Baron Oil Regulatory News (BOIL)

3 June 2013 

Baron Oil plc

("Baron Oil" or "the Company")

Final Results

Posting of Report & Accounts

Baron Oil, the AIM-listed independent oil and gas exploration and production company focused on Latin America, is pleased to announce its final results for the year ended 31 December 2013 and confirms that the Annual Report and Financial Statements have been posted to shareholders.

A full version of the Annual Report and Accounts is set out below and is also available for download from the Company's website at www.baronoilplc.com

- Ends -

For further information:

Baron Oil Plc

Rudolph Berends (Chairman & CEO) Tel: +44 (0) 203 427 5089

Cantor Fitzgerald 

Nominated Adviser and Joint Broker

Stewart Dickson / Tom Sheldon (Corporate Finance) Tel: +44 (0) 20 7894 7000

Richard Redmayne / David Banks (Corporate Broking)

1. CORPORATE INFORMATION

Advisers & General Information

Directors Rudolph Berends, Chairman

William Colvin, Non-Executive Director

Camilo Merendoni, Non-Executive Director

Registered Office Finsgate

5-7 Cranwood Street

London EC1V 9EE

Company Secretary Geoffrey Barnes

Auditors Jeffreys Henry LLP

Finsgate

5-7 Cranwood Street

London EC1V 9EE

Solicitors Kerman & Co LLP

200, Strand

London WC2R 1 DJ

Nominated advisor and broker Cantor Fitzgerald Europe

One Churchill Place

Canary Wharf

London E14 5RD

Registrars Computershare Investor Services (Ireland) Limited,

Heron House,

 Corrig Road,

Sandyford Industrial Estate,

Dublin 18

Ireland

Communications Web Site www.baronoilplc.com

Company number: 5098776 (England and Wales)

2. CORPORATE STATEMENT

Baron Oil Plc ("the Company") is an independent oil and natural gas exploration and exploitation company focused on the South American continent. Shares in the Company are listed in the UK on the AIM market of the London Stock Exchange - (BOIL.L).

The Company is seeking to maintain a balanced portfolio of higher risk and reward exploration assets supplemented by cash flow from producing assets which also contain further exploitation upside. This strategy is being pursued through establishing significant licence ownership positions concentrated in a few, highly prospective geographic areas. The Company, and its subsidiaries (together "the Group" or "Baron Oil") currently has a significant acreage position and is recognized as an approved operator for both onshore and offshore licences in Peru, and is an operator of production through its now 50% subsidiary Inversiones Petroleras de Colombia SAS (also known as "Invepetrol SAS") onshore Colombia and also has a further ownership interest in an exploration licence onshore Colombia.

The Group's objective is to deliver shareholder value through generating substantial increases in our asset values by discovering commercial quantities of hydrocarbons while mitigating our costs as much as possible through farm-out and cost carry arrangements with our partners.

3.CHAIRMAN'S STATEMENT & OPERATIONS REPORT

FINANCE AND FINANCIAL RESULTS

In the year ended 31 December 2013, the net result for the year was a loss before taxation of £2,998,000, which compares to a loss of £9,353,000 for the preceding financial year. The improvement arises primarily from the greatly reduced impairment provisions in 2013.

Turnover for the year was £2,211,000, down from £2,832,000 in the preceding year, reflecting the significant drop in revenue from the Colombian producing wells, as detailed below. This has led to a loss at the gross profit line of £186,000 as certain direct costs are fixed and do not vary directly with production.

In this year, the Group sold its entire interest in its subsidiary company Plectrum Petroleum Limited to Union Oil & Gas Group. Plectrum Petroleum Limited is a 50% licence holder in the Peru Z34 offshore exploration licence and its sale forms part of the larger farmout of an 80% interest in that licence. The sale led to a book loss of £88,000 after taking into account the reversal of prior year impairment provisions. We also continue with our policy of writing down the value of our investment in the Nancy-Burdine-Maxine asset until the contract termination date in 2015, this gives rise to a further impairment charge of £526,000.

The Income Statement also shows a charge to tax of £567,000. This is largely made up of tax arising on the capital receipt from the farmout of Block XXI Peru in 2012, which was higher than originally anticipated.

At the end of the financial year, free cash reserves of the Group had improved to £2,078,000 from a level at the preceding year end of £950,000 (excluding funds held in escrow in respect of performance guarantees). The placing of shares in January 2013 raised a gross £2 million, plus an additional $3.5 million was received from the first phase of the Z34 farm-out. A further $2.5 million was due at the end of the year in respect of the Z34 farm-out, of which $500,000 has been received, and we anticipate the remainder will be received within the next twelve months, along with $2 millionon the sale of a 50% interest in the Nancy-Burdine-Maxine producing fields in Colombia.

It is our belief that, in taking hard decisions in impairing the carrying value of our assets, we now have a Balance Sheet that recognises clear value in our exploration and production assets. Coupled with the fact that the Company is now carried on all its exploration commitments, we can expect to see positive results in both net income and cash flow in 2014 and beyond.

Operations in Peru

Block Z-34 offshore

The main event in early 2013 was the farm out of 80% of the interest in our very prospective North West Peru offshore block Z-34 to Union Oil & Gas Group ("Union"). Baron Oil has retained operatorship and 20% of the block equity and our share of all costs will be carried by Union until the end of the exploration commitment period in our license contract.

During 2013 we have progressed our partnership with Union and together have been working hard to obtain final approval for the Environmental Impact Assessment ("EIA") study which includes seismic coverage over 85% of the block area plus a selection of 90 well locations which were identified by interpreting the extensive 2D and 3D seismic data acquired in 2009 and 2011.

