Preliminary Results

Desire Petroleum plc("Desire" or the "Company")Preliminary Results

Desire Petroleum plc (AIM:DES) the exploration company focusing on the North Falkland Basin, is pleased to announce its Preliminary Results for the year ended 31 December 2012.

Highlights

·; Publication of complete CPR prepared by Senergy (GB) Ltd in November

o Total Best Case contingent resources of 495 Bscf and 95 MMstb, net to Desire

o Net Contingent resources of 178 Bscf and 85 MMstb assigned to Sea Lion Complex

o Best Case unrisked prospective oil resources of 2.45 billion stb, net to Desire

o Significant increase in Desire's prospect inventory (45 prospects)

·; Licence extensions to 1 May 2016 agreed with Falkland Islands Government

·; Reduced loss for the year of $3.9 million

·; Cash of $10.5 million

·; Post period end, Desire has commenced a farm-out process to attract an industry partner

Stephen Phipps, Chairman of Desire Petroleum commented:

"Desire has been active in proving up the exciting hydrocarbon potential in our acreage, firstly, in the Sea Lion area, and secondly over our other acreage which we believe has the best remaining exploration potential in the North Falkland Basin. 

On the strength of this extensive prospect inventory, the Board took the decision to commence a farm-out process in order to attract further investment into our licences. With the next drilling campaign expected to commence in late 2014, a successful farm-out would not only ensure that part of this campaign will be focused on Desire's licences, but also provide an attractive method of funding our ongoing exploration activities."

For further information please contact:

Qualified Person

This statement has been approved by Mr Ken Black, Exploration Director of Desire Petroleum plc, who is a member of the Petroleum Exploration Society of Great Britain, with over 30 years experience in petroleum exploration and management, who is a Qualified Person in accordance with the guidance note for Mining, Oil & Gas Companies issued by the London Stock Exchange in respect of AIM Companies.

CHAIRMAN'S STATEMENT

Dear Shareholder,

The two year drilling campaign in the North Falkland Basin reached a conclusion in January of 2012 with the demobilisation of the Ocean Guardian drilling rig back to the North Sea. In a highly successful campaign a total of 16 exploration and appraisal wells were drilled which have proved up a hydrocarbon system with a commercial oil discovery, the Sea Lion field discovered by Rockhopper Exploration PLC (Rockhopper). The final well in the programme, the 14/15-4a well, was of particular significance to Desire as it proved the extension of the Sea Lion discovery into our PL004b licence with the presence of hydrocarbons in multiple reservoir zones, namely the Sea Lion Main Complex (SLMC), Casper, Casper South and Beverley. The significance of this well was enhanced when, in July 2012, Premier Oil PLC (Premier Oil) acquired 60% of Rockhopper's interest in, and the operatorship of, the Sea Lion discovery. Premier Oil has announced a timeline for first oil from the Sea Lion discovery in 2017. Desire has a small interest in the SLMC reservoir and a more significant interest in the other reservoirs from our 40% equity in licence PL004b.

Senergy (GB) Ltd (Senergy) was commissioned to produce an independent Competent Person's Report (CPR) on the 14/15-4a discovery and published the results in April 2012 which assigned a best estimate of net contingent oil resources to Desire of 85 MMstb and a best estimate of net contingent gas resources of 178 bcf.

Notwithstanding the absence of drilling last year, your Company has, however, been active in proving up the exciting hydrocarbon potential in our acreage, firstly, as previously highlighted, in the Sea Lion area, and secondly over our other acreage which we believe has the best remaining exploration potential in the North Falkland Basin.

The processing of the merged 3D seismic survey over our core licences was completed in early 2012 and we have subsequently fully re-evaluated our prospect inventory. We now have an extensive inventory of 45 prospects in several play types of which 12 prospects have gross resource potential exceeding 100 MMstb and 10 prospects have a geological chance of success exceeding 30%. The most attractive of these prospects are the Jayne and Isobel prospects which we would expect to be high graded for future drilling.

On the strength of this extensive prospect inventory, the Board took the decision to commence a farm-out process in order to attract further investment into our licences. A data room is open and the process is ongoing. Whilst our year end cash resources of $10.5m are sufficient for general expenses, further investment is needed in order to fund future drilling, appraisal and development on our licences. With the next drilling campaign expected to commence in late 2014, a successful farm-out would not only ensure that part of this campaign will be focused on Desire's licences, but also provide an attractive method of funding our ongoing exploration activities.

During the year a number of our licences were due for renewal and following a review of the remaining prospectivity, our licences in the southern part of the North Falkland Basin were relinquished. Our focus is now exclusively on the northern part of the basin where the Sea Lion discovery has proved a working petroleum system and where our major prospects lie. We have agreed a Phase 2 extension with the Falkland Islands Government for our northern licences with a forward work programme commitment to drill one well on any of these licences before May 2016.

Anna Neve decided to step down as a non-executive director in September 2012, and I am grateful for her valuable contribution over the period of her directorship, but I am pleased to say that she will continue as company secretary. Finally, it remains for me to thank my colleagues for their hard work during the year.

Yours sincerely,

Stephen Phipps

Chairman

25 March 2013

FINANCIAL REVIEW

Income statement

The loss for the year decreased by $38,632,000 from $42,500,000 in the previous year to $3,868,000 in the current year. The reduced loss is mainly due to a decrease in exploration and evaluation expense.

Exploration and evaluation expense decreased by $39,858,000 from $41,673,000 to $1,815,000. The 2012 expense included seismic reprocessing and interpretation costs, allocation of administrative costs, data room preparatory costs, and the production of Competent Person's Reports during the year. The 2011 charge included significant costs for the Ninky well and 3D seismic expenditure incurred in the year.

Net administrative expenses for the year increased by $100,000 from $1,580,000 to $1,680,000. This was wholly due to a reduction in the amount reallocated to exploration and evaluation activities, which decreased by $338,000. Gross administrative expenses, as listed in Note 5 of the financial statements, showed a reduction from $2,823,000 to $2,585,000.

