Interim Management Statement

FOR IMMEDIATE RELEASE

20 October 2010

(the "Company" or together with its subsidiaries "Dragon Oil" or the "Group")

Interim Management Statement

Dragon Oil plc (Ticker: DGO), an international oil and gas exploration and production company, issues its Interim Management Statement in accordance with the EU Transparency Directive.  The statement covers the period from 1 July 2010 to date.  The financial and production data are for the period from 1 July 2010 to 30 September 2010.  All other information, including details on operations, is up-to-date as at the date of publication.

Key highlights

- Four new wells were put into production and one well sidetracked in the period from 1 July 2010 to date;

- The average daily production rate was 46,400 barrels of oil per day ("bopd") in Q3 2010;

- Capital expenditure on infrastructure and drilling was approximately US$146 million for Q3 2010;

- The trunkline and Phase 2 expansion of the Central Processing Facility ("CPF") are near completion; it is anticipated that shortly gas will be delivered onshore;

- The Group's financial position further strengthened and it maintained its unleveraged balance sheet at the end of Q3 2010.

Dr Abdul Jaleel Al Khalifa, CEO, commented:

"We remain on track to complete 11 wells this year; the results from seven wells have already been reported, while the results from two more wells are expected shortly with two further wells expected to come on stream by the year-end.

In 2010, Dragon Oil will have completed more wells than we did last year as a result of more rigs being available for our drilling programme. However, due to certain infrastructure bottlenecks experienced this year, we estimate average gross field production to increase only by approximately 5% in 2010. While this result is below our initial expectations, we are confident of resolving many of these issues with completion of the substantial infrastructure upgrade. This will provide a firm foundation for driving production growth in the years ahead. To this end, I am pleased to report that work on the trunkline, Phase 2 expansion of the CPF and associated in-field pipelines is nearing completion. By the year-end the trunkline and expanded CPF will be fully operational with the CPF set up to handle up to 100,000 barrels of liquids per day and up to 220 mmscfd of gas.

The outlook for 2011-13 envisages the drilling of upto 40 wells of which five will be appraisal wells. We expect two new platforms, the Dzheitune (Lam) C and Dzhygalybeg (Zhdanov) A, to be completed in Q4 2011 and Q1 2012, respectively. We are also looking to add more rigs to our current fleet in addition to the Super M2 jack-up rig on order for delivery in Q4 2011. All this will support our drilling campaign and drive future production growth.

Finally, we continue discussions on gas monetisation and search for other strategic opportunities in line with our vision to diversify our portfolio and create additional value for our shareholders."

Analyst conference call details:

A conference call for analysts will be held today at 10.00am BST. For details, please contact Kate Lehane at Citigate Dewe Rogerson on +44 (0)20 7282 1063 or at [email protected].

A replay of the call will be available from around 12.00pm today until 27 October 2010 on the following telephone numbers:

UK +44 (0)20 7111 1244

Ireland +353 (0)1 486 0902

USA +1 347 366 9565

The pass code is 4871224#.

For further information please contact:

Media enquiries

Citigate Dewe Rogerson

Martin Jackson

George Cazenove

+44 (0)20 7638 9571

Investor and analyst enquiries

Dragon Oil plc

Anna Gavrilova / Sally Marshak

+44 (0)20 7647 7804

About Dragon Oil

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

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

www.dragonoil.com  

Disclaimer

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

INTERIM MANAGEMENT STATEMENT

MATERIAL EVENTS AND TRANSACTIONS

Production

Gross field production for Q3 2010 averaged 46,400 bopd (Q3 2009: 46,060 bopd). Currently Dragon Oil produces from 65 wells on 11 offshore platforms.

The entitlement production for Q3 2010 was approximately 71% (Q3 2009: 54%) of the gross production. The entitlement barrels are finalised in arrears and are dependent on, amongst other factors, operating and development expenditure in the period and the realised crude oil price. Higher entitlement barrels in Q3 2010 are due primarily to higher development expenditure, as compared to Q3 2009.

