Cabot Energy Regulatory News (CAB)

23 Jun 2005 12:00

Immediate Release: 23 June 2005 Northern Petroleum Plc ("Northern," the "Group" or the "Company") Final Results for the Year Ended 31 December 2004 HIGHLIGHTS * Strong cash position * A significant entry position established in the Netherlands * Independent valuation of ‚£51.6 million (19.3p per share) placed on the Group's Proven and Probable reserves in the South of England * Two well drilling programme on the Isle of Wight to commence shortly with the potential for recoverable reserves of 47 to 156 million barrels of oil net to the Group * Expansion of licence positions in South of England and Italy Chairman, Richard Latham, commented,"We look forward to the results from the imminent drilling of two wells on theIsle of Wight, as well as development programmes for production in theNetherlands, re-perforation work in Spain and further progress towards drillingonshore Italy. I am extremely encouraged by the considerable progress that wehave made in the last year. Our prospects, particularly with the addition ofthe Netherlands transaction, remain stronger than ever."CHAIRMAN'S STATEMENTQuite apart from the interest in preparing for the imminent drilling of twowells in the summer of 2005 on the Isle of Wight, which are key to our projectsin the Wessex/Channel basin, much has happened since I last wrote toshareholders.Our work on licences in the Weald basin reached such an interesting point andenhanced value that we considered it necessary for it to be independentlyreviewed by Exploration Consultants Limited ("ECL") who, based upon theprogress to date, allow me to report an attribution net to the Company ofProven and Probable recoverable reserves of 10.24 million barrels of oil. Thesereserves are valued at ‚£51.6 million if discounted at 10% per annum andacknowledge an upside potential of 186 million barrels in the Possible categoryof reserve estimation. The next act is to start a wider programme in 2006 todrill appraisal wells to confirm their profitability and thereafter worktowards their development into production.The one feature of the report that I wish to highlight is the conclusion thatthe Horndean field is considered to extend eastwards into our PEDL 126 licenceacquired in 2003. We are currently in discussion with local residents andlandowners to identify a suitable site for drilling and production activities.I believe that this more than compensates for the delays in drilling Avington-3and not yet acquiring a site from which to drill Hedge End-2. The latter was aregrettable event considering the numerous consultations with the localplanning officers and the Hampshire County Council Estates Department whoseadvice we took, only for the previous offer of a site lease to be latersummarily withdrawn. We will most certainly return to locate a suitable sitefor drilling now the local elections have taken place.Helped by the ECL report we have commenced efforts to bring to the attention ofall interested parties in the region the scale of the potential for oilproduction in the Weald and Wessex basins, the potential for renewable thermalenergy resulting from drilling wells for oil and the need for a regionalenvironmentally acceptable and lower cost approach for the disposal ofassociated water production. I believe that a new regional policy will help tobring benefits to all stakeholders in the area if planned for at this stage.I also ask you to join me in welcoming our entry into the Netherlands, both asan applicant for a Production Licence for the Papekop field and in animaginative Joint Venture partnership with the joint ExxonMobil and Shell ownedNederlandse Aardolie Maatschappij, a company known throughout the industry asNAM. The Joint Venture brings to us six suspended oil and gas discoveries, somewith producible oil columns, which we intend to move to bring into productionon a rapid schedule with the Company obtaining a 130% return of the capitalinvested before a equal division of pre-tax profits. In our assessment thiswould bring to the Company estimated net Proven plus Probable recoverablereserves in the order of 8.3 million barrels of oil and 50 bcf of gas whentaken together with Papekop, a contested application. This is a substantialthreshold justifying our move into The Netherlands. The NAM Joint Venture alsoprovides us with the first phase of a considerable upside potential throughexploration, with commitment to an initial portfolio of three prospects to bedrilled as farm-in wells, but allowing the Company a full cost recovery beforetax prior