Full Year Results

26 March 2012

Matra Petroleum PLC

("Matra" or the "Company")

Full Year Results

Matra Petroleum PLC, the independent oil and gas exploration and production company with operations in Russia, today announces its results for the 12 month period ending 31 December 2011.

Highlights

Operational

·; Well A-13 validated following successful extended well test

Financial 

·; Successfully raised £1.2 million through a placement in November 2011

·; Cash or cash equivalents of €1.8 million at year end

Outlook 

·; Imminent production from Well A-13

·; Well A-14 drilling approval granted

·; Planned acquisition of 3D seismic over the entire field

Peter Hind, Managing Director, commented:

"We are delighted that Well A-13 is about to commence production and that approval to drill well A-14 has now been granted. We look forward to achieving sustained production from Well A-13 and increasing our understanding of the Sokolovskoe field."

For further information, please contact:

REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 DECEMBER 2011

CHAIRMAN'S STATEMENT

2011 was a year of progress for the Company, notwithstanding the previously announced execution difficulties experienced with Well A-12.

Well A-13 has been validated as a potential producing well for the Company and the board has been able to advance its strategy for developing its 100 per cent held 20 year production licence on the Sokolovskoe oil field. The Company's independently assessed Contingent Recoverable ("2C") Resources are 15mm bbls.

In particular, 2011 saw the successful extended test on Well A-13 with production expected to commence shortly, following completion of surface production facilities, with anticipated initial oil production of around 40bopd (unpumped), rising to an expected 100bopd once a down-hole electrical submersible pump is installed. This will allow us to take advantage of current strong oil prices and a reduction in Mineral Extraction Tax for small fields that became applicable in January 2012.

Imminent production from Well A-13 puts the Company back on track after operations on Well A-12 had to be suspended following difficulties with the completion of the well over the reservoir interval.

The board expects to be able to utilise Well A-12 at some point in the future development of the Sokolovskoe Field and therefore the well has not been abandoned.

In the absence of a firm programme for this well, however, IFRS guidelines require us to write-off the full cost of this well at this time. Apart from this item, the accounts reflect an overall reduction in overheads compared to last year.

The effects of the global recession on world markets continued in 2011, however in November the Company successfully raised £1.2 million through a placement, leaving the Company in a better cash position and continuing to operate without any debt.

Further funds will be required to enable the drilling of the proposed production Well A-14 and the acquisition of the full field 3D seismic survey. These represent the Company's next steps to evaluate the Sokolovskoe oil field before proceeding with a full field development decision. Accordingly, the Board is currently considering a number of financing and strategic options available to the Company, with the best interests of shareholders in mind.

The board remains optimistic about the Company's prospects in 2012 and anticipates that the start-up of production and the prospect of a key appraisal and development programme will have a significant positive impact on the Company. 2011 was a challenging year for Matra and the Board would like to thank the company's management and staff for their efforts and perseverance in 2011.

Sir Michael Jenkins

Chairman

22 March 2012

REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 DECEMBER 2011

MANAGING DIRECTOR'S REVIEW

Well Activity

Well A-12

Activity in 2011 was focussed on trying to establish commercial production from Well A-12 which was drilled as the discovery well and tested at rates close to 1,000bopd. The side-track to the well was completed successfully but cementing operations were hampered by equipment failure. Poor well performance prior to acidisation was subsequently found to be caused by fill at the bottom of the hole from mud particulates.

After cleaning out the well an acid treatment was completed and subsequently produced at rate of over 1,400bopd with the aid of Nitrogen lift, with no measurable water cut. At the end of the clean-up process the well was inadvertently opened to atmospheric pressure causing unacceptably high levels of pressure differentials across both downhole equipment and the formation itself. After shutting the well in and demobilising the treatment equipment the well was found to hold large volumes of water. This together with further well data indicates that the water influx was caused by the "pressure shock" combined with poor cementation and the proximity of the side-track to the original well (50m).

At this point the board concluded that it would be better to focus efforts on Well A-14 which is likely to have a more material impact on the Company.

