2011 Full-Year Results

21 February 2012

2011 Full-Year Results

Dragon Oil (Ticker: DGO), an international oil and gas exploration, development and production company, today announces its full-year results for the year ended 31 December 2011. These results are prepared in accordance with International Financial Reporting Standards as adopted by the European Union.

Key Financial Highlights

Key Operational and Corporate Highlights

Drilling and Infrastructure

§ 13 wells completed during 2011 against an initial guidance of 11 wells;

§ Average gross daily rate of production rose 30% to 61,500 bopd;

§ Production exit rate for 2011 exceeded the target reaching 71,751 bopd (2010: 57,013);

§ Drilling from the Dzheitune (Lam) C platform commenced; and

§ Dzheitune (Lam) Block-1 gathering station completed and operational.

Corporate and Commercial Developments

§ Dragon Oil sets a 100,000 bopd production target to be reached in 2015 and to be maintained for a minimum of five years thereafter;

§ The Board recommends the payment of a final dividend of US cents 11 per share for 2011; the full-year dividend for 2011 amounts to US cents 20 (2010: 14 US cents);

§ Year-end oil and condensate 2P reserves increased (after allowing for 2011 gross production) by 41 million barrels to 658 (December 2010: 639) million barrels at year-end 2011 with oil and condensate contingent resources upgraded to 88 (December 2010: 47) million barrels; gas 2P reserves and contingent gas resources remained at similar levels of c. 3 TCF;

§ Marketing arrangements via Baku, Azerbaijan extended until the end of 2012 for all entitlement production;

§ Farm-in agreement signed for a 55% participating interest in an offshore exploration block in Tunisia;

§ Limited share buyback programme concluded on 4 November 2011 with five million shares purchased;

§ Nomura International plc appointed Joint Corporate Broker alongside Davy; and

§ Ernst & Young appointed auditors to the Group.

Strong Outlook for 2012-15

§ Complete between 13 and 15 wells in 2012 and 15 to 20 development wells per year in 2013-15;

§ Target annual production growth of 15% in 2012 and 10-15% on average per annum for 2012-15;

§ Reach the 100,000 bopd production target in 2015;

§ Evaluate options to enhance oil recovery from the reservoir by performing and analysing results of a water injection pilot project;

§ Dzhygalybeg (Zhdanov) A platform due in 2H 2012;

§ Plans to award a contract in 2012 to build the Dzheitune (Lam) D and E platforms;

§ New jack-up rig under construction ("Caspian Driller") expected for delivery in 1H 2012;

§ Additional platform-based rig is currently being sourced to be mobilised in 2H 2012;

§ US$1.0 billion estimated capital expenditure for oil infrastructure in 2012-15, including US$250 million for 2012 projects expected to be funded from operational cash flow;

§ Minimise flaring and progress gas monetisation subject to market conditions; and

§ Actively pursue the diversification strategy.

Dr Abdul Jaleel Al Khalifa, CEO, commented:

"In 2011, we achieved a remarkable production growth, 30% increase in gross field production, which has translated into record financial results for the Group. The year also saw several significant infrastructure projects coming to fruition, including the installation of the Dzheitune (Lam) C platform and the Dzheitune (Lam) Block-1 gathering platform, both of which are now operational.

"I am particularly pleased that the excellent results we have achieved with respect to drilling this year have been complemented by the addition of some 41 million barrels of oil and condensate to our 2P reserves, allowing us to achieve a reserve replacement ratio of 183%, while another 88 million barrels are booked as contingent oil and condensate resources.

"We also made progress in our diversification plans in 2011, with the signing of the farm-in agreement with a subsidiary of Cooper Energy Limited for an offshore exploration block in Tunisia. We are actively utilising the in-house exploration talent and have hired a seasoned Exploration Manager with over 30 years of related experience.

"Looking ahead I am confident that Dragon Oil will reach the challenging new 100,000 bopd production target in 2015 and sustain this level for at least five years thereafter. We have both talent and financial resources to deliver on this target."

Analyst meeting and conference call details:

Dragon Oil will host an analyst meeting and conference call today at 9.00am. Please contact Kate Lehane at Citigate Dewe Rogerson on +44 (0)20 7282 1063 or at [email protected] for further details.

A replay of the conference call will be available from around 1pm today until 28 February 2012.

Replay numbers:

For further information please contact:

About Dragon Oil

Dragon Oil plc is an international oil and gas exploration, development and production company, quoted on the London and Irish Stock exchanges (Ticker symbol: DGO). Its principal producing asset is in the Cheleken Contract Area, in the eastern section of the Caspian Sea, offshore Turkmenistan.

Dragon Oil (Turkmenistan) Ltd., a wholly owned subsidiary of Dragon Oil plc, holds 100% interest in and is the operator of the Production Sharing Agreement for the Cheleken Contract Area. The operational focus is on the re-development of two oil-producing fields, Dzheitune (Lam) and Dzhygalybeg (Zhdanov).

www.dragonoil.com 

Disclaimer

This news release may contain forward-looking statements concerning the financial condition and results of operations of Dragon Oil. Forward-looking statements are statements of future expectations that are based on management's current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in these statements. No assurances can be given as to future results, levels of activity and achievements and actual results, levels of activity and achievements may differ materially from those expressed or implied by any forward-looking statements contained in this report. Dragon Oil does not undertake any obligation to update publicly or revise any forward-looking statement as a result of new information, future events or other information.

