4th Apr 2007 07:02
Emerald Energy PLC04 April 2007 EMERALD ENERGY Plc4 April 2007 Final results EMERALD ENERGY Plc ("Emerald" or the "Company"), a United Kingdom based companyengaged in exploration and production of hydrocarbons in South America and theMiddle East, announces its final results for the year ended 31 December 2006. Highlights for 2006 Gross production in 2006 from Emerald's operations totalled 1.3 millionbarrels, 11% higher than in 2005; Average daily gross production for the period was 3,673 bopd comparedwith 3,301 for 2005; Emerald was awarded two new E&P Contracts by the ANH for the Maranta andOmbu blocks in Colombia; During 2006 Emerald participated in the drilling of five exploration andtwo development wells, resulting in one new discovery and two new wells onproduction; The Group generated an EBITDA of $25.1 million in 2006, an increase of47% over 2005 results. After write-offs of unsuccessful exploration efforts of $9.5 million, animpairment charge of $5.9 million and tax charges of $4.5 million, the Groupmade a loss of $2.7 million, compared to a profit after tax of $5.8 millionachieved in 2005. Since the beginning of 2007 Emerald has been awarded E&P contracts by the ANHfor the Helen and Jacaranda blocks in Colombia, and Emerald currently has tenproduction wells on five fields producing 3,800 bopd from its Colombianoperations. Drilling commenced on Khurbet East No. 1, the Company's third exploration wellon Block 26, Syria on 15 February 2007 and has encountered two prospectivehorizons with oil samples having been recovered from the lower Massiveformation. The well is currently drilling ahead below 2,450 m to a planned totaldepth of 3,700 m. Chairman's statement Colombia During 2006 Emerald drilled two prospects which resulted in the discovery of theCentauro Sur field. The other prospect, Las Acacias, was determined to benon-commercial and it has been converted into a disposal well for the waterproduced by the Vigia wells. Emerald also participated, with a 50% share, in the drilling of the Agueda No. 1exploration well, drilled by Rancho Hermoso SA on the El Algarrobo block inMarch 2006. The well recovered no hydrocarbons during a flow test and wasplugged and abandoned. The Company has returned the block to Ecopetrol and hasno further obligations under the Association Contract. The operation of Gigante No. 1A well under the sole risk provisions of theMatambo Association Contract started in February 2003 with Emerald entitled toreceive 100% of production from the Gigante No. 1A well until all of Emerald'sreimbursable costs were recovered. In March 2006, under different provisions ofthe Matambo Association Contract, Ecopetrol exercised its right to participatefor a 50% share in the exploitation of the Gigante No. 1A well and Emeraldagreed to deliver 25% of the well's production to Ecopetrol, whilst Emerald willreceive Ecopetrol's other 25% share until full recovery of the reimbursablecosts is achieved. In early 2006 an electrical submersible pump was installed in Gigante No. 1A toreplace the smaller capacity hydraulic jet pump. The well continues to betreated with chemicals periodically to restore its production capabilities.During the year its production averaged 649 bopd with the highest rate achievedbeing 1,080 bopd. In the fourth quarter of 2006 Emerald acquired a 3D seismic survey of 66 sq kmover the Gigante structure. This survey is now being integrated with othergeological data to determine if further development of the Gigante field istechnically and commercially viable. If the Company decides to drill furtherwells on the Gigante field it will seek to finance this work through debt,issuance of new equity, a farm-in partner or some combination of thesealternatives. Drilling is unlikely to commence before the end of 2007. In the first quarter of 2007, Emerald drilled the Aureliano prospect, on theFortuna block. The Aureliano structure is separated by a fault from the Totumalfield which was produced by Ecopetrol until 1993, when it was abandoned afterproducing over 800,000 barrels of oil. The Aureliano No. 1 well is currentlybeing tested with results expected over the next few weeks. In the reporting period, all of Emerald's production came from operations inColombia. In 2006, Emerald achieved an average gross production rate of 3,673bopd, an 11% increase on 3,301 bopd achieved in 2005. On the entitlement basis,in 2006, Emerald achieved 2,510 bopd compared to 2,296 bopd achieved in 2005.Emerald's production in Colombia continued to produce strong positive cash flowwhich has been used to further develop the Company's assets and to explore fornew reserves. Syria Emerald holds a 50% non-operating interest in the contract to explore andproduce hydrocarbons from Block 26, Syria. The consideration to acquire thisinterest included the issue of 3.5 million ordinary shares to the vendor nolater than May 2007. In January 2006, 1,155 km of 2D seismic data was acquired and subsequentlyprocessed and integrated with the existing seismic data over the block. InDecember 2006 a further 266 km of 2D seismic data was acquired to assist in thelocation of future exploration wells. The Souedieh North No. 1 exploration well, targeting a Cretaceous prospect wasdrilled in the first quarter of 2006. Hydrocarbon bearing zones were identifiedfrom the wireline log data, however no hydrocarbons were recovered during adownhole flow test; the well was suspended and the drilling rig released.Subsequent analysis has determined that the hydrocarbon is most likely highdensity viscous oil that is unlikely to flow without some form of thermalstimulation. The Tigris No. 1 exploration well was spud in September 2006 to test a deepstructure mapped in the northeast part of the block. The Tigris No. 1 wellreached its total depth in February 2007 and after analysis of the drilling andwireline log data Emerald determined, in its view, that the hydrocarbons presentwere unlikely to be sufficient for a commercial development. The operatorelected to continue operations on the well as an exclusive operation at its solecost. Emerald may elect at any time to re-join the well operation on payment ofits share of costs and a back-in penalty. In February 2007, the third of four commitment wells was spud on the KhurbetEast prospect. The well is expected to take 100 days to drill to a planned totaldepth of 3,700 metres. Currently the well is drilling ahead below 2,450 m havingalready penetrated two prospective horizons, the Chilou and Massive formationsas identified from drilling data and electric logging surveys. Live oil sampleshave been recovered from the lower Massive. The rig will continue to drill tothe planned total depth to test the prospectivity of several deeper, as yetundrilled, horizons. A drilling rig is contracted to drill the fourth commitment well and is expectedto commence drilling in July 2007, the location for this well will be finalisedwhen the results of the Khurbet East well are known. Financial results Production growth and a further strengthening of the oil prices in the reportingperiod helped Emerald generate an EBITDA of $25.1 million compared to $17.0million achieved in 2005. The results for the year ended 31 December 2006 showan operating profit of $1.2 million achieved on the revenue of $45.9 millioncompared with an operating profit of $10.0 million achieved on the revenue of $32.1 million in the year ended 31 December 2005. This decline in the operatingprofit is primarily a result of the write-offs of unsuccessful explorationefforts and impairment charges. After tax, the Group made a loss of $2.7 millioncompared to a profit after tax of $5.8 million achieved in 2005. Cash at 31December 2006 totalled $15.7 million compared with $20.7 million at 31 December2005. The Company does not propose to declare a dividend for 2006 as it intends to useits cash reserves and strong cash flow to finance the growth of the Group andits operations. Board change Mr Angus MacAskill was appointed a Director of the Company on 4 September 2006,and on 1 December 2006 was appointed as the Company's Chief Executive. Outlook In Colombia the addition of four new E&P contracts under the more favourableterms offered by the ANH demonstrates the management's commitment to deliver thebest growth opportunities for the Company's shareholders. The work programme inColombia for 2007 will focus on exploring for reserves with a higher intrinsicvalue in the new ANH contract areas. Development drilling on the discoveredfields within the Company's existing Association Contract areas will help tomaintain production whilst the new ANH areas are explored. To optimise itsexposure to exploration activities, Emerald will seek to farmout some prospectsalready identified within its exploration portfolio. The drilling programme in Syria is designed to test for potential hydrocarbonsin material prospects where success will greatly enhance Emerald's value.Results to date from Khurbet East No. 1 are very encouraging and with furtherhorizons to drill we remain optimistic of a successful outcome for this well andthe prospect it is testing. Emerald's objectives