Well A-12 has not been abandoned and it is most likely that the well will be revisited in the future and potentially side-tracked further away from the original hole.

Well A-13

On Well A-13 successful water shut-off was achieved by remedial cementation. The well subsequently completed an extended test period without any significant water production.

The well tested, on free flow, at rates of around 40bopd and the installation of a downhole pump is expected to increase production to around 100 bopd. The success of the remedial cementation in Well A-13 further supports the conclusion that water influx may be avoided during development drilling, by changes in well design.

At the time of writing, production equipment was being installed at the wellsite and production is expected to commence once the equipment is commissioned.

Well A-14

 Well A-14 is planned to test the top of the Sokolovskoe field and is predicted to intersect the reservoir some 20m higher than Well A-12. It is also located at the centre of the "patch" reef as prognosed by ERC/Equipoise in 2010 as part of their Competent Person's Report. The well is therefore a key part of the field's appraisal and will test what the Company believes to be the best part of the reservoir and is structurally higher and hence further away from the oil-water-contact encountered in previous wells. The Company estimates that success at this location could add up to 10 million barrels of oil to the Company's contingent resources.

This well location is also near Well 309 on an adjoining property which was drilled in the 1991 by TNK/BP and encountered a thicker and better oil pay section.

Well A-14 is therefore planned to be located between three known oil wells and up-dip from Well A-12 and in an area covered by existing 3D seismic. We are confident that the well will encounter oil pay at which point we can determine the thickness and quality of the reservoir in that location.

Local authority approval to drill Well A-14 has now been granted. Actual timing of the well is dependent upon various factors including the ending of the spring thaw period, the type of rig to be used and funding.

3D Seismic

The acquisition of a full field 3D survey is required before drilling in the north eastern part of the field which currently has little available data. Subject to funding, it is currently anticipated that the survey will be completed, processed and interpreted during 2012.

REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 DECEMBER 2011

MANAGING DIRECTOR'S REVIEW

Accounts

Although we have not abandoned Well A-12 and expect to utilise it within the overall field development, IFRS guidelines require that the full expenditure is written down until such times as there is a firm plan to use the well.

Outlook

The board is confident in making significant progress for the Company during 2012, establishing production and substantially enhancing the Company's knowledge of the Sokolovskoe oil field. Well A-14 is a low risk appraisal well which has the prospect of improving our knowledge of the field and its reserves and production potential. Data acquired by drilling Well A-14 together with the additional seismic, will enable us to plan the full development of the Sokolovskoe field.

We continue to evaluate financial and strategic opportunities to enable broadening the portfolio but we recognise the importance of being able to commit to the full development of the Sokolovskoe field.

Peter Hind

Managing Director

22 March 2012

REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 DECEMBER 2011

REVIEW OF OPERATIONS AND FINANCE

During the year the Company placed 290 million new shares with subscribers. Details of the Placing are summarised below:

Group administrative expenditure was higher in 2011 by €5,382,889 (2010: €486,324). This increase was largely due to impairment of exploration expenditure and share based payment, but was offset by a reduction of €388,044 in Group overheads.

During the year Russian VAT refunds of €280,688 (2010: €566,137) were received.

The Group capitalised costs of €1,635,983 (2010: €4,520,175) relating to the work on its A-12 and A-13 appraisal wells. An impairment charge of €5,246,672 (2010: nil) has been recognised in respect of costs incurred on Well A-12 (note 11).

Inventory includes €20,787 (2010: €18,421) (note 13) for well casing and other drilling equipment retained for future use. Inventory is accounted for at the lower of cost and net realisable value.

At year end the Group had cash and cash equivalents totalling €1,802,280 (2010: €2,222,041) (note 18). Current cash reserves are sufficient to fund the programmed work on Well A-13 and associated overheads for 2012. Drilling of Well A-14 and the 3D seismic survey planned for 2012 require additional funds to be raised in 2012. The Directors are confident of the Company's ability to secure further funding.

Risks to the Group

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

·; Funding risk - The Group does not currently have commercial production but has a significant capital programme to develop its asset. As a result management carefully monitor the liquidity position. Cash forecasts are produced regularly and are reviewed by management.