The exchange movement for the year showed a gain of $143,000 compared with a gain of $648,000 in the previous year, both arising primarily on the Company's Sterling cash balances. The year end exchange rate of $1.626/£ was higher than the rate at the start of the year ($1.544/£), averaging around $1.59/£ for the year.

Finance income of $36,000 in the year was lower than in the previous year due to a reduction of total cash balances (cash plus restricted cash) through the year.

The tax charge of $483,000 and the finance costs of $69,000 for the year represent the final settlement of corporation tax liabilities arising in respect of finance income in prior years.

Balance Sheet

During the year, the Company initially capitalised $2,294,000 of exploration and evaluation expenditure. Under the Company's successful efforts accounting policy, the only oil and gas intangible costs carried forward at the balance sheet date are those in respect of licence PL004b, where the Company carries contingent hydrocarbon resources, and where the process for determination of commercial reserves is not yet complete. All other intangible oil and gas costs have been expensed in the Income Statement. The costs carried forward in respect of PL004b are $204,000, an increase of $131,000.

The Company's PPE (Property, plant and equipment) balance consists mainly of inventory and equipment that is now surplus to requirements following the conclusion of the 2010 and 2011 drilling campaign. It is the Company's intention to dispose of the rest of the inventory holding, and in recognition that the Company is unlikely to obtain book value at original cost from this exercise, the Company established a PPE impairment provision of $1,400,000. As the assets are held for resale, the PPE balances were transferred to non-current assets and are now disclosed as PPE held for sale on the Balance Sheet.

At the balance sheet date, the net PPE held for sale stood at an estimated recoverable amount $217,000. Since the balance sheet date, and up to the date of this report, further disposals have realised $135,000.

The Company's cash resources at the year end amounted to $10,480,000, slightly down on the previous year end figure of $10,616,000. However, the restricted cash balances, held in escrow accounts with Diamond Offshore Drilling and AGR to meet demobilisation commitments of drilling rig and equipment respectively, which stood at $24,518,000 at the start of the year, have reduced to zero following settlement of all outstanding demobilisation liabilities.

Gross provisions, relating to anticipated commitments for the demobilisation of drilling rig and equipment at the conclusion of the drilling campaign, which stood at $26,353,000 at the start of the year, have likewise reduced to zero following completion of all commitments.

Financial outlook

The Company's available cash resources at the balance sheet date are sufficient to continue in operational existence for the foreseeable future being at least twelve months from the date of this report. The cash resources are not sufficient to drill further wells, and the Company has commenced a data room and farm-out process to attract further investment on the Company's licences.

Change of auditor

In January 2013, the Companyannounced that, following a regular review of external service providers, and a competitive tender process, it had appointed PricewaterhouseCoopers LLP as the auditor to the Company. UHY Hacker Young Manchester LLP resigned as the Company's previous auditor and confirmed to the Company that there are no circumstances in connection with its resignation which it considers need to be brought to the attention of the Company's shareholders or creditors.

The Directors of the Company would like to thank UHY Hacker Young Manchester LLP for their service over the years, and look forward to a productive and successful working relationship with PricewaterhouseCoopers LLP.

Eddie Wisniewski

Finance Director

TECHNICAL REVIEW

1. Introduction

At the beginning of 2012 we saw the completion of the Ocean Guardian drilling campaign. This was the end of a highly successful operation with 16 wells operated by Desire and Rockhopper. The final well in the programme, 14/15-4a was of particular significance to Desire as it proved the extension of the Sea Lion discovery into our PL004 licence and demonstrated the presence of hydrocarbons in multiple reservoirs. The evaluation of this discovery was completed in Q1 2012 and the result of the Senergy Competent Person's Report (CPR) was published in April 2012. This indicated significant potential in the oil reservoirs encountered by the well and we expect these reservoirs to be part of the Sea Lion development plan. The progress towards first oil on Sea Lion was given a substantial boost by the entry of Premier Oil onto the Rockhopper licences as the new operator.

The processing of the merged 3D survey over our core licences was completed in early 2012. Our prospect inventory has been fully re-evaluated and there is now an extensive inventory of 45 prospects in several play types. One of the stand-out areas is in the south of PL004a where the Elaine/Isobel fans were identified at a major sediment entry point into the southern part of the basin. Given the materiality of this area, a Senergy CPR on the Elaine/Isobel prospects was published in August 2012, in advance of the full prospectivity update. The final update was published in November 2012 and included all of the new prospects plus a re-statement of prospective and contingent resources for all of the Company's assets. These assets are now exclusively located within licences PL003, PL004 and PL005 for which a Phase 2 licence extension has been granted by the Falkland Islands Government. The prospectivity of licences PL006, PL007 and PL034 was significantly down-graded following the results of the 2010/2011 drilling campaign, and all of these licences have now been relinquished.

We look forward to working with our partners in PL004b towards the development of the Sea Lion complex and we will be seeking further investment onto our licences to unlock the remaining exploration potential.

The tables in the Technical Review are internally generated unless otherwise stated.

2. Sea Lion Area

The 14/15-4a well encountered four hydrocarbon bearing reservoirs all of which were logged and sampled. The results of this programme are now available and confirm the following:

Beverley 26m net gas pay

Casper South 8.5m net gas pay

(formerly Shona) 11.6m net oil pay

Casper 2.4m net oil pay

SLMC 8m net oil pay

All of the reservoirs are in pressure communication with an observed gas-oil contact at 2403m TVDss and an interpreted oil-water contact at 2477m TVDss.

The Senergy assessment of these reservoirs was published in a CPR (April 2012) which identified the following contingent resources:

Sea Lion Complex - All Reservoirs (Senergy CPR April 2012)

These contingent resources all lie within PL004b which is now operated by Premier Oil along with licence PL032 to the north. The new operator has announced a timeline to first oil for the Sea Lion field which indicates concept selection in Q2 2013, project sanction in mid 2014 and first oil in 2017. Unitisation discussions have not yet commenced and therefore Desire does not currently have access to the detailed development planning. We note that PL004b partner Rockhopper has highlighted two potential exploration drilling locations in PL004b, both of which will have an element of appraisal of the existing reservoirs. These exploration/appraisal wells are planned for 2014.