remain unchanged, to grow its reserve base and increase itsnet production through exploration and development of existing and new acreage.The Company's production sold at current oil prices will continue to generatestrong cash flow which, with the Company's current cash resources, will be usedto explore and create a more substantial reserve base. Alastair BeardsallChairman 3 April 2007 Review of operations Emerald is engaged in exploration and production of hydrocarbons in SouthAmerica and the Middle East. In Colombia, Emerald is participating inAssociation Contracts with Ecopetrol, the Colombian state oil company, and holdsinterests in several exploration and production contracts issued by the NationalHydrocarbon Agency of Colombia ("ANH"). Emerald continues to actively seek newexploration opportunities in Colombia and in other countries of South America.In the Middle East, Emerald is involved in exploration of Block 26 in Syria. Colombia Campo Rico Association Contract Area of 503 sq km; Emerald 100% operated working interest (50% Ecopetrol back-in right); Contract awarded in May 2002 with an exploration period of up to six years and an exploitation period of up to 22 years; Emerald conducts all exploration activities at its own risk; Following a discovery, Ecopetrol has the right toparticipate in the development of the discovery with a 50% working interest andEmerald has the right to recover reimbursable costs from a share of production. The Campo Rico block is located in the Llanos basin. Emerald currently operatesthree fields in the block: the Campo Rico, Vigia and Centauro Sur fields. Inaddition Emerald has identified opportunities for exploration drilling outsideof the existing fields, based on interpretation of the 172 sq km 3D seismicsurvey acquired in the block. Campo Rico field The Campo Rico field was discovered in March 2004 and the cumulative oilproduction from the field at the end of 2006 was 1,801,000 barrels. The field produces 16degrees API crude oil from Mirador sands. The averageproduction rate achieved by the field in 2006 was 1,813 bopd. The downhole pumps in the three production wells have been changed fromhydraulic jet pumps to electrical submersible pumps (ESPs), which have betterefficiency and fluid handling characteristics more suited to long term fieldproduction. In the first quarter of 2007, the Campo Rico field was produced atan average rate of 1,361 bopd. The production facilities at the Campo Rico field used to process the crude oilproduction continue to be enlarged to handle the increasing volumes of waterproduced from the maturing field, thus maintaining oil production levels fromthe increasing fluid rates. A fourth development well location has been identified based on integratedinterpretation of the 3D seismic survey and the geological and productioninformation acquired to date in the field. The Campo Rico No. 4 development wellis being prepared for drilling in 2007. On 28 December 2005, Ecopetrol granted the Campo Rico field commercialitystatus; Ecopetrol now participate with Emerald in commercial exploitation of thefield. Under the terms of the Campo Rico Association Contract, Emerald has theright to recovery of reimbursable costs from 50% of Ecopetrol's share ofproduction. Once the recovery of reimbursable costs is complete, production andcosts associated with the operation of the field will be shared equally betweenEmerald and Ecopetrol. As at 31 December 2006, the Campo Rico field was estimated by the Company tocontain 3.8 million barrels of Proved plus Probable reserves of oil. Vigia field The Vigia field was discovered in April 2005 and the cumulative oil productionfrom this field at the end of 2006 was 380,000 barrels. The field has three production wells and produces 15degrees API crude oil fromthe Une and Lower Gacheta sands. The average production rate achieved by thefield in 2006 was 732 bopd. During 2006, the downhole pump in the Vigia No. 1 production well, the well withthe highest production rate in the field, was changed from a hydraulic jet pumpto an electrical submersible pump (ESP), which is expected to have betterefficiency and fluid handling characteristics more suited for the long termfield production. Conversion of the Vigia No. 2 and No. 3 production wells toESPs remains under evaluation. In the first quarter of 2007, the Vigia field wasproduced at an average rate of 527 bopd. The production facilities at the Vigia field continue to be enlarged to handlethe increasing volumes of water produced from the maturing field, thusmaintaining oil production levels from the increasing fluid rates. The Vigia No. 4 well, drilled in August 2006 as a step out appraisal well totest a westward extension to the Vigia field, was evaluated as non-commercialand has been plugged and abandoned. Emerald is entitled to recover a proportionof the drilling costs from Ecopetrol's share of Vigia's oil production under theterms of the Campo Rico Association Contract. The Las Acacias No. 1 exploration well, drilled in May 2006 to the south of theVigia field has been configured as a permanent disposal well for the producedwater from the Vigia field and a pipeline has been installed between the Vigiafield and the well. Since October 2007 the produced water from the Vigia fieldhas been injected into this well. As at 31 December 2006, the Vigia field was estimated by the Company to contain2.0 million barrels of Proved plus Probable reserves of oil. Centauro Sur field The Centauro Sur field was discovered in April 2006 and the cumulative oilproduction from this new field at the end of 2006 was 172,000 barrels. The Centauro Sur No. 1 discovery well was drilled to a depth of 11,265 ft inApril 2006 and brought on production at the end of April 2006. The Centauro SurNo. 2 appraisal well was drilled directionally from the site of the Centauro SurNo. 1 well to a measured depth of 10,865 ft. The field produces 16degrees APIcrude oil from the Mirador sands. In the period from 28th April to 31 December2006, the field was produced at an average rate of 696 bopd. Following the initial testing of field production, a flow line was installed totransport Centauro Sur field production to the Campo Rico field where it isprocessed using the existing field facilities. In the first quarter of 2007, thefield was produced at an average rate of 670 bopd. As at 31 December 2006, the Centauro Sur field was estimated by the Company tocontain 0.5 million barrels of Proved plus Probable reserves of oil. Applications for field commerciality status Emerald has applied for commerciality status for the Vigia and Centauro Surfields and agreed with Ecopetrol the remaining field work required for Ecopetrolto make its decisions. If a field is granted commerciality status, Ecopetrolwould join Emerald in commercial exploitation of the field. Under the terms ofthe Association Contract, Emerald would have the right to recovery ofreimbursable costs from 50% of Ecopetrol's share of field production. Once therecovery of reimbursable costs is complete, production and costs associated withthe operation of the field would be shared equally between Emerald andEcopetrol. Exploration opportunities in the Campo Rico block In 2006, Emerald completed additional processing and interpretation of the 3Dseismic data acquired in 2005 over 172 sq km of the Campo Rico block. The surveywas acquired to appraise the development potential of the existing fields and toidentify new prospects in the block. Emerald has identified a number ofadditional prospects. Matambo Association Contract Area of 69 sq km; Emerald 100% operated working interest (50% Ecopetrol back-in right); Exploration and exploitation rights extend to November 2024; Emerald conducts all exploration activities at its own risk; A joint operations area, centred on the Gigante No. 1A wellhas been established, Ecopetrol and Emerald participate on a 50/50 basis,Emerald has the right to fully recover the reimbursable costs from a share ofproduction. The Matambo block, located in the Upper Magdalena valley, contains the Gigantefield. The Gigante field is operated with a single well, Gigante No. 1A. Thecumulative oil production from the Gigante field at the end of 2006 was2,291,000 barrels. The Gigante No. 1A well was brought on production in May 1999. The well produces32degrees API gravity crude oil from the Tetuan sand at approximately 16,600 ft.The average production rate achieved by the field in 2006 was 650 bopd. In 2006 the downhole hydraulic jet pump was changed to an electrical submersiblepump (ESP) to increase the well production rate, resulting in an increase ofpeak production from 850 bopd before to 1,100 bopd afterwards. Production in thefourth quarter of 2006 was limited by a failure of the ESP and the periodrequired locating and mobilising a workover rig to replace the ESP. In the firstquarter of 2007, the Gigante field was produced at an average rate of 947 bopd. In the fourth quarter of 2006, Emerald acquired a 66 sq km 3D seismic surveyacross the Gigante field area to refine the structural interpretation andevaluate the potential for further development of