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

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

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

·; Appraisal and development risk - The Group is planning to appraise and develop the Sokolovskoe field. Whilst the Group has a strong technical function and audits this function with independent expertise there is a risk that the volumes of economically recoverable oil may vary from current estimates.

REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 DECEMBER 2011

REVIEW OF OPERATIONS AND FINANCE

Key sources of estimation uncertainty

The Group makes estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on historical experiences and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may deviate from these estimates and assumptions. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are as follows:

Exploration and evaluation costs

Exploration and evaluation costs are capitalised as intangible assets (note 11) and are assessed for impairment when circumstances suggest that the carrying amount may exceed the recoverable value thereof. This assessment involves judgement as to the likely future commerciality of the asset and when such commerciality should be determined as well as future revenues and costs pertaining to the utilisation of the exploration and production rights to which such capitalised costs relate and the discount rate to be applied to such future revenues and costs in order to determine a recoverable value.

Impairment review

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

Share based payments

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

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

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

DIRECTORS' REPORT

FOR THE YEAR ENDED 31 DECEMBER 2011

The Directors present their annual report and the audited consolidated financial statements of Matra Petroleum plc (the "Company" and together with its subsidiaries, the "Group"), for the year ended 31 December 2011.

Principal activity and business review

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

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

Corporate structure

Matra Petroleum plc is a Company limited by shares that is incorporated and domiciled in England and Wales. The Company has the following subsidiaries at 31 December 2011:

·; Matra Cyprus Petroleum Limited (100%)

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

·; OOO Arkhangelovskoe (100%)

Results and dividends

The loss of the Group after taxation amounted to €7,210,221 (2010: €1,769,429) and the Company to €8,219,393 (2010: €1,761,165).

The Directors do not propose the payment of a dividend (2010: nil).

Business review and future developments

Likely developments in the operations of the group have been included in the Chairman's Statement and Managing Director's Review which is incorporated into this report.

Directors

The following Directors held office during the year to 31 December 2011:

Sir Michael Jenkins

Peter Hind

Neil Hodgson

Gideon Tadmor

Bill Guest

Re-election of directors

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

Annual general meeting

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

Supplier payment policy

The Group and Company's policy is that payments made to suppliers are made in accordance with those terms and conditions agreed between the Company and its suppliers, providing that all trading terms and conditions have been complied with. The supplier payment days are 30 days for the Group (2010: 30 days) and 30 days for the Company (2010: 13 days).

Political and charitable contributions

There were no political or charitable contributions made by the Group or Company during the year ended 31 December 2011 (2010: nil).

Events after the reporting period.

The Group has had no events after the reporting period that require disclosure.

Director's liabilities

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

DIRECTORS' REPORT

FOR THE YEAR ENDED 31 DECEMBER 2011

Financial instruments

Details of the use of financial instruments by the Company and its subsidiary undertakings are contained in note 18 of the financial statements.

Principal risks and uncertainties

Principal risks and uncertainties are described in detail on page 6 of the financial statements.

Going Concern

After making enquiries, including the disclosures made in note 1 to the financial statements and the managing Director's Review, the Directors are confident that the Group will have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

Auditors and disclosure of information to auditors

The Directors confirm the following applies:

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

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

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

By order of the Board

Peter Hind

Managing Director

22 March 2012STATEMENT OF DIRECTORS' RESPONSIBILITIES

FOR THE YEAR ENDED 31 DECEMBER 2011

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

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

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

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

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

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

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

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

Website publication

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

INDEPENDENT AUDITORS' REPORT TO

THE MEMBERS OF MATRA PETROLEUM PLC

We have audited the financial statements of Matra Petroleum plc for the year ended 31 December 2011 which comprise the consolidated income statement, the consolidated and company statement of comprehensive income, the consolidated and company statement in changes in equity, the consolidated and company balance sheet, the consolidated and company cash flow statement and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditors

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

Scope of the audit of the financial statements

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

Opinion on financial statements

In our opinion:

·; the financial statements give a true and fair view of the state of the group's and the parent company's affairs as at 31 December 2011 and of the group's loss for the year then ended;

