Trading Statement and Reserves Update

FOR IMMEDIATE RELEASE

20 January 2011

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

Trading Statement and Reserves Update

Dragon Oil plc (Ticker: DGO), an international oil and gas exploration and production company, today issues the following trading statement, which includes an operational update and financial highlights for 2010, and the results of the latest reserves assessment. All information referred to in this update is unaudited and subject to further review. Dragon Oil expects to publish its 2010 preliminary financial results on 22 February 2011.

Key highlights

Operational highlights:

- Planned drilling programme of 11 wells accomplished with the completion of the last well shortly after the year-end;

- Major pipeline and processing infrastructure completed and commissioned before the year-end removing bottlenecks that had constrained production growth in 2010; as a result:

·; Average production in December 2010 rose to 52,575 barrels of oil per day ("bopd") (December 2009: 47,463 bopd);

·; Production exit rate for 2010 reached 57,013 bopd (2009: 49,698);

·; 2010 average daily production rate increased 5.5% to 47,211 bopd (2009: 44,765 bopd);

- Year-end reserves upgraded to 639 (December 2009: 617) million barrels of oil and condensate and 1.6 TCF of gas reserves corresponding to 260 million barrels of oil equivalent ("boe"); the gas resources are reduced to 1.4 (December 2009: 3.1) TCF.

Financial highlights:

- Capital expenditure on infrastructure and drilling amounted to US$454 million for 2010 (2009: US$317 million);

- The Group's cash and cash equivalents and term deposits as at 31 December 2010 was US$1,337 million (31 December 2009: US$1,138 million), including US$174 million in abandonment and decommissioning funds (31 December 2009: US$126 million).

Dr Abdul Jaleel Al Khalifa, CEO, commented:

"2010 was a very active year for Dragon Oil with major pipeline and processing facilities completed, 11 wells put into production and contracts for a Super M2 jack-up rig and two new platforms awarded - just to mention a few of the projects completed and awarded during the year. Over the past year, we have undertaken a number of concrete steps to secure production growth in the years ahead and we will continue to invest in infrastructure and secure drilling rigs on favourable commercial terms.

Dragon Oil has delivered solid results despite last year's production growth falling short of our expectations due to infrastructure bottlenecks. This situation has now been resolved with the introduction of the new facilities, resulting in the year-end exit rate of 57,013 bopd, which is almost 10,000 bopd higher than the average daily production rate for 2010."

Analyst conference call details:

A conference call for analysts will be held today at 9.00am GMT. For details, please contact Kate Lehane at Citigate Dewe Rogerson on +44 (0)20 7282 1063 or at [email protected].

A replay of the call will be available from around 12.00pm today until 27 January 2011 on the following telephone numbers:

UK +44 (0)20 7111 1244

Ireland +353 (0)1 486 0902

USA +1 347 366 9565

The pass code is 9725049#.

For further information please contact:

About Dragon Oil

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

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

www.dragonoil.com  

Disclaimer

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

Glossary/definitions

OPERATIONAL UPDATE

Production

The average daily gross production rate for 2010 on a working interest basis was 47,211 bopd. This represents a 5.5% increase over the comparable period in 2009 when the daily production rate averaged 44,765 bopd. During 2010, Dragon Oil experienced certain infrastructure bottlenecks, which constrained production growth. At the end of 2010, we completed and commissioned an integrated network of 30-inch 40 km trunkline, 14-, 18- and 20-inch inter-field pipelines and the expanded Central Processing Facility ("CPF"). The completion of these projects and the subsequent transition to the new infrastructure system have now eliminated the infrastructure bottlenecks. We are also seeing improved average daily flow rates and achieved an exit rate of 57,013 bopd at the end of 2010.

In 2010, the entitlement production was approximately 61% of the gross production compared to about 58% in 2009. Entitlement barrels are dependant, amongst other factors, on fiscal terms of the Production Sharing Agreement, operating and development expenditure in the period and the realised crude oil price.

Marketing

Dragon Oil sold 10.8 million barrels of crude oil in 2010 (2009: 10.5 million barrels). This is 3% higher than the volume sold during the previous year due to increased production and changes in lifting position.

In 2010, approximately 60% (2009: 10%) of crude oil was exported via Baku, Azerbaijan; the balance was marketed under the swap agreement with Iran, which expired in July 2010. The Group currently exports all of its entitlement barrels through Baku, Azerbaijan. The terms of the contract are FOB the Aladja Jetty, from where the purchaser collects the crude oil and delivers it on, primarily using the BP-operated BTC (Baku-Tbilisi-Ceyhan) pipeline. The marketing contract has been extended up to December 2011 on improved terms.

The Group was in an overlift position of approximately 0.1 million (31 December 2009: 0.2 million) barrels of crude oil at the end of 2010.

Drilling

During 2010 and the first week of January 2011, Dragon Oil completed an 11-well drilling programme in the Dzheitune (Lam) field. The following table summarises the results of this drilling programme:

As part of the workover programme in 2010, the Iran Khazar rig completed a workover of the Dzheitune (Lam) A/125 well, yielding an incremental production of 562 bopd, and a sidetrack of the Dzheitune (Lam) A/129 well, yielding an incremental production of 1,140 bopd. Two wells planned to be sidetracked by Rig 40 on the Dzheitune (Lam) 13 platform were instead perforated using wireline operations yielding a combined incremental production of approximately 700 bopd.

During 2010, Dragon Oil employed four drilling rigs on the basis of a combination of full-time and short-term contracts, three of which will continue to be used in 2011:

·; The successful six-well drilling campaign by Rig 40 on the Dzheitune (Lam) 13 platform will be extended in 2011 to include two more wells, the slots for which have already been added.

·; The platform-based NIS rig is contracted until Q4 2011 and will continue to drill on the Dzheitune (Lam) 28 platform with the objective to complete upto five wells in 2011.

·; The contract for the use of the Iran Khazar rig for a further period of two years has been agreed in principle, enabling the rig to carry on drilling from the Dzheitune (Lam) B platform and to complete four wells this year.

·; The Astra jack-up rig was used in the first half of 2010 on the newly installed Dzheitune (Lam) B platform. The use of the Astra rig or its replacement remains an option in the future, pending favourable contractual terms and availability.

In the first half of the year, Dragon Oil announced the contract award for the lease and management of a new build Super M2 jack-up rig to Yantai Raffles Offshore Ltd. This jack-up rig is due to be delivered in Q4 2011.

Infrastructure

Dragon Oil achieved an important milestone in 2010 having completed and commissioned a significant infrastructure upgrade, including the new 30-inch trunkline, a number of interconnecting in-field pipelines and Phase 2 expansion of the CPF.

The CPF's capacity has been increased to handle up to 100,000 barrels of liquids per day and up to 220 million standard cubic feet per day ("mmscfd") of gas. We are already bringing a substantial portion of the unprocessed gas onshore together with crude oil through the 30-inch 40 km trunkline as we switch over from the two existing 12-inch pipelines.

Additional inter-field pipelines in the Dzheitune (Lam) Field from Platform 28 to Platform A (18-inch), from Platform A to Block II (20-inch) and from Platform B to Platform 28 (14-inch) have been constructed to increase the throughput capacity and accommodate the future development of the western area of the Cheleken Contract Area. A new platform is also being built for the western part of the Dzheitune (Lam) Field to replace the existing Block I. It will act as a gathering station to provide additional throughput capacity for the crude oil flow in this part of the field.

A new 100-tonne floating crane vessel is under construction and is scheduled for delivery in Q4 2011. The addition of this crane vessel to the fleet of our vessels will enhance the Group's offshore operating capabilities. The vessel will be employed to support drilling and infrastructure projects.

In 2010, Dragon Oil awarded contracts for the construction of two new wellhead and production platforms, Dzheitune (Lam) C and Dzhygalybeg (Zhdanov) A, the construction of which is progressing on schedule. The Dzheitune (Lam) C platform is being built to support a jack-up rig and will have up to eight slots for drilling. Once it is completed in Q4 2011, Dragon Oil plans to install the platform in the western part of the Dzheitune (Lam) Field between the Dzheitune (Lam) B and 28 platforms. As such the drilling programme will target reserves beyond the reach of the two existing platforms.