the Gigante field. The Companyis developing plans to drill Gigante No. 2 well to produce from the Tetuan sandsand test the exploration potential of the underlying Caballos sands. Emerald operated the Gigante No. 1A well on a sole risk basis from 1 February2003. Under the sole risk provision of the Matambo Association Contract, Emeraldis entitled to recover the reimbursable costs incurred during exploration andsole risk. When sole risk was granted, a sole risk area of 733 m radius wasestablished around the Gigante No. 1A well and a reserved zone of up to 5 kmaround the sole risk area was established. Emerald retains exclusive explorationrights within the reserved zone without any additional work obligations. SinceApril 2006, Ecopetrol has participated in joint operations in the 733 m radiusexploitation area, previously designated sole risk, around the Gigante No. 1Awell. Ecopetrol and Emerald participate on a 50/50 basis, and Emerald continuesto recover its reimbursable costs from a share of production. As at 31 December 2006, the Gigante field was estimated by the Company tocontain 7.4 million barrels of Proved plus Probable reserves of oil. Fortuna Association Contract Area of 106 sq km; Emerald 90% operated working interest (20% Ecopetrol back-in right); Contract awarded in December 2003 with an exploration period of up to six yearsand exploitation period of up to 22 years; The Associate (Emerald 90%, Geoadinpro S.A. 10%, withEmerald carrying Geoadinpro's share of the costs) conducts all explorationactivities at is own risk; Following a discovery, Ecopetrol has the right toparticipate in the development of the discovery with a 20% working interest andEmerald has the right to recover reimbursable costs from a share of production. The Fortuna block lies in the Middle Magdalena basin and the contract areaincludes the Totumal oil field, produced by Ecopetrol until it was abandoned in1993 after producing over 800,000 barrels of oil. Emerald has identifiedexploration prospects in the La Luna limestone, similar to those produced in theTotumal field, and in the shallower Lisama sands that flank the Totumal fieldhigh. Three oil fields that have produced from the Lisama sands lie just to thesouth of the Fortuna block. Silfide field The Silfide field was discovered in October 2005 and the cumulative oilproduction from this field at the end of 2006 was 2,200 barrels. The Silfide No. 1 exploration well, drilled in October 2005, produced 17degreesAPI crude oil from the Umir sands at an average production rate of 22 bopdduring an extended well test. The well was shut in following the failure of adownhole mechanical pump. A workover to conduct a fracture stimulation to increase the productivity of theUmir sand is planned for the first half of 2007. The Silfide field is currently being operated under the production testprovision of the Fortuna Contract. Emerald has applied for commerciality statusfor the Silfide field and has agreed with Ecopetrol the remaining work requiredfor Ecopetrol to make its decision. If the Silfide field is grantedcommerciality status, Ecopetrol would join Emerald in commercial exploitation ofthe field. Under the terms of the Association Contract, Emerald would have theright to recovery of reimbursable costs from Ecopetrol's share of production.Once the recovery of reimbursable costs is complete, production and costsassociated with the operation of the field would be shared between the Associateand Ecopetrol on an 80/20 basis. Proved plus Probable reserves of oil have not been attributed to the Silfidefield until commercial production rates have been established by the fracturestimulation operation in 2007. Aureliano prospect The Aureliano prospect is located to the north of the Totumal field, separatedonly by a fault. The Aureliano No. 1 well was drilled to a total measured depthof 8,745 feet in January 2007 and targeted the same La Luna limestone thatproduced in the Totumal field. The target formations were encountered asforecast and electric wireline logs indicated the presence of potentialhydrocarbon-bearing zones. The well is currently being production tested. Adetailed study of all the data acquired during the drilling and testing of thewell is being undertaken to determine the potential for further developmentdrilling of the Aureliano accumulation. Emerald has evaluated the potential to re-start production of the Totumal fieldand is developing plans to re-enter a well that previously produced in thefield. The purpose of the re-entry would be to determine the current status ofthe field reservoirs and to test stimulation techniques for improvedproductivity. During 2006 the Company relinquished an area of 113 sq km in the block as partof an agreement with Ecopetrol on the remaining exploration period andexploration commitments. The only remaining commitment is a fracture stimulationof the Silfide No. 1 well. Maranta Exploration and Production Contract Area of 365 sq km; Emerald 100% operated working interest (no 3rd party back-in rights); Contract awarded by the ANH in September 2006 with an exploration period of up to 6 years and exploitation period of up to 24 years; Initial exploration phase of up to 18 months with commitmentto acquire 30 km of new 2D seismic and reprocess 40 km of existing 2D seismic. The Maranta block lies in the Putumayo basin in the south of Colombia. A numberof exploration prospects and leads have been identified, from existing seismicdata, on trend with nearby producing oil fields. The exploration programme inthe initial phase is designed to determine whether a well drilling commitmentwill be undertaken in this block. If Emerald elects to enter the second phase,the minimum work programme includes the drilling of one well to an estimateddepth of 11,000 ft. The Maranta block also contains the Umbria No. 1 well, drilled in 1967, whichencountered oil in the Villeta formation. The Company is investigating thepotential to re-enter this well to further test the formation productivity. Ombu Exploration and Production Contract Area of 300 sq km; Emerald 100% operated working interest (no 3rd party back-in rights); Contract awarded by the ANH in December 2006 with an exploration period of up to 6 years and exploitation period of up to 24 years; Initial exploration phase of 11 months with commitment to acquire 61 km of new 2D seismic and reprocess 60 km of existing 2D seismic. The Ombu block lies in the Caguan basin to the southwest of the Llanos Basin. Anexploration prospect has been identified from existing seismic and well data.The Payara No. 1 well, drilled on the same structure in 1976, tested oil in theMirador sands. The exploration programme in the initial phase, which may includethe re-entry of the Payara No. 1 well, is designed to determine whether a welldrilling commitment will be undertaken in this block. If Emerald elects to enterthe second phase, the minimum work programme includes the drilling of one wellto an estimated depth of 5,000 ft. Helen Exploration & Production Contract Area of 213 sq km; Emerald 15% non-operated working interest (no 3rd party back-in rights), carried through the initial phase; Contract awarded by the ANH in December 2006 with an exploration period of up to 6 years and exploitation period of up to 24 years; Initial exploration phase of up to 16 months with commitment to acquire 30 km of new 2D seismic and reprocess 120 km of existing 2D seismic. The Helen block lies in the Putumayo basin in the south of Colombia. Theexploration programme in the initial phase is designed to determine whether awell commitment will be undertaken in this block. If Emerald elects to enter thesecond phase, the minimum work programme includes the drilling of one well to anestimated depth of 10,000 ft. Emerald entered into an agreement with Vetra Energy Group LLC ("Vetra"), subjectto approval by the ANH, under which Vetra will pay 100% of the cost of theinitial phase of exploration and will be assigned an 85% interest in, andoperatorship of the Contract. Emerald will retain a 15% interest in the Contractand will be fully carried through the initial phase of exploration. Jacaranda Exploration & Production Contract Area of 235 sq km; Emerald 100% operated working interest (no 3rd party back-in rights); Contract awarded by the ANH in March 2007 with an exploration period of up to 6years and exploitation period of up to 24 years; Initial exploration phase of 12 months with commitment toacquire 40 km of new 2D seismic, process seismic attribute for 25 km, andreprocess 25 km of existing 2D seismic. The Jacaranda block lies in the Llanos basin in the south of Colombia. Theexploration programme in the initial phase is designed to determine whether awell commitment will be undertaken in this block. If Emerald elects to enter thesecond phase, the minimum work programme includes the drilling of one well to anestimated depth of 6,000 ft. Technical Evaluation Agreements (TEAs) The Company has completed its evaluation of the Cachama and Las Brisas TEA areasand has been awarded the Jacaranda exploration and production contract over apart of the Cachama TEA area. Following