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

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

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

INDEPENDENT AUDITORS' REPORT TO

THE MEMBERS OF MATRA PETROLEUM PLC

Opinion on other matters prescribed by the Companies Act 2006

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

Matters on which we are required to report by exception

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

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

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

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

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

Scott Knight (senior statutory auditor)

For and on behalf of BDO LLP, statutory auditor

London

United Kingdom

22 March 2012

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

CONSOLIDATED INCOME STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2011

The notes on pages 19 to 38 form part of the financial statements.STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2011

The notes on pages 19 to 38 form part of the financial statements.CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2011

The notes on pages 19 to 38 form part of the financial statements.COMPANY STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2011

The notes on pages 19 to 38 form part of the financial statements.BALANCE SHEET

AS AT 31 DECEMBER 2011

The notes on pages 19 to 38 form part of the financial statements.

The financial statements were approved and authorised for issue by the Board on 22 March 2012 and signed on their behalf by

Peter Hind

Managing DirectorCASH FLOW STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2011

The notes on pages 19 to 38 form part of the financial statements.

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2011

1. Accounting policies

Basis of preparation

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

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

The IFRS financial information has been drawn up on the basis of accounting policies consistent with those applied in the financial statements for the year to 31 December 2010.

Going concern

The Directors have prepared cash flow projections for the next 12 months and on this basis are confident that the company has sufficient funds to continue as a going concern. The projections show that current funds combined with moderate production are sufficient to cover overheads and current work commitments for approximately 13 months. These projections include only the completion of works currently underway at well-13 to allow production start-up at that well, as there are no outstanding commitments within the next 12 months under the licence terms. Additional funding is required to complete the 2012 planned work programme to drill well-14 and acquire 3D seismic. The Directors are confident that funds can be raised to complete the full work programme but these funds are not required to continue as a going concern.

(i)Standards, amendments and interpretations effective in 2011:

The following new standards and amendments to standards are mandatory for the first time for the Group for the financial year beginning 1 January 2011. Except as noted, the implementation of these standards did not have a material effect on the Group:

(ii)Standards, amendments and interpretations effective in 2011 but not relevant for the Group:

 (iii)Standards, amendments and interpretations that are not yet effective and have not been early adopted:

* Not yet endorsed by the EU.

The Group is evaluating the impact of the above pronouncements but they are not expected to have a material impact on the Group's earnings or shareholders' funds.

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2011

Basis of consolidation

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

Segmental reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision maker has been identified as the Managing Director and Exploration Director.

Business combinations

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

Foreign currency translation

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

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

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

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

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

Revenue

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for oil and gas products provided in the normal course of business, net of discounts, VAT and other sales related taxes to third party customers. Revenues are recognised when the risks and rewards of ownership together with effective control are transferred to the customer and the amount of the revenue and associated costs incurred in respect of the relevant transaction can be reliably measured. Revenue is not recognised unless it is probable that the economic benefits associated with the sales transaction will flow to the Group. Revenue recognised in 2011 relates to oil sales from test production.

Cost of sales

During test production cost of sales cannot be reliably estimated and therefore a cost of sales equal to revenue is recognised and credited to the intangible exploration assets.

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2011

Tangible non-current assets

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

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

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

Intangible non-current exploration assets

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

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

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

Impairment

All intangible assets are reviewed regularly for indications of impairment and costs are written off where circumstances indicate that the carrying value might not be recoverable. Any impairment is immediately written off to the income statement. The Group applies the successful efforts method of accounting where costs are capitalised in different cost centres for each well and the impairment review is carried out separately on each cost centre.

Investments

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

Inventories

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

Financial instruments

Financial assets and financial liabilities are recognised when the Group and the Company becomes party to the contractual provisions of the instrument. Financial assets are de-recognised when the contractual right to the cash flow expires or when substantially all the risk and rewards of ownership are transferred. Financial liabilities are de-recognised when the obligations specified in the contract are either discharged or cancelled.

Financial assets

The Group classifies its financial assets into one of the following categories, depending on the purpose for which the asset was acquired. The Group does not have any held to maturity, available for sale or fair value through profit and loss assets.