2011 Full-Year Results

Overview by the Chief Executive Officer

Excellent Operational Year

Last year, we achieved a spectacular production growth of 30%. This was due to a combination of critical factors: an intensive drilling programme, expanded offshore and onshore infrastructure, impressive performance from the Dzheitune (Lam) West area and concerted effort and hard work by management and employees who made it happen.

From 47,200 bopd in 2010, we increased average gross production to 61,500 bopd in 2011. We also finished the year at an exit rate of 71,751 bopd.

Moreover, the 71,751 bopd is a landmark level: we have realised more than a ten-fold increase in the gross production since the turn of 1999-2000 when Dragon Oil became the operator of the Cheleken Contract Area. Our knowledge of the reservoirs, advances in technologies, careful planning and execution have enabled us to become a strong, established, independent oil producer with significant resources to expand organically and inorganically and to deploy our expertise outside of Turkmenistan.

Organic growth in oil and condensate 2P reserves was considerable last year: a reserves replacement ratio of 183% against the 2011 gross production. Encouraging results from the Dzheitune (Lam) West area, since we entered this previously undrilled part of the reservoir in 2007, contributed to a comprehensive review, conducted in 2011, of the recent performance and production potential of the Cheleken Contract Area. The results of the review gave us confidence to announce the goal of reaching a 100,000 bopd production target in 2015, which can then be sustained for a minimum of five years.

Accomplishments on the production side were not the only success story last year. The impressive production rate in 2011 combined with a realised oil price of above US$100 translated into significant revenues for the Group. We surpassed the US$1 billion mark in terms of turnover for the first time and generated substantial cash, some of which will be distributed as dividends and will also finance infrastructure expansion and drilling activities. Most of the cash generated will be retained to help achieve our strategy of diversification through acquiring or investing in new assets as and when such opportunities become available.

We secured a marketing route for the full volume of our entitlement production until the end of 2012 via Baku, Azerbaijan, that has proven to be a reliable outlet for our crude oil to-date.

The infrastructure expansion continued at a steady pace in 2011. The Dzheitune (Lam) C platform, a third new wellhead and production platform installed by Dragon Oil in the Contract Area, and the Dzheitune (Lam) Block-1 gathering platform were completed on time and operations from them commenced in early January 2012. We have experienced some delays in the delivery of the Caspian Driller and construction of the Dzhygalybeg (Zhdanov) A platform, which are now expected in 1H 2012 and 2H 2012, respectively. We will do our utmost to work around these issues and have modified our drilling plans to ensure minimum impact on our operations.

Diversification and Gas Monetisation

We have made progress on executing our diversification strategy by farming into the Bargou Exploration Permit, offshore Tunisia; this particular asset ticked many boxes in our search and evaluation criteria. While the 55% participating interest transaction may not appear material in terms of initial investment, we believe it has added an interesting exploration play to our existing asset. Notably, the permit's area (4,616km2) is almost five times larger than the Cheleken Contract Area with a number of independent leads and prospects, although its potential remains to be proven. This farm-in asset is a start to building our exploration expertise; we have recently hired an Exploration Manager, a geologist by training with over 30 years of exploration experience with a proven record of both oil and gas discoveries, to support us in this goal. We would look to add a few select exploration assets while focusing on finding a right-fit producing asset in the regions close to our home base.

In the second half of 2011, we were able to reduce significantly the flaring of our gas by supplying it into the Turkmenistan system as part of the commissioning of the government's compressor station. We will continue to review the situation regularly with our Turkmenistan counterparties and discuss a range of options for the monetisation of gas, including a long-term gas sales agreement, targeted towards export markets. In the meantime, we are exploring options for condensate recovery from our unprocessed gas.

operating and financial review

Production

An extensive drilling campaign undertaken in 2011 allowed us to reach average gross field production of 61,500 bopd (2010: 47,200 bopd). This represents a remarkable increase of 30% over the previous year's gross production. By adapting and optimising our drilling plans, Dragon Oil completed 13 wells against the original target of 11 wells during 2011 allowing us to achieve production growth significantly above the initial guidance of 10-15%.

For 2011, the entitlement production was approximately 53% (2010: 61%) of the gross production. Entitlement barrels are finalised in arrears and are dependent upon, amongst other factors, operating and development expenditure in the period and the realised crude oil price. Higher realised crude oil prices and lower development expenditure during the year resulted in the lower entitlement rate for 2011.

Marketing

In 2011, sales amounted to 11.4 (2010: 10.8) million barrels of crude oil. The 6% increase in the volume sold over the previous year is mainly due to higher production. The increase in the volumes of crude oil sold was less than the production growth rate due to a combination of a lower entitlement rate in 2011 compared to 2010 and changes in the lifting position.

Approximately 99% (2010: approximately 60%) of the Group's crude oil production was exported to international markets through Baku, Azerbaijan with the balance sold to an independent third party.