the expiry of the agreements in July2006, Emerald does not retain any rights to the remainder of the study areas.The Company has not entered into any further TEAs. Contract terminations During 2006, Emerald participated in the drilling of the Agueda No. 1 well(Emerald 50% non-operated working interest) in the El Algarrobo AssociationContract, satisfying the minimum work obligation. The well was evaluated asnon-commercial and plugged and abandoned. Emerald and its partner subsequentlygave notice to withdraw from the interest in the El Algarrobo AssociationContract which was terminated. Production In the reporting period, Emerald's production came from the Campo Rico block(the Campo Rico, Vigia and Centauro Sur fields), the Matambo block (the Gigantefield) and the Fortuna block (Silfide field). In 2006, Emerald achieved anaverage gross production rate of 3,673 bopd, 11% increase on 3,301 bopd achievedin 2005. On the entitlement basis, in 2006, Emerald achieved 2,510 bopd comparedto 2,296 bopd achieved in 2005. Producing fields ------------------------- Campo Rico Vigia Centauro Sur Gigante Silfide Total mbbl mbbl mbbl mbbl mbbl mbbl ------- ------ ------ ------ ------ ------Grossattributableproduction 662 267 173 237 2 1,341Royaltypetroleum (53) (21) (14) (47) - (135)Ecopetrolentitlementproduction (257) - - (33) - (290)---------------- ------- ------ ------ ------ ------ -----Emeraldentitlementproduction 352 246 159 157 2 916---------------- ------- ------ ------ ------ ------ ---- In the first quarter of 2007, Emerald's gross production averaged 3,508 bopd,compared to 3,586 bopd achieved in the fourth quarter of 2006. This 2% declinein production represents a combination of natural decline, variable operatingefficiency of production equipment, and the deferment of production during threewell workovers, following which production increased to a current level of 3,800bopd. Syria Block 26 Production Sharing Contract Area of 11,000 sq km; Production Sharing Contract (PSC), effective August 2003, with an initial exploration period of 4 years and options to extend for a further 3 years and then 2 years, exploitation period of up to 25 years; Emerald has 50% non-operating working interest in the contract; Royalty of 12.5%; cost recovery allowance with profit oil share reducing on a sliding scale basis. Block 26 is situated in northeast Syria and its boundaries surround existingdiscovered fields, some of which have been developed and currently produce inexcess of 100,000 bopd, including the Souedieh field, the largest oil field inSyria. Production from these fields is from mid-Cretaceous limestone reservoirsthat produce medium gravity 20-26degrees API crude oil. These existing fieldsare excluded from the PSC but the deeper stratigraphic levels below them arenot. The initial phase of exploration, due to expire in August 2007, requiresfour exploration well to be drilled with at least two reaching Palaeozoic ageformations. Two of these wells had been drilled and a third commenced drillingby the end of the first quarter 2007. A drilling rig is contracted to drill theremaining well prior to the expiry of the initial phase. The first exploration well, North Souedieh No. 1, was drilled during the secondquarter of 2006 on the North Souedieh prospect, a Cretaceous target situatedwithin the northeast part of the block, located between the existing Souediehand Karatchok fields. Gas shows were recorded while drilling and interpretationof the electric wireline logs identified potential hydrocarbon zones. However,no hydrocarbons were recovered when tested using a wireline conveyed testingtool. Subsequent analysis has indicated the hydrocarbon to be viscous oil with ahigh density which is unlikely to flow without some form of thermal stimulation.The well has been suspended while the acquired data is reviewed and alternativetesting operations are considered. The second exploration well, Tigris No. 1, was drilled during the fourth quarterof 2006 and first quarter of 2007 on the Tigris prospect, a Palaeozoic target,also located in the northeast part of the block and directly underlying theSouedieh oil field. The Tigris structure had previously been penetrated by theS1100 well in 1994. Operational difficulties in the S1100 well had resulted inequivocal electric wireline log information but records indicated that some gashad been produced to surface during testing. The Tigris No. 1 exploration wellencountered hydrocarbon shows while drilling, two cores were cut, and anextensive suite of wireline logs was run across the Palaeozoic section. Analysisof the wireline logs suggested that hydrocarbons may be present, but formationpressure sampling was unable to confirm the presence or mobility of any suchhydrocarbons. Emerald concluded, based on the data acquired in the well, that itis unlikely that commercial hydrocarbons can be produced from this well. Emeraldtherefore elected not to participate in the running of a liner in the well, anoperation that was conducted by the Operator as an exclusive operation under theJoint Operating Agreement between the Block 26 partners. Emerald may elect, atany time, to participate in the future operations on Tigris No. 1 well and wouldbe required to reimburse the operator its costs with an additional back-inpenalty. In early 2006 1,155 km of 2D seismic was acquired, processed and interpreted. InDecember 2006, an additional 266 km of 2D seismic was acquired in order torefine the geological interpretation of the area and to optimise the remainingdrilling programme. The third exploration well, Khurbet East No. 1, was spud in February 2007 on theKhurbet East prospect, a fault-bound structural culmination, with closure mappedat several potential reservoir levels including Cretaceous, Triassic andPalaeozoic ages. The Khurbet East prospect is located in the northeast of theblock, approximately 12 kilometres southwest of the Souedieh Oil Field and 12kilometres south of the Roumelan Oil Field. While drilling Khurbet East No. 1, hydrocarbon shows were encountered in theTertiary Chilou and Cretaceous Massive formations. Wireline logs indicated agross hydrocarbon interval of 31 metres and a net hydrocarbon interval ofapproximately 22.5 metres in the Massive formation with some additionalpotential in the Chilou formation. A wireline formation pressure samplerconfirmed the presence of hydrocarbon in the Massive formation and retrieved asample of 21 degree API gravity oil to surface. Drilling is continuing to thetotal drilling depth of 3,700 metres to evaluate the remaining prospectiveintervals. The location of the fourth commitment well will be selected from the remainingidentified prospects, refined by the geological understanding being obtainedfrom the ongoing drilling programme. This well is expected to spud around July2007 when the MB3 drilling rig returns from drilling wells for the rig-sharepartner. New ventures Emerald has evaluated several new ventures in Colombia, in other countries ofSouth America, and of a broader international nature. Within Colombia, four newexploration and production contracts have now been added to the portfolio,significantly adding to the future exploration potential. Emerald's objectivesremain to grow its reserve base and to increase its net production throughexploration and acquisition of assets. Proved plus Probable reserves Colombia The table below summarises the gross attributable Proved plus Probable reservesin Colombia as at 31 December 2006. Gross attributable reserves are defined astotal field reserves, including royalty oil and any Ecopetrol's entitlements,but excluding participation of other parties forming the Associate under theterms of the Association Contracts with Ecopetrol. Producing fields ---------------------- Campo Rico Vigia Centauro Gigante Silfide Total SurProved plus mbbl mbbl mbbl mbbl mbbl mbblProbable reserves ------ ------ ------ ------ ------ ------of oil:As at 31December2005(1) 4,482 2,282 - 7,707 - 14,471Revisions(2)(3) - - 694 - 2 696Production (662) (267) (173) (237) (2) (1,341)------------------- ------ ------ ------ ------ ------ ------As at 31December 2006 3,820 2,015 521 7,470 - 13,826------------------- ------ ------ ------ ------ ------ ------ (1) Source: Reserves Evaluation of the Gigante and Campo Rico fields, by RPSEnergy, dated 17 March 2005 and Evaluation of Vigia field, by RPS Energy, dated2 March 2006. (2) Source: Evaluation of Centauro Sur field, by RPS Energy, dated 1 February2007. (3) Reserves are not being attributed to the Silfide field until any developmentpotential is determined following fracture stimulation workover. Syria The table below summarises Emerald's 50% interest of Proved plus Probablereserves in Syria as at 31 December 2006. Oil Gas ------------- ------------Proved plus Probable reserves: mbbl bcf ------------- ------------As at 31 December 2005(4) - 221Revisions(5) - (221)Production - ------------------------ ------------- ------------As at 31 December 2006 - ------------------------ ------------- ------------ (4) Source: Estimated Reserves and Prospective Resources Attributable to TigrisField Syria, by