The EIA study is now in the final phase and the final approval is expected by the end of June this year. Baron Oil has prepared extensive information packages for all the fishing villages, towns and ports along the coast in the direct areas around the block and we believe we have created excellent local relationships with all stakeholders to enable further development of our block in the near future with minimum interference

Now Baron Oil and its partner are presently discussing how to move forward into the Third Phase of our exploration program commitment by either drilling one or more of our identified prospects on the block or acquiring additional 3D seismic data. Any decision taken by the partnership group will of course be reported to shareholders immediately.

Z34 is located within the Talara Basin offshore North West Peru and our block covers a very large area of 3,713 sq km. This highly prospective basin has historically produced more than 1.6 billion barrels of oil. Most of the remaining potential is believed to be in the offshore area of the basin. The block is bordered to the east by Block Z2B which has been in production since the early 1950s.

A competent person's report compiled in 2012 for the Company by independent consultants DeGolyer and MacNaughton using the results from the large 3D-seismic survey has assessed the gross, un-risked potential of this offshore block to be in excess of 2 billion barrels of oil. There are several attractive individual prospects identified across this block, some exceeding 100 million barrels.

Karoon Oil & Gas Company, the operator of the adjoining block Z-38 immediately to the north of Z-34, is well advanced with plans for the publicly announced drilling campaign in the near future on that block.

Positive developments have also been reported to the north east of our block where BPZ Resources Inc. in its offshore Block Z-1 during the first quarter of 2014 announced a substantial gross production increase. Their gross production increased to 5,050 barrels of oil per day ("bopd"), from 2,570 bopd in the previous quarter. In addition BPZ has announced additional and positive news concerning its aggressive drilling campaign and development of the Corvina and Albacora Fields

Due to the proximity of both these blocks, these recent developments are regarded by the Board as being very positive news for our Z34 block.

Block XXI onshore

Developments in this large (3,030 sq km) onshore Block located in northern Peru are progressing very well. Baron Oil is the operator and holds a 30% carried interest while Vale has the remaining 70% interest and currently pays 100% of all the costs.

The EIA is in process and advancing in line with the Board's expectations. We are hopeful of obtaining final approval later this year.

The Company has commenced negotiations with contractors to shoot 350-450 kms of 2D seismic lines immediately after we obtain all necessary permits and EIA approval. The plan is to drill 2-3 shallow exploration wells in 2015 once the seismic survey is acquired and fully interpreted.

The EIA study includes extensive 2D seismic work plus 30 well locations identified by the aero gravimetric survey. Peruvian EIA regulations allow changes between well locations in a much quicker process than preparing a new EIA study after seismic acquisition; therefore the 30 well locations were included from the beginning of the process.

In December 2012 the Geotechnical Company, Fugro, completed the acquisition and processing of an 8,000km line of aeromagnetic and aero gravimetric data over the block.

This survey showed the presence of some deep sedimentary basins creating potential mature "cooking pots" for generating hydrocarbons. It is interesting to note that no seismic coverage exists at all over these gravity anomalies. Also several wells in the south of the block, drilled about 50 years ago without any seismic coverage, showed the presence of gas. The adjoining block to the west held by Olympic recently announced several large, commercial oil and gas discoveries.

Finally this block is located to the west of the Andes Mountains meaning that any potential hydrocarbon reserves discovered will have much easier access to a very attractive local market.

Operations in Colombia

Nancy Burdine Maxine Producing Fields

2013 was a challenging year for all oil and gas operators in the Putumayo region of Colombia and also for the Nancy Burdine Maxine ("NMB") oil fields. The first half of the year was mainly focused on production optimization and cost reduction in the field whereas the second half was mostly dedicated to the commercial improvements and surface facilities repair and revamping.

In January 2013, a detailed in-house evaluation study was conducted on each existing well in the NMB field. This lead to the identification of three wells being capable of producing untapped oil from either the U or N sands in the Villetas formation: B-5, B-2 and B-4. A workover program was designed for each well where the B-5 well was identified as the best candidate to be worked over first.

Early March 2013, B-5 was successfully worked over with a new production string able to independently test either the N or the U sand within the Villetas Formation. The overall B-5 workover results are very encouraging and shows Burdine is a field yet to be produced from the N and the U sand . B-5 is in a long term production test to further evaluate the flowing pressure and water cut behavior over time to enable us to gather sufficient reservoir data for an optimum field development model.

The B-1 well was steadily producing until late January 2013 when water production started to increase with an increasing amount of sediments and then suddenly stopped flowing completely. A work program was designed for B-1 aimed to clean the production string. Unfortunately the B-1 production string was found to be broken at 2,200 ft. and the well was shut-in until a larger rig became available to repair the casing and restart the oil production.

A full operational analysis was carried out during the year to optimize the communication between the field office and the headquarter office. As a result some personnel positions were relocated from the Bogota offices out to the field resulting in both cost reductions and improved relations with the local communities.

Unfortunately on October 6th, 2013 the NBM surface facilities were destroyed by terrorists after a series of attacks and explosions. Thankfully no personnel were injured during these attacks. However these attacks left NBM without any functioning surface facilities resulting in a total shutdown of the field. The field was shut down until early November when B-5 was re-opened again and N-1 was re-opened in early January 2014.

Since January 2014 the NBM field has been producing consistently between 500-600 bopd from the two wells N-1 and B-5. Currently we are in the process of getting final approval from the local authorities to test the B-2 and B-4 wells.