During 2011, we secured an extension of the current marketing arrangements via Baku, Azerbaijan until 31 December 2012 for our full entitlement production volume. The terms of the contract remain FOB the Aladja Jetty primarily using the BP-operated BTC (Baku-Tbilisi-Ceyhan) pipeline. We expect that for 2012 the realised crude oil prices will be in the range of 10% to 13% discount to Brent.

The Group was in an underlift position of approximately 0.05 million barrels of crude oil at the end of 2011 (31 December 2010: overlift position of 0.2 million).

Drilling

Dragon Oil originally set an objective of completing 11 wells during 2011; however, thanks to spare infrastructure capacity and faster drilling rates, we were able to upgrade our plans to 13 wells. The leased rig completed six wells versus five wells planned at the beginning of the year; while availability of additional slots on the Dzheitune (Lam) A platform gave us an opportunity to drill an extra well using the Iran Khazar rig.

The drilling plans are based on the hydrocarbon distribution and oil reserves in every zone. Drilling results from the Dzheitune (Lam) West area over the last five years have shown that this area has a higher potential for shallow reservoirs. Two thirds of the wells drilled in 2011 were in the Dzheitune (Lam) West area. Out of these ten wells, three are considered deep, four were drilled to middle zones and three were targeting shallow horizons. In the future, we plan to drill various wells based on the hydrocarbon distribution and targeting oil reserves in every zone.

The table below summarises the results of the 2011 drilling programme:

Note*: The Dzheitune (Lam) 13/163 well was completed with a single string to a depth of 2,703 metres by Rig 40 in December 2011 and tested at 296 bopd. Additional data initially acquired on this well led to the re-completion of the Dzheitune (Lam) 13/163 in different reservoir intervals in January 2012 and, consequently, allowed to achieve a higher production rate.

In early January 2012, we reported successful completion and testing of a sidetrack of the Dzheitune (Lam) 13/140 well performed by Rig 40 and we put into production the Dzheitune Lam A/165 well, a strong start to the 2012 drilling programme.

The following table summarises the results from drilling in the Dzheitune (Lam) field reported since the beginning of the year:

The Iran Khazar and the leased platform-based rigs are currently drilling the Dzheitune (Lam) C/167 and 28/166 wells, respectively, while Rig 40 is working over the Dzheitune (Lam) 13/144B well.

During 2011, Dragon Oil employed three drilling rigs for all or part of the year. The same rigs are expected to be used in 2012 for all or part of the year, along with the addition of the Caspian Driller, which is expected for delivery in 1H 2012, as well as another 2,000 horse-power platform-based rig, which is planned for mobilisation in 2H 2012.

The contract for the leased platform-based rig has been extended to drill three more wells. We have also commenced the tendering process for a 2,000 horse-power platform-based rig.

In 2011, a preliminary water injection study using a dynamic simulation model was completed for the Dzheitune (Lam) 75 area. Subsequently, based on the simulation results, an injectivity test was conducted in June 2011. The results from the preliminary injectivity test are encouraging and the Group intends to implement a pilot water injection project in 2012. Data from project and analysis of the results are anticipated over the next two-three years. The Group is in the process of procuring equipment for this pilot water injection project, which is the first in a series of steps before a potential implementation on a wider scale in 2015.

In addition, to optimise well performance and production, the Group has embarked on a project to install equipment to have access to permanent downhole pressure monitoring. The first permanent pressure gauge is expected to be installed in 2H 2012.

Infrastructure

Installation of the Dzheitune (Lam) C platform was completed on schedule and drilling commenced in early January 2012 with the Iran Khazar rig spudding the first well on this platform, Dzheitune (Lam) C/167.

In 2011, we carried out structural upgrades on four platforms adding four extra slots for drilling with a jack-up drilling rig on each of the Dzheitune (Lam) platforms 21 and 22 and Dzhygalybeg (Zhdanov) platforms 21 and 60. This allows us to create additional capacity in our infrastructure from which we can benefit later should we need to adapt our drilling plans. Six slots were added on the Dzheitune (Lam) A platform allowing us to schedule the Iran Khazar rig for drilling from this platform in 2011.

The new Dzheitune (Lam) Block-1 gathering platform has been commissioned following the re-connection of the pipelines feeding into this gathering station from the old Block-1. In parallel with Block 1, in 2011, Dragon Oil replaced the old Dzeitune (Lam) Block-2 gathering platform with a new Block-2. We are currently re-connecting the remaining few pipelines and will commission the platform shortly. These are vital infrastructure elements. The brand new modern-design Blocks took the place of the old gathering stations and will help increase the throughput capacity of the Dzheitune (Lam) West area.

Completion of Block-4 gathering platform and installation of the associated pipelines are expected in the second half of 2012. It will act as a gathering station for the production from new wellhead and production platforms in the Dzhygalybeg (Zhdanov) field.

In 2011, we commissioned an onshore pipeline from the Central Processing Facility to the Turkmenistan government's Booster Compressor Station ("the compressor station") allowing us to start supplying unprocessed gas as part of the commissioning of the compressor station.

