Preliminary Results

Dublin

16 May 2014

Petroceltic International plc

Preliminary Results Announcement

Petroceltic International plc ("Petroceltic" or "the Company" and together with its subsidiaries "the Group'), the upstream oil and gas exploration, development and production company focused on the Middle East and North Africa (MENA), the Mediterranean and the Black Sea regions today announces its preliminary results for the year ended 31 December 2013 and a proposed placing to raise $100 million.

Highlights

Overview

· Production of 25.2Mboepd of which 20.4Mboepd relates to Egypt and 4.8Mboepd to Bulgaria

· Revenue of $197m relating to Egypt ($115m) and Bulgaria ($82m), which supported a capital programme of $161m across six countries

· Proposed placing to new and existing shareholders to raise $100m for exploration and development

Solid operational progress

· 2P Reserves at year end of 361mmboe (2012: 378mmboe)

· Ain Tsila development progressing with formation of a joint operating organisation, and the agreement of a farm-out to Sonatrach

· Continued investment in Egyptian operations, including development wells, LPG extraction and gas compression facilities

· Completion of the Kaliakra-1 production well in Bulgaria

· Seismic completed and on-going drilling and testing programme in Kurdistan

· New acreage awards in Egypt, Greece and Italy added to portfolio

· New combined organisation established with additional senior management appointments

Results

· Loss for the year of $19m (2012: $20m), following an exploration write-off of $37m due to unsuccessful wells in Egypt, Bulgaria and Romania

· Completed refinancing of a syndicated facility for up to $500m

· Egyptian receivable reduced by 25% to $81m at year end

· Agreement of second Algerian farm-out with Sonatrach, which will provide $20m, a development carry of $140m and two contingent amounts of $10m each

· Net debt at year-end of $246m (2012: $213m)

· Receipt of $27m from Enel relating to a contingent payment for 2011 farm-out

Robert Adair, Chairman of Petroceltic commented

"Petroceltic has demonstrated its ability to operate as a full cycle Oil and Gas Company with a balanced portfolio and clear regional focus. We have undertaken a successful refinancing, negotiated our second farm out in Algeria, and secured prospective new acreage in core areas. We have also made important new appointments to help our business grow and I have been particularly impressed by the skills, experience and enthusiasm of our team.

I look forward to the remainder of 2014 when some of our material exploration prospects will be drilled in Kurdistan and Romania and front end engineering and design will commence for our most significant asset, the Ain Tsila gas condensate field in Algeria. In addition, the move to the main markets of the London and Irish stock exchanges will broaden the range of current and potential future investors in the Company, while the proceeds of the proposed equity placing will allow us to continue to enhance the value of our existing portfolio and evaluate appropriate growth opportunities as they arise".

For further information, please contact:

Brian O'Cathain/Tom Hickey, Petroceltic International plc Tel: +353 (1) 421 8300

Philip Dennis/Rollo Crichton-Stuart,

Pelham Bell Pottinger Tel: +44 (20) 7861 3919

Joe Murray/Joe Heron, Murray Consultants Tel: +353 (1) 498 0300

John Frain/Roland French, Davy (Nomad and ESM Adviser) Tel: +353 (1) 679 6363

Dr. Dermot Corcoran, Head of Exploration, Petroceltic International plc, is the qualified person who has reviewed and approved the technical information contained in this announcement. Dr. Corcoran has a B.Sc in Geology, a M.Sc. in Geophysics, and a Masters degree in Business Administration, all from the National University of Ireland, Galway. He also holds a Ph.D in Geology from Trinity College, Dublin. Dr. Corcoran has over 20 years' experience in oil & gas exploration and production, and has previously worked at ExxonMobil, the Petrofina Group, and Statoil.

Notes to Editors

Petroceltic International plc is a leading Upstream Oil and Gas Exploration and Production Company, focused on North Africa, Mediterranean and Black Sea Regions, and listed on the London Stock Exchange's AIM Market and the Irish Stock Exchange's ESM Market. The Company has production, exploration and development assets in Algeria, Egypt, Bulgaria, Romania, the Kurdistan Region of Iraq, Greece and Italy. The Group financial statements are prepared in US dollars, therefore, where the $ symbol is used, it refers to US dollars.

Chairman's Statement

Dear Shareholder,

When we executed the merger between Petroceltic and Melrose in October 2012, we saw a great opportunity to build a balanced exploration and production business, with a clear regional focus and a good blend of operating, financial and technical skills. During 2013, we worked hard to make this vision a reality through integrating our team, undertaking a successful refinancing, negotiating our second farm out of Ain Tsila and making important new appointments to help the business continue to grow. Looking ahead, 2014 will see a number of our most material exploration prospects drilled and the commencement of detailed development work in relation to our largest asset, the Ain Tsila gas condensate field in Algeria. I believe many exciting opportunities lie ahead.

2013 was also a year of transition and occasional uncertainty for some of the regions where we operate. In Egypt, a period of political change resulted in the creation of a new interim government and, more recently, a new constitution. Parliamentary and Presidential elections are also scheduled for later in 2014 and it is hoped that these will enable a return to economic and social stability. In Algeria, the tragic terrorist attack on the In Amenas facility reinforced the need for continual vigilance and review of safety and security arrangements, while in Kurdistan there continues to be uncertainty regarding the timing of oil and gas exports and related payments. While these matters are a timely reminder of some of the potential risks of operating in emerging markets, they had limited impact on our operations and we continue to believe that Petroceltic can operate safely and effectively in these countries and generate material value for our shareholders.

Operational excellence

We invested over $160m in capital expenditure during 2013, over 85% of which was on Petroceltic operated projects. In Algeria, the formation of the Isarene joint operating organisation was a major step on the road to the development of the world class Ain Tsila field with senior Petroceltic staff seconded to a number of critical positions in the new organisation. The successful delivery of this project will be central to the success of the Group over the coming years. In Egypt, our major facilities upgrade projects were completed and an active rig programme undertaken through a period of political and social upheaval. In the Black Sea, we undertook a variety of offshore exploration, development and production operations. Through these operations, we have demonstrated our team's ability to successfully plan, execute and safely deliver multiple work programmes across a variety of jurisdictions in both onshore and offshore settings. These skills also supported our successful acquisition of a number of new licences during the year and enabled us to actively support and, where appropriate, challenge operators where we do not fulfil that role.

Integration and organisation

Following the merger between Petroceltic and Melrose, a substantial portion of 2013 was devoted to integrating the new Group's management structure, and our various teams, work activities, policies, procedures and systems to ensure they were incorporated within the enlarged organisation. This process is now complete. In addition, in recognition of the wide range of activities and regions in which the Group is currently active, a number of important new Senior Management appointments were made during 2013. These included new Heads of Business Development, Health Safety Environmental and Social ('HSES'), Drilling and Legal Services.

Successful refinancing and portfolio management

The availability of adequate funding, supported by high quality assets, is a vital component of Petroceltic's long term growth strategy. In particular, the Group is committed to maintaining its remaining stake in the Ain Tsila development in Algeria through to first gas. In parallel, we are also seeking to maintain active exploration, development and production programmes within our areas of geographic focus. During 2013, we took two major steps towards securing the financing required to meet these critical objectives. These were:

· The farm-out of an 18.375% interest in the Ain Tsila project to Sonatrach, the National Oil Company of Algeria; upon completion, this will provide a minimum of $160m of direct support for Petroceltic's development spend over the coming years. The transaction also represents an encouraging endorsement of the asset quality and our team's technical capability and experience.

· The conclusion in April 2013 of a financing package of up to $500m, led by HSBC and the IFC, which supports our plans for both existing and potential new assets and will also provide important funding for the Ain Tsila development. This facility was concluded in less than ideal market conditions and therefore clearly demonstrates the credit quality of our portfolio.

In addition, since year end we have also announced a proposed placing of new equity to raise $100 million incorporating a $50 million investment by a long term strategic investor, Dovenby Capital, a vehicle associated with Dato Fuad, a prominent industry executive and investor. The proceeds of this placing, once approved by shareholders (to the extent required), will enable Petroceltic to commit to increased or accelerated programmes on existing assets while selectively evaluating growth opportunities within our areas of focus.

Enhanced board and governance framework

After 13 years of service as a non-executive director, Con Casey retired in July. We thank him for his valuable input over the years and wish him well. We were delighted to be able to announce the appointment of Ian Craig as a non-executive director in November. Ian has over 30 years of international experience in the planning, design and execution of major development projects worldwide mainly with Shell and Enterprise Oil. This expertise is of particular benefit to the Ain Tsila project where Ian acts as Chairman of the Project Advisory Committee, which comprises both internal and independent external appointees. Finally, we anticipate adding a further non-executive director to our Board over the coming months pursuant to arrangements agreed as part of the equity placing with our new strategic investor Dovenby Capital.

We are also looking forward to completing the move to the Main Markets of the London and Irish Stock Exchanges. This process has recently commenced and admission to the listing and trading is expected to become effective in Q3 2014.

Industry environment and business performance

While the Group has made great progress during 2013 and met its production guidance under challenging circumstances, there have also been some areas of disappointment. Most notably these were on the exploration front, with three wells failing to encounter commercial hydrocarbons in Bulgaria, Romania and Egypt. Despite this, I firmly believe that our recently expanded exploration portfolio, with 5 new licences secured in Egypt, Italy and Greece, has the potential to deliver material resource additions. In 2014, our exploration drilling programme will continue in Kurdistan, Romania and Egypt.

2013 was also a challenging year for the oil and gas sector as a whole. Of 71 UK listed exploration and production companies over 61% suffered share price declines, while AIM fared even worse with over 69% of oil and gas stocks finishing the year lower than they started. However, a number of recent merger and acquisition announcements suggest that a more positive investor sentiment is beginning to return to the sector. The oil and gas industry has always operated in cycles and I believe Petroceltic's strategy, portfolio and team are well equipped to persist and succeed.

During 2013, I was fortunate to meet retail and institutional shareholders on a number of occasions, either alone or with executive management. On each occasion, I have conveyed my enthusiasm and belief in the potential of our business and my excitement about the opportunities that exist for the Group. Our new business made a good start in 2013, and I look forward to seeing further progress in 2014.

Robert Adair

Chairman

CHIEF EXECUTIVE'S REVIEW

Following a year of fundamental change for Petroceltic in 2012 brought about by the merger with Melrose Resources plc, 2013 was a year of integration and delivery and the creation of a business organisation capable of sustained long-term growth. In particular, our acreage in Kurdistan has the potential to achieve material resource additions during 2014, new licence additions in Egypt will extend our already successful business there and we have secured additional high quality exploration acreage in Greece and Italy.

