prior approval of the Iraqi Government is considered to be void by the Iraqi Government as they have stated it violates the “prevailing Iraqi law”. The Directors believe that the PSC is valid and effective pursuant to the applicable laws.

In addition, the DRC work programme pursuant to the PSC cannot be commenced prior to the grant of a Presidential Decree from the DRC Government. There can be no assurance that final approval or ratification will ever be received in respect of the PSC or that the pre-agreed fiscal terms will not be re-negotiated at a later date by the DRC Government. The Directors are confident that the title will be confirmed.

Furthermore, the Group received a letter from the chairman of the Management Committee of the National Oil Company of Libya dated 28 February 2008 stating that the Block 7 licence area in Malta lies within the Libyan continental shelf and a portion of this area has already been licenced to Sirte Oil Company. This letter also demands that the Group refrain from any activities over, or concerning, the Block 7 licence area and asserts the Libyan Government’s right to invoke Libyan and international law to protect its rights in the Block 7 licence area. The Directors believe that the Libyan Government’s claims are unfounded.

24 Non‑cash Investing and Financing Activities Supplementary Information Year ended 31 December

2009 2008 $ $

Capitalised portion of share-based compensation (2,062,661) (4,639,169)Non-cash property, plant and equipment additions relating to the capitalised portion of share-based compensation 2,062,661 4,639,169

25 Subsequent EventsOn 18 December 2009, Heritage announced that the Company, and its subsidiary Heritage Oil & Gas Limited, had entered into a SPA, with Eni for the sale of its 50% interests in Blocks 1 and 3A in Uganda. On 17 January 2010, Tullow Uganda Limited exercised its right to pre-empt the sale of the Disposed Assets to Eni on the same terms and conditions as agreed in the SPA entered into between Heritage and Eni. The transaction was overwhelmingly approved by shareholders at the General Meeting on 25 January 2010.


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$ US dollars unless otherwise stated

Afren Afren plc

AGM Annual General Meeting

Albion Albion Energy Limited

API a specific gravity scale developed by the American Petroleum Institute for measuring the relative density of various petroleum liquids, expressed in degrees

Articles Articles of Association

bbl/bbls barrel/barrels

bbls/d or bopd barrels per day or barrels of oil per day

bcf billion cubic feet

boe barrels of oil equivalent1

boe/d or boepd barrels of oil equivalent per day

Centric Energy Centric Energy Corporation

Combined Code Combined Code of Corporate Governance published in 2008

Company Heritage Oil Plc

condensate low density, high API hydrocarbon liquids that are present in natural gas fields where it condensates out of the raw gas if the temperature is reduced to below the hydrocarbon dew point temperature of the raw gas

Contingent Resources those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations by application of development projects but which are not currently considered to be commercially recoverable due to one or more contingencies

CSR Corporate Social Responsibility

Dominion Dominion Oil and Gas Limited

DRC The Democratic Republic of Congo

DTR Financial Services Authority’s Disclosure and Transparency Rules

Eagle Energy Eagle Energy (Oman) Limited

EMV Expected Mean Value

Eni Eni International B.V.

ENPV Expected Net Present Value

ESP Electric submersible pump

EU European Union

FEED Front End Engineering and Design

Genel Genel Enerji A.S.

Genel Energy Genel Energy International Limited

Glossary of Terms and Definitions

1 boes may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf: 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Glossary of Terms and Definitions continued

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Gj gigajoules

GPos Geological Probability of Success

Group, Heritage the Company and all of its subsidiaries

HOC or Corporation Heritage Oil Corporation, incorporated in Canada and a wholly owned subsidiary of the Company

IFRS International Financial Reporting Standards

ILO International Labour Organisation

Jersey Companies Law Companies (Jersey) Law 1991

KRG Kurdistan Regional Government

KPI Key Performance Indicators

Kurdistan Kurdistan

Lead potential drilling target that is less well defined than a prospect and requires further data before being considered a prospect for drilling

LOI Letter of Intent

LPG liquid petroleum gas

LSE London Stock Exchange

LTIFR Lost Time Injury Frequency Rate per 10,000 hours worked

LTIP Long Term Incentive Plan

m metres

m3 cubic metres

mbbls thousand barrels

mmbbls million barrels

mboe thousands of barrels of oil equivalent

mmboe millions of barrels of oil equivalent

mcf thousand cubic feet

mcf/d thousand cubic feet per day

mmbtu million british thermal units

mmcf million cubic feet

mmcf/d million cubic feet per day

mmstb million stock tank barrels

N/A not applicable

NGLs natural gas liquids

P10 10% certainty

P50 50% certainty

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P90 90% certainty

Petrodel Petrodel Resources Limited

Petroleum any mineral, oil or relative hydrocarbon (including condensate and natural gas liquids) and natural gas existing in its natural condition in strata (but not including coal or bituminous shale or other stratified deposits from which oil can be extracted by destructive distillation)

Possible Reserves those additional reserves which analysis and geoscience and engineering data suggest are less likely to be recovered than Probable Reserves. The total quantities ultimately recovered from the project have a low probability to exceed the sum of Proved plus Probable plus Possible Reserves

Probable Reserves those additional reserves that are less likely to be recovered than Proved Reserves but more certain to be recovered than Possible Reserves. It is equally likely that actual remaining quantities recovered will be greater than or less than the sum of the estimated Proved plus Probable Reserves