to profit sharing with NAM. The first of these wells is at Steenwijkand is scheduled for drilling by NAM in 2006 but thereafter the Company's localsubsidiary will be the Operator. I look forward to a long and mutuallybeneficial relationship with NAM and the local people who I wish to assure willfind our operations will be environmentally safe.In Italy much progress has been made in the award of licences and I nowanticipate the advance to an active programme, with the drilling of a number ofshallow gas wells in the Po Valley gas province, perhaps as early as 2006. Inlate 2004 we assigned 20% out of all save one of our licences and applicationsto ATI Oil Plc ("ATI") and supported that company's entry to a listing fortrading on Ofex. The Company currently owns 38.25% of the shares in ATI whichis currently treated as an associate undertaking in conformity with advice fromour auditors, though it is our longer term intention that this shareholdingbecomes solely an investment. I draw to your attention the magnitude of ourjoint position with ATI that through existing licences and uncontestedapplications covers an area equal to approximately 45 North Sea blocks andwould in number be over 10% of all the exploration licences in Italy. Includingour investment in ATI, the Company still holds a net beneficial interest of69.13% in each Italian licence, which conforms to our strategic policy to holda significant position wherever we operate.Production during the year was 7,539 barrels from our 10% interest in theHorndean oil field and 20,859 barrels from our interest in the Ayoluengo oilfield in Spain. With the higher prevailing price of crude oil, the revenuesfrom these fields have contributed to the small gross profit of ‚£12,000 that Ireport to you.The result for the year was a loss of ‚£491,000, well within budget, and evenmore remarkable when you consider it includes the provision for NationalInsurance mentioned in the Finance Report. The most important contribution tothe improved result for the year has been the continued tight cost control of ahard working team which has seen a greatly increased activity level andexpansion in size more than matched by their productivity. I thank them. Theoutcome is that we entered 2005 with ‚£5,140,000 of cash in hand, sufficient tofollow up our ambitious plans beyond the two wells on the Isle of Wight.I look to an improvement in revenues in 2005 with better oil pricing in theyear so far and in anticipation of a positive result from a well re-perforationprogramme at Ayoluengo.The Company has also a small investment and commitment in a licence coveringthe whole of the offshore of Guyane. The holding of a 1.25% interest is smallwith a commensurately small commitment; however we assess the potential aslarge - six prospects have been mapped, each with the potential to yield inexcess of one billion barrels of recoverable oil. It is a reward to riskprofile that I find attractive. We are waiting for the Operator, HardmanResources, to take action to drill the first well.In line with the prospective expansion of the Company's production and drillingprogrammes a full reassessment of the Heath, Safety and Environmental policiesand procedures has been undertaken. I am pleased that we are constantlyimproving in these areas. They are as vital to us as profits and must be of thehighest standard especially with our heavy emphasis of onshore explorationprojects bringing us in contact with so many lives.Your Board wishes to bring forward the point at which the Company could be in aposition to pay a future dividend and in the process eliminate the effect ofhistoric losses upon the balance sheet. We have been aware for some while thatthe deferred shares are probably valueless. Accordingly, we are proposing totake steps to eliminate the deferred shares and also to write off a substantialpart of the historic deficit on the profit and loss account against the paid upshare capital on the deferred shares and the share premium account. We furtherpropose to consolidate the ordinary shares on a one for five basis. It ishoped that this will result in the removal of any preconception that we are a"penny share" company. For further explanation I refer both the Company'sdeferred and ordinary shareholders to the Finance Report and my letters to themincluded within the annual report. I hope that you will support our proposalson these issues.I am sure that you look forward with me to the results from the drilling of twowells on the Isle of Wight, development programmes for production in TheNetherlands, re-perforation