Production and reserves

We produced 25,200 boepd during the year, in line with market guidance. The year was one of significant operational activity, with development and production maintenance investments exceeding $94m between Egypt and Bulgaria. We achieved this despite an unscheduled shut-in of our South Batra plant in Egypt for a few weeks in April, during a period of general political and social turbulence in the country. This also caused minor delays to the completion of our LPG plant expansion and compression projects at West Dikirnis and West Khilala, both of which have now been completed. Production for the first quarter of 2014 averaged 26,000 boepd.

Our year end 2013 booked 2P reserves stood at 361 MMboe of which 83% related to Algeria and the remainder to Egypt and Bulgaria. These amounts reflected a reduction of some 4 MMboe in Egypt, which was primarily related to updated performance data from the South Khilala and West Dikirnis fields. These changes will, however, have a relatively modest value impact since they affect the medium to long term production profile, have a negligible impact on our net entitlement reserves. In Algeria, we have made a revision of 4mmboe to reflect our current view of the most likely development schedule and in Bulgaria, the reserves are materially unchanged with an increase in the Galata field offset by a modest downgrade in Kaliakra.

Algeria - major progress on key development project

During 2013, Petroceltic made significant progress towards the development of the strategically important Ain Tsila gas condensate field.

An experienced project team has been established under the leadership of Geoff Stevenson, who was previously responsible for the development of the nearby Ohanet field for BHP Billiton. In parallel, the joint operating organisation which will undertake the execution of the development has been formed with secondees from Sonatrach, Petroceltic and Enel. The invitation to tender for the Front End Engineering and Design (FEED) studies was issued by year end and commercial work on the detailed Gas Sales Agreement is near completion. The FEED study will be a critical input in the finalisation of both the detailed project costs and schedule and, while no formal decisions have been taken to date, first gas now appears more likely to occur in 2018 than the previous estimate of late 2017. Consequently, reserves now reflect this more conservative first gas timing assumption, resulting in a forecast loss of a year's production at the very end of the 30 year development concession.

The Group also agreed a farm out of a further 18.375% interest in the field following pre-emption by Sonatrach for a minimum consideration of $160m, and received $26.9m in contingent consideration from Enel, representing the final amount due under the previous farm out to them. These portfolio management transactions have been a critical part of our overall funding plan for the project.

Egypt - operating effectively through a period of national change

2013 was a year of major political and social change in Egypt. However, the oil and gas industry remains central to the economy and Petroceltic continued to demonstrate its ability to operate effectively in the changing environment with government, regulators and local communities. In particular, our team's strong relationship and regular dialogue with EGPC and EGAS ensured that we managed to secure regular payments for production, as well as two part cargoes, thereby achieving an overall 25% reduction in amounts outstanding during the year. Our production performance continued to be strong, and we were able to support occasional requests from the government to supply additional gas to support increased domestic demand. We also successfully completed a number of important facilities investments which will enhance the value of future production by enabling incremental liquids recovery. As a long-term participant in the country, we took advantage of a period of slightly reduced competition for new acreage to increase our core acreage position by over 300% and build an inventory of new exploration leads and prospects to maintain and expand our business in Egypt for many years to come.

Bulgaria - maximising the value of our infrastructure

Petroceltic's Bulgaria business is centred around the Galata field and its associated infrastructure and discoveries, and our strategy is to maintain and extend the life of this important national asset by bringing existing discoveries on stream and exploring for new reserves in the region. We invested over $40m relating to development in Bulgaria in 2013, with the majority of this capital focused on the sub-sea tie-back of the Kaliakra-1 discovery well, which commenced production in September, and some advance pipe lay work in preparation for the Kavarna East development in 2015. We also drilled the Kamchia exploration well, but this was unfortunately unsuccessful, and we are actively reassessing the exploration potential in the Galata concession in preparation for potential future drilling activity.

Romania - first steps in an emerging exploration province

Recent discoveries offshore Romania have materially increased the level of Black Sea exploration activity and proven the existence of a high quality gas province. Petroceltic's acreage is situated close to a number of these discoveries and contains multiple exploration plays and targets. The region remains comparatively underexplored and consequently each well provides significant new information to enable more accurate ranking and risking of prospects for future activity.

Petroceltic's licences, EX-27 Muridava and EX-28 Est Cobalcescu, are located in shallow water and were covered with high quality 3D seismic data in 2012. Since then, activity has focused on prospect selection and well planning, permitting and preparatory works, culminating in the drilling of the South Cobalcescu-1 well in late 2013. While this well encountered both gas shows and good quality reservoir, these were not in commercial quantities and the well has thus been abandoned. Despite this, we continue to believe that this acreage has significant exploration upside and we look forward to the remainder of the programme in 2014/15.

Kurdistan - material prospects in a dynamic region

Petroceltic has been active in Kurdistan since 2011 and has worked closely with the operator, Hess, to undertake a comprehensive survey and analysis and ranking of prospects on the Shakrok and Dinarta blocks to support the drilling of two exploration wells during the initial three year licence period. Activities in 2013 were principally focussed on rig contracting, permitting, civil engineering and well site preparation works ahead of the spudding of the Shakrok-1 well in August and in preparation for the spudding of the Shireen well on the Dinarta block this year. Both wells are located close to analogous discoveries in adjacent acreage and have multiple exploration targets in a series of stacked reservoir units in the Jurassic and Triassic formations. More broadly, Kurdistan itself is continuing the transition from being an exploration province to creating the infrastructure and commercial arrangements necessary to commercialise the recent material oil and gas discoveries within the region.

On 7 April, the Group announced that the Shakrok-1 well had reached its total depth of 3,538 metres and that a total of 4 Jurassic zones had been selected for testing. To date, two drill stem tests (DSTs) have been undertaken on the Butmah formation with neither flowing hydrocarbons, two further DST's are planned on the overlying Adaiyah and Mus intervals with results anticipated in late May.

The Shireen-1 well will spud in late May and has an anticipated drilling duration of approximately 150 days. The forecast drilling duration of this well extends beyond the end of the first exploration sub-period of the Dinarta PSC. Consequently the operator is taking steps to ensure that the joint venture retains its option to progress to the next phase of the licence in an orderly manner.

Italy and Greece - exciting longer term prospects

In addition to maintaining a clear focus on current activities, we are also looking forward to our pipeline of high impact exploration activities in 2015 and beyond. In Italy, we continue to work with Eni as operator of the onshore Carpignano Sesia prospect to address local stakeholder concerns with a view to potentially commencing drilling activities in 2015; Petroceltic intends to farm down a portion of its interest in advance of drilling. Petroceltic also has a highly prospective portfolio offshore Italy, most notably including the Elsa discovery; we are currently finalising a new Environmental Impact Assessment and detailed drilling and testing plan for this project.

In Greece, a consortium including Petroceltic successfully applied for the Patraikos block, offshore western Greece, an underexplored area which has a proven petroleum system. The lease agreement for this block was signed on 14 May 2014 following the award by the Greek Ministry of Environment, Energy and Climate Change. During the initial three year concession period, the consortium will undertake seismic acquisition and other geological studies aimed at high grading existing leads and prospects for possible future drilling.

Health, Safety, Environmental and Social (HSES) - always a priority

We continually strive to operate safely and to maintain effective policies and procedures that protect our staff, contractors, partners and the communities where we work. We worked particularly hard during 2013 to create a new HSES Management System appropriate for our enlarged business, and expanded our team through the appointment of Stuart Harrower as our Group HSES Manager. Unfortunately, however, the number of lost workday incidents increased during the year. While none of the injuries sustained were of a serious nature, we have taken steps to reinforce our policies and procedures, encourage safe working practices and improve future performance. We have also introduced more detailed reporting of lower level and potential incidents to deepen our understanding of this vital area. During the year we also launched a significant new community development initiative in the village closest to our South Batra plant in the Nile Delta and are providing support to a local school and a community centre containing a medical and dental clinic, weaving facilities, nursery and mosque, in addition to our ongoing educational projects elsewhere in Egypt and Bulgaria.

Investor relations - please keep in touch

Petroceltic places a high priority on effective investor relations and on regular contact with both retail and institutional owners and potential holders. We made over 25 separate announcements during 2013, attended 17 investor conferences across seven cities and carried out over 100 meetings with existing or prospective investors. We have also appointed a new Investor Relations Officer, Sarah Sweeney. In recognition of the broader scale of the business, we actively sought to extend the level of research analyst coverage and consequently now have over 10 analysts regularly writing research on Petroceltic, with more initiations expected over the coming months. If you have any queries for us, please call or email [email protected].

Looking ahead

Our industry has gone through significant changes in recent years, and there have been few material discoveries by independent oil and gas companies during the period. Despite this, I believe that the oil and gas business and Petroceltic in particular, has the potential to deliver very significant returns to shareholders. If 2013 was a year of integration and the creation of a new Petroceltic business, then 2014 is a year when the potential of a number of our most important exploration prospects will be tested through the drill bit. I look forward to keeping shareholders updated on our progress over the remainder of the year.

Brian O'Cathain

Chief Executive

FINANCIAL REVIEW

The financial results for 2013 reflect the first full year of operations of the enlarged business following the completion of the merger of Petroceltic and Melrose in October 2012. These results clearly demonstrate the transformation of Petroceltic from a pre-production, exploration and development company to a full cycle E&P company with the enhanced financial capacity that comes with a material cash generative production base. This increased financial activity has necessitated the continued development of the finance function to ensure the enlarged business is adequately supported to deliver the Group's strategic objectives. 

Revenue and operating costs

Revenue of $197m (2012: $59m) is comprised of $115m for petroleum sales in Egypt and $82m for gas sales in Bulgaria. The Group operates in low cost environments with an average operating cost in 2013 of $2.29 per boe (working interest basis). Cost of Sales of $119m (2012: $33m) includes depletion and decommissioning cost of $92m and production costs of $27m.

Exploration costs of $37m have been recorded to the income statement in the year, $32m relating to the cost of drilling unsuccessful wells in Egypt, Bulgaria and Romania in the year and approximately $5m of other new venture costs.