3. Liz Discovery (14/19-1)

Following completion of the seismic processing on the merged 3D survey, the Liz gas/wet gas discovery has been reassessed. The 14/19-1 well encountered two hydrocarbon bearing reservoirs in the syn-rift sequence - dry gas in the basal volcaniclastics and wet gas in the shallower G4 sand. Both reservoirs are challenging to map on the 3D seismic data due to structural/stratigraphic complexity and low acoustic contrasts. There is also significant uncertainty in the hydrocarbon column heights as no contact was encountered in either reservoir. An integrated assessment of all the available data has now been completed. The Senergy assessment of these reservoirs was published in a CPR (November 2012) which identified the following contingent resources:

A 25% chance of commercial development was assigned to the Liz discovery. There are no current plans for appraisal of this discovery although any future gas development in the area would change this perspective.

4. Prospectivity Update

Our core licences PL003, PL004 and PL005 are almost fully covered with 3D seismic data following the completion of the recent seismic acquisition and the merge with previous 3D surveys. These new data have allowed us to fully re-assess our prospect inventory which has resulted in a major upgrade to our prospective resources. The prospect inventory now comprises 45 prospects in the three main play types - early post-rift East Flank play, later post-rift E2 play and syn-rift. The majority of the prospects are oil plays due to interbedding with the main oil source rock interval or access to oil migration via faults. Deeper prospects within the syn-rift are likely to be gas-bearing and there is some risk of minor gas charge into shallower reservoirs. The occurrence of shallower gas in 14/15-4a can be explained by local structural control in this area.

Our assessment of the prospect inventory has identified four areas which we consider high-graded for future drilling.

Jayne Prospect Stack

The Jayne prospect was identified from initial interpretation of the East Flank Fast-Track volume. In the merged data, the additional potential of the Shona NE prospect and Rachel Updip prospects has been fully recognised. These prospects collectively target 405 MMstb gross prospective resources with geological chance of success in the range 19% to 37%. The prospects are predominantly located within PL004c where Desire has a 75% interest.

Isobel Prospect Stack

The Elaine/Isobel prospect area was identified from the new seismic acquisition. This is a major area of sediment entry into the basin with strong seismic indicators for sand presence. There are multiple reservoir objectives in a stratigraphic trap with enhanced downthrown fault closure. An initial well location can test the Isobel/Lydia SE/Emily prospects, but in the success case we would expect Elaine South and Elaine North also to yield positive results. The Isobel prospect stack would initially target 281 MMstb gross prospective resources with geological chance of success in the range 18% to 30%. The prospects are predominantly located within PL004a where Desire has a 92.5% interest.

Ninky North Prospect Stack

The Ninky North prospect lies immediately to the south of the 14/15-4a discovery but targets a younger reservoir (Upper F2) where there were strong oil shows in the 14/15-3 well to the south. There are also a series of secondary targets within the deeper F3 sequence (Joanne/Kiki W/Harriett, Jayne W) which can be drilled from the same location. This well also provides an opportunity to appraise the Casper South oil reservoir previously encountered in 14/15-4a. The prospects collectively target 260 MMstb gross prospective resources with geological chance of success in the range 19% to 34%. The prospects are predominantly located within PL004b where Desire has a 40% interest.

Ann / Orca South

The Ann / Orca South prospect has been part of the prospect inventory for some time and remains a robust prospect from interpretation of the new 3D data. The primary target is in the post-rift E2 sands within a prominent structural closure over the Orca Ridge. Deeper, secondary targets are present within the syn-rift. The prospects collectively target 194 MMstb gross prospective resources with geological chance of success in the range 19% to 32%. The prospects are predominantly located within PL003b where Desire will have a 57.5% interest following completion of the Denholm farm-out.

These high-graded targets are part of an overall prospect inventory with prospective resources potential net to Desire of almost 4.8 Billion bbl in the high case. This potential emphasises our view that the North Falkland Basin remains significantly under-explored and we look forward to participating in the next drilling campaign.

5. Licence Update

Following a review of remaining prospectivity, the licences in the southern part of the North Falkland Basin have been relinquished - PL006, PL007 and PL034. Our focus is now exclusively on the northern part of the basin where the mature oil source rock has been proven and significant prospectivity remains. The Company has agreed a Phase 2 extension with the Falkland Islands Government for licences PL003, PL004 and PL005. All previous work commitments have been completed for these licences and the work programme commitment going forward is for one well to be drilled on any of these licences before May 2016.

*On PL003b Denholm will earn their 35% interest after fulfilling the terms of a farm-out agreement.

DIRECTORS' REPORT

The Directors present their report and audited financial statements of the Company for the year ended 31 December 2012.

Principal activity

The principal activity of the Company for the year continued to be that of oil and gas exploration.

The Company is incorporated and domiciled in the United Kingdom.

Business review

The Company is required by the Companies Act 2006 to set out in this report a fair review of the business of the Company during the financial year ended 31 December 2012 and the position of the Company at the end of the year, and a description of the principal risks and uncertainties facing the Company. The information that fulfils the requirements of the business review can be found within the Chairman's Statement, the Financial Review, the Technical Review and the Directors' Report shown on the Desire website. These include details of the expected future developments in the business of the Company. The Directors do not believe that there are any significant key performance indicators that are relevant to the Company at present.

The prior year financial statements were consolidated. They are no longer consolidated in the current year following the liquidation of the Company's only subsidiary.

Dividends

The Directors do not recommend payment of a dividend (2011:$Nil).

Share capital

On 11 July 2012 2,974 ordinary shares were cancelled as a result of consideration not received pursuant to the January 2010 Open Offer.