Marketing

Dragon Oil sold 4.5 million barrels of crude oil in Q3 2010 (Q3 2009: 3.1 million barrels), which is 45% higher than the volume sold during the corresponding period last year. In Q3 2010, Dragon Oil exported approximately 65% (Q3 2009: approximately 10%) of its crude oil production through Baku, Azerbaijan, the "western route". The remainder of the crude oil production went via Neka, Iran, the "southern route", under the short-term swap agreement, which expired in July 2010.

In July 2010, Dragon Oil changed its marketing arrangements and currently exports all of its entitlement barrels using the western route. The terms of the contract are FOB the Aladja Jetty, primarily using the BP-operated BTC (Baku-Tbilisi-Ceyhan) pipeline.

Drilling

Since the beginning of the second half of 2010, Dragon Oil has completed four wells and sidetracked one well.

The following table summarises the drilling activity by Dragon Oil in the Dzheitune (Lam) Field since 1 July 2010 to date:

The Dzheitune (Lam) B/148 well has been completed by the Iran Khazar rig and put into production; the testing is currently in progress. The NIS rig is to complete the Dzheitune (Lam) 28/149 well shortly with testing results to follow.

For the remainder of the year, the NIS rig will drill the Dzheitune (Lam) 28/151 well. The Iran Khazar rig has skidded to drill the Dzheitune (Lam) B/150 well. We expect these wells to come on stream before the end of the year and as such to contribute to production growth in 2011.

Infrastructure

Dragon Oil has undertaken significant infrastructure projects to underpin production growth in the years ahead.

Phase 2 expansion of the CPF is nearing completion. The CPF's capacity will increase to handle up to 100,000 barrels of liquids per day and up to 220 mmscfd of gas. We anticipate the completion and commissioning of the 30" 40 km trunkline and other associated in-field pipelines before the end of the year. The trunkline and associated in-field pipelines have been laid and are currently being connected into the system. We are constructing additional associated in-field pipelines from the Dzheitune (Lam) 28 platform to the Dzheitune (Lam) A platform (18") and from the Dzheitune (Lam) A platform to Block II (20") to increase the throughput capacity and accommodate future development of the western area of the Cheleken field.

The 30" 40 km trunkline, which runs from Block II to the CPF, will replace the two existing 12" trunklines currently in use enabling us to bring gas and liquids onshore. The two 12" trunklines will be maintained in a working condition for future use.

Within the infrastructure programme, the construction of two wellhead platforms contracted earlier this year is progressing. The Dzheitune (Lam) C platform, which will be built to support a jack-up rig and will have up to eight slots for drilling, is due to be completed in Q4 2011. Dragon Oil plans to install the platform in the western part of the Dzheitune (Lam) Field between the Lam B and Lam 28 platforms. As such the drilling programme will target reserves beyond the reach of the two existing platforms.

The Dzhygalybeg (Zhdanov) A platform will be the first new platform installed by Dragon Oil in the Dzhygalybeg (Zhdanov) Field. It will be constructed to support a land rig and be suitable for a jack-up rig. Up to eight wells will be drilled from this platform and depending on the results from the first few wells, more slots may be added to extend the drilling programme from this platform. The platform is due to be completed in Q1 2012 and installed in the eastern part of the Dzhygalybeg (Zhdanov) Field. The construction will comprise an accommodation platform for 100 people with a connecting bridge from the drilling platform. 

In order to support our offshore activities, Dragon Oil has also ordered a 100-tonne floating crane vessel from an international contractor. We anticipate the delivery of the crane vessel in Q4 2011. This vessel will be employed for drilling and infrastructure projects, adding to our existing operational capabilities.

Up to six additional slots are currently being added to the Dzheitune (Lam) A platform and we expect to finish this project in Q3 2011. Ten wells have been completed from this platform with an average initial flow rate of above 3,000 bopd per well.