Financing activities

In April 2013, Petroceltic signed a HSBC and IFC led syndicated financing of up to $500m which replaced the previous 18 month $300m Bridge Facility with HSBC. This new facility was secured during a challenging period for the general banking market and more particularly a period in which the market re-assessed perceived risk in North Africa, including Egypt. The facility provides the Group with the financial support to fund its exploration and development commitments as well as additional capacity for future growth. The facility comprises two tranches: Tranche A is an industry standard Reserve Based lending Tranche of up to $375m; Trance B is a development financing Tranche of up to $125m, the availability of which is contingent on meeting certain development milestones on the Ain Tsila asset in Algeria. Total loans drawn at 31 December 2013 stood at $300 million and represented the maximum amount available at that time, while cash in hand was $54 million. Consequently, the Company had net debt of $246m and a net debt to equity ratio of 48% at year-end 2013. There are no additional loans in place.

The Group's drawn borrowings in the year were used to finance the Group's producing assets in Egypt and Bulgaria and therefore no borrowing costs were capitalised.

At the same time as it announces these preliminary results, the Company is also announcing a proposed Placing of new shares to raise $100 million. The proceeds of this Placing, which remains subject to shareholder approval, will provide the Group with the financial flexibility to undertake all of its currently planned exploration programmes, continue the current pace of progress on the Ain Tsila development pending completion of the second farm-out to Sonatrach and to maintain an appropriate balance of debt and equity funding within the business.

Fair value

On the date of the merger with Melrose in 2012, the assets and liabilities of Melrose were included in the accounts of Petroceltic at their fair values on that date based on the overall transaction value of $222m. Within one year of the transaction, it is permitted under the relevant accounting standard to review the fair values of the acquired assets and liabilities and, should any adjustment be required to their value, for such restatement to be reflected in the 2012 comparatives. The fair value calculations were reviewed in 2013 and no adjustment to the previously reported fair value amounts has been made.

Profit/loss for the year

The loss for the year was $18.8m (2012: $20m). This loss arose as a result of exploration costs written off (as discussed above) of $37m and costs of financing of $22m, which included $4m of accelerated amortisation of fees related to the Bridge Facility that was repaid in May 2013. In addition, administration expenses also included costs of $1.5m relating to the postponed move to the Official Lists of the London and Irish Exchanges and the proposed new holding company Scheme of Arrangement. This move to the Official Lists of the UKLA and the Irish Stock Exchange is expected to be completed in the third quarter of 2014; therefore further costs are expected to be incurred in 2014.

Dividend policy

No dividend is proposed in respect of 2013 (2012: Nil). The principal investment focus of the Group over the coming years continues to be centred upon the on-going development of its asset base, most notably in Algeria. However, the dividend policy of the Group will be regularly reviewed based on performance, investment obligations and overall shareholder value.

Capital expenditure programmes

The enlarged Group undertook an extensive capital expenditure programme in the year totalling $161m, which was primarily invested in the on-going development activity in Egypt, the completion of production infrastructure on a pre-existing discovery in Bulgaria and exploration drilling in Bulgaria, Romania and Kurdistan. Both the range of capital expenditure and geographical spread of the expenditure reflect the diverse portfolio of exploration, development and production assets that now exists within the Group.

Based on current plans, capital expenditure for 2014 is forecast to be circa $130m, of which $35m relates to the early development work on the Ain Tsila gas development in Algeria. Following the completion of the transfer of 18.375% of the Group's interest in the Ain Tsila asset to Sonatrach, a significant proportion of these costs will be funded by Sonatrach as part of the development carry structure agreed in the transaction.

In line with our strategy, the Group will continue to fund planned exploration and development expenditure from existing cash resources, cashflow from operations and the proposed share placing, proceeds from portfolio management and debt availability.

Litigation

In July 2013, the Group issued legal proceedings in the Irish High Court against two former consultants to the Group, Mr Seghir Maza and Mr Samir Abdelly and against a Tunisian company owned and controlled by Mr Abdelly, seeking to set aside a number of consultancy agreements entered into in 2004 and 2005 with respect to the Group's North African business activities. The proceedings also seek the return of significant payments that were made to the Consultants under those agreements during 2005 and 2006.

The financial statements do not contain any provisions relating to these contracts or proceedings other than amounts relating to normal legal and associated advisory costs.

Share consolidation

In May 2013, the shareholders approved a consolidation of the ordinary share capital of the Company, on the basis of one new share for every 25 old shares. The share consolidation became effective on 10 June 2013 and has positioned the Company's share price in a range that the board believes is more appropriate to the size of the Group, and that is broadly comparable to Petroceltic's peer group.

Finance function overview

In early 2013, the finance teams from Melrose and Petroceltic were brought together to form an integrated finance function fully equipped to support the long term strategy of the business. This integration has been successfully achieved and now forms an integral piece of the overall financial structure of the Group.

In addition, the Group is continuing to enhance the internal control framework to ensure all the relevant controls and processes are in place to support the current environment and any additional requirements that would come into effect on the step up to the Official Lists of the UKLA and the Irish Stock Exchanges. In parallel with this process and in conjunction with the Audit Committee, the Group is in the process of developing an internal audit function appropriate to the size and complexity of the business.

Investor relations

During 2013, the CEO, COO and CFO as well as other members of the Petroceltic management team held regular meetings with analysts and institutional investors which has resulted in increased analyst coverage and new shareholders in Europe, US, UK and Ireland. In addition to these regular meetings, the Group held a very successful capital markets day in February 2013 in London where Petroceltic senior management presented the strategy and plans for the enlarged Group to an audience of analysts, institutional investors and other finance professionals.

Accounting policies

The Group's accounting policies and standards comply with IFRS as adopted by the EU and as required by the rules of the AIM and the ESM Markets.

Tom Hickey

Chief Financial Officer

Summary REPORT OF THE DIRECTORS

The following information has been extracted from the Directors' report which forms part of the Annual Report of Petroceltic International plc (the "Company") and its subsidiaries (collectively "the Group"), for the year ended 31 December 2013.

Directors

The following are the Directors of Petroceltic International plc - all of whom were in office for the full year except as stated:

Robert Adair, Non-executive Chairman

Brian O'Cathain, Chief Executive Officer.

Tom Hickey, Chief Financial Officer

David Thomas, Chief Operating Officer

James Agnew, Senior Independent Director

Hugh McCutcheon, Non-executive Director and Deputy Chairman

Rob Arnott, Non-executive Director

Alan Parsley, Non-executive Director

Ian Craig, Non-executive Director (appointed 16 September 2013)

Con Casey, Non-executive Director (resigned 7 June 2013)

Directors' responsibility statement

The Directors are responsible for preparing the annual report and the Group and Company financial statements, in accordance with applicable Irish law and regulations.

Company law requires the Directors to prepare Group and parent Company financial statements for each financial year. As required by AIM and ESM rules and as permitted by company law, the Directors have prepared the Group financial statements in accordance with International Financial Reporting Standards ('IFRS') as adopted by the EU and have elected to prepare the Company financial statements in accordance with EU IFRS, as applied in accordance with the provisions of the Irish Companies Acts, 1963 to 2013 (the 'Companies Acts').

The Group and Company financial statements are required by law and IFRS to present the financial position, performance and prospects of the Group. The Companies Acts provide, in relation to such financial statements, that references in the relevant part of the Acts to financial statements giving a true and fair view are references to their achieving a fair presentation.

In preparing each of the Group and Company financial statements, the Directors are required to:

· select suitable accounting policies and then apply them consistently;

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

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

Under applicable law, the Directors are also responsible for preparing a Directors' Report. The Directors are responsible for keeping proper books of account that disclose with reasonable accuracy at any time the financial position of the Group and Company and enable them to ensure that its financial statements comply with the Companies Acts. They are also responsible for taking such steps as are reasonably open to them to safeguard the assets of the Group and Company and to prevent and detect fraud and other irregularities.

The Directors have decided to voluntarily prepare a Corporate Governance Statement although the Company is not required to comply with the UK Corporate Governance Code which is applicable to companies with full listings on the main markets of the Irish and London Stock Exchanges. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in Ireland governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Group activities and results

The Group is involved in oil and gas exploration and production and it has a portfolio of producing and high impact development and exploration assets. A detailed business review is included in the Chairman's Statement and the Chief Executive's Review and the Financial Review.

A loss of $18.8m was recorded for the year (2012: loss of $20m). Net assets of the Group at 31 December 2013 amounted to $510.9 million (2012: $524.7million). No dividends are proposed (2012: no dividend).

Share consolidation

At the Annual General Meeting of the Company held on 30 May 2013, shareholders approved, inter alia, a consolidation of the ordinary share capital of the Company, on the basis of one new share for every 25 old shares. The share consolidation became effective on 10 June 2013.

Going concern

The Directors have considered carefully the financial position of the Group and, in that context, have reviewed cash flow forecasts for the period to 30 June 2015. These forecasts show that a combination of cash resources on hand, committed availability under Senior Bank facilities and the proceeds of portfolio management and equity fundraising will enable the Company to discharge its debts as they fall due and to continue to develop its business in accordance with its strategy.

On this basis, the Directors are satisfied that it is appropriate to prepare the financial statements on a going concern basis. A further summary of funding and liquidity, including the principal assumptions to the cash flow forecasts, is included in the Statement of Accounting Policies (note 1 to the financial statements).

Update on legal proceedings

In July 2013, the Group issued legal proceedings in the Irish High Court against two former consultants to the Group, Mr Seghir Maza and Mr Samir Abdelly ("the Consultants"), and against a Tunisian company owned and controlled by Mr Abdelly ("AAIC"), seeking to set aside a number of consultancy agreements entered into in 2004 and 2005 with respect to the Group's North African business activities. The proceedings also seek the return of significant payments that were made to the Consultants under those agreements during 2005 and 2006.

Petroceltic's action followed the receipt of correspondence during 2013 threatening legal proceedings against the Group on behalf of one of the consultants seeking payment of sums totalling $3.4 million pursuant to these agreements. The agreements contain provisions under which the parties could make claims for further material payments from the Group.

In November 2013, the High Court of Ireland granted the Company judgment, in default of appearance, against Mr Maza and granted all reliefs sought by the Company in the proceedings, including judgment in the amount of $4.7 million, being amounts previously paid under one of the consultancy agreements, plus interest from the date of judgment. The proceedings against Mr Abdelly and AAIC are on-going and the ultimate outcome of these proceedings, by their nature, remains subject to inherent uncertainty.

Principal risks and uncertainties

The Group has a risk management structure in place which is designed to identify, manage and mitigate business risk. Risk assessment and evaluation is an essential part of the Group's internal control system.