As part of the ongoing programme to replace old infrastructure and remove bottlenecks from the system, we installed new subsea pipelines between a number of production and gathering platforms and installed pigging systems for three subsea pipelines. In 2011, we awarded contracts for the EPIC of subsea pipelines between the Dzheitune (Lam) B platform and Block 1 (18-inch) and between Block 1 and 2 (20-inch). The work has commenced and the installation of these subsea pipelines is scheduled for 2H 2012.

Over the next four years, we plan to install at least four wellhead and production platforms in the Dzheitune (Lam) field, while in the Dzhygalybeg (Zhdanov) field the completion of the Dzhygalybeg (Zhdanov) A and B platforms is anticipated in 2H 2012 and 1H 2013, respectively. Each of these Dzhygalybeg (Zhdanov) platforms will have 16 slots and accommodation facilities; their design will allow the deployment of either a platform-based or a jack-up rig.

All new platforms will be constructed according to a standardised template and modern design. We are currently undertaking a tendering process to select a contractor to build the Dzheitune (Lam) D and E platforms and associated in-field pipelines. The contract will also include the development of the fabrication yard in the harbour area near our operations. These platforms will be suitable for the deployment of a jack-up rig. Once the contract is awarded, we anticipate a time span of about two years for the platforms to be constructed and installed.

In 2011, we carried out a geophysical and geotechnical investigation to evaluate locations for 10 future platforms in the Dzheitune (Lam) and Dzhygalybeg (Zhdanov) fields. Geophysical and geotechnical investigations to evaluate locations for future platforms are undertaken on an ongoing basis, currently we are evaluating over 20 sites for platforms and gathering stations.

Dragon Oil has commenced the plugging, abandonment and decommissioning activities in the Cheleken Contract Area. We have identified groups of wells based on their status and age. The Group has also awarded a contract to a company specialising in offshore operation for the plugging and abandonment of old shut-in wells. Overall, up to 15 such wells are expected to be plugged starting from 2Q 2012. Additionally, we intend to conduct work and select a contractor to start dismantling old non-producing platforms in the Dzheitune (Lam) and Dzhygalybeg (Zhdanov) fields. The cost of the projects is to be covered from the abandonment and decommissioning funds.

In order to enhance the Group's offshore and onshore capabilities, a number of projects are being undertaken. A study has been completed to review the existing throughput capacity of the channel in the harbour area used to transport men and materials offshore and the Aladja Jetty used for export of crude oil. Based on the findings of the study, we are preparing an EPIC contract for channel dredging and breakwater construction in order to enhance the Group's operational and crude oil loading capacity. The Group is planning to triple its crude oil storage capacity at the CPF.

Reserves and resources

Based on the results of the recent assessment by an independent energy consultant, the 2011 year-end oil and condensate 2P reserves were upgraded to 658 (31 December 2010: 639) million barrels. The gas 2P reserves decreased slightly to 1.5 (31 December 2010: 1.6) TCF corresponding to approximately 250 million barrels of oil equivalent dependent on the ongoing discussions with the government of Turkmenistan on a gas sales agreement.

The oil and condensate contingent resources of 88 million barrels and the increase of approximately 41 million barrels in oil and condensate 2P reserves are mainly due to an increase in reserves in the Dzheitune (Lam) West area. Performance from certain wells drilled outside the proven hydrocarbon boundary in the Dzheitune (Lam) West area has shown a bigger area extension with a higher potential for the shallow reservoirs. These findings led to an increase in our oil and condensate 2P reserves and resulted in a reserve replacement of 183% against the 2011 gross production.

The gas contingent resources remained at 1.4 (31 December 2010: 1.4) TCF. Necessary upgrades of and additions to offshore and onshore infrastructure are planned to allow the conversion of the contingent resources into reserves in the future.

No changes have been made to the estimates of recoverable oil from the Dzhygalybeg (Zhdanov) field, where we believe 15% of the total proved and probable recoverable reserves are contained. We plan to start drilling in the Dzhygalybeg (Zhdanov) field later this year. This will enable us to understand better what the field is capable of producing.

Gas Monetisation

In 2011, we reduced flaring of gas by over two thirds after we commissioned the pipeline connecting our CPF to the Turkmenistan government's compressor station and the subsequent commissioning of the compressor station in the second half of last year. At the moment, a major portion of the unprocessed gas is feeding into the compressor station. We continue, as we have done in the past, to supply a small proportion of gas to the Hazar town near our operations for domestic use, helping the local community, and to a number of local plants. The reduction of flaring is an important achievement for Dragon Oil as a good corporate citizen and one of the largest independent hydrocarbon producers in Turkmenistan.

In parallel, we continue to discuss with the government of Turkmenistan a range of options for the monetisation of gas, including a long-term gas sales agreement, targeted towards export markets. That would require us to supply processed (or "dry") gas into the Turkmenistan system and for that, the initial capital expenditure, operating costs and the output received warrant a construction of a plant that is based on a modern technology with the best cost-benefits balance. The processing capacity of the plant is expected to be 220 mmscfd of gas, allowing us to strip condensate and blend it with crude oil, and we anticipate the tendering process to start this year with the construction phase to take two years once the contract is awarded.