Ryder Scott Company LP, dated 27 January 2006. (5) Based on the results of the Tigris No. 1 exploration well. Probable reserves of 221 bcf were added in 2005, based on an independentreserves evaluation of the Tigris structure performed by the Ryder Scott CompanyLP. Following the drilling of the Tigris No. 1 well and Emerald's withdrawalfrom the wells future operation these reserves have been removed from the Provedplus Probable reserves summary. Angus MacAskill Chief Executive 3 April 2007 Financial review 1. Change in accounting treatment of production sharing under AssociationContracts In 2006, the Company adopted a new method of accounting for production sharingunder Colombian Association Contracts with Ecopetrol, the Colombian state oilcompany. Under the new method, revenues, costs and profits generated by Emeraldfrom its Association Contracts reflect the actual entitlement to production, asthey would have been reported under more typical production sharing contracts. This represents a change from the accounting treatment effective from 2004,under which cost recovery charges to the income statement were introduced toreflect the repayment of previously capitalised costs. Cost recovery charges hadthe effect of reducing the profit generated by Emerald to the level, whichEmerald would have sustained if Ecopetrol had participated in the costs andrevenues of the project from its start. The newly adopted accounting method presents financial results on the actualentitlement basis. Such accounting treatment is consistent with the productionsharing logic of the Association Contracts, whereby Ecopetrol does notparticipate in exploration activities, which are carried by the associate at itsown risk, but rather backs-in to commercial discoveries at its option, and thenrepays its share of historical costs from its share of production therebygenerating a production entitlement formula akin to a typical production sharingcontract. In the opinion of Directors, presentation of results on the actualentitlement basis is more consistent with how production sharing under theAssociation Contracts works than the previously adopted accounting treatment. Relevant financial statements of the Company and the Group comprised of thebalance sheets as at 1 January 2005 and 31 December 2005 as well as income andcash flow statements for 2005 have been restated to reflect the changesresulting from this change in the accounting treatment of production sharingunder Association Contract. 2. Entitlement production Entitlement production is production to which Emerald is entitled in any givenperiod. Entitlement production excludes royalty petroleum and any otherproduction that belongs to Ecopetrol and other parties forming the Associateunder the terms of the Association Contracts. The table below summarisesEmerald's entitlement production by field: Gross attributable production* Entitlement production Entitlement % --------------- ------------- --------- 2006 2005 2006 2005 2006 2005 --------- -------- -------- ------- ------ ------ -----Field mbbl mbbl mbbl mbbl % %Gigante 237 247 157 198 66% 80%Campo Rico 662 846 352 536 53% 63%Vigia 267 112 246 104 92% 92%Centauro Sur 173 - 159 - 92% -Silfide 2 - 2 - 83% ------------- -------- -------- ------- ------ ------ ----- Total 1,341 1,205 916 838 68% 70% ----------- -------- -------- ------- ------ ------ ----- (*) Gross attributable production is total field production, including royaltypetroleum and participation of Ecopetrol, Colombian state oil company, butexcluding participation of other parties forming the Associate under the termsof the Association Contracts. In the reporting period, Emerald had 100%participation in all of its producing Association Contracts apart from FortunaAssociation Contract, covering the Silfide field, where Emerald has a 90%working interest. 3. Comparative financial results and key statistics 2006 2005 $ '000 $ '000 --------- ---------Revenue (a) 45,856 32,079Production costs (b) (13,529) (9,640)Expensed exploration costs (c) (180) (1,098)General and administrative expenses (d) (8,327) (4,632)Other operating income 1,262 304 --------- ---------EBITDA* 25,082 17,013Net finance income 628 482Depletion and depreciation of oil & gas assets (e) (8,454) (6,289)Write-offs of unsuccessful exploration costs (f) (9,537) (687)Impairment charge (g) (5,901) - --------- ---------Profit before tax 1,818 10,519 --------- --------- 2006 2005 $/bbl $/bbl --------- ---------Revenue per barrel of entitlement production (a) 49.9 38.3Production cost per barrel of entitlement production (b) (14.7) (11.5)-------------------------- --------- --------- 35.2 26.8 --------- --------- (*) EBITDA is earnings before interest, tax, depreciation, depletion,amortisation and write-offs of oil & gas assets. 3.a Revenue Emerald recognises revenues on the entitlement basis. In 2006, revenues from oilsales increased to $49.9 per barrel of oil from $38.3 per barrel of oil achievedin 2005. Currently, realised oil prices are referenced to Vasconia blend, whichtrades at a discount to WTI; in addition, pricing formulae incorporate crudequality adjustments and further discounts reflecting the cost of transportingcrude through the pipeline system. 3.b Production costs Production costs are direct costs incurred to produce and deliver hydrocarbonsto the point of sale. In 2006, on the entitlement basis, production costs were$14.7 per barrel of oil production, compared to $11.5 per barrel of oilproduction in 2005. This increase reflects the cost of workovers in the CampoRico, Vigia and Gigante fields, where electrical submersible pumps wereinstalled to improve productivity of the fields, as well as general costescalation experienced by an increasingly active upstream segment of oil and gasindustry. 3.c Expensed exploration costs Expensed exploration costs include exploration expenditures incurred prior togrant of exploration and production licenses comprised of $180,000 (2005:$1,098,000) associated primarily with the works performed under the technicalevaluation agreements for Cachama and Las Brisas areas awarded by ANH in 2005. 3.d General and administrative expenses General and administrative expenses in 2006 include a charge of $2,675,000relating to the grant of share options under Emerald Energy Plc DiscretionaryShare Option Scheme (2005: $599,000). Increase in general and administrativeexpenses other than share-based payments reflects increased level of activity inColombia. 3.e Depletion and depreciation charges On the entitlement basis, depletion and depreciation of oil and gas assets inthe reporting period was $9.23 per barrel of oil production (2005: $7.50 perbarrel). This increase reflects an upward change in the management estimates ofthe future costs required to develop and produce the reserves in the Company'sfields. 3.f Write-offs of unsuccessful exploration costs Write-offs of unsuccessful exploration costs represent expenditures associatedwith unsuccessful efforts to find commercial reserves of hydrocarbons. Under thesuccessful efforts based method of accounting adopted by the Company, the costsof exploration efforts, such as geological and geophysical works and drillingactivities, are capitalised until it is determined whether these explorationefforts have been successful or not. If the efforts are determined to beunsuccessful, all of the relevant capitalised costs and costs incurred in theperiod are written off. The table below provides the breakdown of write-offs ofunsuccessful exploration costs: 2006 2005Field/prospect Block $ '000 $ '000------------ ------------------ ---------- ----------ColombiaVigia field* Campo Rico block 1,939 -Las Acacias prospect Campo Rico block 2,514 -Algarrobo prospect Algarrobo block 1,575 687SyriaTigris prospect Block 26 3,509 ------------- ------------------ ---------- ----------Total write-offs of unsuccessfulexploration efforts 9,537 687---------------------------- ---------- ---------- (*) The write-off in the Vigia field is associated with the cost of drilling theVigia No. 4 appraisal well. 3.g Impairment charge Impairment review of the Group's properties resulted in an impairment charge of$5,901,000 (2005: nil) relating to the Vigia field in the Campo Rico block inColombia. The ceiling test was conducted at WTI prices of $55/bbl in 2007 and$50/bbl thereafter. The discount rate applied was 10%. 