Share price

The share price movement in the year ranged from a low of Stg133.0p to a high of Stg196.5p (2012: Stg140.0p* to Stg247.5p*). The share price at year end was 175.0p (2012: Stg175.0p*).

* The actual amount of these share prices has been multiplied by 25 to reflect the effect of the share consolidation completed on 10 June 2013.

Directors' interests

The beneficial interests of the Directors and their families who held office at the date of approval of the Annual Report and at 31 December 2013 in the share capital of the Company are as follows:

* Or date of appointment if later.

+ These shareholdings reflect the position after the 25 for 1 consolidation in June 2013.

The beneficial interest of Robert Adair at 15 May 2014 includes 40,445,802 ordinary shares held by Skye Investments Limited, a company in which he has a controlling interest.

All the above shareholdings are beneficially held. No Director or any member of their immediate families had an interest in any subsidiary.

Significant shareholdings

The Company has been informed that as at 15 May 2014, the following shareholders own 3% or more of the issued share capital of the Company:

The Directors are not aware of any other holding of 3% or more of the issued share capital of the Company.

Political and charitable donations

No political donations were made by the Group during the year (2012: nil). Charitable donations made by the Group during the year amounted to $262,000 (2012: $45,000).

Subsidiary undertakings

Details of principal subsidiary undertakings are given in note 24 to the financial statements.

Additional information

The rights and obligations attaching to the Company's ordinary shares, in addition to those conferred on their holders by law, are set out in the Company's Articles of Association, a copy of which can be obtained from the Company's website, Companies Registration Office or by writing to the Company Secretary. The holders of ordinary shares are entitled to receive the Company's Annual Report and Accounts, to attend and speak at general meetings of the Company, to appoint proxies and to exercise voting rights. The Company may amend its Articles of Association by special resolution at a general meeting.

Books and accounting records

The Directors are responsible for ensuring proper books and accounting records, as outlined in Section 202 of the Companies Act 1990, are kept by the Company. The Directors, through the use of appropriate procedures and systems and the employment of competent persons, have ensured that measures are in place to secure compliance with these requirements. These books and accounting records are maintained at 75 St. Stephen's Green, Dublin 2.

Auditor

The auditors, KPMG, Chartered Accountants, will continue in office in accordance with Section 160(2) of the Companies Act, 1963.

independent auditor's report

Independent auditor's report to the directors of Petroceltic International plc

We have examined the Summary consolidated financial statements of Petroceltic International plc ("the Company") for the year ended 31 December 2013 which comprise the Consolidated Income Statement, the Consolidated Balance Sheet, the Consolidated Statement of Changes in Equity, the Consolidated Cash Flow Statement and the related notes.

Respective responsibilities of the directors and the auditor

The Directors are responsible for preparing the Summary consolidated financial statements on the basis of information derived from the Company's audited statutory consolidated financial statements for the year ended 31 December 2013 and for compliance with provisions of regulation 40 of the European Communities (Companies: Group Accounts) Regulations 1992 regarding presentation of abbreviated consolidated financial information.

Our responsibility is to report to you on the consistency of the Summary consolidated financial statements with the audited statutory consolidated financial statements and the Directors' Report, and its compliance with the relevant requirements of regulation 40 of the European Communities (Companies: Group Accounts) Regulations 1992.

We also read the other information contained in the Preliminary Results Announcement and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Summary consolidated financial statements.

We conducted such procedures as we considered necessary for us to determine whether the Summary consolidated financial statements are consistent with the Company's statutory consolidated financial statements in accordance with Bulletin 2008/3 issued by the Auditing Practices Board. Our report on the Company's statutory consolidated and company financial statements, which we issued on 15 May 2014, describes the basis for our opinion on those financial statements and on the Directors' Report.

Opinion

In our opinion, the Summary consolidated financial statements are consistent with the audited statutory consolidated and company financial statements of the Company for the year ended 31 December 2013 and comply with the applicable requirements of regulation 40 of the European Communities (Companies: Group Accounts) Regulations 1992.

On 15 May 2014, we issued an independent auditor's report on the statutory consolidated and company financial statements of Petroceltic International plc for the year ended 31 December 2013. Our report was not modified in any respect and our opinion on those financial statements was issued without qualification.

David Meagher

for and on behalf of KPMG

Chartered Accountants, Statutory Audit Firm

15 May 2014

1 Stokes PlaceSt. Stephen's GreenDublin 2Ireland

Consolidated Income Statement

for the Year Ended 31 December 2013

The loss for the year is derived entirely from continuing operations and is 100% attributable to equity shareholders of the Company.

There was no other comprehensive income during the current or prior year.

CONSOLIDATED BALANCE SHEET

AS AT 31 DECEMBER 2013

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2013

CONSOLIDATED CASH FLOW STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2013

NOTES TO THE Summary FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2013

1. Statement of Accounting Policies

Petroceltic International plc ("Petroceltic" or "the Company") is a company incorporated in Ireland. These Summary consolidated financial statements, have been prepared by the Directors on the basis of information extracted from the statutory consolidated and company financial statements of the Group and Company for the year ended 31 December 2013. The summary consolidated financial statements consolidate those of the Company and its subsidiaries (together referred to as "the Group").

These Summary Financial Statements for the years ended 31 December 2013 and 2012 are not the statutory consolidated and company financial statements of the Company. The statutory consolidated and company financial statements of the Company for the year ended 31 December 2012, to which an unqualified audit opinion was attached, were annexed to the annual return of the Company and filed with the Registrar of Companies. The statutory consolidated and company financial statements of the Company for the year ended 31 December 2013 were approved by the Board of Directors and authorised for issue on 15 May 2014 and will be filed with the Registrar of Companies following the Company's annual general meeting. A report was issued by the Group's auditor, KPMG, Chartered Accountants and Registered Auditor, on those statutory financial statements in accordance with section 163 of the Companies Act, 1963. Their report was not modified in any respect and their opinion on the financial statements was issued without qualification.

A. Statement of compliance

As required by AIM and ESM rules and permitted by Company Law, the Group financial statements have been prepared in accordance with IFRS as adopted by the EU. The individual financial statements of the Company (Company financial statements) have been prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the Companies Acts, 1963 to 2013, which permits a Company, that publishes its Company and Group financial statements together, to take advantage of the exemption in Section 148(8) of the Companies Act, 1963, from presenting to its members its Company income statement and related notes that form part of the approved Company financial statements.

The IFRSs adopted by the EU as applied by the Company and Group in the preparation of these financial statements are those that were effective for accounting periods ending on or before 31 December 2013 or which were early adopted as indicated below.

The accounting policies adopted are consistent with those of the previous year except for the following new and amended IFRS and IFRIC interpretations which were adopted by the Group as of 1 January 2013:

IFRS 7 Financial Instruments: Disclosures (Amended)

IFRS 13 Fair Value Measurement

IAS 1 Presentation of Financial Statements (Amended)

IAS 12 Income Taxes (Amended)

IAS 16 Property, Plant and Equipment (Amended)

IAS 19 Employee Benefits (2011)

IAS 32 Financial Instruments: Presentation (Amended)

IAS 34 Interim Financial Reporting (Amended)

None of these had a significant impact on the results or financial position of the Group for the year ended 31 December 2013.

Forthcoming requirements

A number of new standards or amendments to existing standards as set out below have been published and are mandatory for the Group in future accounting periods. The Group does not plan to adopt these standards early. In due course, the Group's on-going assessments to fully assess the extent of the impact of the changes prescribed by these standards on the Group's accounting policies will be finalised. Our current expectations are as follows:

· IFRS 9 Financial Instruments (2010) (Effective 1 January 2018): Introduces new requirements for classifying and measuring financial assets, for the classification and measurement of financial liabilities, and carrying over the existing de-recognition requirements for IAS 39 Financial Instruments. The standard could materially change the classification and measurement of the Group's financial instruments; (not fully EU endorsed).

· IFRS 10 Consolidation Financial Statements (Effective 1 January 2014): Introduces new principles for determining how an entity should be included in the consolidated financial statements of the parent company. The standard also provides additional guidance to assist in the determination of control where this is difficult to assess. The current assessment is that this standard is not expected to change the classification of entities in which the Group holds interests but this assessment is subject to finalisation.

· IFRS 11 Joint Arrangements (Effective 1 January 2014): Replaces IAS 31 Interests in Joint Ventures. Requires a party to a joint arrangement to determine the type of joint arrangement in which it is involved by assessing its rights and obligations and then account for those rights and obligations in accordance with that type of joint arrangement. The Group is currently completing an assessment of its arrangements to determine whether they fall to be classified as joint ventures or joint operations under the criteria set out in IFRS 11. Early indications are that the standard will not impact significantly on the Group's reported financial position in future financial statements.

· IFRS 12 Disclosure of Interests in Other Entities (Effective 1 January 2014): Requires the extensive disclosure of information that enables users of financial statements to evaluate the nature of, and risks associated with, interests in other entities and the effects of those interests on its financial positions, financial performance and cash flows. No significant impact is anticipated.

· IAS 27 Separate Financial Statements (Effective 1 January 2014): Now only deals with requirements for separate financial statements. Requirements for consolidated financial statements are now contained in IFRS 10 Consolidated Financial Statements. No significant impact is anticipated.

· IAS 28 Investments in Associates and Joint Ventures (2011) (Effective 1 January 2014): Accounting for investments in associates and sets out the requirements for the application of the equity method when accounting for investments in associates and joint ventures. No significant impact is anticipated.

· IAS 32 Financial Instruments: Presentation (Effective 1 January 2014): Outlines basis for offsetting of financial assets and liabilities. No significant impact is anticipated.

In addition, the IASB's Annual Improvements Process, together with some minor amendments to other existing standards, are being assessed by the Group.

B. Basis of preparation

The Group and Company financial statements are prepared on the historical cost basis, except for assets acquired under business combinations and derivative instruments, which are carried at fair value, and equity settled share option awards and warrants which are measured at grant date fair value. The accounting policies have been applied consistently by all Group entities. The financial statements are presented in US dollars, rounded to the nearest thousand.

C. Going concern

The Directors have considered carefully the financial position of the Group and, in that context, have reviewed cash flow forecasts for the period to 30 June 2015.

