(FOGL) Falkland Oil & Gas

2 May 2013

Falkland Oil and Gas Limited

("FOGL" or "the Company")

Final Results for the year ended 31 December 2012

FOGL, the oil and gas exploration company with an extensive licence interest in the Falkland Islands, announces its Final Results for the year ended 31 December 2012.

Strong financial position

·      At 31 December 2012, cash balances were US$174 million with a further US$45 million due from the farm-outs

·      The overall profit for the year was US$1.1 million (2011: loss of US$6.6 million)

Resources in place to deliver value growth

·      Fully funded for planned work

·      Extensive 3D seismic surveys in progress to optimise target selection for next drilling campaign

Industry endorsement secured

·      Endorsement of asset value and potential through farm-out transactions with established international players, Noble Energy Falklands Limited and Edison International S.p.A

·      Position maintained as the largest acreage holder (40,000sq km gross) in the Falkland Islands with a substantial interest retained post farm-outs

Increasing operational capability

·      As operator, successfully drilled two deep-water exploration wells safely, on schedule and within budget

·      Demonstrated year round drilling is possible, with minimal weather downtime

·      Benefitting from Noble's operating experience and track record

Working petroleum system proven

·      Loligo Complex estimated to hold significant in place gas volumes, between 50 and 100 trillion cubic feet (TCF)

·      Results from Loligo, Scotia and Toroa have significantly advanced subsurface understanding

·      Substantial areas remain prospective for oil rather than gas

Outlook

·      Focus on further de-risking of assets through an extensive 3D seismic programme covering over 10,000sq km

o Initial 5,235sq km 3D survey over the Cretaceous aged Diomedea Fan Complex completed in April 2013

o A 1,000sq km survey over the Cretaceous fault block area underway

o Further  large  3D survey in the Northern Licence Area planned for 4Q 2013

·      Defining targets for exploration drilling during H2 2013

Richard Liddell, Chairman of FOGL, said:

"In 2012 FOGL made great progress towards its objective of making commercial discoveries within our licences. As operator two deep-water exploration wells were drilled, safely, within budget and on schedule. Both wells significantly de-risked the East Falkland basin and, in the case of Loligo, demonstrated significant in-place gas volumes within multiple reservoirs. Post well drilling analysis indicates that significant potential for oil discoveries still exists within our licences.

Major farm-out agreements were secured with two substantial international E&P companies with strong exploration track records. At the same time FOGL retained a very substantial interest in its extensive acreage.

FOGL is fully funded for an extensive 3D seismic survey covering some 10,000sq km and a three well exploration programme.

With our partners, we have an ambitious work programme designed to further de-risk our prospect inventory and in particular, focus on the oil potential within our licence areas. This will lead to the identification of new targets and further exploration drilling in 2014/15

To date we have acquired 35,000km of 2D seismic, drilled three wells, and as a result proved a working petroleum system. Now with our new partners we are funded to shoot over 10,000sq km of 3D seismic and drill three further exploration wells.  We remain optimistic about the potential of our licences"

Enquiries:

Chairman's Statement

In 2012, Falkland Oil and Gas Limited ('FOGL' or 'the Company') as operator drilled two deep-water exploration wells offshore the Falkland Islands. These wells were drilled safely, without incident, on schedule and within budget.  This is a significant achievement for a small independent exploration company and is testament to the quality and professionalism of the technical team and our contractors.

Both wells encountered gas, and together with the two wells drilled by Borders & Southern Petroleum Plc (B&S), they have demonstrated beyond doubt that there is a working petroleum system in the South and East Falkland basins, thus confirming the prospectivity of our licence areas.

During 2012, two landmark farm-out agreements were secured with Noble Energy Falklands Limited (Noble) and Edison International S.p.A (Edison), both companies having strong exploration track records. As a result, FOGL is fully funded through a major 3D seismic acquisition programme which commenced in the austral summer of 2012 and will be concluded by May 2014.  These are the first 3D seismic surveys to be acquired over the licence areas.  In addition, FOGL now has sufficient funds for a three well exploration programme which is targeted to commence in the second half of 2014. Following the farm-outs, FOGL retains a 52.5% interest in its Southern Licence Area and a 40% interest in its Northern Licence Area.

Profit for the year was US$1.1 million (2011: loss of US$6.6 million), including interest received on deposits and exchange gains of US$5.7 million (2011: US$1.2 million).

At the start of the year cash balances totalled US$81.4 million. Exploration expenditures totalled US$82 million in the year, but as a result of farm-outs and a share placing raising US$75.1 million, the Company had cash balances at 31 December 2012 of US$174 million plus a further US$45 million receivable from the farm-outs.