Directors and their interests

The interests of the Directors in the ordinary shares of the Company are shown in the Report of the Remuneration and Nomination Committees.

Mr S L Phipps and Mr A G Windham will retire by rotation at the Annual General Meeting and, being eligible, offer themselves for re-election.

Details of the Directors' interests in contracts with the Company are set out in note 27 to the financial statements.

Financial Instruments

The Company holds no financial instruments, other than cash, receivables and payables. Financial risk management policies are shown in note 22 to the financial statements.

Special business - Annual General Meeting resolutions

The 2013 Annual General Meeting of the Company will take place on Wednesday 29 May 2013 at 10:00am at the offices of Buchanan Limited, 3rd Floor, 107 Cheapside, London EC2V 6DN.

Items 5 and 6 of the Notice of the forthcoming Annual General Meeting contain resolutions which renew and extend existing authorisations for a further year. The Directors believe that they should have the authorities proposed under items 5 and 6 in order to take advantage of business opportunities as they arise, thus maintaining a desirable degree of flexibility.

Item 5

Under the Companies Act 2006, the Directors are prohibited from allotting securities of the Company without prior authorisation from shareholders to do so. The effect of this resolution is to give the Directors authority until the 2014 Annual General Meeting to allot relevant securities up to an aggregate nominal amount of £342,282.

Item 6

The Companies Act 2006 also provides that, unless shareholders otherwise consent, all new equity securities to be offered for cash must first be offered to existing shareholders in proportion to their individual holdings. The effect of this resolution is to give the Directors authority, until the 2014 Annual General Meeting, to allot equity securities for cash, other than to existing shareholders, up to a limited aggregate nominal amount of £171,141.

Substantial shareholdings

As at 15 March 2013 the Company had been notified of the following holdings of 3% or more of its issued share capital:

Corporate governance 

The UK Corporate Governance Code is not mandatory for companies traded on the Alternative Investment Market of the London Stock Exchange. However, the Directors are committed to applying the requirements of the Code where they are considered appropriate. This statement explains how the Company has applied the relevant principles of the Code throughout the year. The Board meets regularly throughout the year and is responsible for the overall Company strategy, acquisition and divestment policy, approval of major capital expenditure and consideration of significant financing matters. It reviews the strategic direction of the Company, its annual budgets, its progress toward achievement of these budgets and its capital expenditure programmes.

Status of non-executive directors

Mr G Thomson is the senior independent non-executive director. With the exception of Mr G Thomson, none of the non-executive directors would be deemed independent under the Code. However, the non-executive directors have considerable experience in the Oil and Gas sector which the Company draws upon on a regular basis. In addition, the non-executive directors are sufficiently independent of management so as to be able to exercise independent judgement and bring an objective viewpoint and, thereby, protect and promote the interests of shareholders.

Going concern

At the balance sheet date the Company had available cash resources of $10.5 million, which it considers adequate to meet its anticipated liabilities and continue for the foreseeable future.The financial statements have been prepared on a going concern basis as the Directors are optimistic that the Company will be able to raise funds when required in order to fund further exploration activities.The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future, being twelve months from the date of the approval of the financial statements. For this reason, the Board continues to adopt the going concern basis in the preparation of the financial statements.

Qualifying third party indemnity provisions

The Company's articles of association contain qualifying indemnity provisions under which each Director shall be entitled to be indemnified by the Company in respect of certain liabilities which may attach to him or her in their capacity as a Director of the Company. These provisions were in force throughout the year and remain in force at the date of this report.

Audit Committee

The Audit Committee was chaired by Mr G Thomson, and included Mr A G Windham and Mr R Lyons as members throughout the year. The Committee convenes at least twice a year and its terms of reference include the review of the Annual and Interim Reports, accounting policies of the Company, internal management and financial controls, and the planning, scope and results of the Auditors' programme of work. PricewaterhouseCoopers LLP attend the meetings at the invitation of the Committee.

The Audit Committee recommends to the Board the appointment of the external auditor, which is subject to approval of shareholders at a general meeting. The Audit Committee is responsible for the approval of audit and, where applicable, non-audit services provided by the external auditor, and to ensure that the independence of the external auditor is maintained, and that there exist no conflicts of interest. In general, the external auditor will only be used for audit and tax compliance services. During the year, tax advisory services were also provided by the Company's external auditor.

Fees payable to external auditors are disclosed in note 5 to the financial statements.

Remuneration Committee and Nomination Committee

Both Committees comprise three non-executive directors and meet as required during the year.

The Remuneration Committee is chaired by Mr A G Windham and included Mr R Lyons and Mr G Thomson as members throughout the year.

The Nomination Committee is chaired by Mr R Lyons and included Mr A G Windham and Mr G Thomson as members throughout the year.

The Committees' responsibilities include the consideration and recommendation of the terms of service, nomination, remuneration and benefits of the Company's Directors.

Where board appointments are considered, the Committees may make use of the services of external search consultancies.

The Board, as a whole, determines the remuneration of the non-executive directors (with Directors absenting themselves from discussions regarding their own remuneration as appropriate).

Directors' attendance

The Directors' attendance at scheduled board and committee meetings for the period is shown in the table below:

*Chairman

†By invitation

Mrs A R Neve resigned as a director on 17 September 2012.

Internal control

The Board, which presently comprises the Chairman, the Chief Executive, the Finance Director, the Exploration Director and non-executive directors, meets formally and informally on a regular basis. The Directors are responsible for ensuring that the Company maintains adequate internal control over the business and its assets. There is an agreed schedule of matters requiring referral to the Board. These matters include the Company's corporate strategy, acquisitions and disposals, approval of major capital expenditure, treasury policy and risk management policies. Procedures have been formalised where the Directors may need to take independent professional advice. The Audit Committee has reviewed the necessity for the establishment of an internal audit function, but considers that, due to the nature and size of the Company at present, it would not be appropriate for the Company to have its own internal audit department.