The principal assumptions underlying the forecast are that:

• the proposed share placement to be announced on 16 May raises $100 million before costs

• the farm-out of an interest in the Ain Tsila gas condensate development to Sonatrach is completed as anticipated with timely receipt of related consideration

• production revenues and operating and capital expenditure are in line with commitments and current expectations

• the Senior Bank Facility continues to operate in accordance with its terms

• The step up to the Official Lists and associated corporate restructuring are effected as planned

The cash flow forecasts for the period to 30 June 2015 show sufficient cash resources on hand to enable the Group to discharge its debts as they fall due and to continue to develop its business in accordance with its strategy.

On this basis, the Directors are satisfied that it is appropriate to prepare the financial statements on a going concern basis.

D. Accounting judgements and estimates

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

In particular, significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are set out as follows:.

E. Consolidation

The consolidated financial statements comprise the financial statements of Petroceltic International plc and its subsidiaries for the year ended 31 December 2013.

Subsidiaries are entities controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. Subsidiaries are fully consolidated from the date that control commences until the date that control ceases. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

Intragroup balances and any unrealised gains and losses or income and expenses arising from intragroup transactions are eliminated in preparing the Group financial statements.

F. Business combinations

Business combinations are accounted for using the acquisition method on the date on which control is transferred to the Group. The merger of Petroceltic and Melrose completed on 10 October 2012, with Petroceltic shares issued in exchange for Melrose shares. On completion, Petroceltic shareholders owned 54% of the enlarged group with Melrose shareholders owning the remainder. Petroceltic was the deemed acquirer in the transaction for the purposes of acquisition accounting under IFRS.

This merger qualified as a business combination and IFRS 3 'Business Combinations' required the transaction to be recorded for financial reporting purposes using the acquisition method. All identifiable assets and liabilities that satisfy the recognition criteria were included in the acquirer's balance sheet at fair value (purchase price allocation). Fair value is defined in IFRS 3 as 'the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction'. Costs related to the acquisition, other than those associated with the issue of debt or equity securities were expensed as incurred.

G. Revenue recognition

Revenue from the sale of oil, oil liquids and gas in Egypt and Bulgaria is recognised at the fair value of consideration received or receivable when the significant risks and rewards of ownership are transferred to the buyer and it can be reliably measured. The revenue of the Group in Egypt is calculated under the terms of production sharing agreements between the Group and its partner (a state owned company). Revenue is reported to include income taxes and royalties payable which are settled on the Company's behalf by the Egyptian authorities. Other revenue represents royalty income. Realised gains and losses arising from cash flow hedges relating to oil and gas pricing are added to or deducted from turnover.

H. Property, plant & equipment and intangible assets

Property, plant and equipment consists of production and development assets in Algeria, Bulgaria and Egypt and a royalty right over certain Kinsale gas fields. Intangible assets comprise exploration and evaluation assets in Bulgaria, Egypt, Italy, Kurdistan Region of Iraq and Romania.

Exploration and evaluation assets

Expenditure incurred prior to obtaining the legal rights to explore an area is written off to the consolidated income statement. Expenditure incurred on the acquisition of a licence interest is initially capitalised on a licence by licence basis based on the fair value of the consideration paid. Exploration and evaluation expenditure incurred, including directly attributable borrowing costs, in the process of determining exploration targets on each licence is also capitalised. This expenditure is held undepleted within the exploration licence asset until such time as the exploration phase on the licence area is complete or commercial reserves have been recognised, subject to any impairment losses recognised. This is in accordance with IFRS 6, 'Exploration for and Evaluation of Mineral Resources'.

Exploration and evaluation drilling costs are capitalised on a well by well basis within each licence until the success or otherwise of the well has been established. Unless further exploration and evaluation expenditure in the area of the well has been planned and agreed or unless the drilling results indicate that hydrocarbon reserves exist and there is a reasonable prospect that these reserves are commercial, drilling costs are written off on completion of a well.

Depletion

Depletion of development and production assets is calculated on a field or a concession basis as appropriate. The calculation is based on proved and probable reserves using the unit of production method; any changes are recognised prospectively.

Impairment and ceiling test of oil and gas assets

Exploration and evaluation expenditures which are held as intangible assets under IFRS 6 are reviewed at each reporting date for indicators of impairment. If such indicators exist then the assets are tested for impairment by allocating the relevant item to a CGU or a group of CGUs. An impairment test is also carried out before the transfer of costs related to assets which are being transferred to development and production assets following a declaration of commercial reserves. This impairment test is carried out in accordance with IAS 36, 'Impairment of Assets', which requires that the impairment be calculated on the basis of a CGU, which in the Group's case is defined to be a field or a concession, as appropriate.

A review for impairment indicators is also carried out at least annually on the capitalised costs in development and production assets. This is carried out on a field or a concession basis, as appropriate. Under oil industry standard practice this impairment test is calculated on a value in use basis by comparing the net capitalised cost with the net present value of future pre-tax cash flows which are expected to be derived from the field or concession. Key assumptions and estimates in the impairment models relate to commodity prices which are based on commercial reserves and the related cost policies. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

Reversals of impairment

An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

Jointly controlled operations

Jointly controlled operations are activities where the Group has joint control, established by contractual agreement. From time to time, the Group enters into farm-in and farm-out arrangements that result in jointly controlled assets. In these situations, the Group accounts for only its share of assets, liabilities, income and expenditure relating to the jointly controlled operations.

Non oil and gas assets

Plant and equipment is stated at cost less accumulated depreciation. Subsequent costs are included in an asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group. Non oil and gas plant and equipment is depreciated over its expected useful economic life on a straight-line basis at the following rates:

IT infrastructure: 33.3% straight-line

Furniture & equipment: 10% to 33% straight-line

The residual value and useful lives of plant and equipment are reviewed annually and adjusted if appropriate at each reporting date.

On disposal of property, plant and equipment the cost and related accumulated depreciation are removed from the financial statements and the net amount, less any proceeds, is taken to the consolidated income statement.

Royalty asset

The royalty asset is carried at cost, net of accumulated amortisation. Amortisation is charged in the proportion that the current year's production bears to the total anticipated production from the start of the financial year to the end of the gas field's life. Changes in estimated production are accounted for prospectively.

I. Decommissioning provisions

Provisions are made for the decommissioning or abandonment of oil and gas wells and associated infrastructure. A provision is recognised when the Group has an obligation as a result of past events, and it is probable that an outflow of resources will be required to settle the obligation. The amount recognised as a provision is the estimated cost of decommissioning and a corresponding amount is added to the carrying value of the related asset. Changes in the decommissioning cost estimates are dealt with prospectively by recording an adjustment to the provision and a corresponding adjustment to the related asset. The decommissioning provision is reviewed annually.

J. Foreign currency

The Directors have determined that, in accordance with IAS 21, the functional currency of the Company and its subsidiaries is the US dollar. The Group and Company financial statements are presented in dollars and accordingly no foreign currency translation reserve arises.

Foreign currency transactions

Transactions in foreign currencies are translated to the functional currency of Group entities at exchange rates at the dates of the transactions. For practical reasons, this is taken as the monthly average exchange rate where these rates are a reasonable approximation of actual rates. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. Foreign currency differences arising on retranslation are recognised in profit or loss. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date of the transaction. Ordinary share capital denominated in Euro is translated to the functional currency at the date of issue and is not remeasured thereafter.

K. Taxation

Income tax expense comprises current and deferred tax. Income tax expense is recognised in profit or loss except to the extent that it relates to items recognised directly in other comprehensive income, in which case it is recognised in other comprehensive income.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is recognised using the liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: those arising on the initial recognition of goodwill, those arising on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they probably will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.

A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which temporary differences can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

L. Retirement benefit obligations

The Group contributes to defined contribution pension schemes for certain members of staff. Pension scheme costs are accounted for on an accruals basis.

M. Share-based compensation and warrants over shares

The Group issues share options and makes conditional grants of performance shares (PSP shares) as an incentive to certain key management and staff (including Executive Directors). In the Group financial statements, the fair value of share options and PSP shares granted to employees is recognised as an expense with a corresponding credit to the share-based payments reserve. The cost of share-based payments relating to employee share options and PSP shares is borne by subsidiary companies as the employees are employed in the subsidiary. Consequently, the grant date fair value of share options granted to employees under the Company's option schemes is recognised as an increase in investment in subsidiaries with a corresponding credit to the share-based payments reserve. In the subsidiary company, the cost of share options granted to employees is recognised as an expense with a corresponding credit to the capital contribution reserve.

The fair value is measured at grant date and this is expensed in the consolidated income statement with the charge being spread over the period during which the awards vest. The fair value is measured using a binomial lattice model, taking into account the terms and conditions upon which the options were granted. A discount for market conditions has been applied to the fair values determined by the binomial model based on a Monte Carlo simulation analysis. The options issued are subject to both market based and non-market based vesting conditions. Market conditions are included in the calculation of fair value at the date of the grant. Non-market vesting conditions are not taken into account when estimating the fair value of awards as at grant date; such conditions are taken into account through adjusting the number of equity instruments that are expected to vest. Nil-cost options granted under the PSP are only exercisable if the TSR of Petroceltic's shares equals or exceeds the median of the peer group TSR over the vesting period, because of the nature of this market performance condition, the Monte Carlo simulation technique has been used to calculate the fair value. This involves simulating one possible path of the TSR for Petroceltic's shares and possible paths of the TSR of peer group companies. It is then tested to see whether the Company's TSR has outperformed the peer group. This process is then repeated many thousands of times and the option value is the average value from all the simulations.

The Group has issued warrants in connection with a number of transactions with third parties. Where the fair value of the goods and services provided by the third party as compensation for the warrant issuance is observable, the warrants are measured on that basis. In other instances, the fair value of warrants issued is determined in accordance with IFRS 2 based upon a valuation model.

The proceeds received on exercise of options or warrants, net of any directly attributable transaction costs, will be credited to share capital (nominal value) and share premium when options or share warrants are converted into ordinary shares.

N. Earnings per share

The Group presents basic and diluted earnings per share ("EPS") data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise share options granted to employees and warrants.

O. Operating leases

Operating lease payments are recognised as an expense in the consolidated income statement on a straight line basis over the lease term.

P. Financial instruments

(i) Non-derivative financial assets

Cash and cash equivalents

Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short term deposits with an original maturity of three months or less. Bank overdrafts that are repayable on demand and form part of the Group's cash management are included as a component of cash and cash equivalents for the purpose of the cash flow statement.

Trade and other receivables

Trade and other receivables are stated at cost less impairment, which approximates fair value given the short-term nature of these assets.