4. Profit for the year 2006 2005 $ '000 $ '000 --------- ---------Profit before tax 1,818 10,519Tax charge for the period (968) (1,641)Deferred tax resulting from utilisation of tax (829) (2,329)lossesDeferred tax resulting from temporary (2,745) (775)differences --------- -----------------------------------Profit for the period (2,724) 5,774-------------------------- --------- --------- 5. Financial performance of business entities Currently, the Group is comprised of three business entities: Colombia, Syriaand London Head Office. The table below summarises the financial performance ofthe Group by business entity. Colombia Syria Head Office Group $ '000 $ '000 $ '000 $ '000-------------------- -------- -------- -------- --------Revenue 45,856 - - 45,856Production costs (13,529) - - (13,529)Expensed exploration costs (150) - (30) (180)General and administrative expenses (3,847) - (4,480) (8,327)Other operating income 1,262 - - 1,262-------------------- -------- -------- -------- --------EBITDA 29,592 - (4,510) 25,082Net finance income/(cost) (37) (53) 718 628Depletion and depreciation of oil &gas assets (8,454) - - (8,454)Write-offs of unsuccessfulexploration costs (6,028) (3,509) - (9,537)Impairment charge (5,901) - - (5,901)-------------------- -------- -------- -------- --------Profit before tax 9,172 (3,562) (3,792) 1,818Tax charge for the period (968) - - (968)Deferred tax (3,574) - - (3,574)-------------------- -------- -------- -------- --------Period profit/(loss) 4,630 (3,562) (3,792) (2,724)-------------------- -------- -------- -------- --------Capital expenditure Investment in tangible oil &gas assets (a) 14,517 - - 14,517Investment in intangible oil &gas assets (b) 3,949 9,875 - 13,824Investment in other fixed assets 199 - 63 262-------------------- -------- -------- -------- --------Total capital investment 18,665 9,875 63 28,603-------------------- -------- -------- -------- -------- 5.a Investment in tangible oil & gas assets Investment in tangible oil and gas assets includes investment in the Gigante,Campo Rico, Vigia and Centauro Sur fields in Colombia. 5.b Investment in intangible oil & gas assets Investment in intangible oil and gas assets represents exploration anddevelopment expenditures associated with either unevaluated fields, such as theSilfide field in the Fortuna block in Colombia, or unevaluated prospects. 6. Going concern The Directors confirm that in their opinion the Company has adequate resourcesto continue in operational existence for the foreseeable future and thereforeDirectors continue to adopt a going concern basis in preparing the financialstatements of the Company and the Group. Edward GraceFinance Director 3 April 2007 Group income statement For the year ended 31 December 2006 2005 $ '000 $ '000----------------------------------------------------- ---------- ----------- Restated Revenue fromoil sales 45,856 32,079 Cost of sales ---------- ----------- Production costs (13,529) (9,640) Expensed exploration costs (180) (1,098) Depletion and depreciation of oil and gas (8,454) (6,289) assets Write-offs of unsuccessful exploration costs (9,537) (687) Impairment charge (5,901) - ---------- -----------Total cost of sales (37,601) (17,714) ---------- -----------Gross profit 8,255 14,365Other income 1,262 304Administrative expenses (8,327) (4,632) ---------- -----------Profit from operations before tax andfinance income 1,190 10,037 ---------- -----------Finance costs (199) (7)Finance income 827 489 ---------- -----------Profit before tax 1,818 10,519 ---------- -----------Tax expense ---------- ----------- Current tax charge for the year (968) (1,641) Deferred tax (charge)/credit for the year (3,574) (3,104) ---------- -----------Total tax expense (4,542) (4,745)------------------------ ---------- ----------- (Loss)/profit for the year attributableto equity holders of the parent (2,724) 5,774------------------------ ---------- ----------- ---------- ----------- Basic earnings per ordinary share (4.86c) 11.22c Diluted earnings per ordinary share (4.86c) 10.68c------------------------ ---------- ----------- Group and Company balance sheets As at 31 December Group Company ------------ ----------- 2006 2005 2006 2005 $ '000 $ '000 $ '000 $ '000---------------------- ------- ------ ------ ------ Restated Restated Non-current assets Intangible oil and gas assets 29,371 23,145 5,598 5,739Tangible oil and gas assets 36,740 38,516 36,740 38,516Other tangible assets 261 15 261 15Deferred tax 152 829 152 829Investments - - 23,839 17,406 ------- ------ ------ ------ 66,524 62,505 66,590 62,505 ------- ------ ------ ------Current assets Inventories 4,649 234 4,649 234 Trade and other receivables 4,963 3,447 4,908 3,447 Corporation tax debtor 905 - 905 -Cash and cash equivalents 15,762 20,679 15,762 20,679 ------- ------ ------ ------ 26,279 24,360 26,224 24,360 ---------------------- ------- ------ ------ ------Total assets 92,803 86,865 92,814 86,865---------------------- ------- ------ ------ ------ Current liabilities Trade and other payables 7,118 5,410 7,118 5,410 Accruals 2,299 1,028 2,258 1,028 Provisions 410 410 410 410 ------- ------ ------ ------ 9,827 6,848 9,786 6,848 ------- ------ ------ ------ Non-current liabilities Deferred tax 6,504 3,607 6,504 3,607 ------- ------ ------ ------ 6,504 3,607 6,504 3,607 ------- ------ ------ ------ Equity attributable to the shareholders Issued share capital 9,216 9,203 9,216 9,203 Share premium 40,838 40,784 40,838 40,784 Shares to be issued 10,130 10,130 10,130 10,130 Retained earnings 15,609 15,658 15,661 15,658 Foreign exchange reserve 679 635 679 635 ------- ------ ------ ------ 76,472 76,410 76,524 76,410---------------------- ------- ------ ------ ------ Total liabilities and shareholders' 92,803 86,865 92,814 86,865equity ---------------------- ------- ------ ------ ------ Group and Company cash flow statement For the year ended 31 December Group Company -------------- ------------ 2006 2005 2006 2005 $ '000 $ '000 $ '000 $ '000 -------- ------- ------ ------- Restated RestatedCash flow from operating activitiesProfit from operations before taxand finance 1,190 10,037 4,699 10,037income and costsShare based payments 2,675 599 2,675 599Depletion and depreciation 8,454 6,149 8,454 6,149Write-offs of unsuccessfulexploration costs 9,537 687 6,028 687Impairment charges 5,901 - 5,901 -------------------- -------- ------- ------ -------Operating profit before changes inworking capital and provisions 27,757 17,472 27,757 17,472------------------- -------- ------- ------ -------Movement in inventory (4,415) (78) (4,415) (78)Movement in operating receivables (1,584) (1,727) (1,529) (1,727)Movement in operating payables (1,824) 2,396 (1,865) 2,396------------------- -------- ------- ------ -------Cash flow from operatingactivities 19,934 18,063 19,948 18,063------------------- -------- ------- ------ -------Profit tax paid (1,861) (1,384) (1,861) (1,384)------------------- -------- ------- ------ -------Net cash flow from operations 18,073 16,679 18,087 16,679------------------- -------- ------- ------ ------- Cash flow from investing activitiesCapital investment in Colombia (13,894) (27,144) (13,894) (27,144)Capital investment in Syria (9,875) (16) - -Purchase of 50% interest in Block26, Syria - (7,260) - (7,260)Investment in subsidiaries - - (9,942) (16)Interest received 864 524 864 524------------------- -------- ------- ------ ------- (22,905) (33,896) (22,972) (33,896) -------- ------- ------ -------Cash flow from financing activitiesNet proceeds from issue of equity 67 14,440 67 14,440Interest paid (158) - (105) -------------------- -------- ------- ------ ------- (91) 14,440 (38) 14,440 -------- ------- ------ ------- ------------------- -------- ------- ------ -------Net (decrease) in cash and cashequivalents (4,923) (2,777) (4,923) (2,777)------------------- -------- ------- ------ -------Cash at period start 20,679 23,646 20,679 23,646Period cash flow (4,923) (2,777) (4,923) (2,777)Currency translation 6 (190) 6 (190)------------------- -------- ------- ------ -------Cash and cash equivalents atperiod end 15,762 20,679 15,762 20,679------------------- -------- ------- ------ ------- Statement of changes in equity Group Foreign Share Share Shares to be Retained exchange capital(1) premium(2) issued(3) earnings(4) reserve(5) Total -------- ------- -------- -------- ------- -------Balance at 31December 2004(Original) 8,068 27,479 - 8,417 884 44,848Prioradjustments(*) - - - 868 - 868Balance at 31December 2004(Restated) 8,068 27,479 - 9,285 884 45,716----------- -------- ------- -------- -------- ------- ------- Translationdifferences - - - - (249) (249)Profit forthe - - - 5,774 - 5,774periodIssue of newshare capital 1,135 13,305 - - - 14,440Acquisitionconsideration(*) - - 10,130 - - 10,130Share basedpayment - - - 599 - 599----------- -------- ------- -------- -------- ------- -------Balance at 31December 2005(Restated) 9,203 40,784 10,130 15,658 635 76,410----------- -------- ------- -------- -------- ------- ------- Translationdifferences - - - - 44 44Loss for theperiod - - -- (2,724) - (2,724)Issue of newshare capital 13 54 - - - 67Share basedpayments - - - 2,675 - 2,675----------- -------- ------- -------- -------- ------- -------Balance at 31December 2006 9,216 40,838 10,130 15,609 679 76,472----------- -------- ------- -------- -------- ------- ------- Company Foreign Share Share Shares to be Retained exchange capital(1) premium(2) issued(3) earnings(4) reserve(5) Total ------- ------- --------- -------- ------- ------Balance at 31December 2004(Original) 8,068 27,479 -- 8,417 884 44,848Prioradjustments(*) - - -- 868 -- 868Balance at 31December 2004(Restated) 8,068 27,479 -- 9,285 884 45,716------------ ------- ------- --------- -------- ------- ------- Translationdifferences - - - - (249) (249)Profit forthe - - - 5,774 - 5,774periodIssue of newshare capital 1,135 13,305 - - - 14,440Acquisitionconsideration(*) - - 10,130 - - 10,130Share basedpayment - - - 599 - 599------------ ------- ------- --------- -------- ------- -------Balance at 31December 2005(Restated) 9,203 40,784 10,130 15,658 635 76,410------------ ------- ------- --------- -------- ------- ------- Translationdifferences - - - - 44 44Profit forthe - - - (2,672) - (2,672)periodIssue of newshare capital 13 54 - - - 67Share basedpayments - - - 2,675 - 2,675------------ ------- ------- --------- -------- ------- -------Balance at 31December 2006 9,216 40,838 10,130 15,661 679 76,524------------ ------- ------- --------- -------- ------- ------- (*) Prior adjustments reflect change in accounting treatment of productionsharing under association contracts and the reclassification of shares to beissued. The following describes the nature and purpose of each reserve withinshareholders' equity: Share capital(1) Nominal value of amounts subscribed for share capital Share premium(2) Amounts subscribed for share capital in excess of nominal value Shares to be issued(3) Shares to be issued to Soyuzneftegas Limited pursuant tothe SNG Overseas Limited Share Purchase Agreement Retained earnings(4) Cumulative net gains and losses recognised in the incomestatement. Retained earning and reserves include fair value of the share optionsissued under the Company's discretionary share option plan and recognised on thedate of the grant Translation reserve(5) Cumulative effect of historical differences arising fromconversion of reserves from source to reporting currency. The brought forwardbalance of translation reserves as at 31 December 2004 reflects the historicalcumulative effect of such conversion resulting from the reporting currency beingBritish pound sterling that was changed to US dollar in 2004 Notes to the financial statements 1. Basis of accounting The financial information contained in this statement does not constitute theGroup's statutory accounts. The figures for the year ended 31 December 2006 havebeen extracted from the Group's audited statutory accounts, which were approvedby the Board on 3 April 2007 and will be lodged with the registrars of companiesin the Isle of Man. The report of the auditors on those accounts wasunqualified. 2. Basis of preparation The Group follows the International Financial Reporting Standards as the basisfor preparation of its financial statements. These financial statements areprepared on the historical cost basis as modified by the requirement of IFRS topresent financial assets and financial liabilities at fair value, making therequired adjustment through the income statement. 3. Prior year adjustments 3.a Change of accounting policy of production sharing under associationcontracts In 2006, the Company has adopted a new method of accounting for productionsharing under Colombian association contracts with Ecopetrol. Under a newmethod, revenues, costs and profits generated by Emerald from its associationcontracts reflect the actual entitlement to production, as they would have beenreported under more typical production sharing contracts. This represents a change from the accounting treatment adopted in 2004, underwhich cost recovery charges to the income statement were introduced to reflectthe repayment of previously capitalised costs. Cost recovery charges had theeffect of reducing the profit generated by Emerald to the level, which Emeraldwould have sustained if Ecopetrol had participated in the costs and revenues ofthe project from its start. The newly adopted accounting method presents financial results on the actualentitlement basis. Such accounting treatment is consistent with the productionsharing logic of the association contracts, whereby Ecopetrol does notparticipate in exploration activities, which are carried by the associate at itsown risk, but rather backs-in to commercial discoveries at its option,generating a production entitlement formula akin to a typical production sharingcontract. In the opinion of Directors, presentation of results on the actualentitlement basis is more consistent with how production sharing under theassociation contracts works than a previously adopted accounting treatment,which would be better suited for presentation of results under a risk-sharedjoint venture style commercial arrangement. Relevant financial statements of the Company and the Group comprised of thebalance sheets as at 1 January 2005 and 31 December 2005 as well as income andcash flow statements for 2005 have been restated to reflect the changesresulting from this change in the accounting treatment of production sharingunder association contract. Adjustments in the historical financial statements resulting from the change inaccounting treatment of production sharing under association contracts aresummarised in the table below: Adjustments in the Group income statements for the year ended 31 December 2005 -------- -------- --------- Original Adjustment Restated $ '000 $ '000 $ '000 -------- -------- ---------Depletion and depreciation of oil & gasassets (4,959) (1,330) (6,289)Cost recovery (3,826) 3,826 -Gross profit 11,869 2,496 14,365Profit from operations before tax andfinance income 7,541 2,496 10,037Profit before tax 8,023 2,496 10,519Deferred tax charge (2,143) (961) (3,104)Profit for the period 4,239 1,535 5,774------------------------- -------- -------- ---------Earnings per ordinary share 8.24c 2.98c 11.22c Earnings per ordinary share on diluted basis 7.84c 2.84c 10.68c------------------------- -------- -------- --------- Adjustments in the Group and Company balance sheets as at 31 December 2004 -------- -------- --------- Original Adjustment Restated $ '000 $ '000 $ '000 -------- -------- ---------Tangible oil & gas assets 21,590 1,415 23,005Trade and other receivables 1,751 -- 1,751Total assets 52,537 1,415 53,952------------------------- -------- -------- ---------Deferred tax 2,285 547 2,832Retained earnings and reserves 9,301 868 10,169Total liabilities and shareholders' equity 52,537 1,415 53,952------------------------- -------- -------- --------- as at 31 December 2005 -------- -------- --------- Original Adjustment Restated $ '000 $ '000 $ '000 -------- -------- ---------Tangible oil & gas assets 32,472 6,044 38,516Trade and other receivables 5,569 (2,122) 3,447Total assets 82,943 3,922 86,865------------------------- -------- -------- ---------Deferred tax 2,099 1,508 3,607Retained earnings and reserves 13,879 2,414 16,293Total liabilities and shareholders' equity 82,943 3,922 86,865------------------------- -------- -------- --------- All the changes in the Group and Company income statements and balance sheetsrelate to the Group's Colombian operations. 3.b Shares to be issued The Directors have reconsidered the presentation of the consideration due on SNGOverseas Limited. As described in note 21, the company is required to issue3,500,000 ordinary shares to the former owners by 17 May 2007. Previously, theamount payable was included in non-current liabilities but, given that a fixednumber of shares is to be issued to settle this amount due, the Directors havereclassified these shares to be issued as equity in accordance with IAS32, 'Financial Instruments - Presentation'. The comparatives as at 31 December 2005have been restated accordingly. 4. Oil and gas assets The Group applies the successful efforts based method of accounting for oil andgas operations. Under the successful efforts based method of accounting, costs are capitalisedif they lead to or represent the development of the oil and gas assets thateither have to be appraised or have been appraised as successful. If evaluationof the oil and gas asset leads to the conclusion that the asset is not economic,the costs incurred acquiring this asset are expensed through the incomestatement. If evaluation of the oil and gas asset leads to the conclusion thatthe asset has economic value but the costs incurred acquiring and developingthis asset exceed this value, the excess costs are expensed through the incomestatement. The costs incurred to evaluate potential assets prior to grant ofexploration and production ("E&P") licenses are expensed. Tangible oil and gas assets For evaluated properties with economic values exceeding the exploration anddevelopment costs incurred after the grant of the license, these costs, whichmay include geological and geophysical costs, costs of drilling exploration anddevelopment wells, costs of field production facilities, including commissioningand infrastructure costs, are capitalised. These expenditures are combined intoasset groups reflecting the anticipated useful lives of individual assets andsubsequently are depreciated over the expected economic lives of those assetgroups. The expenditure within the asset group with a useful life equal to theproducing life of the field is depleted on a unit-of-production basis. Theassets formed by capitalisation of these costs are referred to as tangible oiland gas assets. Intangible oil and gas assets Intangible oil and gas assets represent costs that have been incurred after thegrant of the license where the properties still have to be evaluated and