The Company plans to carry out additional well workovers, a 3D seismic survey and drill several additional wells when we obtain the green light to continue the NBM operations after the end of the current license period which expires at the end of 2015. At present we are in active discussions with Ecopetrol about the potential continuation of our operations in the NMB field. We are anticipating obtaining more clarity from them over the next few months.

In July 2013, Baron Oil created a 50% partnership in the field ownership company with S&J Full Services ("S&J"). Subsequently in April 2014 Baron Oil purchased back the S&J 50% interest in NMB and they were replaced by CI International Fuels Limited, a major Colombian private company with over 10 years experience of working in the commercialization, storage and supply of petroleum derivatives, fuels and lubricants. This joint venture will help Baron Oil with the crude marketing and transportation options in addition to the financial strength of our new partner.

Rosa Blanca Block

Baron Oil has been closely working with P&IG to reactivate the Rosa Blanca exploration permit and to further evaluate its hydrocarbon potential. Baron Oil has a 5% carried interest and is also the operator.

New Ventures

Baron Oil considers Latin America a continent with enormous untapped hydrocarbon potential and is currently seeking out additional opportunities in this part of the world. The Company is presently initiating local contacts in Mexico besides potentially expanding in both Colombia and Peru.

Baron Oil will participate in the upcoming bidding round scheduled for later this year for the onshore exploitation blocks 3 and 4 located in the Talara basin in Peru.

Conclusions

Baron Oil has three exciting exploration and producing assets in Peru and Colombia where the Directors believe each asset has the potential to become a "company maker". Farming out of part of our interest in all three has reduced both the risk and our capital requirements. In Colombia the potential extension of the NMB field would create a completely different scale of operations. In Peru, offshore Z-34 block and onshore block XXI both have significant exploration potential while the Company remains cost carried through the exploration phases, meaning that we have no financial commitments while we are exposed to our share of the upside of any commercial fields discovered.

I would like to thank all Shareholders for their continued support and l am looking forward to a very exciting and rewarding future for our company in South America.

Rudolph Berends

Chairman and CEO

2 June 2014

4.STRATEGIC REPORT

The directors now present their strategic report with the financial statements of Baron Oil Plc ("the company") and its subsidiaries (collectively "the group") for the year ended 31 December 2013.

Principal activities

The principal activity of the Group is that of oil and gas exploration and production.

Business review

A review of the Group's business during the financial period and its likely development is given in the Chairman's Statement and Operations Report.

Key performance indicators

At this stage in the company's development, the key performance indicators that the directors monitor on a regular basis are management of liquid resources that is cash-flows and bank balances and also general administrative expenses, which are tightly controlled. Specific exploration-related key performance indicators that will be relevant in the future include: the probability of geological success (Pg), the probability of commerciality or completion (Pc) and the probability of economic success (Pe).

The following table summarises the key changes in the two KPIs during the period.

Key risks and uncertainties

Exploration for hydrocarbons is speculative and involves significant degrees of risk. The key risks and their impact to the Group are summarised below along with the impact on the Group and the action that the board take to minimise those risks.

Oil prices

Baron Oil's results are strongly influenced by oil prices which are dependent on a number of factors impacting world supply and demand. Due to these factors, oil prices may be subject to significant fluctuations from year to year. The Group's normal policy is to sell its products under contract at prices determined by reference to prevailing market prices on international petroleum exchanges.

Impact

Oil prices can fluctuate widely and could have a material impact on the Group's asset values, revenues, earnings and cash flows. In addition, oil price increases could cause supply or capacity constraints in areas such as specialist staff or equipment.

Action

The Group keeps under regular review its sensitivity to fluctuations in oil prices. The Group does not as a matter of course hedge oil prices, but may enter into a hedge programme for oil where the Board determines it is in the Group's interest to provide greater certainty over future cash flows.

Liquidity risk

The Group is exposed to liquidity risks, including the risk that borrowing facilities are not available to meet capital expenditure requirements, and the risk that financial assets cannot readily be converted to cash without the loss of value.

Impact

Failure to manage financing risks could have a material impact on the Group's cash flows, earnings and financial position as well as reducing the funds available to the Group for working capital, capital expenditure, acquisitions, dividends and other general corporate purposes.

Action

The Group manages liquidity risk by maintaining adequate committed borrowing facilities and working capital funds. The Board monitors the net debt level of the Group taking into consideration the expected outlook of the Group.

Taxation

As the tax legislation in Colombia and Peru is developing, tax risks are substantially greater than typically found in countries with more developed tax systems. Tax law is evolving and is subject to different and changing interpretations, as well as inconsistent enforcement. Tax regulation and compliance is subject to review and investigation by the authorities who may impose severe fines, penalties and interest charges.

Impact

The uncertainty of interpretation and application, and the evolution, of tax laws create a risk of additional and substantial payments of tax by the Group, which could have a material adverse effect on the Group's cash flows, earnings and financial position.

Action

The Group makes every effort to comply with tax legislation. The Group is also of the opinion that all its contracts in Peru and Colombia are tax compliant. The Group takes appropriate professional tax advice and works closely with the tax authorities to ensure compliance.

By order of the Board

Rudolph Berends

Chairman

2 June 2014

5. REPORT OF THE DIRECTORS

The directors submit their report together with the audited financial statements of Baron Oil Plc ("the Company") and its subsidiaries (collectively "the Group"), for the year ended 31 December 2013.

Directors

The following are biographical details of the directors of Baron Oil Plc.

Rudolph Berends, Chairman

Rudolph Berends, aged 68, has more than 40 years experience in the oil and gas industry. He started with Shell as an explorationist and has more than 20 years experience in Latin America where he has been the CEO/President of various public and private companies. Rudolph has a Doctoral degree in Geology/Geophysics and a BSc in Economics from universities in the Netherlands and the United States.

Camilo Merendoni, Non-Executive Director

Camilo Merendoni, aged 81, has 50 years of diversified experience in the Oil and Gas industry. He started as a Petroleum Engineer with Texas Petroleum Company in Colombia and has worked mainly in Latin America, the Middle East and Central Asia. His career included stints with Ecopetrol, Petrobras, Hocol, Shell and Bridas Energy. He has degrees in Petroleum Engineering from Pittsburgh University and Advanced Management from Universidad de los Andes.

William ("Bill") Colvin, Non-Executive Director

Bill Colvin, aged 56, has over 30 years experience in the international oil and gas and healthcare sectors both in senior management and board positions of large corporations. He was Finance Director of British-Borneo Oil & Gas Plc from 1992 to 1999. From 1990 to 1992, Bill was Finance Manager at Oryx UK Energy. From 1984 to 1989, he worked in a variety of financial roles for Atlantic Richfield (ARCO) Inc. He qualified as a Scottish Chartered Accountant in 1982 and holds a Bachelor of Commerce degree from the University of Edinburgh. Bill is currently a non-executive Director of Energy XXI, a NASDAQ and UK listed oil & gas exploration and production company, and Infrastrata PLC. He also advises the private equity firm Duke Street Capital.

Proposed dividend

The directors do not recommend the payment of a dividend in respect of the financial year ended 31 December 2013.

Political and charitable contributions

In the year ended 31 December 2013 the Group made no political or charitable contributions.

Policy and practice on payment of creditors

The Group and Company policy, in relation to all of its suppliers, is to settle the terms of payment when agreeing the terms of the transactions and to abide by those terms. The Group and the Company do not follow any code or statement on payment policy. The creditors' days as at 31 December 2013 were 165 days (2012: 172 days).

Activities and results

A loss of £3,565,000 (2012: £9,471,000) was recorded for the year. Net assets of the Group at 31 December 2013 amounted to £8,343,000 (2012: £9,456,000). No dividends or transfers to reserves are proposed.

Details of the Group's affairs and the development of its various activities during the period, important events since the period end, and details of the Company's plans for the next year are given in the Chairman's Statement and Operations Report.

Change of name

On 29 June 2013, the Company changed its name from Gold Oil Plc to Baron Oil Plc.

Issue of shares

On 24 January 2013, the Company placed 278,000,000 Ordinary Shares at a subscription price of £0.0075, raising £2,050,000 after expenses.

The Environment

The Company is firmly committed to protecting the environment wherever we do business. We will do our upmost to minimise the impact of the business on the environment. Both the Company and its employees will try and be recognised by regulatory agencies, environmental groups and governments where we do business for our efforts to safeguard the environment.

Community

We believe it is our responsibility as a good corporate citizen to improve the quality of life in the communities in which we do business. Where we can we will seek to contribute towards local cultural and educational organisations.

Future outlook

Details of the Group's affairs and the development of its various activities during the period, important events since the period end, and details of the Company's plans for the next year are given in the Chairman's Statement and the Operations Report.

Directors' interests

* Each £0.0075 option grants the holder the right to subscribe for one Ordinary Share at £0.0075 per share, and is exercisable at any time prior to 27 January 2016.

** Each £0.016 option grants the holder the right to subscribe for one Ordinary Share at £0.016 per share, and are granted under one option contract exercisable at any time prior to 27 June 2016.

*** Each £0.0167 option grants the holder the right to subscribe for one Ordinary Share at £0.0167 per share, and are granted under one option contract exercisable at any time prior to 27 June 2016.

There have been no contracts or arrangements of significance during the period in which the directors of the Company were interested.

Currently there are service contracts in place with all directors of the Company and the contracts are available for inspection at the registered office of the company on request.

Remuneration policy

The Remuneration Committee takes into account both Company and individual performance, market value and sector conditions in determining director and senior employee remuneration. The Company has maintained a policy of paying only minimum salaries compared with peer companies in the oil and gas independent sector until the Company established a good position with acreage, assets, income and cash at hand. All current salaries are without pension benefits.

Basic salaries

Basic salaries are reviewed annually or when individuals change positions or responsibility or the Company's position changes. Details of the salaries are shown below.

The share options held by the directors are disclosed above and no pension contributions were made during the period for the directors.

Employees

The Group seeks to keep employees informed and involved in the operations and progress of the business by means of regular staff meetings by country open to all employees and directors.

The Group operates an equal opportunities policy. The policy provides that full and fair consideration will be given to disabled applications for employment and that existing employees who become disabled will have the opportunity to retrain and continue in employment wherever possible.

Event after the Reporting Period

On 14 April 2014, the company announced the sale of 50% of its interest in the Nancy-Burdine-Maxine fields in Colombia for US$2,000,000.

Financial Review

Liquidity & Share Trading

The Board believes that high liquidity is important in attracting both small and institutional investors to Baron Oil. During the last financial period Baron Oil has had a reasonably high stock liquidity on the E&P sector on AIM.

Shares in Issue and Shareholders Profile

The number of shares in issue at 22 May 2014 was 1,169,513,025 Ordinary Shares, each share having equal voting rights.

Baron Oil Plc has 1,297 shareholders.