(ii) Non-derivative financial liabilities

The Group initially recognises debt securities issued and subordinated liabilities on the date that they are originated. The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expire.

Financial assets and liabilities are offset and the net amount presented in the balance sheet when, and only when, the Group has a legal right to offset the amounts and intends to settle on a net basis. Other financial liabilities comprise loans and borrowings, bank overdrafts, and trade and other payables.

The Group classifies non-derivative financial liabilities into the other financial liabilities category. Such financial liabilities are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest method.

(iii) Derivative financial assets and liabilities

Derivatives are recognised initially at fair value in the balance sheet; attributable transaction costs are recognised in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are recognised immediately in profit or loss.

(iv) Equity financial instruments

Share capital

Ordinary shares are classified as equity instruments. Costs directly attributable to the issue of ordinary shares and share options are recognised as a reduction in equity.

Q. Finance income and costs

Finance income comprises interest income on funds invested and foreign currency gains. Interest income is recognised as it accrues, using the effective interest rate method.

Finance expense comprises interest arising on borrowings calculated using the effective interest rate method, foreign currency losses and unwinding of the discount on provisions. Borrowing costs, which include all directly attributable costs and fees together with the deemed cost of warrants or other equity instruments issued in connection with borrowing, that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the costs of the asset, in accordance with IAS 23 'Borrowing Costs'. Qualifying assets are assets that necessarily take a substantial period of time to get ready for their intended use or sale, such as intangible assets during the development period.

R. Segmental information

In accordance with IFRS 8: 'Operating Segments', the Group has four principal reportable segments which are the Group's strategic business units as follows:

Algeria: Oil and gas development in Algeria

Egypt: Oil and gas production in Egypt

Black Sea: Oil and gas exploration and production in Bulgaria and Romania

Kurdistan Region of Iraq: Oil and gas exploration in the Kurdistan Region of Iraq

Other operations "Corporate & other Europe" includes cash resources held by the Group, interest income earned and other operational expenditure incurred by the Group including Italy, Greece and royalty income from certain gas fields in Ireland. These areas are not within the definition of an operating segment.

The chief operating decision maker has been identified as the Executive Directors. The Executive Directors review the Group's internal reporting in order to assess performance and allocate resources and the Group has determined the operating segments based on this reporting.

The Executive Directors consider the business from a geographic perspective and assess the performance of principal reporting segments based on results from operations. The information provided to the chief operating decision maker is measured in a manner which is consistent with the financial statements.

2. Revenue and segmental information

*Administrative expenses incurred in Algeria, Kurdistan, Romania and Italy have been capitalised within exploration and evaluation assets.

Oil and gas revenues are generated in Egypt and Bulgaria. Three of the Group's customers accounted for more than 10% of revenue in 2013 (2012: two customers). All Egyptian revenue in 2012 and 2013, as set out in the tables above, is receivable from EGPC, an Egyptian state owned company. Bulgarian revenues include $45.8m (2012: $24.6m) from Bulgargaz EAD, a Bulgarian state owned company, and $35.7m (2012: $0.6m) from Agripolychim, an independent chemicals company.

For segmental analysis of capital expenditure see notes 9 and 10.

3. Acquisition of subsidiary in the prior year

The merger of Petroceltic International plc and Melrose Resources plc completed on 10 October 2012, with Petroceltic shares issued in exchange for Melrose shares. On completion, Petroceltic shareholders owned 54% of the enlarged group with Melrose shareholders owning the remainder. Petroceltic was the deemed acquirer in the transaction for the purposes of acquisition accounting under IFRS.

Consideration transferred

At completion, Melrose shareholders received 17.6 Petroceltic ordinary shares in exchange for each Melrose ordinary share. In addition, a special dividend of Stg4.7p per Melrose share was paid by Melrose to Melrose shareholders to a total value of $8.71m. The liability for this amount was included in the Melrose balance sheet at the date of acquisition and was settled subsequently. The fair value of the Petroceltic ordinary shares issued was $222m, and was based on the listed share price of the Company at 10 October 2012 of £0.069 per share with 2,018,830,085 new shares issued.

Fair value of identifiable assets acquired and liabilities assumed

Property plant and equipment was recognised at fair value on acquisition whereby the value attributed to the acquired assets was independently calculated by a third party taking account of future cash flows relating to each category of asset. The resulting valuation was then risk adjusted in accordance with the Director's estimate of risk associated with the recovery of that cash flow.

Intangible assets were recognised at fair value on acquisition whereby the value attributed to the acquired assets was calculated taking account of estimated future cash flows on identified prospects. The resulting valuation was then risked in accordance with the Director's estimate of the chance of success of each prospect. Where a market value was available to assess the fair value of the intangible asset, this was recognised as the fair value of that asset.

The trade receivables comprised gross contractual amounts due of $133.6m, all of which were deemed recoverable and related to the Bulgarian and Egyptian assets. The Directors' were of the opinion that the fair value of the receivables was not materially different from the acquired value.

The decommissioning provision related to plugging, abandonment and restoration of facilities and well sites. These costs were expected to be incurred between 2013 and 2033.

If new information became available within one year from the acquisition date relating to facts and circumstances that existed at the acquisition date which would result in material adjustments to the above amounts, or require further provisions than those that existed at the acquisition date, then the acquisition accounting would have been revised. The fair value assessments were reviewed in 2013 and no adjustments to the above fair value amounts have been made.

All share option and similar incentive schemes relating to the acquired entity were cancelled at the date of the transaction and no liabilities remain outstanding.

The fair value of the consideration transferred was equal to the fair value of the identifiable assets acquired and liabilities assumed and consequently no goodwill arose on the transaction.

Impact on the prior year Income Statement

In the period from 10 October to 31 December 2012, Melrose contributed revenue of $59m and profit after tax of $4m to the Group's results. If the acquisition had occurred on 1 January 2012, management estimates that consolidated revenue would have been $254m, and consolidated profit after tax for the year would have been $7m. In determining these amounts, management has assumed that the fair value adjustments that arose on the date of acquisition would have been the same if the acquisition had occurred on 1 January 2012.

Impact on prior year Cash Flow Statement

The prior year Cash Flow Statement reflects the activity of the Group for the entire period including the acquisition of the assets and liabilities of Melrose at 10 October 2012 (which are non cash acquisitions with the exception of cash acquired) and the movement on the acquired interests between 10 October and 31 December 2012.

Acquisition-related costs- prior year

The Group incurred acquisition-related costs of $6.4m related to external legal fees and due diligence costs. These costs were recognised in administrative expenses in the Group's consolidated income statement. Costs of $0.03m associated with the issue of new shares were netted against share premium.

4. Finance income and expense

5. Statutory information

Other assurance services provided by the auditor in 2012 and 2013 related primarily to the Melrose transaction and to the deferred step up to the main Stock Exchange listing, respectively.

For details of operating leases, see note 22.

6. Income tax expense

7. Employee data

At 31 December 2013, the total number of employees across the Group was 171 (2012: 154).

8. Earnings per share

The average market value of the Company's shares which would be used for the purposes of calculating the dilutive effect of share options and warrants was based on quoted market prices for the period in which the options and warrants were outstanding during the reporting period. However, the Group reported a loss for the year and the prior year and therefore the dilutive impact of share options and warrants is to reduce the loss per share and therefore is not dilutive. Consequently, the reported diluted loss per share is the same as the basic loss per share. Share options and warrants in issue as at 31 December 2013 would increase the weighted average number of shares by 7,562 (2012: 657,993, after restatement for 25:1 share consolidation).

9. Exploration and evaluation assets

* Relates to the costs associated with drilling exploration wells which were unsuccessful. Included in this balance was an amount of $11.1m relating to the write off in Romania on the Cobalcescu South-1 well in Block Ex-28, $16.5m relating to the write off in Bulgaria of the Kamchia-1 well; and $3.3m in relation to the Mesaha-1 exploration well in Egypt which was plugged and abandoned in February 2013. Following a technical review of the acreage the Group also relinquished the Casa Sparse, Vercelli and Civitaquana permits in Italy and wrote off an amount of $1.1m.

** Additions include a credit amount of $22.5m (2012: $nil) relating to Romanian cash calls funded by joint venture partners.

The Directors have considered the licence, exploration and appraisal costs capitalised in respect of all exploration and evaluation assets, which are carried at historical cost to the Group. These assets have been assessed for impairment, in particular with regard to remaining licence terms, likelihood of licence renewal, requirement for further expenditures and ongoing appraisal for each area, details of which are further described in the Chairman and Chief Executive's statements. The Directors have considered whether there are any indicators of impairment at 31 December 2013 and note that future realisation of the value of these oil and gas interests is dependent on further successful exploration activities. The Directors formed the view that no write offs or impairment charges; except for those disclosed, are required.

The Directors continue to assess the impact of the environmental legislation in Italy on the carrying value of the Group's assets of $15.1m. In light of new legislation the Group is in discussions with the relevant authorities with the aim of recommencing the appraisal of the BR268 prospect and reactivating previously suspended licences.

10. Property, plant and equipment

Reserves

The volume of recoverable proved plus probable reserves which it is estimated will be recovered from the Group's oil and gas properties has a direct impact on the calculation of the depletion charge in the development and production assets. This volume has been estimated by the Directors based on evaluations by independent consultants and on evaluations by senior management of the Group as reviewed by independent consultants.

Valuation of oil and gas development and production assets

These assets are reviewed annually for indicators of impairment or more frequently when there is an indication that the CGU may be impaired. The impairment assessment is undertaken by comparing the future discounted cash flows expected to be derived from production of commercial reserves (the value in use) against the carrying value of the asset. The cash flows are long term in nature, up to 20 years, and justified by the period required in order to complete the extraction of the oil and gas reserves. The assumptions involved in impairment measurements include estimates of commercial reserves and production volumes, future oil and gas prices and the level and timing of expenditures, all of which are inherently uncertain.

The net present value of future cash flows expected to be derived from the field/ concession was estimated based on the following pricing and volume assumptions:

These assumptions reflect current prices received on either the open market or from long term contracts and an assessment of future prices based upon externally available information. No growth in oil or gas prices has been assumed beyond a period of 5 years. Discount rates of 9.0% (2012: 9.0%) in Egypt and 8.0% (2012:8.0%) in Bulgaria were applied. Key assumptions were also made in respect of the future cost profiles of the on-going development and production of each field/concession. The estimates used are consistent with detailed field development or production plans which form a core part of the Group's operating strategy.