whereproduction of hydrocarbons has yet to commence. Costs related to suchunevaluated properties are not amortised until such time as the related propertyhas been appraised and put on production. Other tangible fixed assts Other tangible fixed assets, currently comprising furniture and fittings,communications equipment and computer equipment, are depreciated on astraight-line basis over five, three and two years, respectively. Impairment review Impairment reviews of development and/or producing assets are carried on afield-by-field basis. At each reporting date, the net book values of thedevelopment and/or producing assets are compared to the net present values ofexpected future cash flows from the relevant fields. If the net book value ishigher than the underlying economic value of the asset, then the difference iswritten off to the income statement as impairment. Expected future cash flowsare calculated using production profiles and costs determined on afield-by-field basis by in-house engineers, using appropriate petroleumengineering techniques, and using oil price forecasts which are developed by theGroup for business planning purposes. Exploration and appraisal assets are regarded as intangible fixed assets untilit has been established whether they are associated with commercially produciblereserves of hydrocarbons or not. If the efforts associated with the costs ofthese assets are successful, these assets are reclassified into development and/or producing assets, which are subject to regular impairment reviews on afield-by-field basis. If the efforts associated with the costs of these assetsare unsuccessful, the carrying cost of these assets is written off to the incomestatement in accordance with the successful efforts based accounting method. 5. Segment information The Group is engaged in oil and gas exploration and production activities only.As the operating businesses are organised and managed separately on acounty-by-country basis, segment information is reported geographically only. Currently, the Group and its companies are not involved in transfer pricing. Geographic segments Year ended 31 December 2006 Colombia Syria Group $ '000 $ '000 $ '000--------------------------- -------- -------- -------Revenue from oil sales 45,856 - 45,856Depletion and depreciation of oil & gas assets (8,454) - (8,454)Write-offs of unsuccessful exploration efforts (6,028) (3,509) (9,537)Impairment charges (5,901) - (5,901)Gross profit/(loss) 11,764 (3,509) 8,255Profit/(loss) from operations before tax and finance income 4,699 (3,509) 1,190Finance costs (146) (53) (199)Profit/(loss) before tax 5,380 (3,562) 1,818--------------------------- -------- -------- ------- Other segment information:Segment assets:Oil and gas assets 42,339 23,772 66,111Other tangible and non-current assets 413 - 413Current assets 26,224 55 26,279--------------------------- -------- -------- -------Total assets 68,976 23,827 92,803--------------------------- -------- -------- -------Capital expenditure:Oil and gas assets 18,466 9,875 28,341Other tangible assets 262 - 262--------------------------- -------- -------- -------Total capital expenditure 18,728 9,875 28,603--------------------------- -------- -------- ------- Total liabilities:Liabilities 15,880 41 15,921Head office - - 410 Total liabilities 15,880 41 16,331--------------------------- -------- -------- ------- Year ended 31 December 2005 Colombia Syria Group $ '000 $ '000 $ '000 -------- -------- ------- Restated RestatedRevenue from oil sales 32,079 - 32,079Profit before tax 10,519 - 10,519--------------------------- -------- -------- ------- Other segment information:Segment assets:Oil and gas assets 44,255 17,406 61,661Other tangible and non-current assets 844 - 844Current assets 24,360 - 24,360--------------------------- -------- -------- -------Total assets 69,459 17,406 86,865--------------------------- -------- -------- -------Capital expenditure:Oil and gas assets 23,957 17,406 41,363Other tangible assets 676 - 676--------------------------- -------- -------- -------Total capital expenditure 24,633 17,406 42,039--------------------------- -------- -------- ------- Total liabilities:Liabilities 10,045 - 10,045Head office - - 410 Total liabilities 10,045 - 10,455--------------------------- -------- -------- ------- With the exception of the liability of $410,000 relating to Argentina, all headoffice items have been incurred on behalf of a segment and have been allocatedon that basis. 6. Dividends The Directors do not recommend payment of an ordinary dividend. 7. Taxation Reconciliation of the total tax charge The expense in the income statement for the year is higher than the standardrate of corporation tax in the UK of 30% (2005: 30%). As an internationalbusiness the company is exempt from paying Isle of Man tax. The company is UKresident therefore expects to incur tax at the UK corporation tax rate. Thedifferences are reconciled below: 2006 2005 $ '000 $ '000 ------- ------- RestatedCurrent income tax 968 1,641---------------------------------- ------- -------Deferred tax:Colombian tax losses 677 2,329Accelerated capital allowances 2,897 775---------------------------------- ------- -------Total deferred tax 3,574 3,104---------------------------------- ------- -------Total tax expense 4,542 4,745---------------------------------- ------- ------- 2006 2005 $ '000 $ '000 ------- ------- Restated ------- -------Profit before tax 1,818 10,519---------------------------------- ------- -------Accounting profit multiplied by the UK standard rate ofcorporation tax of 30% 545 3,156Expenses not deductible for tax purposes 208 (1,877)Higher taxes on overseas earnings 215 362Deferred tax assets 677 2,329Accelerated capital allowances 2,897 775---------------------------------- ------- -------Total tax reported in the income statement 4,542 4,745---------------------------------- ------- ------- Colombian taxation Although Emerald Energy Plc is subject to UK and Colombian taxation, the Companydoes not expect to pay any UK corporation tax in the foreseeable future for thefollowing reasons: (a) Emerald does not have any revenue generating activities in the UK; (b) Effective corporation tax in Colombia, 38.5%, exceeds that in the UK; (c) Most of the costs incurred in the UK are not deductible in Colombia for taxpurposes; (d) In the UK, as at the date of the last UK tax return, Emerald had lossesbrought forward and utilisable capital allowances of $49.1 million and theselosses and allowances will continue to widen for reasons mentioned in points a,b and c above. --------- ------- -------- Historical Deferred tax 2006 deferred losses and asset tax charges disallowed costs brought forward $ '000 $ '000 $ '000 --------- ------- --------As at 31 December 2005before utilisation oftax losses 8,203 3,158Utilisation of tax losses in 2005 (6,048) (2,329)As at 31 December 2005after utilisation oftax losses 2,155 829---------------------- --------- ------- --------Utilisation oftax losses in 2006 (2,155) (829) (829)Disallowed costsgenerated in 2006 447 152 152---------------------- --------- ------- --------As at 31 December 2006 447 152---------------------- --------- ------- Temporary Deferred tax differences liability $ '000 $ '000---------------------- --------- -------As at 31 December 2005 (9,370) (3,607)---------------------- --------- ------- --------Movement in temporarydifferences in 2006 (8,520) (2,897) (2,897)---------------------- --------- ------- --------As at 31 December 2006 (17,890) (6,504) Total (3,574)---------------------- --------- ------- ------ -------- 8. Earnings per ordinary share Basic earnings per share amounts are calculated by dividing profit for theperiod attributable to ordinary equity holders of the parent by the weightedaverage number of ordinary shares outstanding during the year. Diluted earnings per share amounts are calculated by dividing the profit for theperiod attributable to ordinary equity holders of the parent by the weightedaverage number of ordinary shares outstanding during the year plus the weightedaverage number of ordinary shares that would be issued on the conversion of allthe dilutive potential ordinary shares into ordinary shares. The following reflects the income and share data used in the basic and dilutedearnings per share computations: 2006 2005 $ '000 $ '000---------------------------------- ------- ------- RestatedNet profit/(loss) for the period attributable to equityholders (2,724) 5,774---------------------------------- ------- ------- 2006 2005 ------- -------Basic weighted average number of shares 56,089,217 51,475,647Dilutive potential ordinary shares:Shares to be issued to Soyuzneftegas Limited -- 421,918Employee share options -- 2,149,487---------------------------------- ------- -------Diluted weighted average number of shares 56,089,217 54,047,052---------------------------------- ------- ------- There have been no other transactions involving ordinary shares or potentialordinary shares between the reporting date and completion of these financialstatements. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Emerald Energy