FOGL exited 2012 having made significant progress towards its objective of discovering commercial hydrocarbons. This has been achieved through successful drilling operations, the transactions with Edison and Noble and the support from shareholders. We are in an excellent position to unlock the substantial potential value within our acreage.

Chief Executive's Business Review

For the Company 2012 was a momentous year, as we drilled exploration wells on the Loligo and Scotia prospects, both of which are located in the northern part of the East Falkland Basin

The selection of the two prospects was based on a number of criteria, but in particular, both exhibited favourable seismic amplitude responses, which were believed to be an indication of the presence of hydrocarbons. A prime objective of the drilling programme was to verify this hypothesis and determine the hydrocarbon phase (gas or oil) within these reservoir targets. The final Loligo well location was selected because it enabled us to test six different reservoir objectives with a single well. 

The two exploration wells (Loligo and Scotia) encountered hydrocarbons, while B&S has made a gas-condensate discovery in the southern part of the basin with their Darwin well. These three well results clearly prove that the South and East Falklands basins have a working petroleum system. 

Drilling Results

Both wells were drilled with the Leiv Eirikssen, a deep-water harsh environment drilling rig. Drilling operations continued through the austral winter, yet weather down-time accounted for less than two days of the total programme.

Loligo

Well 42/07-01 was drilled to a depth of 4,043 metres. The well demonstrated the presence of mature source rocks, active hydrocarbon migration and a viable stratigraphic trap. Gas bearing zones were encountered over a 1,300 metres vertical interval from 2,420 to 3,720 metres.

The well penetrated six Tertiary aged reservoir objectives on prognosis. These comprised the T1, T1 deep, T2 (Trigg), T2 deep (Trigg deep), T3 (Three Bears) and T5 targets. Petrophysical analysis of the T1 to T3 intervals inclusive (2,420 to 2,885 metres) indicated porosities ranging from 18% to 35% in the gas bearing zones. Within the T5 target, two main hydrocarbon bearing zones were encountered (3,462 to 3,558 metres and 3,608 to 3,705 metres). The net hydrocarbon bearing reservoir in these two zones was 46 and 59 metres respectively. Porosities ranged between 23% and 30% and hydrocarbon saturations between 40% and 75%. Attempts to obtain pressure data and collect fluid samples were unsuccessful, probably due to the fine grained nature of sediments in the gas bearing zone.

The six reservoir horizons encountered in the Loligo well comprised very fine-grained sandstones and siltstones. FOGL interprets that these sediments were deposited either outside, or at the distal (outer) end of the slope channel system. In order to select a drilling location that could penetrate all six reservoirs, certain compromises had to be made. Critically, it was not possible to select a drilling location that intersected the multiple objectives and at the same time was optimally located at any one of the target horizons. As a result, it is likely that the well did not penetrate any of the main channel systems that are believed to be present within Loligo.

Detailed technical work is now underway to better define reservoir distribution within the Loligo Complex, and more precisely map the channel systems. This work may be augmented by the acquisition of 3D seismic in Q4 2013.

Scotia

Well 31/12-01 was drilled to a depth of 5,555 metres. The farm-outs with Noble and Edison, meant that FOGL, with a 40% working interest, paid only 15% of the costs of this well.

Gas bearing sands were encountered in the main target. This demonstrated that Scotia is a viable stratigraphic trap with active hydrocarbon migration and good top, bottom and lateral seals.  However, the reservoir intersected by the well was tight (low permeability).

The Scotia objective had been identified on the basis of its clear seismic amplitude response. Interpretation of wireline log data indicated that the target interval 4,719 metres to 4,769 metres comprised 50 metres of hydrocarbon bearing fine-grained sandstones and claystones. Other thin hydrocarbon bearing sandstones were also encountered beneath the main target in the interval 4,900 metres to 5,164 metres.

The well was deepened below the main target in order to penetrate and sample Cretaceous aged source rocks.

Subsequent analysis of rock cuttings and sidewall core samples indicated that reservoir quality had been impaired as result of secondary cementation, which had significantly reduced both porosity and permeability.

Analysis of the Cretaceous aged source rock intervals penetrated by the well is on-going but initial work indicates the presence of good quality source rocks, with total organic contents of up to 4% with mixed type II and III kerogens (organic matter).

This well revealed that the geothermal gradient was higher than expected. This had an impact on source rock maturity. Our pre-drill evaluation of the source rocks suggested that they had been buried to a depth and temperature ideal for the generation of oil over a very wide area, but the drilling results indicate that the 'oil window' (as opposed to gas generation) is more restricted than previously thought. However, conditions still appear to be conducive for oil generation over substantial areas of our licences.