11. Investment in subsidiaries

Details of subsidiaries are set out in note 24.

12. Inventories

13. Trade and other receivables

* Included is a debt service reserve account of $6.0m which is held for security on loan interest repayments. These funds are not accessible to the Group in the normal course of business. The balance of $2.8m is a receivable relating to the Bulgarian concession agreement.

The Group's exposure to credit and currency risks related to trade and other receivables is set out in note 23.

14. Cash and cash equivalents

In addition to cash at bank, at 31 December 2013, the Group also maintained a balance of $6.0 million (2012: Nil) in a debt service reserve account (note 13).

15. Trade and other payables

The Group's exposure to currency and liquidity risks related to trade and other payables is set out in note 23.

16. Loans and borrowings

Interest-bearing loans and borrowings are measured at amortised cost. On 12 April 2013, the Group signed a financing agreement for up to $500m with a syndicate of international banks including mandated lead arrangers HSBC, the IFC (a member of the World Bank Group), Nedbank and Standard Chartered Bank and a facility amendment agreement was signed in April 2013. This facility replaced the $300m bridge facility provided exclusively by HSBC in 2012. The financing has two tranches: tranche A is a revolving senior Reserve Based Lending tranche of up to $375m; tranche B is a Development Financing Tranche of up to $125m. Availability under Tranche A was $300 million at 31 December, with no amounts available under tranche B at that time pending completion of security arrangements. Both tranches have an initial 5 year term and are extendable by 2 years, subject to lender consent. Amounts falling due within one year are the amounts projected to be repaid during 2014 in accordance with the terms of the facility. This facility is secured over the assets of the Group and contains representations and warranties, covenants and events of default typical for a loan facility of this nature.

17. Provisions

These provisions relate to the best estimates of costs expected to be incurred on the decommissioning of Algerian, Bulgarian and Egyptian wells and are expected to be incurred between 2014 and 2033 (2012: 2013 and 2032). The provision at 31 December 2013 represents the present value of the estimated cost, using existing technology at current prices (which are adjusted for estimated inflation), of decommissioning the Group's oil and gas wells and production facilities in Algeria, Bulgaria and Egypt. The discount factor used reflects an applicable risk free rate, taking into account the currency in which the provision will be settled. The discount factor used in 2013 was 3% (2012: 2%).

18. Deferred tax

Deferred tax assets and liabilities are attributable to the following:

Movement in deferred tax during the year

Unrecognised deferred tax assets and liabilities

Deferred tax assets not recognised in the Group, all of which relate to unrecognised tax losses, amounted to $28.1m (2012: $14.2m).

19. Share capital

On 7 June 2013, the ordinary share capital of the Company was consolidated on the basis of one new consolidated share for every 25 shares existing. The number of ordinary shares in issue was reduced from 4,388,435,134 to 175,537,405.

At year end, Directors hold 24% (2012: 24%) of ordinary shares and 26% (2012: 24%) assuming that all outstanding share options vest and are exercised. The maximum number of share options which can be outstanding is 10% of issued share capital.

20. Share-based payments: Share options and warrants

Group share schemes

The Group has made awards to employees under a number of share based payments arrangements, the '2004 Incentive Scheme', the '2009 Incentive Scheme', the '2013 Share Option Plan'; and the '2013 Performance Share Plan'. All awards made are equity-settled share-based payments as defined in IFRS 2. This standard requires that a recognised valuation method be employed to determine the fair value of awards. The fair value of awards has been arrived at through applying a binomial lattice model, with a discount for market conditions applied to the fair value determined by this model based on a Monte Carlo simulator analysis. Under the 2004 and 2009 Schemes, options awarded may only be exercised if predetermined growth rates in the Company's share price are achieved. In 2013, two further share option schemes were established, the PSP 'Performance Share Plan' and the SOP 'Share Option Plan'. The PSP scheme is open to executive directors and senior management with the SOP scheme being open to certain Petroceltic staff.

PSP Scheme: Nil cost options were granted on 16 September 2013 and 2 December 2013 with respective expiration dates of 16 March 2017 and 2 June 2017. Awards are exercisable only if the total shareholder return ("TSR"), the combination of any share price increase and any dividends paid, of Petroceltic's shares equals or exceeds the median of a peer group TSR of comparable listed entities over the vesting period. 25% vesting is achieved for median TSR and 100% vesting is achieved for upper quartile TSR performance. There is straight line vesting between median and upper quartile. The TSR is compared with a number of Peer Group companies over the three-year performance period. No part of the Award will vest unless the Group's performance is at or above the median of the Peer Group and the whole of it will vest if it is above the upper quartile. A scheme member will be able to exercise their Award to acquire ordinary shares, to the extent it has vested, at any time during the six-month period following the third anniversary of the Grant Date (the "Normal Vesting Date"). The Award expires at the end of that six-month period.

SOP Scheme: Awards were granted on 16 September 2013. Awards are exercisable at any time after the third anniversary of the grant date until the Option expires on the seventh anniversary of the grant date or the tenth anniversary in the case of UK based employees under an Inland Revenue approved scheme. The exercise price established, based on the market price at the date of grant, was Stg151.7p.

In 2011 and 2012, the Group issued warrants to Macquarie in lieu of arrangement and facility fees. The related loan facility was repaid in full on 13 February 2012. As at that date, warrants to acquire a total of 2,362,792 (pre consolidation 59,069,802) shares in the Company had been issued to Macquarie. All warrants were priced on the dates of individual issuance at prices from Stg113p to Stg206p based on the volume weighted average price during the five business days preceding each issuance. Under the facility;1.6 million of these warrants fall within the scope of IFRS 2 Share-based Payment and were recognised over the term of the facility. These costs were included within borrowing costs capitalised as part of the exploration and evaluation assets with the corresponding credit to the share based payment reserve. A further 762,792 warrants were issued in 2012, based on the amount and timing of drawings. The commitment to issue a variable number of warrants is a derivative financial liability for accounting purposes and is subject to measurement initially and subsequently at fair value. The initial fair value of the liability was offset against the carrying value of the loan on drawdown and was recognised over the term of the loan on an effective interest rate basis. This amount, together with interest payable, was included in borrowing costs capitalised as part of the exploration and evaluation assets during the term of the facility. Subsequent changes in the fair value of the derivative liability are recognised within finance income and expense in profit or loss. In 2013 an amount of $48,085 (2012: $0.3m) is recognised as finance income due to a movement in the fair value of the warrants.

In January 2014, Macquarie exercised their subscription rights relating to the first tranche of 600,000 warrants granted to them in October 2011 at a subscription price of Stg113p. The Total Received Ordinary Shares ('TROS') amounted to 240,845 and the aggregate nominal value paid in consideration of these shares was €75,264. These new shares were admitted to trading on the AIM and ESM exchanges on 14 January 2014.

The share-based payment charge for the year is as follows:

The movement on outstanding share options and issued warrants during the year was as follows:

The prior year comparative amounts have been adjusted to reflect the 25:1 share consolidation.

The value of share options which lapsed during the year was $2.06m. This has been recognised as a debit to the share based payment reserve and a credit to retained earnings. There were no options exercised during the year.

The assumptions used to determine the fair value of options granted were as follows:

The market-based vesting conditions in the 2004 Incentive Scheme require the share price of the Company to increase from the market value at grant date by 10% (standard options) or 20% (super options) per annum, compounded year on year from the effective date of grant to the exercise date. The market-based vesting conditions in the 2009 Incentive Scheme require the share price of the Company to achieve or exceed a figure which is 30% greater than the exercise price.

Expected share price volatility was determined by taking account of historical daily share price movements over the three years prior to grant date. The average expected term to exercise used in the models is based on the Directors' best estimate, taking account of behavioural conditions, forfeiture and historical experience.

The risk free rate has been determined from market yields for German government bonds with outstanding terms equal to the average expected term to exercise for each relevant grant.

At 31 December 2013, the following options and warrants over ordinary shares were outstanding:

\* These options were granted in Euro; the exercise price shown reflects the Sterling equivalent at grant date rates.

** These options expired on 25 March 2014.

*** These warrants were exercised in January 2013.

21. Related party transactions

Identity of related parties

The Company has a related party relationship with its subsidiaries and key management, which the Group defines to include Directors and senior management. There were no related party transactions in the Group or Company during the year other than as stated below.

Contract of significance

Under the terms of a Net Profit Interest Agreement relating to the Galata gas field in Bulgaria and originally entered into in 1998 an amount of $0.6m (2012: $nil) is payable in respect of 2013 to Orbis Holding Limited, a company in which David Archer (Managing Director, Black Sea) has a 50% beneficial interest.

Information regarding the Directors' remuneration, shareholdings and share options is contained in the audited part of the Directors' remuneration report. In addition to their salaries and other elements of their remuneration, the Executive Directors participate in the Group's share option schemes.

In the year ended 31 December 2013, the aggregate total remuneration (including healthcare benefits, pension and bonus but excluding share and share option incentive arrangements) paid by the Group to the senior managers (excluding Directors) was $3,752,025. In addition, $1,070,763 of the Group's non-cash charge in respect of share based payment arrangements referred to in note 20 relates to senior management.

22. Capital commitments and lease commitments

(a) Exploration and production expenditure:

The Group had capital commitments of $120m at 31 December 2013 (2012: $143m). The relevant cash outflows will occur over the period to December 2014.

(b) Total commitments payable under non-cancellable operating leases are as follows:

The Group has operating lease commitments in respect of office premises located in the Group's areas of operation.

During the year ended 31 December 2013, $1.4m (2012:$0.6m) was recognised as an expense in the consolidated income statement in respect of operating leases.

23. Financial instruments

(a) Overview of risk exposures and risk management strategy

The Group is exposed to various financial risks in the ordinary course of business including credit, liquidity, currency and interest rate risk. The Group's financial exposures are predominantly related to changes in commodity price, foreign exchange rates and interest rates as well as the creditworthiness of counterparties which impact on financial assets and liabilities. The Group has a risk management programme in place which seeks to limit the impact of these risks on financial performance and it is Group policy to manage these risks in a non-speculative manner. The Group has an established treasury risk policy in place.

This note presents information about the Group's exposure to each of the above risks, the objectives, policies and processes for measuring and managing the risk, and the management of liquid resources. Further quantitative disclosures are included throughout the notes to the accounts.