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

Within the framework of a standardisation process that would enhance the Group's operating capabilities, Dragon Oil is initiating a generic Front End Engineering Design ("FEED") study to determine a template for the construction of platforms in the Cheleken Contract area. This template would be utilised to improve and standardise Dragon Oil's platform design in order to optimise drilling and reduce platform construction costs.

Another study is being launched to review the existing throughput capacity of the channel in the harbour area and the Aladja Jetty. Based on the findings of the study, it is planned to perform dredging with the aim to enhance the Group's operational and crude oil loading capacity.

Reserves and resources

Based on the results of the recent assessment by an independent energy consultant, the 2010 year-end reserves were upgraded to 639 (December 2009: 617) million barrels of oil and condensate and 1.6 TCF of gas reserves corresponding to 260 million boe; the gas resources are accordingly reduced to 1.4 (December 2009: 3.1) TCF.

The increase in oil and condensate reserves is due to increase in reserves in the Dzheitune (Lam) West area and addition of condensate that will be stripped from gas once the Gas Treatment Plant ("GTP") is constructed and becomes operational. A portion of gas previously booked as contingent resources has now been converted into gas reserves based, amongst other factors, on the planned capacity of the GTP.

The 30-inch trunkline and Phase 2 expansion of the CPF are part of the infrastructure necessary to deliver unprocessed gas to the Turkmen gas network. The Group is producing about 120 mmscfd of gas most of which is currently flared.

In Q3 2010, our contractors completed the final FEED study for the onshore GTP for the further processing of our gas. Discussions with the Turkmenistan Government regarding the gas development opportunities continue.

FINANCIAL UPDATE

Cash and cash equivalents

The cash and cash equivalents and term deposits as at 31 December 2010 was higher at US$1,337 million (31 December 2009: US$1,138 million), including US$174 million (31 December 2009: US$126 million) set aside for abandonment and decommissioning activities.

Capital expenditure

Capital expenditure for 2010 was approximately US$454 million (2009: US$317 million). Of the total capital expenditure, approximately 55% (2009: 50%) was attributable to infrastructure with the balance spent on drilling. The infrastructure spend during the year included completion of the 30-inch trunkline and associated inter-field pipelines, as well as the final phases of Phase 2 expansion of the CPF, construction of the gathering station and two wellhead platforms.

Realised prices

Dated Brent for the year averaged approximately US$80 per barrel, about 29% above 2009's average of approximately US$62 per barrel. The Group's realised crude oil prices were at a 9% discount to Brent (2009: at par with Brent), in line with the previous guidance of an 8% to 10% discount to Brent due to expected realised net crude oil prices being less favourable than the historic netback prices . The average realised crude oil price during 2010 was approximately US$72/bbl (2009: US$62/bbl), which was 16% higher than the price realised in the previous year.

CURRENT OPERATIONS AND OUTLOOK

The Iran Khazar jack-up rig and the platform-based NIS rig are drilling two development wells in the Dzheitune (Lam) field, B/153 and 28/152, respectively. These two wells are due to be put into production around the end of Q1 2011.

In 2011, we expect the Iran Khazar rig to drill and complete four wells on the Dzheitune (Lam) B platform. The NIS rig will continue to drill from the Dzheitune (Lam) 28 platform and is expected to complete upto five wells under the optimised drilling programme. Rig 40 will be re-deployed on the Dzheitune (Lam) 13 platform with the aim to drill and complete two wells.

In total, Dragon Oil expects to complete 11 development wells in 2011. The drilling of an appraisal well in the Cheleken Extension Area, which was announced previously, has now been deferred until an additional jack-up rig is available.

More detailed guidance on production growth and infrastructure projects, as well as a strategy update, will be provided in the preliminary results statement.

The Group is scheduled to report its 2010 preliminary financial results on 22 February 2011.

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