Diversification

On 10 October 2011, Dragon Oil announced that it had signed a farm-in agreement with a wholly owned subsidiary of Cooper Energy Limited through which Dragon Oil is to earn a 55% participating interest in the Bargou Exploration Permit, offshore Tunisia, subject to confirmation from the Government of Tunisia. Further, if the Joint Venture proceeds with a development phase, Dragon Oil will assume operatorship of the block.

Recently, we have hired an Exploration Manager with a proven record of both oil and gas discoveries. This is in line with our strategy to build our own in-house exploration team.

Dragon Oil has been pre-qualified to participate in the fourth round of bidding in Iraq (due to take place in 1H 2012). Twelve exploration blocks are on offer in this bidding process. This round, given Iraq's significant hydrocarbon resource base, creates a potentially attractive diversification opportunity for the Group.

In relation to the Group's minority interests in the Republic of Yemen (which it acquired in December 2007), the interests in Blocks 49 and R2 were relinquished due to lack of commerciality. The Group on behalf of the consortium has notified the government of Yemen of the intention to relinquish Block 35. We anticipate receiving the confirmation from the government in due course.

Dragon Oil continues to screen and evaluate targets that fit our criteria within Africa, Central Asia, the Middle East and selectively south-east Asia in order to create a diversified balanced portfolio of exploration and development assets for the Group.

Share Buyback Programme

In 2011, Dragon Oil launched a limited share buyback programme of up to five million shares in the Company. The buy-back programme commenced on 26 September 2011 and concluded on 4 November 2011. The sole objective and purpose of the programme was to meet all relevant obligations arising from the Company's various share schemes.

As of 4 November 2011, 100% of the targeted number of shares was purchased at a weighted average price of GBP 4.84 per share.

Dividends

The Board of Directors of Dragon Oil recommends the payment of a final dividend of US cents 11 per share. Together with the interim dividend of US cents 9, the total dividend for the year ended 31 December 2011 is US cents 20. The final dividend of US cents 11 is subject to shareholder approval at the Annual General Meeting to be held in London, UK on 18 April 2012. If approved, the final dividend of US cents 11 is expected to be paid on 27 April 2012 to shareholders on the register as of 30 March 2012.

The following is the dividend timetable for the shareholders' information:

21 February 2012: Declaration of final dividend

28 March 2012: Ex-Dividend Date

30 March 2012: Record Date

18 April 2012: AGM

27 April 2012: Dividend Payment Date.

The dividend is declared in US dollars, the Group's functional currency. The exchange rate for the pound sterling or euro amounts payable will be determined by reference to the exchange rates applicable to the US dollar on the closest practicable date to the dividend payment date. The new shareholders, who bought Dragon Oil shares in the last 12 months, will receive instructions regarding currency elections, dividend withholding tax ("DWT") and bank mandate forms in the post. These forms are also available on the Group's corporate website, www.dragonoil.com.

The closing date for receipt of currency elections is 30 March 2012. By default shareholders (other than shareholders holding their shares within CREST) with registered addresses in the UK will be paid their dividends in pounds sterling. Those with registered addresses in European countries, which have adopted the euro, will be paid in euro. Shareholders with registered addresses in all other countries will be paid in US dollars. Shareholders may, however, elect to be paid their dividends in a currency other than their default currency, and will have a choice of US dollars, euro or pounds sterling provided such election is received by our registrars by the record date for the dividend. As the above arrangements can be inflexible for institutional shareholders, where shares are held in CREST, dividends are automatically paid in US dollars unless a currency election has been made. CREST members should use the facility in CREST to make currency elections. Currency elections must be made in respect of entire holdings and partial elections are not permitted.

Dividends can be paid directly into a UK bank account to shareholders who elect for their dividend to be paid in pounds sterling and to an Irish bank account where shareholders elect to receive their dividend in euro. A dividend reinvestment plan is not available under the Company's dividend policy.

Irish DWT must be deducted from all dividends paid by an Irish resident company, unless a shareholder is entitled to an exemption and has submitted a properly completed exemption form to the Company's Registrar, (by post) Capita Registrars, PO Box 7117, Dublin 2, Ireland (or by hand) Capita Registrars, Unit 5, Manor Street Business Park, Manor Street, Dublin 7, Ireland, by the dividend record date. DWT is deducted at the standard rate of Income Tax (currently 20%). Non-resident shareholders and certain Irish companies, trusts, pension schemes, investment undertakings and charities may be entitled to claim exemption from DWT. Copies of forms applicable to all exemption types may be obtained online from Irish Revenue (www.revenue.ie/en/tax/dwt/forms/index.html).

Individuals who are resident in Ireland for tax purposes are not generally entitled to an exemption from Irish DWT.

Our People

In 2011, the Group increased its average headcount to 1,223, an 11% increase over the previous year. The Group continued with its objective of strengthening our expertise, cultural diversity and talent through hiring experienced and competent people.

Our guiding principle of "People First" continues to drive our focus on training, empowering and trusting our talented workforce. It also drives our commitment towards the people in the community. The desalination unit and the recently awarded contract for the construction of a polyclinic are only examples of such efforts.

Corporate Social Responsibility

In 2012-13, Dragon Oil is undertaking a significantproject, building a polyclinic in Hazar, Turkmenistan to provide healthcare services to our employees and local community. In 2010-early 2011, Dragon Oil completed the concept design and scope of work, while the actual tendering process to award this project to a contractor took place in 2011. We are pleased to report that the contract, which will be worth some US$5 million, has been awarded to an international contracting company and is at the initial engineering stage. We anticipate that the polyclinic will be constructed by early 2013.

Smaller-scale community-support projects included refurbishment of a local school and nursery. During 2011, we sponsored a number of sports, social and cultural events in Hazar; we will continue to do so for the benefit of the community.

We are extending our corporate social responsibility work to other regions of interest to us. In particular, Iraq is one of the countries where we feel there are significant opportunities for operators to explore and develop the country's substantial hydrocarbon resources. One of the projects we are commencing in Iraq is the refurbishment of sanitary facilities at three secondary schools for girls in the Basra City, Iraq.

Outlook for 2012

For 2012, our target is to achieve a 15% increase in gross production on the basis of 13-15 wells, which are expected to be put into production during the year as well as a number of workovers. The details of the drilling programme are as follows:

·; Rig 40 is working on the Dzheitune (Lam) 13 platform: it has completed a sidetrack of the 13/140A well and is currently working over the 13/144B well; after that it is scheduled to drill two more wells and perform a sidetrack operation on an existing well;

·; The leased platform-based rig is currently completing the Dzheitune (Lam) 28/166 well and will drill up to three more wells in 2012;

·; The Iran Khazar rig completed the Dzheitune (Lam) A/165 well in early January and was then mobilised to the newly-installed Dzheitune (Lam) C platform where it is currently drilling the Dzheitune (Lam) C/167 development well and after that well is due to complete three more wells until the end of the year;

·; The Caspian Driller is expected in 1H 2012 and we anticipate to be able to complete three wells using this rig in the second half of the year; and

·; A new 2,000 horse-power platform-based rig is currently being sourced and is expected to be mobilised to the field in 2H 2012 where it is due to complete one well.

Over the 2012-15 period, we expect to maintain an average production growth of 10% to 15% per annum, taking our gross field production to a level of 100,000 bopd in 2015 with the aim of maintaining this level for a minimum period of five years thereafter. Delivery of the production targets, including the attainment of this sustainable production level is supported by a development plan that envisages the deployment of up to three jack-up rigs, additional platform-based rigs, construction of new platforms and execution of a range of key infrastructure projects.

The infrastructure spend in 2012 is expected to amount to US$250-300 million, while the overall infrastructure capex for 2012-15 is likely to surpass US$1 billion.

Financial Summary

Dragon Oil has strengthened its balance sheet further in the last 12 months with a growth of 24% in net assets to US$2.6 billion. This comprises increases of US$693 million in total assets, offset by an increase of US$197 million in total liabilities. The Group has no debt and is able to finance its operations internally with net cash generated from its operations in Turkmenistan.

A 47% increase in revenue to US$1,151 million and a 76% increase in operating profit to US$856 million are attributed mainly to increased average realised crude oil prices in 2011 and increased production. Earnings per share were 68% higher than in 2010 and net cash from operations was up 71% over 2010.

Key financial data 

Income Statement

Revenue

Gross production levels in 2011 averaged about 61,500 bopd (2010: about 47,200 bopd) on a working interest basis.

Revenue for the year was US$1,151 million compared with US$780 million in 2010. The increase of 47% over the previous year is primarily attributable to a 40% increase in the average realised crude oil price and a 6% increase in the volume of crude oil sold over the previous year. The average realised crude oil price during the year was approximately US$101 per barrel (2010: US$72 per barrel) and was at a 9% (2010: 9%) discount to Brent during the year. The 6% increase in the volume sold over the previous year is mainly due to higher production. The increase in the volumes of crude oil sold was less than the production growth rate due to a combination of a lower entitlement rate in 2011 compared to 2010 and changes in the lifting positions. The PSA includes provisions such that parties to the agreement may not lift their respective crude oil entitlements in full, and as such, underlifts or overlifts of crude oil may occur at period-ends.

Operating profit

Gross profit is measured on an entitlement basis. The entitlement production was approximately 53% (2010: 61%) of the gross production in 2011. Entitlement barrels are finalised in arrears and are dependent on, amongst other factors, operating and development expenditure in the period and the realised crude oil price. The lower proportion of entitlement barrels in 2011 is primarily due to the higher realised crude oil price and lower development expenditure during the year. 

At the year-end, the Group was in an underlift position of approximately 0.05 million barrels that is recognised and measured at market value (31 December 2010: overlift position of 0.2 million barrels).

The Group generated an operating profit of US$856 million (2010: US$488 million), 76% higher than in the previous year.

The increase in operating profit of US$368 million was primarily on account of higher revenue. The Group's cost of sales was US$267 million in 2011 compared to US$265 million in 2010, an increase of about 1%. Cost of sales includes operating and production costs and the depletion charge. The increase is primarily due to increased depletion charge during the year, offset by lower marketing costs and movement in the lifting position. Lower marketing costs in 2011 are due to the higher volume, of about 99% (2010: 60%), of crude oil exported on FOB basis ex-Aladja Jetty.

The depletion and depreciation charge during the year was higher by about 9% at US$205 million (2010: US$188 million) primarily due to an upward revision in estimates of field development costs and the increased entitlement barrels during the year.

Administrative expenses (net of other income) remained similar at US$28 million (2010: US$28 million), with an increase in head office costs during 2011 offset by one-off charges in the previous year.

Profit for the year

Profit for the year was US$648 million (2010: US$386 million), 68% higher than the previous year. The profit for the year includes finance income of US$16 million (2010: US$27 million) and a higher taxation charge of US$223 million (2010: US$129 million). Finance income decreased in 2011 despite the higher cash and cash equivalents and term deposits maintained during the year due to lower interest yields.

During 2008, the effective tax rate applicable to the Group's operations in Turkmenistan was increased to 25% by the Hydrocarbon Resources Law of 2008. The Group has continued to apply this rate in determining its tax liabilities as at 31 December 2011. The Group is in discussions with the authorities in Turkmenistan about the applicability of this rate to periods prior to 2008, but it does not believe that these prior periods are affected by the new rate. A provision has been made in respect of the additional tax that could become payable if the increased tax rate were applied to prior periods based on the expected value (weighted average probability) approach.

Basic EPS of 126 US cents for the year were 68% higher than the previous year (2010: 74.9 US cents).

Balance Sheet

Investments in property, plant and equipment were higher by US$178 million primarily due to capital expenditure of US$351 million (2010: US$460 million) incurred on oil and gas interests and reclassification of drilling supplies of US$32 million, offset mainly by the depletion and depreciation charge during the year. The expenditure during the year was on drilling and infrastructure projects in Turkmenistan. Of the total capital expenditure on oil and gas interests for 2011, 47% was attributable to infrastructure (2010: 55%) with the balance spent on drilling. The infrastructure spend during the year included construction of the Dzheitune (Lam) C and Dzhygalybeg (Zhdanov) A platforms, work on Block-1, 2 and 4 gathering stations, additional slots on the Dzheitune (Lam) A platform, upgrade of certain existing platforms and construction of a crane vessel, as well as the geophysical and geotechnical investigation to evaluate locations for future platforms.

Current Assets and Liabilities

Current assets rose by US$515 million primarily due to an increase of US$523 million in term deposits and US$86 million in trade receivables partly offset by a decrease of US$40 million in inventories mainly owing to the reclassification of drilling supplies and US$54m in cash and cash equivalents. The cash and cash equivalents and term deposits at the year-end were US$1,806 million, including US$279 million (2010: US$174 million) held for abandonment and decommissioning activities. Amounts of US$1,718 million (2010: US$1,195 million) are held in term deposits with original maturities greater than three months.

Current liabilities rose by US$164 million due to increases of US$123 million in the abandonment and decommissioning liability owing to increased production and US$101 million towards the current tax liability, offset by a decrease of US$47 million in trade and other payables and movement of US$13 million in overlift creditors.

Cash flows

Net cash generated from operations during the year increased by US$421 million to US$1,016 million (2010: US$595 million). The increase was primarily attributable to the higher average crude oil sales price realised during the year and the change in the working capital position.

Cash used in investing activities was US$914 million (2010: US$722 million), comprising capital expenditure of US$407 million (2010: US$424 million) and placement of additional term deposits of US$523 million (2010: US$325 million), offset by interest received on cash and cash equivalents and term deposits of US$16 million (2010: US$27 million). Cash used in financing activities was US$155 million (2010: generated by financing activities US$2 million) on account of payment of dividends of US$118 million (2010: nil) and that used for the share buy-back programme of US$38 million (2010: nil) slightly offset by proceeds of US$1 million (2010: US$2 million) from the issue of share capital resulting from the exercise of share options.

Group balance sheet

As at 31 December

Group income statement

Year ended 31 December

Group statement of comprehensive income

Year ended 31 December

Group cash flow statement

Year ended 31 December

Group statement of changes in equity

1 General information

Dragon Oil plc ("the Company") and its subsidiaries (together "the Group") are engaged in upstream oil and gas exploration, development and production activities primarily in Turkmenistan under a Production Sharing Agreement ("PSA") signed between Dragon Oil (Turkmenistan) Limited and The State Agency for Management and Use of Hydrocarbon Resources at the President of Turkmenistan ("the Agency"). The production of crude oil is shared between the Group and the Government of Turkmenistan as determined in accordance with the fiscal terms as contained in the PSA.

The Company is incorporated in Ireland. The Group headquarters is based in Dubai, United Arab Emirates ("UAE").

The Company's ordinary shares have a primary listing on the Irish Stock Exchange and a premium listing on the London Stock Exchange.

These abridged financial statements have been approved for issue by the Board of Directors on 20 February 2012.

2 Basis of preparation

In accordance with EU Regulations, the Group is required to present its annual consolidated financial statements for the year ended 31 December 2011 in accordance with EU adopted International Financial Reporting Standards ("IFRS"), International Financial Reporting Interpretations Committee ("IFRIC") interpretations and those parts of the Irish Companies Act, 1963 to 2009 applicable to companies reporting under IFRS and Article 4 of the International Accounting Standards ("IAS") Regulation.

This financial information has been extracted from the consolidated financial statements for the year ended 31 December 2011 approved by the Board of Directors on 20 February 2012. The financial information comprises the Group balance sheets as of 31 December 2011 and 31 December 2010 and related Group income statements, statements of comprehensive income, cash flow statements, statements of changes in equity and selected notes for the twelve months then ended, of Dragon Oil plc. This financial information has been prepared under the historical cost convention except for the measurement at fair value of share options, underlift receivables/overlift payables.

The preliminary results for the year ended 31 December 2011 have been prepared in accordance with the Listing Rules of the Irish Stock Exchange.

The preparation of financial information 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 Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the Group financial information are disclosed in Note 4.

3 Accounting policies

The accounting policies used are consistent with those set out in the audited financial statements for the year ended 31 December 2010, which are available on the Company's website, www.dragonoil.com, except for the reclassification of drilling supplies to 'Property, plant and equipment' in the current year, and the following new and amended IFRS and IFRIC interpretations effective as of 1 January 2011:

·; IAS 24 Related Party Transactions (amendment) effective 1 January 2011;

·; IAS 32 Financial Instruments: Presentation (amendment) effective 1 February 2010;

·; IFRIC 14 Prepayments of a Minimum Funding Requirement (amendment) effective 1 January 2011; and

·; Improvements to IFRSs (May 2010).

The application of these standards and interpretations did not result in material changes to the financial statements.

4 Critical accounting judgements and estimation uncertainties

The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities as well as contingent assets and liabilities at the date of the balance sheet, and the reported amounts of revenues and expenses during a reporting period. The resulting accounting estimates will, by definition, seldom equal the related actual results.

The critical accounting judgements and estimates used in the preparation of financial statements that could result in material adjustments to the income statement and the carrying amounts of assets and liabilities are discussed below:

Carrying value of development and production assets

In arriving at the carrying value of the Group's development and production assets, significant assumptions in respect of the depletion charge have been made. These significant assumptions include estimates of oil and gas reserves, future oil and gas prices, finalisation of the gas sales agreement and future development costs including the cost of drilling, infrastructure facilities and other capital and operating costs.

The Group revised its estimated long-term view of oil prices from US$70 per barrel to US$75 per barrel from 1 August 2011. The effect of an upward revision in the estimated long-term oil price is to lower the level of reserves attributable to the Group and to increase the depletion charge per barrel.

The Group's estimated long-term view of netback prices for gas is US$3.5 per Mscf, based on the current outlook.

If the estimate of the long-term oil price had been US$20 per barrel higher at US$95 from 1 August 2011 and the netback price of gas had been US$1 per Mscf higher at US$4.50 from 1 January 2011, the reserves attributable to the Group would decrease, with a consequent increase in the depletion charge of US$6.7 million for the year.

If the estimate of the long-term oil price had been US$20 per barrel lower at US$55 from 1 August 2011 and the netback price of gas had been US$1 per Mscf lower at US$2.50 from 1 January 2011, the reserves attributable to the Group would increase, with a consequent decrease in the depletion charge of US$12.7 million for the year.

If the gas sales were delayed to 2016, the depletion charge would increase by US$2.3 million.

The depletion computation assumes the continued development of the field to extract the assessed oil and gas reserves and the required underlying capital expenditure to achieve the same. For this purpose, it also assumes that the PSA, which is valid up to 2025, will be extended on similar terms up to 2035 under an exclusive right to negotiate for an extension period of not less than ten years, provided for in the PSA.

5 Segment information

The Group is managed as a single business unit and the financial performance is reported in the internal reporting provided to the Chief Operating Decision-maker ("CODM"). The Board of Directors ("BOD"), who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the CODM that makes strategic decisions.

The financial information reviewed by the CODM is based on the IFRS financial information for the Group.

6 Dividend distribution

At a meeting held on 19 February 2012, the board of directors' of the Company have proposed a final dividend of USc11 per share (2010: USc14 per share ) be paid to the shareholders in respect of the full year 2011. The total dividend to be paid is US$56.2 million (2010: US$72.2 million). In accordance with company law and IFRS, this dividend has not been provided for in the balance sheet at 31 December 2011. The proposed final dividend is subject to approval by shareholders at the Annual General Meeting.

7 Earnings per share

Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year.

For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potential dilutive options over ordinary shares.

8 Cash generated from operating activities

9 Statutory Accounts

This financial information is not the statutory accounts of the Company and the Group, a copy of which is required to be annexed to the Company's annual return to the Companies Registration Office in Ireland. A copy of the statutory accounts in respect of the year ended 31 December 2011, upon which the Auditors have given an unqualified audit opinion, will be annexed to the Company's annual return for 2011. Consistent with prior years, the full financial statements for the year ended 31 December 2011 and the audit report thereon will be circulated to shareholders at least 20 working days before the AGM. A copy of the statutory accounts, containing an unqualified audit report, required to be annexed to the Company's annual return in respect of the year ended 31 December 2010 has been annexed to the Company's annual return for 2010 to the Companies Registration Office.

10 Further information is available on the Company's website, www.dragonoil.com.