Prospect potential drilling target that is well defined, usually by seismic data

Prospective Resources those quantities of petroleum which are estimated, as of a given date, to be potentially recoverable from undiscovered accumulations

Proved Reserves those quantities of petroleum, which by analysis and geoscience, can be estimated with reasonable certainty to be commercially recoverable. It is likely that the actual remaining quantities recovered will exceed the estimated Proved Reserves

PSA or PSC production sharing agreement or production sharing contract

Regulations UK Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008

Replacement Scheme The Heritage Oil Limited 2008 Replacement Share Option Scheme

RPS RPS Energy

SeaDragon SeaDragon Offshore Limited

SPA Sale and Purchase Agreement

TSX Toronto Stock Exchange

TSR Total Shareholder Return

Tullow Tullow Oil plc

WTI West Texas Intermediate

Conversion Table The following table sets forth standard conversions from Standard Imperial Units to the International System of Units (or metric units). To Convert From To Multiply By

boe Mcf 6mcf Cubic metres 28.174Cubic metres Cubic feet 35.494bbls Cubic metres 0.159Cubic metres bbls oil 6.290Feet Metres 0.305Metres Feet 3.281Miles Kilometres 1.609Kilometres Miles 0.621Acres Hectares 0.405

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Company Secretary Woodbourne Secretaries (Jersey) Limited Ordnance House 31 Pier Road St Helier JE4 8PW Jersey Channel Islands

Registered Office of the Company Ordnance House 31 Pier Road St Helier JE4 8PW Jersey Channel Islands

Head Office and Directors’ Fourth FloorBusiness Address Windward House Route de la Liberation St Helier JE2 3BQ Jersey Channel Islands

UK Office of the Company 34 Park Street London W1K 2JD United Kingdom

Broker and Financial Advisers J.P. Morgan Securities Limited 125 London Wall London EC2Y 5AJ United Kingdom

English Legal Advisers to the Company McCarthy Tétrault Registered Foreign Lawyers & Solicitors 2nd Floor 5 Old Bailey London EC4M 7BA United Kingdom

Jersey Legal Advisers to the Company Mourant du Feu & Jeune 22 Grenville Street St Helier JE4 8PX Jersey Channel Islands

Canadian Legal Advisers to the Company McCarthy Tétrault LLP Suite 3300 421-7th Avenue SW Calgary Alberta T2P 4K9 Canada

Auditors of the Company KPMG Audit Plc 8 Salisbury Square London EC4Y 8BB United Kingdom

Registrars of the Company Computershare Investor Services (Jersey) Limited Ordnance House 31 Pier Road St Helier JE4 8PW Jersey Channel Islands

Principal Bankers of the Company Standard Bank (Europe) Bank of Scotland (Europe) Barclays Bank Investec

List of Advisers

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Independent Petroleum Engineering RPS EnergyConsultants to the Company 309 Reading Road Henley-on-Thames Oxfordshire RG9 1EL United Kingdom

Press Agents Pelham Bell Pottinger 6th Floor Holborn Gate 330 High Holborn London WC1V 7QD United Kingdom

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Group results for the year to 31 December are announced in March/April. The Annual General Meeting is held during the second quarter. Half year results to 30 June are announced in August. Additionally, the Group will issue an Interim Management Statement between ten weeks after the beginning and six weeks before the end of each half year period.

Websitewww.heritageoilplc.com

Financial Calendar

Heritage Oil Plc is an independent oil and gas exploration and production company with a Premium Listing on the London Stock Exchange (“LSE”) (symbol HOIL). The Company is a member of the FTSE 250 Index. The Company has Exchangeable Shares listed on the Toronto Stock Exchange (“TSX”) (symbol HOC) and the LSE (symbol HOX). The Company has core activity areas focused on Africa, the Middle East and Russia.

Overview

01 Highlights04 Company Overview08 Chairman’s Statement

Business Review

12 Chief Executive’s Statement

14 Chief Executive’s Q&A16 Strategy17 Reserves and Resources18 Operations Review20 Kurdistan22 Malta23 Pakistan24 Democratic Republic

of Congo25 Tanzania26 Mali27 Russia28 Uganda30 Financial Review34 Principal Risks38 Corporate Social

Responsibility


46 Board of Directors48 Corporate Governance

Report55 Remuneration Report62 Directors’ Report65 Responsibility Statement

of the Directors

Financial Statements

68 Independent Auditors’ Report to the Members of Heritage Oil Plc

70 Consolidated Income Statement

71 Consolidated Statement of Comprehensive Income

72 Consolidated Balance Sheet

73 Consolidated Statement of Changes in Equity

75 Consolidated Cash Flow Statement

76 Notes to Consolidated Financial Statements

Other

99 Glossary of Terms and Definitions

102 List of Advisers104 Financial Calendar

Front cover picture designed by Hawnaz Wahab, 5th Grade, Halgurd School, Kurdistan (for more information see page 43).

Heritage Oil PlcAnnual Report & Accounts 2009

SECURING OUR FUTURE

www.heritageoilplc.com

Head Office and Directors’ Business Address:Fourth Floor, Windward House La Route de la Liberation JE2 3BQ Jersey Channel Islands

Tel +44 1534 835 400Fax +44 1534 835 412

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Heritage Oil Plc Annual Report & Accounts 2009 · 2020-01-31 · Heritage Oil Plc Annual Report & Accounts 2009 SECURING OUR FUTURE Head Office and Directors’ Business Address: