Annual Results for the year ended 31 December 2010

28th March 2011

Matra Petroleum PLC

("Matra" or the "Company")

Preliminary Results

Matra Petroleum PLC, an independent oil and gas exploration and production company with operations in Russia, today announces its results for the 12 month period ending 31 December 2010.

Highlights

Operational

·; Granting of a 20 year Production Licence for the Sokolovskoe Field

·; Completed drilling of well A-13, the first appraisal well on the Sokolovskoe Field

·; Well A-12 successfully side-tracked and now being prepared for production

·; Independent field assessment showed unrisked upside potential of the Sokolovskoe field to be in excess of 50 mmbbls

Financial

·; Year-end cash and cash equivalents totalling €2.2 million

·; Additional €1.80million (£1.55 million) raised through placement since year-end

Outlook

·; 3D seismic survey to be carried out across the entire field

·; Further wells planned to appraise the field and increase production

Peter Hind, Managing Director commented:

"Significant progress was made in 2010 with the issue of the 20-year Production Licence and a Competent Person's Report on the field. We expect to move onto the next stage of development and further drilling later this year once production testing of existing wells is complete."

Enquiries:

REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 DECEMBER 2010

CHAIRMAN'S STATEMENT

Dear Shareholder

Matra made good progress in 2010 with the drilling of well A-13, the first appraisal well on the Sokolovskoe Field. This well is now being brought on stream. 2010 ended with the grant, by the Russian Authorities, of a 20 year Production Licence for the Sokolovskoe Field. This was a significant event that followed on from the Competent Person's Report ("CPR") issued in October last year.

The CPR confirmed the existence of a commercial field having substantial value. The report also highlighted the potential upside that will be defined as the field is further developed.

Since the CPR was issued showing the indicative value of the field, world oil prices have increased considerably from the $75/bbl market price assumed at the time. We are also aware that the Russian Authorities are proposing changes in taxation that will further benefit the economics of the Sokolovskoe Field if, as expected, they become law.

It is fortuitous that these changes are happening as the field begins production.

In the early part of 2011 well A-12 was successfully side-tracked and the well is being prepared for production.

The focus for Matra in 2011 is to begin full development of the Sokolovskoe Field, alongside further field appraisal, and to broaden the company's portfolio by acquiring new assets in the region.

There were also changes to the Matra board in the past year with Craig Burton, who was a founding Director of the Company, stepping down in 2010. Craig made a major contribution to the company during his time on the board, for which we thank him. We wish him well in his various ongoing and new business ventures in Australia.

I was very pleased to welcome Bill Guest as a non-executive Director in June 2010. Bill has a wealth of both technical and commercial experience in the upstream oil business.

The Board is grateful to Matra's management and staff in both London and Orenburg for their continued hard work and efforts during 2010 and into 2011.

Sir Michael Jenkins

Chairman

23 March 2011

MANAGING DIRECTOR'S REVIEW

Overview of 2010 and 2011 Operations

During the second half of 2010 we had three main objectives; to obtain a long term Production Licence, to independently assess the field and to bring the two existing wells onto production. The first two objectives were achieved before year end. Subsequently well A-13 has commenced production and the well A-12 side-track has been completed and is about to commence production.

Matra has been granted a 20 year Production Licence to develop the Sokolovskoe field. Under the terms of the licence we are required to drill at least one well, to run additional seismic and then to submit a full development plan for approval by the authorities.

The independent field assessment confirmed the presence of a field with 15 mmbbls of Contingent Recoverable Resource. With the subsequent issue of the Production Licence and with board approval of an outline development we are confident that these resource estimates will move into the Proven plus Probable Reserve category, according to SPE guidelines. This assessment also showed that the unrisked upside potential of the field to be in excess of 50 mmbbls.

It is our intention, subject to funding, to run a 3D seismic survey over the entire field and to drill or commence drilling two development wells this year. The 3D seismic is required to provide further confidence over the eastern flank of the field. Until that is acquired and processed we will not drill in that area. In the interim we plan to begin drilling a development well in the western area not far from existing wells.

This well will provide additional production and test an area that may contain a patch reef. The existence of patch reefs is postulated as part of the geological model and if encountered would be likely to increase reserves and have greater productivity.

A second well on the eastern flank of the field would help clarify the overall size of the field and, if successful, increase reserves.

Wells

Our first two wells in the field (12 & 13) were classified as exploration wells requiring us to drill to a certain depth and to test specific formations. This entailed drilling into water bearing formations below the oil reservoir. Due to the higher permeability of this water zone a good cement bond was not achieved in either well and subsequently water flowed behind the casing and into the well. Although this water zone caused difficulties in these wells it should be understood that development wells will incur no such obligations and will be terminated in the oil reservoir, thus avoiding such water influx. In well A-13 the water was isolated by squeeze cementing and in well A-12 a side-track hole was drilled to a new location some 50m from the original well and terminated in the oil zone.

As is usual in carbonate (limestone) reservoirs, the reservoir quality varies across the field. Well A-13 encountered a poorer reservoir section and a lower flow rate than well A-12. It should be pointed out however that well A-13 is typical of production rates in the area from commercial fields.

The productivity of wells encountering a lower permeability reservoir can be improved by acid stimulation, installation of a down-hole pump, and perhaps even more effectively by drilling a short horizontal section through the reservoir. The drilling of horizontal sections through the reservoir has the potential to significantly improve well productivity and is used extensively within the Orenburg region, and throughout the world. The success of the well A-12 side-track indicates that such operations may be carried out in the Sokolovskoe Field and reservoir studies are underway to estimate the likely improvement in well rates.

Strategy 

We are fortunate to begin producing at a time of improving oil prices. Our focus for 2011 is therefore to advance the development and production of the Sokolovskoe Field. This is the key to the future growth of the company.

Our longer term strategy is to build a bigger portfolio of similar projects, ideally within the same region of Russia. We are continuously reviewing new opportunities but it was clear that we should demonstrate success in Sokolovskoe to investors before moving on to new territory. More emphasis will therefore be placed on selectively broadening the company's portfolio during the coming year.

Peter Hind

Managing Director

23 March 2011

REVIEW OF OPERATIONS AND FINANCE

No new funds were raised in 2010. Subsequently on 14 February 2011 the Company placed 50 million new shares with subscribers at 3.1p per share. Details of the Placing are summarised below:

Group administrative expenditure was lower in 2010 by €486,324 (note 7). This reduction was largely due to currency variances and share based payment charges, but also reflects a reduction of €128,618 in Group overhead.

During the year Russian VAT refunds of €566,137 (2009: €967,603) were received.

The Group capitalised costs of €4,520,175 relating to the drilling of the A-13 appraisal well, the workover / sidetrack of well A-12 and all costs associated with the granting of the Production Licence (note 10).

Inventory includes €18,421 (2009: €163,745) (note 12) for well casing and other drilling equipment retained for future use. Inventory is accounted for at the lower of cost and net realisable value.

At year end the Group had cash and cash equivalents totalling €2,222,041 (2009: €6,727,308) (note 17). Current cash reserves are sufficient to fund the budgeted work programme and associated overhead for 2011. Further development of the Sokolovskoe Field will require additional funds to be raised in 2011 or 2012 through debt, equity or other arrangement. The Directors are confident of the Company's ability to secure further funding as appropriate.

Risks to the Group

The Group's Oil and Gas activities are subject to various risks as described below, which can significantly impact upon its performance:

·; Liquidity risk and interest rates - The Group has a significant capital programme to develop its asset. As a result management carefully monitor the liquidity position. Cash forecasts are produced regularly and are reviewed by management

·; Currency risk - The Group has a presentational currency of the Euro but a significant proportion of capital expenditure is denominated in Roubles and US Dollars. At present the Group has no formal currency hedging policy but management will continue to monitor the situation and adopt an appropriate hedging policy if necessary

·; Commodity risk - The economic viability of the Group's oil and gas assets is dependent on the underlying oil price. Management produce financial models of the assets based upon conservative long term oil prices and regularly revise these estimates

·; Operational risk - Operational risks include equipment failure, well control issues and the impact of hostile weather conditions. The Group takes responsibility to ensure all relevant legislation is met and that contractors have the relevant insurance in place

REVIEW OF OPERATIONS AND FINANCE

Key sources of estimation uncertainty

The Group makes estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on historical experiences and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may deviate from these estimates and assumptions. 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 as follows:

Exploration and evaluation costs

Exploration and evaluation costs are capitalised as intangible assets (note 10) and are assessed for impairment when circumstances suggest that the carrying amount may exceed the recoverable value thereof. This assessment involves judgement as to the likely future commerciality of the asset and when such commerciality should be determined as well as future revenues and costs pertaining to the utilisation of the exploration and production rights to which such capitalised costs relate and the discount rate to be applied to such future revenues and costs in order to determine a recoverable value.

Impairment review

While conducting an impairment review of its assets, the Group exercises judgement in making assumptions about future oil & gas prices and future development and production costs. Changes in the estimates used can result in significant charges to the income statement.

Share based payments

Where equity settled share options are awarded to employees, the fair value of the options at the date of grant is charged to the consolidated income statement over the vesting period. Non-market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each balance sheet date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. Market vesting conditions are factored into the fair value of the options granted. As long as all other vesting conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are satisfied. The cumulative expense is not adjusted for failure to achieve a market vesting condition.

Where the terms and conditions of options are modified before they vest, the increase in the fair value of the options, measured immediately before and after the modification, is also charged to the consolidated income statement over the remaining vesting period.

Where equity instruments are granted to persons other than employees, the consolidated income statement is charged with the fair value of goods and services received.

DIRECTORS' REPORT

FOR THE YEAR ENDED 31 DECEMBER 2010

The Directors present their annual report and the audited consolidated financial statements of Matra Petroleum plc (the "Company" and together with its subsidiaries and associates, the "Group"), for the year ended 31 December 2010.

Principal activity and business review

The principal activity of the Group is that of oil and gas exploration and production.

A full review of the Group's activities during the year, recent events and future developments are contained in the Chairman's Statement, Managing Director's Review and Operational Review incorporated within the Annual Report and Accounts.

Corporate structure

Matra Petroleum plc is a Company limited by shares that is incorporated and domiciled in England and Wales. The Company has the following subsidiaries at 31 December 2010:

·; Matra Cyprus Petroleum Limited (100%)

·; Matra Cyprus Petroleum (Alpha) Limited (100%)

·; OOO Arkhangelovskoe (100%)

Results and dividends

The loss of the Group after taxation amounted to €1,769,429 (2009: €2,325,053).

The Directors do not propose the payment of a dividend (2009: nil).

Business review and future developments

Likely developments in the operations of the group have been included in the Chairman's Statement and Managing Director's Review which is incorporated into this report and details of events after the reporting period can be found in note 21.

Directors

The following Directors held office during the year to 31 December 2010:

Sir Michael Jenkins

Peter Hind

Neil Hodgson

Craig Burton (resigned 9 April 2010)

Gideon Tadmor

Bill Guest (appointed 2 June 2010)

Re-election of directors

The Articles of Association require one-third of the Directors who are subject to retirement by rotation to retire and offer themselves for re-election each year.

Annual general meeting

Details of the Company's forthcoming Annual General Meeting will be set out in a separate circular and sent to all Shareholders with the Annual Report and Accounts.

Supplier payment policy

The Group and Company's policy is that payments made to suppliers are made in accordance with those terms and conditions agreed between the Company and its suppliers, providing that all trading terms and conditions have been complied with. The supplier payment days are 30 days for the Group (2009: 23 days) and 13 days for the Company (2009: 31 days).

Political and charitable contributions

There were no political or charitable contributions made by the Company during the year ended 31 December 2010.

Director's liabilities

The Company has granted an indemnity to all of its Directors and officers against liability in respect of proceedings brought by third parties, subject to the conditions set out in the Companies Act 2006. Such qualifying third party indemnity provision remains in force as at the date of approving the Directors' report and is provided by way of insurance policy with a collective limit of £10 million.

Financial instruments

Details of the use of financial instruments by the Company and its subsidiary undertakings are contained in note 17 of the financial statements.

Going Concern

After making enquiries, including the disclosures made in note 22 to the financial statements and the managing Director's Review, the Directors have a reasonable expectation that the Group will have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

Auditors and disclosure of information to auditors

The Directors confirm the following applies:

·; So far as the Directors are aware, there is no relevant audit information of which the Company's auditors are unaware, and;

·; The Directors have taken all steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that the Company's auditors are aware of that information.

BDO LLP offer themselves for re-appointment as auditors and an appropriate resolution will be put to the shareholders at the AGM.

By order of the Board

Peter Hind

Managing Director

23 March 2011

STATEMENT OF DIRECTORS' RESPONSIBILITIES

FOR THE YEAR ENDED 31 DECEMBER 2010

The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the group and company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and company and of the profit or loss of the group for that period. The directors are also required to prepare financial statements in accordance with the rules of the London Stock Exchange for companies trading securities on the Alternative Investment Market. 

In preparing these financial statements, the directors are required to:

·; select suitable accounting policies and then apply them consistently;

·; make judgements and accounting estimates that are reasonable and prudent;

·; state whether they have been prepared in accordance with IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements;

·; prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company's transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the requirements of the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Website publication

The directors are responsible for ensuring the annual report and the financial statements are made available on a website. Financial statements are published on the company's website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the company's website is the responsibility of the directors. The directors' responsibility also extends to the ongoing integrity of the financial statements contained therein.

INDEPENDENT AUDITORS' REPORT

FOR THE YEAR ENDED 31 DECEMBER 2010

We have audited the financial statements of Matra Petroleum Plc for the year ended 31 December 2010 which comprise the consolidated income statement, the consolidated and company statement of comprehensive income, the consolidated and company statement in changes in equity, the consolidated and company balance sheet, the consolidated and company cash flow statement and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. 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 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 auditors 

As explained more fully in the statement of directors' responsibilities, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's (APB's) Ethical Standards for Auditors.

Scope of the audit of the financial statements 

A description of the scope of an audit of financial statements is provided on the APB's website at www.frc.org.uk/apb/scope/private.cfm.

Opinion on financial statements 

In our opinion:

·; the financial statements give a true and fair view of the state of the group's and the parent company's affairs as at 31 December 2010 and of the group's loss for the year then ended;

·; the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;

·; the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and

·; the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

Opinion on other matters prescribed by the Companies Act 2006 

In our opinion the information given in the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements.

Matters on which we are required to report by exception 

We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

·; adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or

·; the parent company financial statements are not in agreement with the accounting records and returns; or

·; certain disclosures of directors' remuneration specified by law are not made; or

·; we have not received all the information and explanations we require for our audit.

Scott Knight (senior statutory auditor)

For and on behalf of BDO LLP, statutory auditor

London

United Kingdom

23 March 2011

BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).

CONSOLIDATED INCOME STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2010

The notes on pages 19 to 37 form part of the financial statements.

STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2010

The notes on pages 19 to 37 form part of the financial statements.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2010

The notes on pages 19 to 37 form part of the financial statements.

COMPANY STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2010

The notes on pages 19 to 37 form part of the financial statements.

BALANCE SHEET

AS AT 31 DECEMBER 2010

The notes on pages 19 to 37 form part of the financial statements.

The financial statements were authorised and approved by the Board on 23 March 2011 and signed on their behalf by

Peter Hind

Managing Director

CASH FLOW STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2010

The notes on pages 19 to 37 form part of the financial statements.

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2010

1. Accounting policies

Basis of preparation

The financial statements have been prepared on the going concern basis in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union and the provisions of the SORP "Accounting for Oil and Gas Exploration, Development, Production and Decommissioning Activities in so much as it complies with IFRS.

These financial statements are presented in Euro, and the Company's functional currency is Sterling.

The IFRS financial information has been drawn up on the basis of accounting policies consistent with those applied in the financial statements for the year to 31 December 2009. The following standards, interpretations and amendments to existing standards have been adopted for the first time in 2010:

Standards, amendments and interpretations, which are effective for reporting periods beginning after the date of these financial statements which have not been adopted early:

The Group has not yet assessed the impact of IFRS 9. Except for the amended disclosure requirements of IAS 24 (the above revised standards), amendments and interpretations are not expected to materially affect the Group's reporting or reported numbers.

* Not yet endorsed by European Union.

Basis of consolidation

Where the company has the power, either directly or indirectly, to govern the financial and operating policies of another entity or business so as to obtain benefits from its activities, it is classified as a subsidiary. The consolidated financial statements present the results of the company and its subsidiaries ("the Group") as if they formed a single entity. Intercompany transactions and balances between Group companies are therefore eliminated in full.

Segmental reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision maker has been identified as the Managing Director, Finance Manager and the other executive and non-executive Board Members.

Business combinations

The consolidated financial statements incorporate the results of business combinations using acquisition accounting. In the consolidated balance sheet, the acquiree's identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the consolidated income statement from the date on which control is obtained.

Foreign currency translation

Transactions entered into by group entities in a currency other than the currency of the primary economic environment in which they operate (their "functional currency") are recorded at the rates ruling when the transactions occur. Foreign currency monetary assets and liabilities are translated at the rates ruling at the balance sheet date. Exchange differences arising on the retranslation of unsettled monetary assets and liabilities are recognised immediately in the consolidated income statement.

On consolidation, the results of overseas operations are translated into Euro at rates approximating to those ruling when the transactions took place. All assets and liabilities of overseas operations, including goodwill arising on the acquisition of those operations, are translated at the rate ruling at the balance sheet date. Differences arising on retranslating the opening net assets and the results of operations are recognised directly in equity (the "foreign currency translation reserve").

The income statement of individual Group companies with functional currencies other than Euro are translated into Euro at the rate ruling at the date of the transaction and the balance sheet translated at the rate of exchange ruling on the balance sheet date. Exchange differences which arise from translation of the opening net assets and results of such subsidiary operations are taken to reserves.

Exchange differences recognised in the income statement of Group entities' separate financial statements on the translation of long-term monetary items forming part of the Group's net investment in the overseas operation concerned are reclassified to the foreign currency translation reserve on consolidation.

On disposal of a foreign operation, the cumulative exchange differences recognised in the foreign currency translation reserve relating to that operation up to the date of disposal are transferred to the consolidated income statement as part of the profit or loss on disposal.

Profit from operations

Profit from operations is defined as the profit on all continuing activities before Finance income, Finance costs and Taxation.

Tangible non-current assets

Tangible non-current assets are stated at cost less depreciation. Depreciation is provided at rates calculated to write off the cost of assets, less their estimated residual value, over their expected useful economic lives on the following basis:

Property, plant and equipment 25% per annum straight line.

The useful lives and residual values of tangible non-current assets are re-assessed annually and any revisions taken to the income statement in the current period.

Intangible non-current exploration assets

The Group applies the successful efforts method of accounting for exploration and appraisal costs. Under the successful efforts method of accounting, all licence acquisition, exploration and appraisal costs are initially capitalised in well, field or specific exploration well cost centres as appropriate, pending determination. Costs are capitalised until commercial reserves are established or the exploration site is deemed to have no commercial value. Costs are then amortised over the production life of the well or written-off immediately.

Pre-licence costs: costs incurred prior to having obtained the legal rights to explore an area are expensed directly to the income statement as they are incurred.

Exploration and appraisal costs are initially capitalised as an intangible asset. Intangible assets are not amortised prior to the conclusion of appraisal activities and determination of commercial reserves.

All intangible assets are reviewed for impairment on an annual basis. Any impairment is immediately written off to the Income Statement.

Investments

In its separate financial statements the Company recognises its investments in subsidiaries and associates at cost less allowances for impairments in value.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost comprises all costs of purchase, costs of conversion and other costs included in bringing the inventories to their present location and condition.

Trade and other receivables

Trade and other receivables are stated initially at fair value and subsequently at amortised cost (unless the effect of the time value of money is immaterial) less allowance for impairment in value.

Cash and cash equivalents

The Company considers all highly liquid investments, with an original maturity of 90 days or less, to be cash or cash equivalents.

Trade and other payables

Trade and other payables are stated initially at fair value and subsequently at amortised cost.

Tax

Income tax on the profit or loss from ordinary activities includes current and deferred tax.

Current tax is based on the profit or loss from ordinary activities adjusted for items that are non-assessable or disallowed and is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Income tax is charged or credited to profit or loss, except where the tax relates to items credited or charged to other comprehensive income in which case the tax is also dealt with in other comprehensive income, or when the tax relates to items credited or charged directly to equity, in which case the tax is also dealt with in equity.

Deferred taxation

Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.

Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets and current tax losses have not been recognised since it is uncertain that taxable profits will be available against which deductible temporary differences can be utilised.

Deferred tax assets and liabilities are offset when the Group has a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes levied by the same tax authority on either the same taxable Group company or different Group Entities which intend either to settle current tax assets and liabilities on a net basis or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets or liabilities are expected to be settled or recovered.

Contributed equity

Issued and paid up share capital is recognised at the fair value of the consideration received by the Company. Any transaction costs arising on the issue of ordinary shares are recognised directly in equity as a reduction of the share proceeds received.

Share Based Payments

Where equity settled share options are awarded to employees, the fair value of the options at the date of grant is charged to the consolidated income statement over the vesting period. Non-market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each balance sheet date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. Market vesting conditions are factored into the fair value of the options granted. As long as all other vesting conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are satisfied. The cumulative expense is not adjusted for failure to achieve a market vesting condition.

Where the terms and conditions of options are modified before they vest, the increase in the fair value of the options, measured immediately before and after the modification, is also charged to the consolidated income statement over the remaining vesting period.

Where equity instruments are granted to persons other than employees, the consolidated income statement is charged with the fair value of goods and services received.

Significant accounting judgements and key sources of estimation uncertainty

The Group makes estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on historical experiences and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may deviate from these estimates and assumptions. 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 as follows:

Exploration and evaluation costs: are capitalised as intangible assets (note 10) and are assessed for impairment when circumstances suggest that the carrying amount may exceed the recoverable value thereof. This assessment involves judgement as to the likely future commerciality of the asset and when such commerciality should be determined as well as future revenues and costs pertaining to the utilisation of the exploration and production rights to which such capitalised costs relate and the discount rate to be applied to such future revenues and costs in order to determine a recoverable value.

Carrying value of assets: while conducting an impairment review of its assets, the Group exercises judgement in making assumptions about future oil & gas prices and future development and production costs. Changes in the estimates used can result in significant charges to the income statement.

Share based payments: employee services received, and the corresponding increase in equity, are measured by reference to the fair value of the equity instruments at the date of grant, excluding the impact of any non-market vesting conditions. The fair value of share options is estimated by using the Black Scholes valuation model, on the date of grant based on certain assumptions. Those assumptions are described in note 15 and include, among others, the dividend growth rate, expected volatility, expected life of the options and number of options expected to vest. More details including carrying values are disclosed in note 15. 

2. Loss per share

Loss per share of €0.00166 (2009: €0.00328) is calculated by dividing the loss attributable to equity shareholders for the year by the weighted average number of ordinary shares outstanding during the year of 1,064,917,872 (2009: 708,399,007).

The effect of all potential ordinary shares arising from the exercise of options going forward is considered to be anti-dilutive and therefore diluted earnings per share has not been calculated. At the balance sheet date there were 52,400,000 (2009: 52,200,000) potentially dilutive ordinary shares. 

3. Parent company's income statement

The company has taken advantage of section 408 of the Companies Act 2006 and has not included its own income statement account in these financial statements. The company loss for the year after taxation was €1,761,165 (2009: €3,504,300). 

4. Expenses by nature

5. Salaries

Included in the above were pension contributions totalling €nil (2009: €nil).

6. Taxation

Below is a reconciliation of the theoretical income tax rate to the actual effective tax rate in the Group's income statement:

Factors that may affect future tax charges

No deferred tax asset has been recognised on accumulated tax losses as the recoverability of any such assets is not probable in the foreseeable future (see note 18).

 7. Segmental reporting

The Group has two reportable segments:

·; Arkhangelovskoe: this segment is involved in the exploration of oil within the Arkhangelovskoe licence area in Russia; and

·; Head Office Operations: this segment is the head office of the Group.

The operating results of each of these segments are regularly reviewed by the Group's chief operating decision makers in order to make decisions about the allocation of resources and assess their performance.

The accounting policies of these segments are in line with those described in note 1.

The finance income, finance costs and taxation have been analysed above in line with the way the Group's business is structured.

All material non-current assets other than financial instruments are owned by the Russian subsidiary and are located in Russia.

Share based payments of €1,167 (2009: €377,517) relate solely to Head Office.

All material capital expenditure in the current and previous year relate to the Arkhangelovskoe segment. 

8. Finance costs

9. Property, plant and equipment

Property, plant and equipment is comprised of office and computer equipment.

10. Intangible assets

Intangible assets as at 31 December 2010 were:

Intangible assets as at 31 December 2009 were:

 11. Investment in subsidiaries

 12. Inventories

 13. Receivables

The fair value of receivables is not significantly different from the carrying value.

The Intercompany loans are shown net of a provision of €6,686,321 ,(2009: €5,157,533).

The Intercompany loans are repayable on demand and bear interest at the rate of 2% above the Russian Base Rate (2009: 2% above the Russian Base Rate).

14. Payables

 15. Share based payments

The fair value of equity-settled share options granted is estimated as at the date of grant using the Black Scholes model, taking into account the terms and conditions upon which the options were granted. The table below lists the inputs to the model used for options granted during the year ended 31 December 2010:

The total fair value of the options issued is spread over the vesting period of the options. The share-based payment charge for the year was €1,167 (2009: €377,517).

The expected life of the options is based on academic research and is not necessarily indicative of exercise patterns that may occur. Volatility is calculated with reference to comparative entities share price volatility and reflects the assumption that the comparator's volatility is indicative of future trends, which may also not necessarily be the actual outcome. No other features of options granted were incorporated into the measurement of fair value.

16. Share capital

Reserve Description and purposeThe following describes the nature and purpose of each reserve within owners' equity:

·; Share capital: Amount subscribed for share capital at nominal value

·; Share premium: Amount subscribed for share capital in excess of nominal value

·; Foreign currency translation reserve: Exchange gains/losses arising on retranslating the net assets of operations into the presentation currency

·; Retained earnings: Cumulative net gains and losses recognised in the consolidated incomestatement

No new issues of shares in the Company took place in the period.

The Group considers its capital to comprise entirely of equity. The Group's primary objective is to ensure its continued ability to provide a consistent return for its equity shareholders through capital growth.

In order to achieve this objective, the Group seeks to maintain a gearing ratio that balances risks and returns at an acceptable level wherever such a choice between the raising of debt, equity or a combination of the two exists.

Overriding the above is the need for the Group to maintain a sufficient funding base to enable it to meet its working capital and strategic investment needs.

In making decisions to adjust its capital structure to achieve these aims the Group considers not only its short-term position but also its long-term operational and strategic objectives.

17. Financial instrument risk exposure and management

In common with all other businesses, the Group and Company are exposed to risks that arise from its use of financial instruments. This note describes the Group and Company's objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout these financial statements.

There have been no substantive changes in the Group or Company's exposure to financial instrument risks, its objectives, policies and processes for managing those risks or the methods used to measure them from previous periods unless otherwise stated in this note.

Principle financial instruments

The principle financial instruments used by the Group, from which financial instrument risk arises, are as follows:

Fair value of financial assets and liabilities

At 31 December 2010 and 2009, the fair value and the book value of the Group and Company's financial assets and liabilities were materially the same.

Principal financial instruments

The principal financial instruments used by the Group and Company, from which financial instrument risk arises, are as follows:

Ÿ cash at bank

Ÿ trade and other payables

General objectives, policies and processes

The Board has overall responsibility for the determination of the Group and Company's risk management objectives and polices and, whilst retaining ultimate responsibility for them, it has delegated the authority for designing and operating processes that ensure the effective implementation of the objectives and policies to the Group and Company's finance function. The overall objective of the Board is to set polices that seek to reduce risk as far as possible without unduly affecting the Group and Company's competitiveness and flexibility. Further details regarding these policies are set out below:

Credit risk

Credit risk arises principally from the Group's other receivables. It is the risk that the counterparty fails to discharge its obligation in respect of the instrument. The maximum exposure to credit risk equals the carrying value of these items in the financial statements. When commercial exploitation commences sales will only be made to customers with appropriate credit rating. Existing trade receivables relate to sales of oil from test drilling, and these are not considered to be material. Credit risk with cash and cash equivalents is reduced by placing funds with banks with high credit ratings.

Hedging policy

It is the Company and Group policy not to actively hedge against foreign currency transactions and balances. However, this policy is kept under constant review.

Capital

The Company and Group define capital as ordinary shares, share premium and retained earnings. To date the company has not included long-term borrowings in its definition of capital, because it does not have any

Liquidity risk

Liquidity risk arises from the Group and Company's management of working capital. It is the risk that the Group or Company will encounter difficulty in meeting its financial obligations as they fall due.