A new platform is being built in the western part of the Dzheitune (Lam) Field to replace the existing Block I, which will act as a gathering station, in order to increase the throughput capacity of the crude oil flow in this part of the field.

FINANCIAL UPDATE

Realised prices

The average realised crude oil price during Q3 2010 was approximately US$68/bbl (Q3 2009: US$69/bbl), which was 1% lower compared to the corresponding period last year. For the year to 31 December 2010, Dragon Oil expects to achieve an average realised price in the range of an 8% to 10% discount to Brent.

Cash and cash equivalents

The cash and cash equivalents and term deposits at 30 September 2010 were approximately US$1,267 million (30 June 2010: US$1,155 million), including US$163 million (30 June 2010: US$155 million) set aside for abandonment and decommissioning activities.

Capital expenditure

Capital expenditure for Q3 2010 was around US$146 million (Q3 2009: US$56 million). Of this capital expenditure, approximately 67% was attributable to infrastructure with the balance spent on drilling. The infrastructure spend during Q3 2010 included work on the construction of the trunkline, associated in-field pipelines, two new platforms and the gathering station, Phase 2 expansion of the CPF as well as adding slots on the Dzheitune (Lam) A platform.

Capital expenditure on infrastructure in 2010 is expected to amount to US$250 million with the completion of the trunkline and Phase 2 expansion of the CPF.

Gas monetisation

The 30" trunkline and Phase 2 expansion of the CPF are part of the infrastructure necessary to put us in the position to deliver unprocessed raw gas to the Turkmen gas pipeline system. In addition, in Q3 2010, our contractors have completed the final Front End Engineering Design (FEED) study for a potential onshore gas treatment plant for the further processing of our gas. We are currently evaluating the study while discussions with the Turkmenistan Government regarding the commercialisation of the gas resources continue.

Investigation update

Following on from the announcements in early 2009 regarding Dragon Oil's investigation into irregularities in its procurement processes, Dragon Oil has continued to liaise with authorities in multiple jurisdictions, including Dubai, the U.S.A., the U.K. and Switzerland, in connection with their investigations or proceedings. The Company is taking such steps as it deems necessary to protect its interest and progress its own proceedings and is satisfied that these irregularities will have no material impact on its operations or the Group's financial position.

OUTLOOK

The Iran Khazar rig and the platform-based NIS rig, which are contracted until May 2011 and Q4 2011, respectively, are expected to complete a further three of the 11 wells planned for 2010 in Q4 2010. We expect to put these wells into production before the end of the year. In order to support our drilling campaign for the year ahead, we are also looking to add more rigs to our current fleet in addition to the Super M2 jack-up rig on order for delivery in Q4 2011.

In 2011, our aim is to complete 11 wells, including one appraisal well in the Cheleken Extension. We expect the NIS rig to drill and complete four wells. After the anticipated contract renewal, the Iran Khazar rig is planned to drill and complete four wells. We expect to drill and complete two wells from the Dzheitune (Lam) 13 platform in 2011, using Rig 40. We are currently sourcing a new land rig, which will drill an appraisal well in the Cheleken Extension.

By the year-end Dragon Oil will have completed more wells than we did last year. However, a number of infrastructure bottlenecks have impacted production growth; thus, based on our production forecasts for the remainder of the year we anticipate an increase of approximately 5% in average gross field production for 2010. We are confident that the new 30" trunkline, the associated in-field pipelines and expanded CPF will be fully operational by the end of the year. This substantial upgrade to our infrastructure base alongside a number of other ongoing projects should resolve many of the issues, which constrained production growth this year, and provide a firm foundation for driving production growth in the years ahead.

The outlook for 2011-13 envisages the drilling of upto 40 wells of which five will be appraisal wells. We target 10-15% annual gross field production growth over this period with total capital expenditure for infrastructure estimated at US$600-700 million.

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