work in Spain and further progress towards drillingonshore Italy. I also reflect upon the considerable progress made year uponyear, a goal that we intend to maintain and, with the Netherlands transaction,have already taken significant steps towards achieving.OPERATIONS REPORTREVIEW OF OPERATIONS: OVERVIEWThe past twelve months have seen a confirmation by ECL of our assets in theWeald and Wessex Basins. Work upon our understanding of old oil discoveries andindeed certain dry holes has resulted in the attribution of 10.24 millionbarrels of Proven plus Probable recoverable reserves. To this can now be added,subject to the approval by Government authorities, a new position in TheNetherlands which it is estimated would add a further 8.3 million barrels ofoil and 50 billion cubic feet of gas, in total 15.9 million barrels of oilequivalent, of which 7 million barrels of oil equivalent is behind pipe insuspended wells.On the exploration front further Italian exploration licences have been awardedand further applications made and, through NAM, drillable prospects in TheNetherlands are available. The overall result is that, short of a majorproduction purchase, the Company has now built a well balanced profile ofassets from exploration concept through to developable proven and probablereserves.REVIEW OF OPERATIONS: UNITED KINGDOMWhen Northern took over the Operatorship of activities in the south west WealdBasin and the Isle of Wight (Wessex Basin) it placed a major emphasis on theacquisition of existing seismic and well data from the area. Concluding a dataexchange agreement with Star Energy Plc during 2003 was of major assistance.Benefiting from modern computer processing capabilities and production datafrom the producing wells in the region, Northern was able to develop throughpaleo-reconstruction a regional model of the structures available to receiveoil during the period of oil migration and determine which structures wereeither late in formation or breeched during the period of inversion during theTertiary. Utilising this information, petrophysical analysis of many wells anda more recently developed understanding of the effect of different drilling mudsystems upon oil contained within the Great Oolite, it has been possible tocome to an understanding of past exploration results and make a prediction ofprobable oil reserves and indeed in some cases proven oil reserves. This workhas been evaluated and summarised in the ECL report announced to shareholderson 4th May 2005.The first well to be drilled will be the Sandhills-2 appraisal well in theWessex Basin. The sequence is more dictated by the historical sequencing of thelicences and their drilling or relinquishment dates than a ranking of risk orreward.The overall strategy is to drill and test at least four Great Oolite wells toprove or modify our modelling in both the Wessex and Weald Basins which shouldbe treated as separate identities having two distinct sources.ECL REPORTIn early 2005 the potential value of the licence holdings was verified throughan independent geological, geophysical and petroleum engineering assessmentundertaken by ECL which has provided for the first time recognition of thepotential value resulting from our extensive work and licensing in these twobasins in the South of England. Reporting under The Society of PetroleumEngineers definitions and compliant with the UK Listing Authority guidelines,ECL have confirmed as oil fields attributed with proven and possible reservesas Avington, Hedge End, Horndean, Horndean (easterly extension) in the WealdBasin and Sandhills in the Wessex-Channel Basin. Net to Northern 10.24 millionbarrels proven plus probable reserves have been assigned.The ECL report makes the judgement that previous drilling and testing of wellsin the area has proven the existence of three oil fields to which reserves havebeen attributed in the proven category. A further seven discovered oil fieldshave been attributed reserves in the probable and possible categories. Thesefields have undergone a full reserves evaluation in the proven, probable andpossible categories as defined by The Society of Petroleum Engineers andsummarised below. In addition, ECL has evaluated the prospective reserves (i.e.reserves multiplied by probability of success) for defined explorationprospects and the contingent reserves applicable in the event of higherrecovery factors in oolite reservoirs to be achieved mainly from the successfulimplementation of multi-lateral drilling techniques and an improvement incapabilities for the handling of associated