The shareholding distribution at 22 May 2014 is as follows:

Significant shareholdings

The Company has been informed that, as of 22 May 2014, the following shareholders own 3% or more of the issued share capital of the Company:

Listing

The Company's ordinary shares have been traded on the AIM market of the London Stock Exchange since 14 July 2004. Cantor Fitzgerald Europe are the Company's Nominated Adviser and Broker. As of 31 December 2012, the Company's listing on AIM was suspended . The suspension was lifted on 24 January 2013 and shares commenced trading on that day. The closing mid-market price on 22 May 2014 was 1.3p.

Financial instruments

Details of the financial risk management objectives and policies, and details on the use of financial instruments by the Company and its subsidiary undertakings, are provided in note 22 to the financial statements.

Going concern

With the cash reserves the Group's medium term investment plans in Peru and Colombia show, in the directors' opinion, that there is a reasonable expectation that the resources available to the Company will allow it to continue operations. Thus, the going concern basis for the preparation and reporting of accounts has been adopted.

Publication on company's website

Financial statements are published on the Company's website (www.baronoilplc.com). The maintenance and integrity of the website is the responsibility of the directors. The directors' responsibility also extends to the financial statements contained therein. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other countries.

Indemnity of officers

The Group may purchase and maintain, for any director or officer, insurance against any liability and the Group does maintain appropriate insurance cover against legal action bought against its directors and officers.

By order of the Board

Geoffrey Barnes

Secretary

2 June 2014

6. CORPORATE GOVERNANCE STATEMENT

The directors recognise the importance of sound corporate governance commensurate with the Group's size and the interests of shareholders. As the Group grows, policies and procedures that reflect the FRC's UK Corporate Governance Code will be developed. The Company has sought to comply with a number of the provisions in the Code in so far as it considers them to be appropriate for a company of this size and nature.

The Board

The board comprises one executive director and two non-executive directors, details of who are contained in the Report of the Directors included in this report.

The board meets at least four times a year.

The board is responsible for the strategy, review and approval of acquisition opportunities, capital expenditures, budgets, trading performance and all significant financial and operational issues.

The Audit Committee

The Audit Committee is comprised of two directors with Bill Colvin as chairman and Camilo Merendoni as the other member. The Audit Committee meets at least twice a year and the external auditors have the opportunity to meet with the Audit Committee without any executive management being present. The Audit Committee´s terms of reference include the review of the Interim and Annual Accounts, review of internal controls, risk management and compliance procedures, consideration of the Company accounting policies and all issues with the annual audit.

The Remuneration Committee

The Remuneration Committee is comprised of three directors with Rudolph Berends as chairman, Bill Colvin and Camilo Merendoni are the other members. The Remuneration Committee determines the contract terms, remuneration and other benefits of the directors and senior employees. The Remuneration Committee meets as required, but at least twice a year.

The Nominations Committee

Due to the small size of the Group, it is not considered necessary to have a Nominations Committee at this time in the Company´s development and the board reserves to itself the process by which a new director is appointed.

CommunicationsThe Company provides information on Group activities by way of press releases, Interim and Annual Accounts and also the website (www.baronoilplc.com). The Company website is updated regularly and contains all operational reports, press releases and Interim and Annual Accounts.

Internal controlThe board has the overall responsibility for identifying, evaluating and taking the necessary action to manage the risks faced by the Company and the Group. The process of internal control is not to eliminate risk, but to manage the risk to reasonably minimise loss.

7. STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE STRATEGIC REPORT, THE DIRECTORS' REPORT AND THE FINANCIAL STATEMENTS

Directors' responsibilities

The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial period in accordance with applicable law and International Financial Reporting Standards ("IFRS") as adopted by the European Union. Under Company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit and loss of the Group for that year. The directors are also required to prepare the financial statements in accordance with the rules of the London Stock Exchange for companies trading securities on the Alternative Investment Market.

In preparing those 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;

· state whether financial statements have been prepared in accordance with IFRS as adopted by the European Union subject to any material departures disclosed and explained in the financial statements.

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

The directors are responsible for keeping adequate accounting records which disclose with reasonable accuracy at any time the financial position of the Company and the Group and to enable them to ensure that the financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and the Group and to prevent and detect fraud and other irregularities.

Statement of disclosure to auditor

So far as the directors are aware, there is no relevant audit information of which the Group's auditors are unaware, and they have taken all steps that they ought to have taken as directors in order to make themselves aware of any relevant audit information and to establish that the Group auditors are aware of that information.

Auditors

A resolution for the reappointment of Jeffreys Henry LLP as auditors will be proposed at the forthcoming Annual General Meeting.

By order of the board

Rudolph Berends

Chairman

2 June 2014

8. REPORT OF THE INDEPENDENT AUDITORS TO THE MEMBERS OF BARON OIL PLC

We have audited the Group and Parent Company financial statements of Baron Oil Plc for the year ended 31 December 2013, which comprise the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity, company statement of changes in equity, consolidated statement of financial position, company statement of financial position, consolidated statement of cash flows, company statement of cash flows and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and as regards the parent company financial statements as applied in accordance with the provisions of the Companies Act 2006.

This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditors' report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditors

As explained more fully in the Statement of Directors' Responsibilities, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group's and the parent Company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition we read all financial and non-financial information in the Corporate Statement, Chairman's Statement and Strategic Report, Report of the Directors and Corporate Governance Statement to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Opinion on financial statements

In our opinion:

- the financial statements give a true and fair view, of the state of the Group's and Parent Company's affairs as at 31 December 2013 and of the Group's loss and Group's and Parent Company's cash flow for the year then ended;

- the group financial statements have been properly prepared in accordance with IFRS as adopted by the European Union;

- the parent company financial statements have been properly prepared in accordance with IFRS's as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and

- the financial statements have been properly prepared in accordance with the Companies Act 2006.

