17th Mar 2008 08:36
Emerald Energy PLC17 March 2008 EMERALD ENERGY Plc 17 March 2008 EMERALD ENERGY Plc ("Emerald" or the "Company"), a United Kingdom based companyengaged in exploration for and production of hydrocarbons in South America andthe Middle East, announces its final results for the year ended 31 December2007. HIGHLIGHTS OPERATIONS • Discovery of Khurbet East field in Block 26, Syria, with gross life-of-field Proved plus Probable reserves of 65.6 mmbbl of oil (11.3 mmbbl Emerald net entitlement); • 390 sq km of 3D seismic data acquired over Khurbet East structure and nearby areas in Block 26, Syria to assist in future development and exploration drilling activity; • Proved plus Probable gross reserve addition of 0.5 mmbbl (before deduction of 1.3 mmbbl production) in Colombia, following independent evaluation of assets by RPS Energy; • Gross production of 3,456 bopd (2006: 3,673 bopd), working interest production of 2,274 bopd (2006: 2,796 bopd) with Emerald net entitlement of 2,038 bopd (2006: 2,510 bopd); • 178 km of 2D seismic acquired over ANH license areas in Colombia to identify location of prospects for near term exploration drilling programme. FINANCIAL • Adjusted EBITDA* of $30.1 million (2006: $27.8 million); • Profit after tax of $6.6 million (2006: $2.7 million loss). OUTLOOK • Approval for commercial development of Khurbet East field will lead to first oil production before end 2008; • Exploration drilling in Syria may provide material upside from the Khurbet East and other areas; • Exploration drilling on three ANH licenses in Colombia may provide material upside on favourable fiscal terms; • Business plan for 2008 supported by strong balance sheet with cash and cash equivalents of $40.2 million as at 31 December 2007 (2006: $15.8 million). (*) = EBITDA excluding the share base payment charge of $1.6 million (2006: $2.7 million). CHAIRMAN'S STATEMENT The Company has had a very successful year with exploration and appraisalsuccess in Syria creating material value from the Block 26 investment, andexploration activities in new licenses in Colombia creating the potential todiscover material reserves through drilling. Discovery of the Khurbet East field in Block 26, Syria, has transformed theCompany's outlook with production from the field expected to commence before theend of 2008. Proved plus Probable life-of-field reserves have been estimated byRPS Energy, independent consultants, to be 65.6 million barrels of oil. Fielddevelopment has commenced with more development wells to be drilled and an earlyproduction facility capable of handling 10,000 barrels per day expected to beoperational by the year end. In addition to development of the Khurbet East field, some two and a half yearsremain of the current exploration period, with an option of a further two yearextension, to explore lands adjacent to the Khurbet East discovery and otherareas in Block 26, an area that totals more than 8,000 sq km. In Colombia, the drilling location for the Gigante No.2 well has been selectedup-dip from Gigante No.1A to further develop the producing Tetuan formation aswell as test the exploration potential of the Caballos sands approximately 130feet below the Tetuan. The Company estimates the Caballos to potentially containbetween 10 and 20 million barrels of unrisked recoverable oil resources. The exploration strategy for the Colombian operation is focused on testing thepotential in three contract areas, Ombu, Maranta and Jacaranda, granted to theCompany by the ANH, the licensing authority, on fiscal terms that are morefavourable than the older Association Contracts. On an unrisked basis, the Ombublock is estimated to contain more than 30 million barrels, the Maranta blockbetween 5 and 15 million barrels and the Jacaranda block over 10 million barrelsof potential recoverable oil resources. We are optimistic that the plans for the current year, financed by cashresources and strong cash flow, expected from our Colombian production, willcontinue to deliver growth for the Company and thus enhance shareholder value. Alastair BeardsallExecutive Chairman 14 March 2008 REVIEW OF OPERATIONS Emerald is engaged in exploration and production of hydrocarbons in SouthAmerica and the Middle East. In the Middle East, Emerald is participating in thecontract to explore, develop and produce hydrocarbons in Block 26, Syria. InSouth America, Emerald is participating in three Association Contracts withEcopetrol, the Colombian state oil company, and in several exploration andproduction contracts issued by the National Hydrocarbon Agency of Colombia("ANH"). SYRIA Block 26 Production Sharing Contract • Area of 8,300 sq km; • Contract for the Exploration, Development and Production of Petroleum ("PSC"), effective August 2003; • Exploration period to August 2010, with option to extend for additional two years; • Exploitation period of up to 25 years for each commercial discovery; • 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. The PSC grants rights to explore, develop and produce from all stratigraphiclevels outside the existing field areas and in the deeper stratigraphic levelswithin the pre-existing discovered field areas. The initial phase of exploration expired in August 2007 and the joint venturepartners elected to enter the first extension of the exploration period withduration of three years and a minimum work obligation of 250 sq km of 3D seismicand two exploration wells. The terms of the first extension included therelinquishment of an area equivalent to 25% of the original area of Block 26,for which the partnership selected an area considered to be of limitedexploration potential. In August 2010 the joint venture partners have the optionto enter a second extension period of two years with a minimum work obligationof two exploration wells. Three exploration wells were drilled during the initial phase of explorationresulting in the discovery of one field, Khurbet East. The Khurbet East field islocated in the northeast of the block, approximately 12 kilometres southwest ofthe Souedieh oil field and 12 kilometres south of the Roumelan oil field. The Khurbet East No.1 well was spud in February 2007 and encountered hydrocarbonat Cretaceous and Triassic levels. Wireline logs and a formation samplerindicated a gross hydrocarbon interval of 31 metres and a net hydrocarboninterval of approximately 22 metres in the Cretaceous Massive formation at 1,917metres. The Triassic aged Butmah formation top was encountered at 2,850 metres;a wireline formation sampler recovered a gas sample from a net hydrocarboninterval estimated to be approximately 16 metres. The top of the Triassic agedKurrachine Dolomite formation was identified at 3,098 metres with hydrocarbonshows observed across an interval of approximately 60 metres; the nethydrocarbon interval was uncertain as well bore conditions resulted ininconclusive wireline logs over this section. During the well test of a 102metre open hole section of the Kurrachine Dolomite formation, oil ofapproximately 35 degrees API gravity was produced to surface under naturalflowing conditions through a 32/64 inch choke at a rate of up to 478 barrels perday, with a gas to oil ratio averaging approximately 2,000 standard cubic feetper barrel. The Khurbet East No.2 appraisal well, located approximately 1.2 kilometres tothe northeast of the Khurbet East No.1 discovery well, was spud in June 2007 anddrilled to a total depth of 2,050 metres to appraise