Loans and receivables

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

Cash and cash equivalents

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

Financial liabilities

The Group's financial liabilities consist of trade and other payables which are initially stated at fair value and subsequently at amortised cost. There are no fair value through profit and loss liabilities.

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2011

Tax

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

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

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

Deferred taxation

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

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

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

Contributed equity

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

Share Based Payments

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

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

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

Warrants

Warrants are treated as equity instruments and are valued using the Black-Scholes option pricing model. The proceeds from issuance of warrants are credited to retained earnings.

Significant accounting judgements and key sources of estimation uncertainty

The Group makes estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on historical experiences and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may deviate from these estimates and assumptions. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are as follows:

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2011

Exploration and evaluation costs: are capitalised as intangible assets (note 11) and are assessed for impairment when circumstances suggest that the carrying amount may exceed the recoverable value thereof. This assessment involves judgement as to the likely future commerciality of the asset and when such commerciality should be determined as well as future revenues and costs pertaining to the utilisation of the exploration and production rights to which such capitalised costs relate and the discount rate to be applied to such future revenues and costs in order to determine a recoverable value.

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

Share based payments: employee services received, and the corresponding increase in equity, are measured by reference to the fair value of the equity instruments at the date of grant, excluding the impact of any non-market vesting conditions. The fair value of share options is estimated by using the Black Scholes valuation model, on the date of grant based on certain assumptions. Those assumptions are described in note 16 and include, among others, the dividend growth rate, expected volatility, expected life of the options and number of options expected to vest. More details including carrying values are disclosed in note 16.

2. Loss per share

Loss per share of €0.00638 (2010: €0.00166) is calculated by dividing the loss attributable to equity shareholders for the year €7,210,221 (2010: €1,769,429) by the weighted average number of ordinary shares outstanding during the year of 1,129,808,508 (2010: 1,064,917,872).

The effect of all potential ordinary shares arising from the exercise of options going forward is considered to be anti-dilutive and therefore diluted earnings per share has not been calculated. At the balance sheet date there were 59,650,000 (2010: 52,400,000) potentially dilutive ordinary shares.

3. Parent company's income statement

The company has taken advantage of section 408 of the Companies Act 2006 and has not included its own income statement account in these financial statements. The company loss for the year after taxation was € 8,219,393 (2010: €1,761,165).

4. Loss from operations

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2011

5. Staff costs

 Total staff costs (including Directors) comprise:

The key management personnel consist of the Board of Directors and the Director in Russia.

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2011

Included in the above were pension contributions totalling €nil (2010: €nil).

6. Taxation

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

Factors that may affect future tax charges

No deferred tax asset has been recognised on accumulated tax losses as the recoverability of any such assets is not probable in the foreseeable future (see note 19).

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2011

7. Segmental reporting

The Group has two reportable segments:

·; Arkhangelovskoe: this segment involves the appraisal and production of oil within the Sokolovskoe Field licence area in Russia; and

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

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

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

 NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2011

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

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

Share based payments of €525,428 (2010: €1,167) relate solely to Head Office.

All material capital expenditures in the current and previous year relate to the Arkhangelovskoe segment.NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2011

9. Finance costs

10. Property, plant and equipment

Property, plant and equipment is comprised of office and computer equipment and transport vehicles.NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2011

11. Intangible assets

Intangible assets as at 31 December 2011 were:

Intangible assets as at 31 December 2010 were:

During the year various operations were carried out to establish commercial production at Well A-12. Operational failures caused an influx of water production and sustained oil production was not restored. Although the well may be used in the future development of the field IFRS guidelines require that in the absence of a firm programme for the well the full cost of the well is written down. NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2011

12. Investment in subsidiaries

13. Inventories

14. Receivables

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

The Intercompany loans are shown net of a provision of €14,008,976 (2010: €6,686,321).

The Intercompany loans are repayable on demand and bear interest at the rate of 2% above the Russian Base Rate (2010: 2% above the Russian Base Rate).

15. Payables

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2011

16. Share based payments