Opinion on other matter prescribed by the Companies Act 2006

In our opinion the information given in the Strategic Report and Report of the Directors for the financial period for which the financial statements are prepared is consistent with the financial statements.

Matters on which we are required to report by exception

We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

Jonathan Isaacs

SENIOR STATUTORY AUDITOR

For and on behalf of Jeffreys Henry LLP, Statutory Auditor

Finsgate

5-7 Cranwood Street

London

EC1V 9EE

United Kingdom

2 June 2014

15. NOTES TO THE FINANCIAL STATEMENTS

General Information

Baron Oil Plc is a company incorporated in England and Wales and quoted on the AIM market of the London Stock Exchange. The address of the registered office is disclosed on page 2 of the financial statements. The principal activity of the Group is described in the Report of the Directors in section 4.

(1) Significant accounting policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated.

Going concern basis

These financial statements have been prepared on the assumption that the Group is a going concern.

When assessing the foreseeable future, the directors have looked at a period of twelve months from the date of approval of this report. The forecast cash-flow requirements of the business are contingent upon the ability of the Group to generate future sales and seek investment partners for its assets.

The uncertainty as to the timing and volume of the future growth in sales and source of funds from investment partners requires the directors to consider the group's ability to continue as a going concern. Notwithstanding this uncertainty, the directors believe that the group has demonstrated progress in achieving its objective of positioning the assets for future investment.

After making enquiries, the directors firmly believe that the Company has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the financial statements.

Were the Group to be unable to continue as a going concern, adjustments may have to be made to the statement of financial position of the Group to reduce statement of financial position values of assets to their recoverable amounts, to provide for future liabilities that might arise and to reclassify non-current assets and long-term liabilities as current assets and liabilities.

Basis of preparation

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) and IFRIC interpretations issued by the International Accounting Standard Board (IASB) as adopted by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention. The principal accounting policies adopted are set out below.

New and amended standards adopted by the company

There are no IFRSs or IFRIC interpretations that are effective for the first time for the financial year beginning on or after 1 January 2013 that would be expected to have a material impact on the group.

Standards, interpretations and amendments to published standards that are not yet effective.

The following new standards, amendments to standards and interpretations have been issued, but are not effective for the financial year beginning 1 January 2013 and have not been early adopted:

Basis of consolidation

The consolidated financial statements include the financial statements of the Company and its subsidiaries and associated undertakings.

Subsidiaries

Subsidiaries are all entities over which Baron Oil Plc has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are de-consolidated from the date that control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement.

Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

Joint ventures

The Group is engaged in oil and gas exploration and appraisal through unincorporated joint ventures. The Group accounts for its share of the results and net assets of these joint ventures as jointly controlled assets. The Group's interests in jointly controlled entities are accounted for by proportionate consolidation. The Group combines its share of the joint ventures' individual income and expenses, assets and liabilities and cash flows on a line-by-line basis with similar items in the Group's financial statements. The Group recognises the portion of gains or losses on the sale of assets by the group to the joint venture that is attributable to the other venturers. The Group does not recognise its share of profits or losses from the joint venture that result from the Group's purchase of assets from the joint venture until it re-sells the assets to an independent party. However, a loss on the transaction is recognised immediately if the loss provides evidence of a reduction in the net realisable value of current assets, or an impairment loss. In addition, where the Group acts as operator of the joint venture, the gross liabilities and receivables (including amounts due to or from non-operating partners) of the joint venture are included in the Consolidated Statement of financial position.

Business combinations

The Group has chosen to adopt IFRS 3 prospectively from the date of transition and not restate historic business combinations from before this date. Business combinations from the date of transition are accounted for under IFRS 3 using the purchase method.

Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the net identifiable assets of the acquired subsidiary or associate at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in 'intangible assets'. Separately recognised goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. The Group allocates goodwill to each business segment in each country in which it operates.

Impairment of non-financial assets

Assets that have an indefinite useful life, for example goodwill, are not subject to amortisation and are tested annually for impairment.

At each statement of financial position date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired.

Recoverable amount is the higher of fair value less costs to sell and value in use. 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 for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately, unless the relevant asset is carried at a re-valued amount, in which case the impairment loss is treated as a revaluation decrease.

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior periods. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

Intangible Assets

Oil and gas assets: exploration and evaluation

The Group has continued to apply the 'successful efforts' method of accounting for Exploration and Evaluation ("E&E") costs, having regard to the requirements of IFRS 6 'Exploration for the Evaluation of Mineral Resources'. 

The successful efforts method means that only the costs which relate directly to the discovery and development of specific oil and gas reserves are capitalised. Such costs may include costs of license acquisition, technical services and studies, seismic acquisition; exploration drilling and testing but do not include costs incurred prior to having obtained the legal rights to explore the area. Under successful efforts accounting, exploration expenditure which is general in nature is charged directly to the income statement and that which relates to unsuccessful drilling operations, though initially capitalised pending determination, is subsequently written off. Only costs which relate directly to the discovery and development of specific commercial oil and gas reserves will remain capitalised and to be depreciated over the lives of these reserves. The success or failure of each exploration effort will be judged on a well-by-well basis as each potentially hydrocarbon-bearing structure is identified and tested. Exploration and evaluation costs are capitalised within intangible assets. Capital expenditure on producing assets is accounted for in accordance with SORP 'Accounting for Oil and Gas Exploration'. Costs incurred prior to obtaining legal rights to explore are expensed immediately to the income statement.