and test the CretaceousMassive formation which was encountered at 1,931 metres. Wireline logs indicateda gross hydrocarbon interval of 49 metres and a net hydrocarbon interval of 29metres. During the well testing of the upper 10 metres of the section, oil ofapproximately 26degrees API gravity flowed to surface under natural flow througha 32/64 inch choke at an average rate of 710 barrels per day, increasing to afinal rate of 820 barrels per day. Khurbet East No.3 appraisal well, located approximately 0.9 kilometres southeastof the Khurbet East No.1 discovery well and 1.2 kilometres south of the KhurbetEast No.2 appraisal well, was spud in November 2007 and drilled to a depth of2,050 metres. The Cretaceous Massive formation was encountered at a similardepth to the Khurbet East No.1 and No.2 wells, and wireline logs indicated areservoir interval with properties similar to the earlier wells. During a welltest conducted over the full section of the main Massive reservoir, oil ofapproximately 26 degrees API gravity flowed to surface under natural flow at anaverage stabilised rate of 3,420 barrels per day through a 48/64 inch choke. In February 2008, the Syrian Ministry of Oil and Mineral Resources and theSyrian Petroleum Company granted approval for commercial development of theKhurbet East Field and approved a Development Area of approximately 100 sq kmcovering the field. The Development Area will be operated by a joint operatingcompany to be set up with the Syrian Petroleum Company. Field development will commence by establishing early production from theshallow Cretaceous Massive reservoir as soon as early production facilities canbe installed at Khurbet East field. Early production facilities, capable ofprocessing some 10,000 barrels per day, are expected to be operational by thefourth quarter of 2008. Information collected during the early production of theMassive will be used to optimise the design of the full field developmentfacilities. The first well to be drilled in the development phase of the field, Khurbet EastNo.4, reached a total depth of 1,935 metres in March 2008 and was completed andsuspended as an oil producer. The well is located close to the crest of thestructure in the Cretaceous Massive reservoir, approximately 150 metres awayfrom the Khurbet East No.1 well, which is intended to be used for furtherappraisal of the deeper reservoirs. Approximately 150 square kilometres of 3D seismic data has been acquired overthe Khurbet East field to assist in defining the limits of the field andoptimising the location of development wells. The data will also progressexploration leads that have been identified on existing 2D seismic dataimmediately adjacent to the field. A further 240 square kilometres of 3D seismic data has been acquired in aseparate area to the south of the Khurbet East field. This data will progressexploration leads that are similar to the Khurbet East field and were identifiedpreviously on existing 2D seismic data. 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 to participate in the development of the discovery with a 50% working interest and Emerald 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. Relinquishment of 50% of the area takes place atthe end of the exploration period. Campo Rico field The Campo Rico field was discovered in March 2004. In December 2005, Ecopetrolgranted the Campo Rico field commerciality status. The reimbursable costs onthis field have been recovered and future costs and production for this fieldare shared with Ecopetrol on a 50/50 basis. The field has four producing wells and produces 16degrees API crude oil fromMirador sands. The average production rate achieved by the field in 2007 was1,444 bopd and the cumulative oil production from the field at the end of 2007was 2.257 million barrels. The fourth development well, Campo Rico No.4, was drilled and completed in May2007 and commenced production at an initial rate of approximately 360 bopd. Thewell is located in the north of the Campo Rico field. A fifth development well, Campo Rico No.5, is planned for 2008 at a structurallyhigh location in the field to recover reserves from the Mirador formation thatwould not be recovered by the existing producing wells. Vigia field The Vigia field was discovered in April 2005. In July 2007, Ecopetrol electednot to exercise its 50% back in right in the Vigia field and Emerald has electedfor sole risk field status. Emerald will continue to pay 100% of future costsand benefit from 100% of production until the sole risk reimbursable costs onthis field have been recovered, after which Ecopetrol will join operations withfurther costs and production being shared with Ecopetrol on a 50/50 basis. 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 2007 was 656 bopd and the cumulative oil production from this field atthe end of 2007 was 0.620 million barrels. A further development well, Vigia No.5, is planned for 2008 at a structurallyhigh location in the field to recover reserves from the Une and Gachetaformations that would not be recovered by the existing producing wells. Centauro Sur field The Centauro Sur field was discovered in April 2006. The Centauro Sur fielddevelopment was awarded commerciality status by Ecopetrol in May 2007 and jointoperations commenced. The reimbursable costs on this field have been recoveredand future costs and production for this field are shared with Ecopetrol on a 50/50 basis. The field has two producing wells and produces 16degrees API crude oil fromMirador sands. Field production is transported through a flow line to the CampoRico field where it is processed using the Campo Rico field facilities. Theaverage production rate achieved by the field in 2007 was 506 bopd and thecumulative oil production from this field at the end of 2007 was 0.356 millionbarrels. 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; • Following a discovery, Ecopetrol has the right to participate in the development of the discovery with a 50% working interest and Emerald has the right to recover reimbursable costs from a share of production. The Matambo block, located in the Upper Magdalena valley, contains the Gigantefield, discovered in 1999. Emerald operated the Gigante No.1A well on a solerisk basis from February 2003. Emerald has recovered the historic costs on thisfield and Ecopetrol now participates in joint operations with costs andproduction being shared with Ecopetrol on a 50/50 basis. When sole riskdevelopment commenced, an area of 733 metres radius around the Gigante No.1Awell was established by Ecopetrol based on an interpreted drainage area. In2007, this area was increased to 1,038 metres radius. Since April 2006,Ecopetrol has participated within this joint operations area. Emerald retainsexclusive exploration rights in the block, without any additional workobligations. The field is operated with a single well, Gigante No.1A, producing 32degrees APIgravity crude oil from the Tetuan reservoir at approximately 16,600 feet. Theaverage production rate achieved by the field in 2007 was 820 bopd and thecumulative oil production from the Gigante field at the end of 2007 was 2.589million barrels. Production in the second half of 2007 was reduced due to the electricalsubmersible pump ("ESP") in the Gigante No.1A well needing replacement on twooccasions. The well, normally averaging 950 bopd, did not contribute toproduction for a period of seven weeks while workover rigs were mobilised andthe two operations conducted. The ESP required replacement again in February2008; during this operation a re-configured ESP was sourced from a differentsupplier and the well has been returned to production. The Company is developing plans to drill the Gigante No.2 well to produce fromthe Tetuan sands and test the exploration potential of the underlying Caballossands. The Company estimates that the proposed well may recover, in themid-case, approximately four million barrels of oil from the Tetuan formationand that the unrisked prospective resources of the Caballos formation are in therange of 10 to 20 million barrels. 