Farm-outs

Edison International S.p.A

In June 2012, a farm-out agreement was entered into with Edison.  Edison earned a 25% interest in FOGL's Northern Licence Area and a 12.5% interest in FOGL's Southern Licence Area, and contributed its pro-rata share of the costs of the 2012 drilling programme and also certain other historical costs. In addition, Edison made a separate cash contribution to FOGL of US$43 million as part of the farm-out agreement.

Noble Energy Falklands Limited

In August 2012, a farm-out agreement was entered into with Noble. Noble farmed into both the Northern and Southern Licence Areas for a 35% interest, except for two excluded areas (the Loligo and Nimrod-Garrodia Complexes). Noble took over operatorship of the northern licences in March 2013 and will become operator of the southern licences in early 2014.

As part of the farm-out arrangements, Noble paid 60% of the Scotia well costs, including associated costs incurred during 2011 and in January 2013 made a US$25 million cash contribution towards exploration costs. Noble will also pay 60% of the costs of a future Southern Licence Area commitment well and 45% of a third exploration well. Noble's total investment over a three year period is currently estimated to range between US$180 million and US$230 million.

Licences

Resulting licence interests post farm-out are as follows:

The drilling of the Loligo and Scotia wells has fulfilled the Phase 1 and Phase 2 drilling commitments for the Northern Licence Area and these have no further commitments or relinquishments until their expiry in December 2016.

FOGL has also reached agreement with the Falkland Islands Government with respect to extending the duration of the current phase (Phase 2) of the licences. Licence durations can be extended by undertaking further discretionary work such as 3D seismic surveys or drilling of exploration wells.

As a result of the Diomedea 3D survey, the southern licences will be extended by two years, so that they now expire in December 2017. If any commercial hydrocarbon discoveries are made in this period they may be retained for 35 years or until the end of field life.

Outlook

2013 3D Seismic Survey Programme

A substantial 3D seismic programme is currently underway in the Company's licence areas.  The principle aim of these surveys is to identify targets for the next drilling campaign and they will also have a particular focus on targeting oil prone prospects and ensuring such prospects have good quality reservoirs. In addition, the data will be used to identify fluid content and reservoir properties (e.g. porosity) using seismic amplitude analysis (AVO). This work will benefit significantly from having well information from Loligo, Scotia and Toroa to calibrate the dataset.

PGS's vessel the M/V Ramform Sterling has already completed the first 3D seismic survey over the Mid Cretaceous Diomedea Fan Complex within the Southern Licence Area. A total of 5,235sq km of full fold seismic data have been acquired. The Diomedea Fan Complex is a large Mid Cretaceous aged deep-water fan system, covering an area of approximately 7,000sq km. A number of prospects and leads have already been identified on existing 2D seismic within this fan complex. The 3D seismic survey will enable these prospects to be mapped in much more detail.

The data will now be processed by PGS, the seismic contractor, and a fast track product is expected to be available for interpretation in August 2013 and it is anticipated that the final processed data will be available in Q4 2013. The fast track data will be used to commence prospect mapping and well planning. Initial test lines from the survey indicate excellent data quality and imaging of the Cretaceous target interval.

A second 3D seismic survey, over the Cretaceous fault blocks located in the South Falkland basin, started in April 2013. This survey is designed to cover a number of prospects and leads that lie adjacent to the B&S Darwin gas-condensate discovery, which has an estimated, most likely, recoverable resource of 200 million barrels. FOGL has identified, on existing 2D seismic data, a number of prospects and leads such as Inflexible, Scharnhorst and Nurnberg that could be analogous to Darwin. 

A third 3D survey to be acquired within the Northern Licence Area is currently in the planning stage. A number of tender offers for this work from suitably qualified contractors are currently being considered.

It is expected that the three seismic surveys will cover more than 10,000sq km. This data will play a vital part in planning the Company's future exploration drilling programme.

Next Drilling Campaign

The next drilling programme is currently being planned and will be operated by Noble. Noble have already established a technical and operations team for the Falklands and are actively seeking a suitable drilling rig that is able to start drilling in the second half of 2014.

Falkland Oil and Gas Limited

Statement of Comprehensive Income for the year ended 31 December 2012

The profit for the year arose from continuing operations.

Falkland Oil and Gas Limited

Audited Statement of Financial Position at 31 December 2012

Falkland Oil and Gas Limited

Audited Statement of Cash Flows for the year ended 31 December 2012

Falkland Oil and Gas Limited

Audited Statement of Changes in Equity for the year ended 31 December 2012

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 December 2012 or 2011, but is derived from those accounts. Statutory accounts for 2012 will be available at the end of May 2013. The auditors have reported on those accounts: their report was unqualified and did not draw attention to any matters by way of emphasis.