The Group and Company's policy is to ensure that it will always have sufficient cash to allow it to meet its liabilities when they become due. To achieve this aim, it seeks to maintain cash balances (or agreed facilities) to meet expected requirements for a period of at least 30 days. The Group and Company also seeks to reduce liquidity risk by maximising interest rates (and hence cash flows) on its cash deposits, this is further discussed in the 'interest rate risk' section below. The Board receives rolling 12 month cash flow projections on a periodic basis as well as information regarding cash balances and (as noted above).

Trade and other payables are due on demand.

Interest rate risk

The Group has no interest bearing borrowings and so there is no interest rate risk.

There is no significant interest rate risk in respect of temporary surplus funds invested in deposits and other interest bearing accounts with financial institutions as the operations of the Group are not dependent on the finance received. However, it is the Group's policy to manage the interest rate risk over the cash flows on its invested surplus funds by using only substantial financial institutions when such funds are invested.

A 1% change in interest rates would have increased or decreased profit after tax by approximately €44,747 (2009: €36,287).

At the year end, the Group had a cash balance of €2,222,041 (2009: €6,727,308) and the Company had a cash balance of €1,606,328 (2009: €3,839,039) which was made up as follows:

Included in the Group and Company totals above are amounts of €1,517,151 (2009: €5,451,694) held within deposit accounts.

Currency risk

The Group and Company's policy is, where possible, to allow group entities to settle liabilities denominated in their functional currency (primarily Euro, Russian Roubles or Great British Pounds) in that currency. Where Group or Company entities have liabilities denominated in a currency other than their functional currency (and have insufficient reserves of that currency to settle them) cash already denominated in that currency will, where possible, be transferred from elsewhere within the Group.

In order to monitor the continuing effectiveness of this policy, the Board receives a periodic forecast, analysed by the major currencies held by the Group and Company.

The Group and Company is primarily exposed to currency risk on purchases made from suppliers in Orenburg, Southern Russia in Russian Roubles. As it is not possible for the Group or Company to transact in Russian Roubles outside of Russia, a Sterling account is maintained in Orenburg and all funding is transferred to its Russian subsidiary in this currency. Once the funding has been received, the local finance team negotiates a favourable spot rate with its Russian bank for transferring Sterling to Russian Roubles. The UK finance team, along with its advisors, carefully monitors movements in the Sterling / Russian Rouble rate and chooses the most beneficial times for transferring monies to its subsidiary, whilst ensuring that it has sufficient funds to continue its operations.

A movement in the Russian Rouble of 15% would result in the expenditure in the year increasing or decreasing by €767,789 (2009: €96,311).

A movement in the Great British pound of 25% would result in the expenditure in the year increasing or decreasing by €307,740 (2009: €418,408).

A movement in the Great British pound of 25% would result in the average cash and cash equivalents increasing or decreasing by €396,169 (2009: €961,429).

18. Deferred tax

No deferred tax asset has been recognised as the recovery of such assets is not probable in the foreseeable future. 

19. Commitments

The Company has no operating or finance lease commitments.

On 23 December 2010 the 100% subsidiary, OOO Arkhangelovskoe, was awarded a production licence (the Licence) for the exploration and production hydrocarbon resources within the Sokolovskoe field in Orenburg, Russia.

The Licence is valid to 31 December 2030 and in order to maintain the current rights of tenure to the licence, the group currently has the following commitments:

·; To submit for approval an Appraisal Programme for the Sokolovskoe field by the end of 2011

·; To drill a minimum of one well by the end of 2013

·; To issue for approval a reserve report for the field by the end of 2014

·; To submit for a approval a development plan for the field buy the end of 2015

20. Related party transactions

The Group had no transactions with related parties during the year ended 31 December 2010.

Key management remuneration is disclosed in note 5.

 21. Events after the reporting period

On 14 February 2011, the Group raised cash funds of £1,550,000 by way of an equity Placing of 50 million shares at an issue price of 3.1p per share.

 22. Going concern

The Group currently has sufficient cash resources to fund the committed work programme and overheads for the next twelve months. Upon completion of the committed work programme the Group will seek to raise funds to finance the full development of the Sokolovskoe field. The Directors are confident, based upon preliminary discussions with potential investors and lenders that sufficient funds either in equity or debt could be raised when required.