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 years and exploitation period of up to 22 years; • The Associate (Emerald 90%, Geoadinpro S.A. 10%, with Emerald carrying Geoadinpro's share of the costs) conducts all exploration activities at its own risk; • Following a discovery, Ecopetrol has the right to participate in the development of the discovery with a 20% working interest and Emerald 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. Emerald has identified exploration prospects in the La Luna limestone,similar to those produced in the Totumal field, and in the shallower Lisamasands that flank the Totumal field high. Three oil fields that have producedfrom the Lisama sands lie just to the south of the Fortuna block. Silfide field The Silfide field was discovered in October 2005. In December 2007, Ecopetrolelected not to exercise its 20% back-in right in the Silfide field in theFortuna Association Contract and Emerald has elected to exploit the field undersole risk field status. The Company is currently in discussions with potentialpartners for further operations on the field. 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. Hydraulic fracture stimulation was conducted onthe Umir formation in May 2007 and commenced production with an initial rate of35 bopd. Cumulative oil production from this field at the end of 2007 wasapproximately 5,324 barrels. Aureliano field The Aureliano field is located to the north of the Totumal field, separated by afault. Drilling of the Aureliano No.1 exploration well on the Fortuna block wascompleted in late January 2007, with the target La Luna limestone formationsbeing encountered as forecast. An extended phase of production testing wasconducted, including an acid stimulation treatment. Following these operations,a flow rate of 10 bopd of 25degrees API gravity oil was established. Therecovery of oil confirmed the presence of hydrocarbons but the low flow rateindicates that communication with a fracture network was not established. Totumal field The Totumal field produced over 800,000 barrels of oil from the La Lunaformations prior to abandonment in 1993. The Totumal No.4 well, in the Fortuna block, was re-entered in July 2007 withthe aim of determining the potential to recommence production from the well. Thewell bore was cleaned out and a production tubing string with a mechanical pumpinstalled. Production commenced in July at an initial rate of approximately 40bopd of 25degrees API gravity oil. The Totumal No.1 well was re-entered in November 2007 and production commencedunder natural flow at an initial rate of approximately 40 bopd. The Aureliano and Totumal fields are considered to be two parts of the samestructure, separated by a fault with the hydrocarbon bearing La Luna horizonencountered in both fields. An integrated study of the data acquired during thedrilling and testing of the Aureliano No.1 well, the Totumal No.4 and TotumalNo.1 well re-entries is being undertaken to determine the future potential ofthe Totumal and Aureliano accumulations. Maranta Exploration & Production Contract • Area of 365 sq km; • Emerald 100% operated working interest (no third party back-in rights); • Contract awarded by the ANH in September 2006 with an exploration period of up to six years and exploitation period of up to 24 years; • Initial exploration phase of up to 18 months with commitment to acquire 30 kilometres of new 2D seismic and reprocess 40 kilometres of existing 2D seismic. The Maranta block lies in the Putumayo basin in the south-west of Colombia. Anumber of exploration prospects and leads have been identified, from existingseismic data, on trend with nearby producing oil fields. A 71 kilometre 2D seismic data acquisition programme was conducted in 2007 withthe aim of maturing the identified prospects and leads to drill-ready status. Emerald has elected to enter the second phase of the exploration period with aminimum work programme of drilling one well to an estimated depth of 11,000feet. The Company expects that at least one exploration well will be drilled in2008 and estimates the prospect to be drilled may contain unrisked recoverableresources in the range 5 to 15 million barrels. Ombu Exploration & Production Contract • Area of 300 sq km; • Emerald 100% operated working interest (no third 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 17 months with commitment to drill an exploration well. The Ombu block lies in the Caguan basin to the southwest of the Llanos Basin. Anexploration prospect, Capella, has been identified from existing seismic andwell data. The Payara No.1 well, drilled on the same structure in 1975, testedover 200 barrels of oil from the Mirador sands at a depth of less than 4,000feet. The Company estimates the structure may contain over 30 million barrels ofunrisked recoverable resources. Emerald agreed with the National Hydrocarbon Agency of Colombia ("ANH") tosubstitute the drilling of an exploration well for the initial 2D seismicobligation and to extend the current phase of the contract by six months toprovide sufficient time for this well to be drilled. The well is planned to bedrilled in first half of 2008, followed by a period of testing of up to sixmonths to evaluate various production methods to identify the most costeffective for a possible commercial development, including steam injection forthermal recovery If Emerald elects to enter the second phase, the minimum work programme includesthe drilling of one well to an estimated depth of 5,000 feet. Jacaranda Exploration & Production Contract • Area of 235 sq km; • Emerald 100% operated working interest (no third party back-in rights); • Contract awarded by the ANH in March 2007 with an exploration period of up to 6 years and exploitation period of up to 24 years; • Initial exploration phase of 12 months with commitment to acquire 40 kilometres of new 2D seismic, conduct advanced processing of 25 kilometres of 2D seismic, and reprocess 25 kilometres of existing 2D seismic. The Jacaranda block lies in the Llanos basin in the south of Colombia. A single large exploration lead with unrisked prospective resources, estimatedby the Company, of over 10 million barrels had been identified from existingseismic data. A 55 kilometre 2D seismic data acquisition programme was conductedin 2007 with the aim of maturing the identified lead to drill-ready status. Emerald has elected to enter the second phase with a minimum work programme ofdrilling one well to an estimated depth of 6,000 feet. The Company expects thatan exploration well will be drilled in 2008. Relinquishments On the Helen block, in the Putumayo basin, 52 kilometres of 2D seismic data wereacquired. A small, sub-commercial, single prospect was identified from theinterpretation of the new seismic data, and Emerald has subsequentlyrelinquished the acreage. All of the exploration costs have been borne by athird party. LICENSE INTERESTS The table below summarises the Group's worldwide license interests at 31December 2007. License Field workingCountry Block License type working interest Field interestSyria Block 26 Production Sharing 40% Khurbet East 50% AssociationColombia Matambo Contract 100% Gigante 50% Campo Association Campo Rico Contract 100% Rico 50% Vigia 100% Centauro Sur 50% Association Fortuna Contract 90% Silfide 90% Aureliano 90% Totumal 90% Ombu Tax & Royalty 100% Maranta Tax & Royalty 100% Jacaranda Tax & Royalty 100% PRODUCTION In the reporting period, Emerald's production came from its operations inColombia; the Campo Rico block (the Campo Rico, Vigia and Centauro Sur fields),the Matambo block (the Gigante field) and the Fortuna block (Silfide field). In2007, Emerald achieved an average gross field production rate of 3,456 bopd,compared to 3,673 bopd in 2006. This 6% decline in production represents acombination of natural decline and variable operating efficiency of productionequipment. On the entitlement basis, in 2007, Emerald achieved 2,038 bopd, 59%of the gross field production, compared to 2,510 bopd, or 68%, achieved in 2006. +-----------------------+--------+--------+--------+--------+-------+-------+| | Campo| Vigia|Centauro| Gigante|Fortuna| Total|| | Rico| | Sur| | block| |+-----------------------+--------+--------+--------+--------+-------+-------+| | mbbl| mbbl| mbbl| mbbl| mbbl| mbbl|+-----------------------+--------+--------+--------+--------+-------+-------+|Gross field production | 527| 240| 185| 299| 11| 1,262|+-----------------------+--------+--------+--------+--------+-------+-------+|Working interest | 264| 240| 123| 193| 10| 830||production | | | | | | |+-----------------------+--------+--------+--------+--------+-------+-------+|Royalty petroleum | (21)| (15)| (10)| (39)| (1)| (86)|+-----------------------+--------+--------+--------+--------+-------+-------+|Emerald entitlement | 243| 225| 113| 154| 9| 744||production | | | | | | |+-----------------------+--------+--------+--------+--------+-------+-------+ PROVED PLUS PROBABLE RESERVES Colombia An independent estimate of the reserves in the producing fields in the CampoRico and Matambo Association Contracts has been made by RPS Energy. Revisions toRPS Energy's previous estimates are made using additional production history,well and seismic data, and the application of different methodologies based onfield maturities. +------------------+--------+--------+--------+--------+--------+--------+| | Campo| Vigia|Centauro| Gigante| Fortuna| Total|| | Rico| | Sur| | block| || | | | | | fields| |+------------------+--------+--------+--------+--------+--------+--------+|Oil: | mbbl| mbbl| mbbl| mbbl| mbbl| mbbl|+------------------+--------+--------+--------+--------+--------+--------+|Gross Field as at | 3,820| 2,015| 521| 7,470| -| 13,826||31 December 2006 | | | | | | ||(1)(3) | | | | | | |+------------------+--------+--------+--------+--------+--------+--------+|Revisions | (1,989)| (127)| (146)| 2,707| 11| 456|+------------------+--------+--------+--------+--------+--------+--------+|Production | (527)| (240)| (185)| (299)| (11)| (1,262)|+------------------+--------+--------+--------+--------+--------+--------+|Gross Field as at | 1,304| 1,648| 190| 9,878| -| 13,020||31 December 2007 | | | | | | ||(2)(3) | | | | | | |+------------------+--------+--------+--------+--------+--------+--------+|Working Interest | 652| 1,648| 95| 4,939| -| 7,334||as at 31 December | | | | | | ||2007(4) | | | | | | |+------------------+--------+--------+--------+--------+--------+--------+|Net Entitlement as| 600| 986| 87| 4,361| -| 6,034||at 31 December | | | | | | ||2007(2)(5) | | | | | | |+------------------+--------+--------+--------+--------+--------+--------+ 1) Source: Reserves Evaluation of the Gigante and Campo Rico fields, by RPS Energy, dated 17 March 2005, Evaluation of Vigia field, by RPS Energy, dated 2 March 2006, and Evaluation of Centauro Sur field, by RPS Energy, dated 1 February 2007, all adjusted for cumulative production. 2) Source: Reserves Evaluation of the Gigante, Campo Rico, Vigia and Centauro Sur fields, by RPS Energy, dated 13 March 2008. 3) Gross Field reserves are the total field reserves during the life of the contract, including royalty and participation of other parties. 4) Working Interest reserves are the total field reserves during the life of the contract, including royalty and participation of other parties, multiplied by Emerald's working interest in the field. 5) Net Entitlement reserves are the reserves attributable to the Company's interest, after deducting royalty oil and entitlements of other parties to the Association Contract, such as Ecopetrol and other third parties. Syria Gross life-of-field Proved plus Probable reserves The table below summarises the gross life-of-field Proved plus Probable reservesin Syria as at 31 December 2007, defined as total reserves of the field,including royalty oil, Syrian Petroleum Company entitlements, and participationof other parties forming the Contractor under the terms of the Contract for theExploration, Development and Production of Petroleum with the Syrian PetroleumCompany. +--------------------------------------------------------+--------------+| | Khurbet East|| | field|+--------------------------------------------------------+--------------+|Oil: | mbbl|+--------------------------------------------------------+--------------+|As at 31 December 2006 | -|+--------------------------------------------------------+--------------+|Revisions (1) | 65,600|+--------------------------------------------------------+--------------+|Production | -|+--------------------------------------------------------+--------------+|As at 31 December 2007 | 65,600|+--------------------------------------------------------+--------------+ Net entitlement Proved plus Probable reserves The table below summarises the Company's net entitlement Proved plus Probablereserves in Syria as at 31 December 2007. Net entitlement reserves are definedas the reserves expected to be produced during the term of the contractattributable to the Company's interest, after deducting royalty oil, SyrianPetroleum Company entitlements, and the participation of other parties formingthe Contractor under the terms of the Contract for the Exploration, Developmentand Production of Petroleum with the Syrian Petroleum Company. +--------------------------------------------------------+--------------+| | Khurbet East|| | field|+--------------------------------------------------------+--------------+|Oil: | mbbl|+--------------------------------------------------------+--------------+|As at 31 December 2006 | -|+--------------------------------------------------------+--------------+|Revisions (1) | 11,300|+--------------------------------------------------------+--------------+|Production | -|+--------------------------------------------------------+--------------+|As at 31 December 2007 | 11,300|+--------------------------------------------------------+--------------+ (1) Source: Independent Estimate of Khurbet East Field Petroleum Reserves as at 31 December 2007 by RPS Energy, dated 18 January 2008. Under the terms of the Contract for the Exploration, Development and Productionof Petroleum relating to Block 26, the Company's liability for income taxes inSyria, related to the Khurbet East field, is paid on behalf of the Company outof revenue from the Syrian Petroleum Company's share of oil produced from thefield. Angus MacAskillChief Executive 14 March 2008 FINANCIAL REVIEW 1. COMPARATIVE FINANCIAL RESULTS AND KEY STATISTICS 2007 2006 $ '000 $ '000Revenue (a) 44,357 45,856Production costs (b) (10,924) (13,529)Expensed exploration costs (c) (50) (180)Administrative expenses - excluding (4,545) (5,636)share based payments and depreciation ofother property & equipmentOther operating income 1,254 1,262 ________ ________Adjusted EBITDA* 30,092 27,773Administrative expenses - share based (1,622) (2,675)payments ________ ________EBITDA* 28,470 25,098Net finance income 252 628Depletion and depreciation (d) (10,299) (8,470)Write-offs of unsuccessful exploration (e) (9,834) (9,537)costsImpairment charge (f) - (5,901) ________ ________Profit before tax 8,589 1,818 ________ ________ 2007 2006 $/bbl $/bblRevenue per barrel of entitlement (a) 59.7 49.9productionProduction cost per barrel of (b) (14.7) (14.7)entitlement production ________ ________ 45.0 35.2 ________ ________ (*) EBITDA is earnings before interest (and other finance income and costs), tax, depreciation, depletion, amortisation and write-offs of oil & gas assets. Adjusted EBITDA is calculated before share based payments, charged to the income statement under IFRS 2. EBITDA increase of 13% year on year is explained in the sections below. 1.a Revenue Emerald recognises revenues on the entitlement basis. In 2007, revenues from oilsales increased to $59.7 per barrel of oil from $49.9 per barrel of oil achievedin 2006. Currently, realised oil prices are referenced to Vasconia blend, whichtrades at a discount to WTI; in addition, pricing formulae incorporate crudequality adjustments and deductions reflecting the cost of transporting crudethrough the pipeline system. Overall revenue from oil sales decreased by 3%reflecting a 19% reduction in entitlement production from currently producingfields (all operated under Association Contracts in Colombia) compensated by a20% increase in realised revenue per barrel of oil production. 1.b Production costs Production costs are those costs incurred to lift, gather, process and deliverhydrocarbons to the point of sale. In 2007, on the entitlement basis, productioncosts remained at $14.7 per barrel of oil production (2006: $14.7 per barrel ofoil production). 1.c Expensed exploration costs Expensed exploration costs include exploration expenditures incurred prior togrant of exploration and production licenses. 1.d Depletion and depreciation charges 2007 2006 $ '000 $ '000Depletion of oil and gas properties 9,512 8,228Depreciation of oil and gas plant & 695 226equipmentDepreciation of other properties & 92 16equipment ________ ________ 10,299 8,470 ________ ________ In the reported period, all depletion and depreciation charges are attributableto Colombian operations of the Group. On the entitlement basis, depletion of oiland gas properties in the reporting period increased to $12.8 per barrel of oilproduction from $9.0, charged in the previous year, reflecting the changes inestimated entitlement reserves. Increase in the depreciation of oil and gasplant & equipment reflects the procurement of owned production facilities toreplace rented early production equipment in the producing fields. 1.e 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 Group, the costs ofexploration efforts, such as geological and geophysical works and drillingactivities, are capitalised as intangible assets until it is determined whetherthese exploration efforts have been successful or not. If the efforts aredetermined to be unsuccessful, all of the relevant capitalised costs and costsincurred in the period are written off. The table below provides the breakdownof write-offs of unsuccessful exploration costs: 2007 2006Field/prospect Block $ '000 $ '000ColombiaVigia field Campo Rico block - 1,939Las Acacias Campo Rico block - 2,514prospectAlcaravan Campo Rico block 218 -prospectAlgarrobo Algarrobo block - 1,575prospectSilfide field Fortuna block 2,665 -Aureliano field Fortuna block 5,684 -SyriaTigris prospect Block 26 1,267 3,509 ________ ________Total write-offs of unsuccessful exploration 9,834 9,537efforts ________ ________ 1.f Impairment charge Impairment review of the Group's properties resulted in no impairment charge(2006: charge of $5.901 million relating to the Vigia field in the Campo Ricoblock in Colombia). The ceiling test was conducted at WTI prices of $80/bbl in2008, $70/bbl in 2009 and $60/bbl in 2010 and thereafter. The discount rateapplied was 10%. 2. PROFIT FOR THE YEAR 2007 2006 $ '000 $ '000Profit before tax 8,589 1,818Tax charge for the period (2,097) (968)Deferred tax resulting from utilisation - (829)of tax lossesDeferred tax resulting from temporary 59 (2,745)differences ________ ________Profit/(loss) for the period 6,551 (2,724) ________ ________ 3. 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 Group Office $ '000 $ '000 $ '000 $ '000Revenue from oil sales 44,357 - - 44,357Production costs (10,924) - - (10,924)Expensed exploration costs (11) - (39) (50)General and administrative expenses (2,715) - (3,452) (6,167)Other operating income 1,254 - - 1,254 ________ _______ _______ ________EBITDA 31,961 - (3,491) 28,470Net finance income/(cost) 416 (9) (155) 252Depletion and depreciation (10,274) - (25) (10,299)Write-offs of unsuccessful (8,567) (1,267) - (9,834)exploration costsImpairment charge - - - - ________ _______ _______ ________Profit before tax 13,536 (1,276) (3,671) 8,589Tax charge for the period (2,097) - - (2,097)Deferred tax 59 - - 59 ________ _______ _______ ________Period profit/(loss) 11,498 (1,276) (3,671) 6,551 ________ _______ _______ ________Capital expenditure Investment in oil & gas assets:- Property, plant & equipment (a) 4,485 12,870 - 17,355- Intangible assets (b) 6,504 1,267 - 7,771Investment in other property & 49 - - 49equipment ________ _______ _______ ________Total capital investment 11,038 14,137 - 25,175 ________ _______ _______ ________ 3.a Investment in tangible oil & gas assets In Colombia, investment in tangible oil and gas assets includes capitalexpenditure in the Gigante, Campo Rico, Vigia and Centauro Sur fields. In Syria,investment in tangible oil & gas assets includes capital expenditure allocatedto the Khurbet East field. 3.b Investment in intangible oil & gas assets In Colombia, investment in intangible oil and gas assets includes capitalexpenditure in the Fortuna, Ombu, Maranta and Jacaranda blocks; $8.349 millionof costs incurred in the Fortuna block to the end of 2007 were written off asunsuccessful exploration efforts pursuant to the impairment review of intangibleassets. In Syria, investment in intangible oil and gas assets is comprised of costsincurred in 2007 exploring the Tigris prospect in Block 26 - all of these costswere written off in the year as unsuccessful exploration costs. During 2007,intangible costs, associated with finding and appraisal of the Khurbet Eastfield, were reclassified into tangible assets. 4. PROPERTY, PLANT & EQUIPMENT AND INTANGIBLE ASSETS As at 31 2007 2006December, Property, Intangible Total Property, Intangible Total Plant & Assets Plant & Assets Equipment Equipment $ '000 $ '000 $ '000 $ '000 $ '000 $ '000Oil & GasAssets:Colombia:Matambo block 14,003 - 14,003 14,953 - 14,953Campo Rico 16,934 - 16,934 21,787 218 22,005blockFortuna block 53 1,588 1,641 - 5,379 5,379Ombu block - 135 135 - - -Maranta block - 1,243 1,243 - 2 2Jacaranda block - 569 569 - - - _______ _______ ______ _______ ______ ______ 30,990 3,535 34,525 36,740 5,599 42,339Syria: Block 26 35,651 992 36,643 - 23,772 23,772Other Property 218 - 218 261 - 261& Equipment _______ _______ ______ _______ ______ ______ 66,859 4,527 71,386 37,001 29,371 66,372 _______ _______ ______ _______ ______ ______ 5. CAPITAL STRUCTURE Issue of convertible bonds In July 2007, the Group diversified its capital structure through the issuanceof senior unsecured convertible bonds with an aggregate nominal value of $30million. Issued at par value and structured in two tranches of equal nominalvalue, Series A and Series B bonds pay a coupon of 5.875% and 4.875% and maturein January 2012 and January 2013, respectively. Series A and Series B bonds areconvertible into ordinary shares of the Company at 290p and 270p, respectively,at any time prior to maturity at the option of the bondholders. The Company hasan option to redeem the bonds at their nominal value from July 2010, subject tocertain conditions relating to the Company's share price performance. Shareholders' equity Issuance of shares to Soyuzneftegas Limited In the reported period, as part of consideration for SNG Overseas Limited, aninvestment vehicle holding a 50% participating interest in Block 26 acquired bythe Group in 2005, the Company issued 3,500,000 ordinary shares to SoyuzneftegasLimited, the former parent of SNG Overseas Limited. These shares were valued at$10.130 million. No other shares or options to acquire shares were issued by theCompany in the period to 31 December 2007. Capital employed As at 31 December 2007 2006 $ '000 $ '000Debt:Recognised debt portion of convertible 24,269 -bondsEquity: Share capital: Issued share capital 9,825 9,216 Share premium 50,359 40,838 Shares to be issued to - 10,130 Soyuzneftegas Limited Total share capital 60,184 60,184Retained earnings and reserves: Retained earnings and reserves, 24,461 16,288 excluding recognised equity portion of convertible bonds Recognised equity portion of 5,005 - convertible bonds Total retained earnings and reserves 29,466 16,288 _______ ______Total equity 89,650 76,472 _______ ______Total capital employed 113,919 76,472 _______ ______ 7. 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 14 March 2008 GROUP INCOME STATEMENT For the year ended 31 December 2007 2006 $ '000 $ '000 Revenue from oil sales 44,357 45,856 Cost of sales Production costs (10,924) (13,529) Expensed exploration costs (50) (180) Depletion and depreciation of oil (10,207) (8,454) and gas assets Write-offs of unsuccessful (9,834) (9,537) exploration costs Impairment charge - (5,901)Total cost of sales (31,015) (37,601) ________ ________Gross profit 13,342 8,255Other income 1,254 1,262Administrative expenses General and administrative (4,637) (5,652) expenses before share-based payments Share-based payments (1,622) (2,675)Total administrative expenses (6,259) (8,327) ________ ________Profit from operations before tax 8,337 1,190and finance income ________ ________Finance costs (1,372) (199)Finance income 1,624 827 ________ ________Profit before tax 8,589 1,818 Tax expense Current tax charge for the year (2,097) (968) Deferred tax credit/(charge) for 59 (3,574) the yearTotal tax expense (2,038) (4,542) ________ ________Profit/(loss) for the year 6,551 (2,724)attributable to equity holders ofthe parent ________ ________ Basic earnings per ordinary share 11.21c (4.86c) Diluted earnings per ordinary share 10.94c (4.86c) ________ ________ GROUP AND COMPANY BALANCE SHEETS As at 31 December Group Company 2007 2006 2007 2006 $ '000 $ '000 $ '000 $ '000 Non-current assets Property, plant and equipment 66,859 37,001 31,208 37,001Intangible assets 4,527 29,371 3,535 5,598Deferred tax 127 152 127 152Investments in subsidiaries - - 40,625 23,839 _______________________________ 71,513 66,524 75,495 66,590 _______________________________Current assets Inventories 6,241 4,649 5,592 4,649Trade and other receivables 4,715 3,801 4,694 3,747Prepayments 132 948 132 947Corporation tax debtor 824 905 824 905Cash and cash equivalents 40,169 15,762 40,169 15,762Restricted cash collateral 3,493 214 243 214 _______________________________ 55,574 26,279 51,654 26,224 _______________________________Total assets 127,087 92,803 127,149 92,814 _______________________________ Current liabilities Trade and other payables 4,321 7,118 4,321 7,118Accruals 2,017 2,299 2,017 2,258Provisions 410 410 410 410 _______________________________ 6,748 9,827 6,748 9,786 _______________________________ Non-current liabilitiesDeferred tax 6,420 6,504 6,420 6,504Debt component of convertible 24,269 - 24,269 -bonds _______________________________ 30,689 6,504 30,689 6,504 _______________________________ Equity attributable to theshareholdersIssued share capital 9,825 9,216 9,825 9,216Share premium 50,359 40,838 50,359 40,838Shares to be issued - 10,130 - 10,130Retained earnings and reserves 29,466 16,288 29,528 16,340 _______________________________ 89,650 76,472 89,712 76,524 _______________________________Total liabilities and 127,087 92,803 127,149 92,814shareholders' equity _______________________________ GROUP AND COMPANY CASH FLOW STATEMENT For the year ended 31 December Group Company 2007 2006 2007 2006 $ '000 $ '000 $ '000 $ '000 Cash flow from operatingactivitiesProfit from operations before 8,337 1,190 8,337 4,699tax and financeincome and costsShare based payments 1,622 2,675 1,622 2,675Depletion and depreciation 10,299 8,454 10,299 8,454Write-offs of unsuccessful 9,834 9,537 8,567 6,028exploration costsImpairment charges - 5,901 1,267 5,901Exchange gains 404 - 404 - _________________________________Operating profit before 30,496 27,757 30,496 27,757changes in working capitaland provisionsMovement in inventory (1,592) (4,415) (943) (4,415)Movement in operating (3,377) (1,584) (161) (1,529)receivablesMovement in operating (1,899) (1,824) (1,858) (1,865)payables _________________________________Cash flow from operating 23,628 19,934 27,534 19,948activitiesProfit tax paid (2,016) (1,861) (2,016) (1,861) _________________________________Net cash flow from operations 21,612 18,073 25,518 18,087 _________________________________ Cash flow from investingactivitiesCapital investment in (12,189) (13,894) (12,189) (13,894)ColombiaCapital investment in Syria (14,138) (9,875) - -Investment in subsidiaries - - (18,053) (9,942)Interest received 1,220 864 1,220 864 ___________________________________ (25,107) (22,905) (29,022) (22,972) ___________________________________Cash flow from financingactivitiesGross proceeds from issue of - 67 - 67equityCosts relating to issue of - - - -equityGross proceeds from issue of 30,000 - 30,000 -convertible bondsCosts relating to issue of (1,268) - (1,268) -convertible bondsInterest paid and banking (830) (158) (821) (105)charges ___________________________________ 27,902 (91) 27,911 (38) ___________________________________Net change in cash and cash 24,407 (4,923) 24,407 (4,923)equivalents ___________________________________ Cash at period start 15,762 20,679 15,762 20,679Period cash flow 24,407 (4,923) 24,407 (4,923)Currency translation - 6 - 6 ___________________________________Cash and cash equivalents at 40,169 15,762 40,169 15,762period end ___________________________________ STATEMENT OF CHANGES IN EQUITY Group:+------------------+-------+--------+--------+-----------+--------+-------+| | Share| Share| Shares| Equity|Retained| || |capital| premium| to be| portion of|earnings| || | (1)| (2)| issued|convertible| (5)| Total|| | | | (3)| bonds(4)| | |+------------------+-------+--------+--------+-----------+--------+-------+| | $ '000| $ '000| $ '000| $ '000| $ '000| $ '000|+------------------+-------+--------+--------+-----------+--------+-------+|Balance at 31 | 9,203| 40,784| 10,130| -| 16,293| 76,410||December 2005 | | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Changes in equity:| | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Translation | -| -| -| -| 44| 44||differences | | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Net income | -| -| -| -| 44| 44||directly | | | | | | ||recognised in | | | | | | ||equity | | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Loss for the | -| -| -| -| (2,724)|(2,724)||period | | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Total recognised | -| -| -| -| (2,680)|(2,680)||income and expense| | | | | | ||for the year | | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Issue of new share| 13| 54| -| -| -| 67||capital | | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Share based | -| -| -| -| 2,675| 2,675||payments | | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Balance at 31 | 9,216| 40,838| 10,130| -| 16,288| 76,472||December 2006 | | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Changes in equity:| | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Income for the | -| -| -| -| 6,551| 6,551||period | | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Total recognised | -| -| -| -| 6,551| 6,551||income and expense| | | | | | ||for the year | | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Issue of new share| 609| 9,521|(10,130)| -| -| -||capital | | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Issue of | -| -| -| 5,005| -| 5,005||convertible bonds | | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Share based | -| -| -| -| 1,622| 1,622||payments | | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Balance at 31 | 9,825| 50,359| -| 5,005| 24,461| 89,650||December 2007 | | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+ Company:+------------------+-------+--------+--------+-----------+--------+-------+| | Share| Share| Shares| Equity|Retained| || |capital| premium| to be| portion of|earnings| || | (1)| (2)| issued|convertible| (5)| Total|| | | | (3)| bonds(4)| | |+------------------+-------+--------+--------+-----------+--------+-------+| | $ '000| $ '000| $ '000| $ '000| $ '000| $ '000|+------------------+-------+--------+--------+-----------+--------+-------+|Balance at 31 | 9,203| 40,784| 10,130| -| 16,293| 76,410||December 2005 | | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Changes in equity:| | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Translation | -| -| -| -| 44| 44||differences | | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Net income | -| -| -| -| 44| 44||directly | | | | | | ||recognised in | | | | | | ||equity | | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Loss for the | -| -| -| -| (2,672)|(2,672)||period | | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Total recognised | -| -| -| -| (2,628)|(2,628)||income and expense| | | | | | ||for the year | | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Issue of new share| 13| 54| -| -| -| 67||capital | | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Share based | -| -| -| -| 2,675| 2,675||payments | | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Balance at 31 | 9,216| 40,838| 10,130| -| 16,340| 76,524||December 2006 | | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Changes in equity:| | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Income for the | -| -| -| -| 6,561| 6,561||period | | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Total recognised | -| -| -| -| 6,561| 6,561||income and expense| | | | | | ||for the year | | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Issue of new share| 609| 9,521|(10,130)| -| -| -||capital | | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Issue of | -| -| -| 5,005| -| 5,005||convertible bonds | | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Share based | -| -| -| -| 1,622| 1,622||payments | | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+|Balance at 31 | 9,825| 50,359| -| 5,005| 24,523| 89,712||December 2007 | | | | | | |+------------------+-------+--------+--------+-----------+--------+-------+ The following describes the nature and purpose of each reserve withinshareholders' equity: Share capital (1) Nominal value of amounts subscribed for share capitalShare premium (2) Amounts subscribed for share capital in excess of nominal valueShares to be issued Shares issued to Soyuzneftegas Limited pursuant(3) to the SNG Overseas Limited Share Purchase AgreementEquity portion of Portion of convertible bonds recognised asconvertible bonds (4) equity on issuance of Series A and Series B senior unsecured convertible bondsRetained earnings (5) Cumulative net gains and losses recognised in the income statement. Retained earnings include fair value of the share options issued under the Company's discretionary share option plan and recognised on the date of the grant and cumulative effect of historical differences arising from conversion of reserves from source to reporting currency NOTES TO THE FINANCIAL STATEMENTS BASIS OF ACCOUNTING The financial information contained in this statement does not constitute theGroup's statutory accounts for the years ended 31 December 2007 or 2006, but isdelivered from those accounts. Statutory accounts for 2006 have been deliveredto the Registrars of Companies in the Isle of Man and those for 2007 which wereapproved by the Board on 14 March 2008 will also be lodged there following theCompany's Annual General Meeting to be held on 15 May 2008. The auditors havereported on those accounts; their reports were unqualified and did not includereferences to any matters to which the auditors drew attention by way ofemphasis without qualifying their reports. 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 certain financial assets and financial liabilities at fair value, makingthe required adjustment through the income statement. BASIS OF CONSOLIDATION Where the Company has the power, either directly or indirectly, to govern thefinancial and operating policies of another entity or business so as to obtainbenefits from its activities, it is classified as a subsidiary. The consolidatedfinancial statements present the result of the Company and its subsidiaries (the"Group") as if they formed a single entity. Intercompany transactions andbalances between group companies are therefore eliminated in full. BUSINESS COMBINATIONS The consolidated financial statements incorporate the results of businesscombinations using the purchase method. In the consolidated balance sheet, theacquiree's identifiable assets, liabilities and contingent liabilities areinitially recognised at their fair values at the acquisition date. The resultsof acquired operations are included in the consolidated income statement fromthe date on which control is obtained. Jointly controlled operations The Group includes the assets it controls, its share of any income and theliabilities and expenses of jointly controlled operations and jointly controlledassets in accordance with the terms of underlying contractual agreements. 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. CONVERTIBLE BONDS Convertible bonds equity and debt elements are classified separately as theircomponent parts in the financial statements. The method used is as follows: - The fair value of the liability component is calculated, and this fair value establishes the initial carrying amount of the pure liability component; and - The fair value of the pure liability component is deducted from the fair value of the instrument as a whole, with the resulting residual amount being the equity component. The equity element is the difference between the proceeds of the bond issue andthe present value of the liability component using a hypothetical debt rate. Theproceeds represent the fair value of the bonds as a whole. The financialliability component is then accreted up to the redemption amount accordinglyeach year. 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 acountry-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 2007 Colombia Syria Group $ '000 $ '000 $ '000 Revenue from oil sales 44,357 - 44,357Depletion and depreciation of oil & gas 10,207 - 10,207assetsWrite-offs of unsuccessful exploration 8,567 1,267 9,834effortsImpairment charges - - -Gross profit/(loss) 14,609 (1,267) 13,342Profit/(loss) from operations before tax 9,604 (1,267) 8,337and finance incomeFinance costs 1,363 9 1,372Profit/(loss) before tax 9,865 (1,276) 8,589Profit/(loss) after tax 7,827 (1,276) 6,551 ___________________________Other segment information:Segment assets:Oil and gas assets 34,525 36,643 71,168Other tangible and non-current assets 345 - 345Current assets 51,653 3,921 55,574 ___________________________Total assets 86,523 40,564 127,087 ___________________________Capital expenditure:Oil and gas assets 10,988 14,138 25,126Other tangible assets 49 - 49 ___________________________Total capital expenditure 11,037 14,138 25,175 ___________________________ Total liabilities:Liabilities 37,027 - 37,027Head office - - 410 ___________________________Total liabilities 37,027 - 37,437 ___________________________ Year ended 31 December 2006 Colombia* Syria Group $ '000 $ '000 $ '000Revenue from oil sales 45,856 - 45,856Depletion and depreciation of oil & gas (8,454) - (8,454)assetsWrite-offs of unsuccessful exploration (6,028) (3,509) (9,537)effortsImpairment charges (5,901) - (5,901)Gross profit/(loss) 11,764 (3,509) 8,255Profit/(loss) from operations before tax 4,699 (3,509) 1,190and finance incomeFinance costs (146) (53) (199)Profit/(loss) before tax 5,380 (3,562) 1,818Profit/(loss) after tax 838 (3,562) (2,724) ___________________________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 ___________________________ (*) With the exception of the liability of $410,000 relating to Argentina, all head office items have been incurred on behalf of a segment and have been allocated on that basis. FINANCE INCOME AND COST Group Company 2007 2006 2007 2006Finance income $ '000 $ '000 $ '000 $ '000 Interest receivable on cash deposits and 1,220 748 1,220 748investments in money marketsAccreted income, calculated using effective - - - -interest rate method ___________________________Total interest income 1,220 748 1,220 748Exchange gain 404 69 404 69Other finance income - 10 - 10 ___________________________Total 1,624 827 1,624 827 ___________________________ Group Company 2007 2006 2007 2006Finance cost $ '000 $ '000 $ '000 $ '000 Interest payable (760) (11) (760) (11)Accretion expense, calculated using (542) - (542) -effective interest rate method ___________________________Total interest expense (1,302) (11) (1,302) (11)Banking charges and other finance costs (70) (188) (61) (135) ___________________________Total (1,372) (199) (1,363) (146) ___________________________ 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% (2006: 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: 2007 2006 $ '000 $ '000 Current income tax 2,097 968 _______________Deferred tax:Colombian tax losses - 829Temporary differences on Colombian income and costs 627 (152) _______________Accelerated capital allowances (686) 2,897 _______________Total deferred tax (credit) / charge (59) 3,574 _______________Total tax expense 2,038 4,542 _______________ 2007 2006 $ '000 $ '000 Profit before tax 8,589 1,818 _______________Accounting profit multiplied by the UK standard rate 2,577 545of corporation tax of 30%Reversal of historical inflation adjustment to (2,251) -foreign earnings(1)Expenses not deductible for tax purposes 1,079 208Higher taxes on overseas earnings 692 215Deferred tax assets(2) 627 677Accelerated capital allowances (686) 2,897 _______________Total tax reported in the income statement 2,038 4,542 _______________ (1) Reversal of historical inflation adjustment to foreign earnings represents a one-off adjustment to the Company's profit before tax in Colombia, relating to introduction of a new statutory requirement to reverse historical inflation adjustments in the computation of profit and loss. (2) Movement in deferred tax assets is attributable to changes in accruals of income and costs that are not recognised in the period tax computation in Colombia. 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, 34%, exceeds that in the UK; (c) Most of the costs incurred in the UK are not deductible in Colombia for tax purposes; (d) In the UK, as at the date of the last UK tax return, Emerald had losses brought forward and utilisable capital allowances of $60.5 million and these losses and allowances will continue to widen for reasons mentioned in points a, b and c above. The deferred tax relating to these losses and allowances is not recognised, as the Group does not generate taxable income in the UK against which these losses and allowances could be offset. Historical Deferred 2007 losses and tax asset deferred disallowed tax costs charges brought forward $ '000 $ '000 $ '000 As at 31 December 2006 before (1,708) (677)utilisation of tax lossesUtilisation of tax losses in 2006 2,155 829As at 31 December 2006 after 447 152utilisation of tax losses Utilisation of tax losses in 2007 - - -Disallowed costs generated in (60) (25) (25)2007 As at 31 December 2007 387 127 _______ ______ Temporary Deferred differences tax liability $ '000 $ '000 As at 31 December 2006 (17,890) (6,504) Movement in liability due to - 600 600change in tax rateDisallowed income generated in (1,825) (602) (602)2007Movement in temporary differences 260 86 86in 2007 As at 31 December 2007 (19,455) (6,420) Total: 59 _______ ______ _____ 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: 2007 2006 $ '000 $ '000 Net profit/(loss) for the period attributable to 6,551 (2,724)equity holders __________ __________ 2007 2006Basic weighted average number of shares 58,432,720 56,089,217Dilutive potential ordinary shares:Shares to be issued on conversion of convertible - -bonds*Employee share options 1,441,588 - __________ __________Diluted weighted average number of shares 59,874,308 56,089,217 __________ __________ (*) Series A bonds are convertible into 2,564,282 ordinary shares of the Company at 290 pence per share and Series B bonds are convertible into 2,754,229 ordinary shares of the Company at 270 pence per share. As the average share price in 2007 was below either of the conversion prices, the shares potentially issuable on conversion of the bonds did not contribute to the computation of diluted weighted average number of shares. DIVIDENDS The Directors do not recommend payment of an ordinary dividend. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Emerald Energy