On the wider aspects of internal control, relating to operational and compliance controls and risk management, the Board, in setting the control environment, identifies, reviews, and reports on the key areas of business risk facing the Company. These procedures have been in place throughout the current financial year.

There is close day-to-day involvement by the Directors in all of the Company's activities. This includes the comprehensive review of both management and technical reports, the monitoring of foreign exchange and interest rate fluctuations, commitment to the Health, Safety and the Environment Management System, government and fiscal policy issues, employment and information technology requirements and cash control procedures. Attendance at meetings of joint arrangements and site visits are made whenever appropriate. In this way, the key risk areas can be monitored effectively and specialist expertise applied in a timely and productive manner.

Any system of internal control can provide only reasonable, and not absolute assurance that the risk of failure to achieve business objectives is eliminated. The Directors having reviewed the effectiveness of the system of internal controls and risk management consider that the system of internal control operated effectively throughout the financial year and up to the date the financial statements were signed.

Risk management report

The Company regularly monitors the significant strategic, operational, financial and external risks it faces, and has in place a system of internal controls to manage these risks. An annual review of the Company's internal controls is carried out by the Audit Committee who report on its effectiveness to the Board. Further information on financial risk management is provided in note 22.

The Company's assessment of the principal risks and uncertainties which could impact on long term performance, together with the likelihood of each risk occurring (Low, Medium or High) and its potential impact (Low, Medium or High), and how the risk is managed, is detailed below.

STRATEGIC

OPERATIONAL

FINANCIAL

EXTERNAL

Performance evaluation

A formal performance evaluation of the Board, its Committees and its Directors was not undertaken during the year due to the nature and size of the Company at present.

The Board is satisfied that the Board and its Committees are operating in an effective and constructive manner.

Relations with shareholders

The Company is active in communicating with both its institutional and private investors. The Annual General Meeting, at which Directors are introduced and available for questions, provides further opportunities for dialogue.

Creditor payment policy

It is the policy of the Company to ensure that all of its suppliers of goods and services are paid promptly and in accordance with contractual and legal obligations. At 31 December 2012 there was 1 day (2011 - 4 days) of purchases remaining unpaid.

Political contributions and charitable donations

The Company made no political or charitable donations during the year (2011 - $Nil).

Auditors

Each of the persons who is a Director at the date of approval of this annual report confirms that:

A so far as the Director is aware, there is no relevant audit information

of which the Company's Auditors are unaware, and

B the Director has taken all steps that they ought to have taken as a

Director in order to make themselves aware of any relevant audit

information and to establish that the Company's auditors are aware

of that information.

This confirmation is given and should be interpreted in accordance with the provisions of s418 of the Companies Act 2006.

PricewaterhouseCoopers LLP have expressed their willingness to continue in office as auditors and a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting.

This report was approved by the Board on 25 March 2013 and signed on its behalf by

Mrs A R Neve BA Secretary

REPORT OF THE REMUNERATION AND NOMINATION COMMITTEES

Remuneration Committee and Nomination Committee

The Committees met as required during the year.

The Chairman and other Directors may also attend meetings but are not involved in any matter relating to themselves.

There were no board appointments during the year. When board appointments are made or considered, the Committees have access to appropriate external recruitment advice.

The Company considers that it has, to the extent appropriate given the Company's particular circumstances, applied the UK Corporate Governance Code throughout the year regarding remuneration committees. In formulating remuneration policy the Committees give due consideration to the best practice provisions section of the Code.

Remuneration policy

The remit of the Committees is to advise on all aspects of the remuneration packages of Directors.

The policy of the Committees is to ensure that the remuneration packages offered are competitive and designed to attract, retain and motivate Directors of a high calibre.

The Directors' emoluments are not pensionable.

Details of Directors' emoluments are set out in this report.

Directors' contracts

The Directors' Service Contracts are for an indefinite period but can be terminated with six months notice by either party.

Details of the Directors' contracts are summarised as follows:

Directors remuneration

†Benefits comprise healthcare and life assurance costs.

*Fees are included in related party transactions in note 27.

††Other comprises payroll tax liabilities in respect of prior years settled by the Company.

The Company does not operate a bonus scheme, and does not make any pension contributions.

Mrs A R Neve resigned as a director on 17 September 2012.

Directors' interests

The interests (all of which are beneficial) of the Directors in office during the year in the ordinary shares of the Company are shown below, together with their share options under the Desire Petroleum Plc Unapproved Share Option Scheme and their share appreciation rights.

Mrs A R Neve resigned as a director on 17 September 2012.

Mr S L Phipps' and Mrs A R Neve's interest in 33,532,633 (31 December 2012 and 2011 - 33,532,633) shares are through their shareholding in Phipps & Company Limited.

Mr S L Phipps and Mrs A R Neve have an interest in 2,840,000 (31 December 2012 and 2011 - 2,840,000) shares through their interest in the Phipps & Company Retirement Benefit Scheme.

The interest of Dr I G Duncan includes 107,143 (31 December 2012 and 2011 - 107,143) shares held by Chase Energy Limited of which he is a director and shareholder.

Mr G Thomson held no shares as of 22 March 2013 or during the year.

Share options

Share options held by the Directors, in office during the year, are shown in the table below.

Mrs A R Neve resigned as a director on 17 September 2012.

Share Appreciation Rights ('SARs')

The Company operates an incentive plan that would permit the grant of awards over up to 5% of the issued share capital of the Company. The Remuneration Committee sought advice from external independent remuneration consultants as to its design and implementation, and in 2006 the Company adopted the new Desire Incentive Plan 2006 (the "Plan").

The awards under the Plan are structured as "Share Appreciation Rights" ("SARs"). SARs are designed to deliver a net gain equal to the increase in the price of a share between grant and exercise. The number of shares actually issued following exercise will therefore be less than the number of shares to which the grant relates as referred to below.

SARs have been granted to the Directors in office during the year, as shown in the table below.

Mrs A R Neve resigned as a director on 17 September 2012.