The Board of Directors has the overall responsibility for the establishment and oversight of the Group's risk management framework. The Board has reviewed the process for identifying and evaluating the significant risks affecting the business and the policies and procedures by which these risks will be managed effectively. The Board has embedded these structures and procedures throughout the Group and considers there to be a robust and efficient mechanism for creating a culture of risk awareness at every level of management.

The Group's overall risk management programme seeks to minimise potential adverse effects on the Group's financial performance from fluctuations in financial markets.

(b) Financial assets and liabilities - fair values

(i) Measurement of financial assets and liabilities

Financial assets and liabilities comprise:

The fair values of the loans and borrowings at 31 December 2013 was $300m. For all other financial assets and liabilities, the carrying amount is considered equal to fair value.

The method in which the fair value of loans and derivative instruments have been determined using the following hierarchy:

Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities.

Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly.

Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.

There were no transfers between Levels 1, 2 or 3 categories in the reporting period.

(ii) Derivatives

As set out in note 20, the commitment to issue a variable number of warrants to Macquarie is a derivative liability for accounting purposes. The liability was initially measured based on an estimate of the number of warrants potentially issuable under the Warrant Deed, taking into account the expected funds which would be drawn under the facility applied to the fair value per warrant at the measurement date. The fair value of an individual warrant was derived using an option pricing model, the inputs to which are more fully described in note 20 to the financial statements. The number of warrants potentially issuable became fixed on the settlement of the Macquarie facility in February 2012 and fair value changes arise primarily in respect of movements in the share price of Petroceltic and foreign currency rates which has been updated at the reporting date. The resulting movement in the fair value of the derivative liability recorded in the consolidated income statement and the derivative liability at year end were $48k (2012: $0.3m) and $0.6m (2012: $0.6m) respectively.

(iii) Interest bearing loans and borrowings

For interest bearing loans and borrowings, the fair value of the amount drawn at the reporting date has been calculated based on the present value of the expected future principal and interest cash flows discounted at estimated market interest rates effective at the balance sheet date and adjusted for movements in credit spreads. The Directors believe that the existing loan facilities are on par with current credit spreads and therefore the fair value is not materially different from the carrying value.

(iv) Trade receivables and trade payables

All receivables and payables have a remaining maturity of less than 12 months or are on-demand balances, and therefore the carrying value is deemed to reflect fair value. Egyptian trade receivables which become overdue are interest bearing.

(c) Credit risk

Credit risk arises from the exposure on receivables from various counterparties together with cash held by various financial institutions. Wherever possible, the Group seeks to transact with counterparties of proven credit quality and on defined payment terms. The Group's maximum exposure to credit risk at the reporting date arising from financial assets is the carrying value of cash and cash equivalents and trade and other receivables.

Receivables

The Group's most material receivable balance relates to its Egyptian business. During 2013, the overall amounts outstanding from this counterparty reduced by 25% with receipts in line with an agreed payment schedule. 

The Group undertakes continued and active monitoring of all its credit risk exposures to ensure all amounts due are received in accordance with the terms and that cash balances are held with counterparties who satisfy credit rating and other criteria.

Cash and cash equivalents

The Group enters into transactions with financial institutions for the purposes of placing deposits. From a credit risk management perspective, it is the Group's policy to enter into such transactions only with well capitalised financial institutions and, accordingly, the Group does not expect any counterparty to fail to meet its obligations.

Details of these deposits, which are all for terms of three months or less, are as follows:

(d) Liquidity risk

The Group has adequate cash resources and an available loan facility, which, combined with anticipated completion of the farmout of an 18.375% interest in the Ain Tsila asset to Sonatrach, provide sufficient liquidity to fulfil current operational expenses and capital plans and therefore limited liquidity risk exists at present. In addition, in May 2014 the Group announced a proposed equity placing to raise $100 million, subject (in part) to shareholder approval. These funds will provide significant ongoing liquidity support to the Group's business.

At 31 December 2013, the Group had interest bearing liabilities of $300m relating to a loan facility funded by a syndicate of banks led by HSBC. Full details are set out in note 16.

All cash and cash equivalent amounts are on demand, and all trade and other receivables and trade and other payables are due within three months of the reporting date with the exception of a certain portion of the Egyptian trade receivables due from EGPC.

The Board monitors the availability of and requirements for funds in the Group. Surplus cash within the Group is used to reduce the loans drawn or put on deposit in accordance with limits and counterparties agreed by the Board, the objective being to maximise return on funds whilst ensuring that the short-term cashflow requirements of the Group are met.

The table below sets out the contractual maturities of the financial liabilities, including estimated contracted interest payments based on the contractual terms of all agreements and excluding the impact of netting agreements.

(e) Interest rate risk

Cash and loan amounts are denominated primarily in dollars. Exposure to interest rate risk on cash and loan balances are actively monitored and managed. If interest rates rose by 0.5% based on balances at the reporting date, the Group's loss for the year would increase and equity at year end would decrease by approximately $1.2m based on financial assets and liabilities held at that date. If interest rates fell by 0.5% it would have an equal but opposite effect.

(f) Commodity price risk

In Egypt, liquids realise market prices based on Western Desert pricing, and during 2013 equated to approximately 99% of Brent (2012: 98%). Gas production from development leases within the El Mansoura and South East El Mansoura Concessions in Egypt is sold under long-term contracts in which the gas price is linked to the oil price when the oil price lies in the range of between $10 per barrel to $22 per barrel. With the oil price at its current level, significantly above $22 per barrel, the gas price is at the top of the contractual range and is, therefore, effectively fixed. In Bulgaria, gas is sold to two suppliers, Bulgargaz EAD, the state owned gas company and Agropolychim, an independent chemicals company. Sales nominations are agreed in advance of the start of the calendar year. The Bulgargaz EAD pricing is agreed for each quarter throughout the year whereas the independent company gas price is at a discount to the local quarterly consumer natural gas price, as published by Bulgargaz EAD.

 For the year ended 31 December 2013, it is estimated that a general weakening of one percentage point in commodity prices (with the exception of Egyptian gas prices which are effectively fixed when the price of oil is greater than $22 per barrel) would decrease the Group's loss before tax by approximately $0.1m (2012: $0.4m).

(g) Currency risk

The US dollar is the primary currency in which the Group conducts business. The dollar is used for planning and budgetary purposes and as the presentation currency for financial reporting. The Group also has some costs, assets and liabilities, denominated in Algerian Dinars, Bulgarian Lev, Egyptian Pounds, Romania Lei, Euro and Sterling. The Group manages the exposure by matching receipts and payments in the same currency to the extent possible and monitoring the residual net position.

In order to minimise currency risk, it is Group policy that borrowings incurred in relation to development projects should be denominated in the currency in which future cash flows from the development projects are denominated, currently dollars. Similarly, it is Group policy that corporate borrowings should be denominated in dollars.

The Group may, from time to time, with the approval of the Board, use derivative financial instruments to manage its exposure to fluctuations in foreign currency exchange rates. No such instruments were in use during the current or prior year. The Group does not undertake any trading activity in financial instruments.

If the dollar increased by 5% in value, the Group's loss for the year would decrease by approximately $0.7m. A 5% weakening would have an equal but opposite effect.

At year end, the Group's foreign currency balances were as follows:

The exchange rates used in the preparation of the financial statements were as follows:

(h) Capital management

The Board's policy is to maintain a strong capital base in order to maintain investor, creditor and market confidence and to sustain future development of the business. The Board of Directors monitor the allocation of operating cash flow against projects to maximise the return on asset value within the Group.

The Group seeks to maintain a balance between the levels of debt borrowings undertaken and the advantages and security afforded by a sound capital position.

24. Subsidiary undertakings

The Company's principal subsidiary undertakings at 31 December 2013, all of which are wholly owned, are as follows:

All shareholdings are of ordinary shares.

A full list of subsidiary companies is filed with the Registrar of Companies, in the appropriate jurisdiction.

25. Update on legal proceedings

In July 2013, the Group issued legal proceedings in the Irish High Court against two former consultants to the Group, Mr Seghir Maza and Mr Samir Abdelly ("the Consultants"), and against a Tunisian company owned and controlled by Mr Abdelly ("AAIC"), seeking to set aside a number of consultancy agreements entered into in 2004 and 2005 with respect to the Group's North African business activities. The proceedings also seek the return of significant payments that were made to the Consultants under those agreements during 2005 and 2006.

Petroceltic's action followed the receipt of correspondence during 2013 threatening legal proceedings against the Group on behalf of one of the consultants seeking payment of sums totalling $3.4 million pursuant to these agreements. The agreements contain provisions under which the parties could make claims for further material payments from the Group.

In November 2013, the High Court of Ireland granted the Company judgment, in default of appearance, against Mr Maza and granted all reliefs sought by the Company in the proceedings, including judgment in the amount of $4.7 million, being amounts previously paid under one of the consultancy agreements, plus interest from the date of judgment. The proceedings against Mr Abdelly and AAIC are on-going and the ultimate outcome of these proceedings, by their nature, remains subject to inherent uncertainty.

The financial statements do not contain any provisions relating to these contracts or proceedings other than amounts relating to normal legal and associated advisory costs.

26. Post balance sheet events

On 12 February 2014, the Group announced the agreed sale of an 18.375% interest in the Isarene Production Sharing Contract ("PSC") to Sonatrach, the Algerian National Company for Hydrocarbons. The terms of the deal provide for a consideration of up to a maximum amount of $180 million. The consideration comprises $20 million payment on completion of the transaction, a further $140 million payment of Petroceltic's share of Isarene project development cost from the effective date of 4 July 2013 and contingent payments of up to $20 million based on the achievement of certain project

related milestones.

Sonatrach has acquired the interest by exercising its right of pre-emption in relation to a transaction with similar terms previously agreed between Petroceltic and another oil and gas company. Formal completion of this assignment remains subject only to final ratification by the Algerian Government Authorities. Upon completion of the transaction, Sonatrach will hold a 43.375% participating interest in the Isarene PSC, Petroceltic will hold 38.25% and Enel will hold 18.375%.

In May 2014, the Company announced a proposed placing of new shares to raise $100 million. The proceeds of this Placing, which remains subject (in part) to shareholder approval, will provide the Group with the financial flexibility to undertake all its currently planned exploration programmes, continue the current pace of progress on the Ain Tsila development pending completion of the second farm-out to Sonatrach and to maintain an appropriate balance of debt and equity funding within the business.

OIL AND GAS RESERVES

Proved and probable reserves at 31 December 2013