All lease and licence acquisition costs, geological and geophysical costs and other direct costs of exploration, evaluation and development are capitalised as intangible or property, plant and equipment according to their nature. Intangible assets comprise costs relating to the exploration and evaluation of properties which the directors consider to be unevaluated until reserves are appraised as commercial, at which time they are transferred to tangible assets as 'Developed oil and gas assets' following an impairment review and depreciated accordingly. Where properties are appraised to have no commercial value, the associated costs are treated as an impairment loss in the period in which the determination is made.

Costs are amortised on a field by field unit of production method based on commercial proven and probable reserves, or to the expiry of the licence, whichever is earlier.

The calculation of the 'unit of production' amortisation takes account of the estimated future development costs and is based on the current period and un-escalated price levels. Changes in reserves and cost estimates are recognised prospectively.

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

Property, plant and equipment

Oil and gas assets: development and production

Development and production ("D&P") assets are accumulated on a well by well basis and represent the cost of developing the commercial reserves discovered and bringing them into production, together with the E&E expenditures incurred in finding commercial reserves transferred from intangible E&E assets as outlined above. The carrying values of producing assets are depreciated on a well by well basis using the unit of production method based on entitlement to provide by reference to the ratio of production in the period to the related commercial reserves of the well, taking into account any estimated future development expenditures necessary to bring additional non producing reserves into production.

An impairment test is performed for D&P assets whenever events and circumstances arise that indicate that the carrying value of development or production phase assets may exceed its recoverable amount. The aggregate carrying value is compared against the expected recoverable amount of each well, generally by reference to the present value of the future net cash flows expected to be derived from production of commercial reserves.

The cost of the workovers and extended production testing is capitalised within property, plant and equipment as a D&P asset.

The D&P assets for Nancy-Burdine- Maxine wells are amortised evenly over the remaining life of the licence.

Decommissioning

Site restoration provisions are made in respect of the estimated future costs of closure and restoration, and for environmental rehabilitation costs (which include the dismantling and demolition of infrastructure, removal of residual materials and remediation of disturbed areas) in the accounting period when the related environmental disturbance occurs. The provision is discounted where material and the unwinding of the discount is included in finance costs. Over time, the discounted provision is increased for the change in present value based on the discount rates that reflect current market assessments and the risks specific to the liability. At the time of establishing the provision, a corresponding asset is capitalised where it gives rise to a future benefit and depreciated over future production from the field to which it relates. The provision is reviewed on an annual basis for changes in cost estimates, discount rates or life of operations. Any change in restoration costs or assumptions will be recognised as additions or charges to the corresponding asset and provision when they occur. For permanently closed sites, changes to estimated costs are recognised immediately in the income

Statement.

Non oil gas assets

Non oil gas assets are stated at cost of acquisition less accumulated depreciation and impairment losses. Depreciation is provided on a straight-line basis at rates calculated to write off the cost less the estimated residual value of each asset over its expected useful economic life. The residual value is the estimated amount that would currently be obtained from disposal of the asset if the asset were already of the age and in the condition expected at the end of its useful life.

Buildings, plant and equipment unrelated to production are depreciated using the straight-line method based on estimated useful lives.

The annual rate of depreciation for each class of depreciable asset is:

· Equipment and machinery - 4-10 years

The carrying value of tangible fixed assets is assessed annually and any impairment is charged to the income statement.

Investments

Investments are stated at cost less provision for any impairment in value.

Trade receivables

Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired.

Cash and cash equivalents

Cash and cash equivalents include cash in hand, deposits held on call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the statement of financial position.

Inventories

Inventories, including materials, equipment and inventories of gas and oil held for sale in the ordinary course of business, are stated at weighted average historical cost, less provision for deterioration and obsolescence or, if lower, net realisable value.

Revenue

Oil and gas sales revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for the Group's share of oil and gas supplied in the period. Revenue is shown net of value-added tax, returns, rebates and discounts and after eliminating sales within the Group. Revenue is recognised when the oil and gas produced is despatched and received by the customers.

Taxation

Income tax

Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit or loss for the year. Taxable profit or loss differs from profit or loss as reported in the same income statement because it excludes items of income or expense that are taxable or deductible in other periods and it further excludes items that are never taxable or deductible. The Company's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the statement of financial position date.

Deferred tax

Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the statement of financial position liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

The carrying amount of deferred tax is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised. Deferred tax is charged or credited to income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.

Trade payables are not interest bearing and are stated at their nominal value.

Fair values

The carrying amounts of the financial assets and liabilities such as cash and cash equivalents, receivables and payables of the Group at the statement of financial position date approximated their fair values, due to relatively short term nature of these financial instruments.

The Company provides financial guarantees to licensed banks for credit facilities extended to a subsidiary company. The fair value of such financial guarantees is not expected to be significantly different as the probability of the subsidiary company defaulting on the credit lines is remote.

Share-based compensation

The fair value of the employee and suppliers services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. At each statement of financial position date, the entity revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity.

Share based payments (Note 20)

The fair value of share-based payments recognised in the income statement is measured by use of the Black Scholes model, which takes into account conditions attached to the vesting and exercise of the equity instruments. The expected life used in the model is adjusted; based on management's best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. The share price volatility percentage factor used in the calculation is based on management's best estimate of future share price behaviour and is selected based on past experience, future expectations and benchmarked against peer companies in the industry.