As described above upon exercise of the SARs, the relevant Awardee will be issued with shares with a market value at the date of exercise equivalent to the notional gain that the Awardee would have made, being the amount by which the aggregate market value on exercise of the number of shares in respect of which the SAR is exercised, exceeds the aggregate base price of that number of shares. The base price of a SAR will be the middle-market quotation of a share on the dealing day immediately preceding the date of grant.

SARs can be satisfied by either the issue of new shares, the transfer of existing shares or the cash equivalent.

No further awards of SARs will be made to the listed Awardees. No consideration is payable on the grant of a SAR.

The market price of the shares on 31 December 2012 was 18.75p and the range during the year was 18.50p to 36.00p

Other than shown above, no Director had any interest in the shares of the Company at 31 December 2012.

Approval

This Report was approved by the Board on 25 March 2013.

Mr A G Windham

Chairman of the Remuneration Committee

Mr R Lyons

Chairman of the Nomination Committee

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The Directors are responsible for preparing the Directors' 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 prepared the 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 Company and of the profit or loss of the Company for that period. 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 applicable International Financial Reporting Standards (IFRSs) as adopted by the European Union have been followed, 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 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.

The Directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

On behalf of the Board

S L Phipps

Chairman

INCOME STATEMENT

There is no other comprehensive income for the year.

Movement on reserves are shown in the Statement of Changes in Equity.

All operating income and operating gains and losses relate to continuing activities.

BALANCE SHEET

The financial statements were approved by the Board of Directors and authorised for issue on 25 March 2013.

Company Registration No: 3168611

They were signed on its behalf by:

S L Phipps

Chairman

STATEMENT OF CHANGES IN EQUITY

Equity attributable to equity holders of the Company

CASH FLOW STATEMENT

\* The 2011 presentation has been restated to disclose $782,000 of pre-licence costs through net cash from operating activities instead of through purchase of tangible and intangible assets, as previously disclosed.

Transactions through restricted cash

As restricted cash is excluded from cash and cash equivalents, then payments for oil expenditure costs from restricted cash are treated as non-cash transactions. In addition to the purchase of tangible and intangible assets stated above, there was $23,557,000 (2011: $44,449,000) paid from restricted cash.

Other movements through restricted cash were finance income of $19,000 (2011: $86,000) and exchange gain of $284,000 (2011: loss of $34,000)

NOTES TO THE FINANCIAL STATEMENTS

1 Accounting policies

The financial statements are based on the following significant accounting policies which have been consistently applied:

Basis of preparation

The results for the year ended 31 December 2012 have been prepared in accordance with IFRS as adopted by the EU, and IFRIC (International Financial Reporting Interpretations Committee) interpretations.

The financial statements have been prepared under the historical cost convention.

The financial information set out below does not constitute the Company's statutory accounts for the years ended 31 December 2012 or 31 December 2011, but is derived from those accounts. Statutory accounts for 2011 have been delivered to the Registrar of Companies and those for 2012 will be delivered in due course. The auditors have reported on those accounts; their reports were unqualified, did not draw attention to any matter by way of emphasis without qualifying their report and did not contain statements under s498(2) or (3) Companies Act 2006. Whilst the financial information included in this preliminary announcement has been computed in accordance with the International Financial Reporting Standards this announcement does not itself contain sufficient information to comply with IFRS.

Going concern

The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. Further detail is contained in the business review.

Intangible assets

a) Exploration and evaluation assets

The Company applies the successful efforts method of accounting, as set out in the Statement of Recommended Practice "Accounting for Oil and Gas Exploration, Development, Production and Decommissioning Activities" and as permitted by IFRS 6 "Exploration for and Evaluation of Mineral Resources".

Intangible exploration and evaluation assets

Under the successful efforts method of accounting, all licence acquisition, exploration and appraisal costs are initially capitalised in well, field or general exploration cost centres as appropriate, pending determination. Expenditure incurred during the various exploration and appraisal phases is then written off unless commercial reserves have been established or the determination process has not been completed.

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 evaluation ('E&E') costs

Costs of E&E are initially capitalised as E&E assets. Payments to acquire the legal right to explore, costs of technical services and studies, seismic acquisition, exploratory drilling and testing, and other directly attributable licence costs are capitalised as intangible E&E assets.

Such intangible costs include directly attributable man time and overhead, including the depreciation of property, plant and equipment utilised in E&E activities, together with the cost of other materials consumed during the exploration and evaluation phases.

Tangible assets used in E&E activities are classified as property, plant and equipment. However, to the extent that such a tangible asset is consumed in developing an intangible E&E asset, the amount reflecting that consumption is recorded as part of the cost of the intangible asset.

E&E costs are not amortised prior to the conclusion of appraisal activities.

Treatment of E&E assets at conclusion of appraisal activities

Intangible E&E assets related to each cost centre are carried forward, until the existence, or otherwise, of commercial reserves has been determined subject to certain limitations including review for indications of impairment. If commercial reserves have been discovered, the carrying value, after any impairment loss, of the relevant E&E assets, is then reclassified as development and production assets within property, plant and equipment. If, however, commercial reserves have not been found, the capitalised costs are charged to expense.

Impairment

In accordance with IFRS 6, E&E assets are reviewed regularly for indicators of impairment and costs written off where circumstances indicate that the carrying value of the asset exceeds the recoverable amount.

Where there has been a charge for impairment in an earlier period, that charge will be reversed when there has been a change in circumstances to the extent that the discounted future net cash flows are higher than the net book value at the time. In reversing impairment losses, the carrying amount of the asset will be increased to the carrying value that would have been determined had no impairment loss been recognised in prior periods.

Development and production assets

Development and production assets, classified within property, plant and equipment, are accumulated on a field-by-field basis and represent the costs of developing the commercial reserves discovered and bringing them into production, together with the E&E expenditures transferred from intangible E&E assets.

Depreciation of producing assets

The net book values of producing assets are depreciated on a field-by-field basis using the unit-of-production method by reference to the ratio of production in the year and the related proven and probable reserves of the field, taking into account the future development expenditure necessary to bring those reserves into production.

b) Computer software 

Computer software costs are amortised over their expected useful lives, as follows:

Computer software 33% straight line basis

c) Consortia and farm out agreements

In addition to holding licences on its own account, the Company is a member of consortia (a joint arrangement). The Company's proportionate share of the consortia costs are included in intangible assets or PPE, as appropriate.

Where the Company acts as operator to a joint arrangement and has a direct legal liability to third party creditors or a similar entitlement in respect of debtors then the gross liabilities and receivables (including amounts due to or from non-operating partners) are included in the balance sheet.

Where the Company acts as a non-operating participant to a joint arrangement, the entitlement or liability in respect of its share of working capital balance relating to the joint arrangement is analysed across the underlying elements of working capital such as inventories, receivables, cash and payables.

d) Decommissioning costs

Provision for the future cost of decommissioning an installation is recognised as part of the total investment to gain access to future economic benefit. The asset is established and included as part of the overall cost pool. Provision is made when the Company has an obligation to dismantle and remove a facility or an item of plant and to restore the site on which it is located, and when a reasonable estimate of that liability can be made.

The decommissioning asset is recognised and capitalised as the related facilities are installed, simultaneously with the recognition of the provision. The incremental amount capitalised on each phase of installation should equal the incremental amount provided in respect of each phase.

Property, plant and equipment (PPE)

a) Exploration and Evaluation expenditure

PPE acquired as exploration and evaluation assets are capitalised as such and, to the extent that the asset is consumed in developing an intangible asset, the amount reflecting the consumption is capitalised as the cost of an intangible asset.

b) Computer hardware

PPE are stated at cost or valuation less depreciation. Depreciation is provided at rates calculated to write off the cost or valuation, less estimated residual value of each asset, over its expected useful life, as follows:

Computer hardware 33% straight line basis

Foreign currencies 

a) Functional and presentation currency

Items included in the financial statements of the Company's entities are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). The functional and presentation currency is US dollars, and the 2012 Annual Report is presented in US dollars as this reflects the primary economic environment in which the Company operates.

b) Transactions and balances

Transactions denominated in foreign currencies are translated into the functional currency at the month end exchange rate preceding the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange

rates ruling at the year-end. Foreign exchange gains and losses resulting from the settlement of such transactions, and from the translation at year-end exchange rates of monetary assets

and liabilities denominated in foreign currencies are recognised in the income statement.

The year end rates of exchange actually used were:

Recognition of non-operating income

a) Finance income

Finance income is recognised when it is probable that economic benefits will flow to the Company and the amount of revenue can be measured reliably. Finance income is accrued on a time basis.

Taxation 

a) Current income tax

Current tax, including UK corporation tax, is provided on amounts expected to be paid or recovered using the tax rates and laws that have been enacted or substantially enacted by the balance sheet date.

Interest and penalties are recognised, measured and presented as provisions under IAS 37, and these costs are classified as finance costs and other administrative costs, respectively, in the Income Statement.

b) Deferred income tax

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is determined using tax rates and laws that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred income tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised.

Cash and cash equivalents 

Cash and cash equivalents includes cash in hand, deposits held at call with banks and bank overdrafts. Bank overdrafts are shown within current liabilities on the balance sheet.

Restricted cash

Where cash is deposited with financial institutions, securing various guarantees and performance bonds associated with the Company's operating activities, it is treated as a financial asset of the Company and released on maturity of the guarantee or performance bond.

Where cash balances are not under the exclusive control of the Company, such amounts are disclosed as restricted cash.

Share-based payments

The Company operates equity-settled, share-based compensation plans. The economic cost of awarding SARs and share options is recognised as an expense in the income statement equivalent to the fair value of the benefit awarded. The fair value is determined by reference to Black-Scholes option pricing models. The charge is recognised in the income statement over the vesting period of the award. The vesting period is three years from the date of the award.

Financial instruments

The Company uses certain financial instruments in its operating and investing activities that are appropriate to its strategy and circumstances.

Financial instruments currently comprise cash and short-term receivables and payables. The Company regularly reviews the funding opportunities available to it in order to finance its operations, including considering the use of borrowings, as well as equity, to fund short-term cash requirements.

Receivables and payables are initially recognised at fair value and subsequently held at amortised cost.

The main risks arising from the Company's present use of financial instruments are currently foreign exchange movements relating to the Company's non-US dollar cash resources. The addition of any borrowings to the Company's portfolio of financial instruments will introduce interest rate risk.

Operating segments

The Company considers itself to have a single purpose, the exploration and exploitation of its licences in the North Falkland Basin, and therefore concludes that it has only one business segment and only one geographic segment.

Adoption of new and revised Standards

In the current year, the following significant new and revised Standards and Interpretations have been adopted none of which have affected the amounts reported in these financial statements.

IFRS 1 First-time adoption. The IASB made two amendments to IFRS 1 in December

2010: an exemption for severe hyperinflation, and removal of fixed dates.

IAS 12 Income taxes. The IASB amended IAS 12 to introduce an exemption to the

existing principle for the measurement of deferred tax assets or liabilities arising

on investment property measured at fair value.

IFRS 7 Financial instruments: Disclosure. The IASB issued an amendment to IFRS 7 on

8 October 2010. The amendment requires a greater disclosure of transferred financial assets.

The following amendments were made as part of Annual Improvements to IFRS (May 2011).

IFRS 1 First-time adoption

IAS 1 Presentation of financial statements

IAS 16 Property plant and equipment

IAS 32 Financial instruments: Presentation

IAS 34 Interim financial reporting

At the date of authorisation of these financial statements, the following significant Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective:

Effective from 1 July 2012

IFRS 10 Consolidated financial statements

IFRS 11 Joint arrangements

IFRS 12 Disclosure of interest in other entities

IFRS 13 Fair value measurement

Effective from 1 January 2013

IFRS 1 First-time adoption

IFRS 7 Financial instruments: Disclosures

IAS 1 Presentation of financial statements

IAS 19 Employee benefits

IAS 27 Separate financial statements

IAS 28 Associates and joint ventures

IFRIC 20 Stripping costs in the production phase of a surface mine

Effective 1 January 2014

IAS 32 Financial instruments: Presentation

Effective 1 January 2015

IFRS 9 Financial instruments

The Directors do not expect that the adoption of the standards listed above will have a material impact on the financial statements of the Company in future periods.

2 Estimates, assumptions and judgements

In the application of the Company's accounting policies, described in note 1, the Directors are required to make judgements, estimates and assumptions about assets, liabilities and disclosures that are not readily available from other sources. The estimates and associated

assumptions are based on experience and other factors that are considered to be relevant. These may include expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates and the estimates and underlying assumptions are regularly reviewed.

The most significant areas relate to the writing off, to the Income Statement, of exploration costs, which is based on management assessment of the likelihood of commercial reserves (as disclosed in note 13), and the carrying value of inventory held within PPE held for sale (as disclosed in note 16). The degree of sensitivity in relation to reserves is included in the Technical Review.

3 Production costs incurred

Pre-production costs incurred, or provided, in oil and gas exploration activities were as follows:

Falkland Islands

4 Exploration and evaluation expense Falkland Islands

5 Administrative expenses

Included in the Auditors' remuneration in 2012 above are $5,000 of audit fees and $18,000 of other services paid to UHY Hacker Young Manchester LLP.

6 Directors remuneration

Further information on the remuneration of Directors and their share awards can be found in the Remuneration and Nomination Committee's report.

Information on related-party transactions is disclosed in note 27 to these Accounts.

The total remuneration of the highest paid Director was;

The aggregate gain on the exercise of share options by all Directors was $Nil (2011:$Nil).

7 Employment costs

The Company does not operate a bonus scheme, a pension scheme, or a Long Term Incentive Scheme (LTIS).

8 Share-based payments

The charge above is based on fair value determined by reference to the Black-Scholes option pricing model and is recognised in the income statement of the vesting period of the grant or award.

9 Finance costs

10 Finance income

11 Taxation

c) Factors that may affect future tax charges

The Company is carrying forward an amount of tax-deductible expenditure under the assumption that it will have income from oil exploration in the future.

The amount currently available for offset against future revenue is estimated at $199 million.

No deferred tax is provided on this expenditure as it is not reasonably certain that the income from this source will materialise.

12 Loss per share

The calculation of basic loss per ordinary share is based on a loss of $3,868,000 (2011: loss $42,500,000) and on 342,283,758 (2011: 342,285,172) ordinary shares, being the weighted-average number of ordinary shares in issue during the year.

As the Company reports a loss for the current and comparative year, then in accordance with IAS 33, the share options and Share Appreciation Rights in issue are not considered dilutive. Details of such instruments that could potentially dilute basic earnings per share in the future are included in note 23.

13 Intangible fixed assets

At the balance sheet date, the $204,000 carried forward as exploration and evaluation assets, relates to costs incurred on license PL004b, where a successful farm-out well was drilled.

The Company carries contingent oil and gas resources on this licence, pending determination of commercial reserves.

In all other cost centres, the Company currently has no firm plans to return to the prospects, so all other costs have been written off in accordance with the accounting policy.

The Company's exploration and evaluation assets all relate to the Falkland Islands.

14 Property, plant and equipment

The impairment charge in 2012 is disclosed under Exploration and evaluation expense in the Income Statement.

The Company's exploration and evaluation assets comprise inventory purchased for the 2010 and 2011 drilling campaign and all relate to the Falkland Islands.

It is the Company's intention to dispose of the balance of its exploration and evaluation tangible assets. In recognition that the original cost may not be achieved on disposal, a PPE impairment provision of $1,400,000 was set up.

As the assets are held for re-sale, the cost and provision have been reclassified as PPE held for sale (note 16).

15 Investments

At 31 December 2011 the Company held 100% of the ordinary shares of Gaelic Resources Plc, a dormant company incorporated in the Republic of Ireland. Gaelic Resources Plc was liquidated on 12 November 2012.

16 Property, plant and equipment held for sale

Since the balance sheet date, and up to the date of this report, disposals of PPE with an original cost of $210,000 have been made for proceeds of $135,000.

17 Other receivables

The Directors consider that the carrying amount of receivables approximates to their fair value.

Other receivables are expected to be recovered in full within a month of the date of this report.

Included within other receivables is an amount of $Nil (2011: $16,621,000) which relates to partner contributions towards the demobilisation provision.

18 Restricted cash

The amount in 2011 is treated as restricted cash as the balance of cash was not under the exclusive control of the Company.

19 Cash and cash equivalents

20 Other payables

The Directors consider that the carrying amount of payables approximates to their fair value. Substantially all of the above payables were settled by the date of this report.

21 Provisions

The Company's share of the release of provision is disclosed under Exploration and evaluation expense in the Income Statement.

The provision at the start of the year was in respect of commitments for the demobolisation, back to the UK, of the drilling rig and associated equipment.

22 Financial Instruments

The Company's policies as regards to financial instruments are set out in the accounting policies. The Company does not trade in financial instruments. The risks and uncertainties facing the Company include, but are not limited to:

Currency rate risk

The Company currency risk is primarily attributable to GBP cash deposits held at the bank. These deposits are held in GBP as the Company incurs expenditure in this currency. Foreign exchange movements on monetary assets and liabilities are taken to the income statement and the potential exposure is set out in the table below.

Credit risk and counter-party risk

The Company's principal financial assets are cash at bank and other receivables. The Company's credit risk is primarily attributable to amounts included in other receivables. The maximum credit risk exposure relating to financial assets is represented by the carrying values as at the Balance Sheet date. The Company manages its counter-party risk by holding its cash with a range of recognised banks and institutions.