Ordinary shares are classified as equity.

Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from proceeds.

Provisions

Provisions are recognised when the Company has a present obligation as a result of a past event, and it is probable that the Company will be required to settle that obligation. Provisions are measured at the directors' best estimate of the expenditure required to settle the obligation at the statement of financial position date, and are discounted to present value where the effect is material.

Financial instruments

Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables.

Non-derivative financial instruments are recognised initially at fair value plus, for instruments not at fair value through profit or loss, any directly attributable transactions costs, except as described below. Subsequent to initial recognition non-derivative financial instruments are measured as described below.

A financial instrument is recognised when the Group becomes a party to the contractual provisions of the instrument. Financial assets are derecognised if the Group's contractual rights to the cash flows from the financial assets expire or if the Group transfers the financial assets to another party without retaining control or substantially all risks and rewards of the asset. Regular purchases and sales of financial assets are accounted for at trade date, i.e. the date that the Group commits itself to purchase or sell the asset. Financial liabilities are derecognised if the Group's obligations specified in the contract expire or are discharged or cancelled.

Foreign currencies

i) Functional and presentation currency

Items included in the financial statements of the Group are measured using the currency of the primary economic environment in which the entity operates (the functional currency), which are mainly in Pounds Sterling (£), US Dollars (USD), Colombian Pesos (COP) and Peruvian Nuevo Sol (PEN). The financial statements are presented in Pounds Sterling (£), which is the Group's presentation currency.

ii) Transactions and balances

Foreign currency transactions are translated into the presentational currency using exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.

iii) Group companies

The results and financial position of all Group entities (none of which has the currency of a hyper-inflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

(a) assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position;

(b) income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and

(c) all resulting exchange differences are recognised as a separate component of equity.

On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders' equity. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are recognised in the income statement as part of the gain or loss on sale.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

Management of capital

The Group's policy is to ensure that it will always have sufficient cash to allow it to meet its liabilities when they become due. The principal liabilities of the Group arise in respect of committed expenditure in respect of its ongoing exploration work. To achieve this aim, it seeks to raise new equity finance and debt sufficient to meet the next phase of exploration and where relevant development expenditure.

The Board receives cash flow projections on a monthly basis as well as information on cash balances. The Board will not commit to material expenditure in respect of its ongoing exploration work prior to being satisfied that sufficient funding is available to the Group to finance the planned programmes.

Dividends will be issued when there are sufficient reserves available.

Critical accounting judgments and key sources of estimation uncertainty

The preparation of the consolidated financial statements requires management to make estimates and assumptions concerning the future that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The resulting accounting estimates will, by definition, differ from the related actual results.

Intangible assets plant and equipment are amortised or depreciated over their useful lives. Useful lives are based on management's estimates of the period that the assets will generate revenue, which are periodically reviewed for continued appropriateness. Changes to the estimates used can result in significant variations in the carrying value.

The Group assesses the impairment of plant and equipment and intangible assets subject to amortisation or depreciation whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Additionally, goodwill arising on acquisitions is subject to impairment review. The Group's management undertakes an impairment review of goodwill annually or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable.

The discount rate used by the group during the period for impairment testing was 10%.

The complexity of the estimation process and issues related to the assumptions, risks and uncertainties inherent in the application of the Group's accounting estimates in relation to plant and equipment and intangible assets affect the amounts reported in the financial statements, especially the estimates of the expected useful economic lives and the carrying values of those assets. If business conditions were different, or if different assumptions were used in the application of this and other accounting estimates, it is likely that materially different amounts could be reported in the Group's financial statements.

The directors have carried out a detailed impairment review in respect of goodwill. The group assesses at each reporting date whether there is an indication that an asset may be impaired, by considering the net present value of discounted cash flows forecasts which have been discounted at 10%. The cash flow projections are based on the assumption that the group can realise projected sales. A prudent approach has been applied with no residual value being factored. At the period end, based on these assumptions there was no indication of impairment of the value of goodwill.

However, if the projected sales do not materialise there is a risk that the value of the intangible assets shown above would be impaired.

Commercial reserves estimates

Oil and gas reserve estimates: estimation of recoverable reserves include assumptions regarding commodity prices, exchange rates, discount rates, production and transportation costs all of which impact future cashflows. It also requires the interpretation of complex geological and geophysical models in order to make an assessment of the size, shape, depth and quality of reservoirs and their anticipated recoveries. The economic, geological and technical factors used to estimate reserves may change from period to period. Changes in estimated reserves can impact developed and undeveloped property carrying values, asset retirement costs and the recognition of income tax assets, due to changes in expected future cash flows. Reserve estimates are also integral to the amount of depletion and depreciation charged to income.

Decommissioning costs

Asset retirement obligations: the amounts recorded for asset retirement obligations are based on each field's operator's best estimate of future costs and the remaining time to abandonment of oil and gas properties, which may also depend on commodity prices.

Share based payments (Note 20)

The fair value of share based payments recognised in the income statement is measured by use of the Black Scholes model, which takes into account conditions attached to the vesting and exercise of the equity instruments. The expected life used in the model is adjusted; based on management's best estimate, for the effects of non -transferability, exercise restrictions and behavioural considerations. The share price volatility percentage factor used in the calculation is based on management's best estimate of future share price behaviour and is selected based on past experience, future expectations and benchmarked against peer companies in the industry.

The preparation of the consolidated financial statements requires management to make estimates and assumptions concerning the future that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The resulting accounting estimates will, by definition, differ from the related actual results.