waters.Net Northern Reserves (Million barrels)Reserve Category Wessex Channel Basin Weald Basin Total Proven 1.27 1.27 Proven + Probable 6.64 3.60 10.24 Proven + Probable + 28.70 26.50 55.20 Possible Contingent Reserves 9.70 5.50 15.20 Prospective 53.30 2.90 56.20 Net Northern NPV10* (‚£ Millions)Reserve Category Wessex Channel Basin Weald Basin Total Proven 4.65 4.65 Proven + Probable 35.70 15.90 51.60 Proven + Probable + 151.20 122.20 273.40 Possible *calculated using a discount rate of 10%The report does not cover all the leads and prospects that Northern is workingon. There is another logged oil discovery contained within PEDL 154 and withthe licence surrounding the Storrington oil field additional potential can beexpected. A Sherwood sandstone level prospect mapped in Blocks 98/7a and 98/8aon trend east of Wytch Farm and Great Oolite level prospects in PEDLs 152 and155 have also been identified. It is a very satisfactory list of prospectsdeveloped at low cost.SOUTH OF ENGLAND - Towards the realisation of significant valueIn 2004 Northern consolidated its licence position in the south of England withthe successful award of all five of its 12th Round of UK onshore licensingapplications for which Northern is the designated Operator.The additional licences are on the Isle of Wight (PEDL 152), the western Solent(PEDL 151) in the Wessex-Channel Basin, licences in the south west Weald Basin(PEDL 154 & PEDL 155) and in the north east Weald Basin (PEDL 153). Theselicences are all adjacent to existing interests and have already recognisedprospectivity to augment the significant undeveloped oil reserves nowestablished in the earlier awarded licences.The 2005 Drilling Campaign - Testing the Wessex BasinDrilling of the Sandhills-2 appraisal well and Bouldnor Copse-1 explorationwell on the Isle of Wight within the Wessex-Channel Basin will evaluate thepotential of a logged oil column within the Great Oolite at Sandhills-1. ECLhas evaluated these to contain probable oil reserves and the potential for alarge Sherwood sandstone oil accumulation with the potential to be a companymaker in the event of success.The Sandhills discovery in the Great Oolite on the Isle of Wight, being withinthe Wessex-Channel Basin, is considered a slightly higher risk than the GreatOolite discoveries in the Weald Basin as there is no experience as to reservoirproductivity from producing oil fields. This makes the data from Sandhills-2important to our interpretations in the area.An Avington Appraisal WellIt is planned that the Avington-3 appraisal well of the Avington-2 oildiscovery made in 2003 will be drilled later this year, this well having beendelayed since 2004 by the Operator Pentex Oil Limited.2006 OnwardsIt is intended that the summer 2005 wells will be followed by a 2006 drillingprogramme focused upon the Weald Basin.In the Weald Basin a low risk appraisal of an eastwards extension of theHorndean field into PEDL 126 and an appraisal of the Hedge End-1 oil discoveryare attributed proven plus probable reserves by ECL within the Great Oolite andare obvious targets. Three other structures are still being evaluated.In the Wessex Basin the Hurst Castle prospect could be a very interestingtarget subject to a re-evaluation after gaining Sherwood level data fromBouldnor Copse-1. On the Isle of Wight there is one further prospect and onelead at the Great Oolite level.KENTIn this north east part of the Weald Basin we have adopted the same approach asin the south west. As seismic data has been obtained a paleo-reconstruction ofthe basin was made for the prognosed time of oil migration in order tounderstand and eliminate as too late, the many structures which were drilleddeeper into the basin and closer to the zone of oil generation during earlierexploration campaign. From this work it has been concluded that in thisquadrant of the Weald Basin there were no barriers to oil migration beforereaching the centre and western areas currently under licence.In Kent we have two prospects defined and a number of leads with Upper JurassicCorallian and Portland sandstones being the primary reservoir targets. Theseprospects and leads are being integrated into a full interpretation andpaleo-reconstruction of the seismic data on the two licences in order to defineand select an initial prospect for drilling in 2006.SUMMARYIn the near future we are looking forward with reasonable confidence to takinga number of oil discoveries through into development and building a productionbase in the UK under our management.REVIEW OF OPERATIONS: ITALYTHE STRATEGYNorthern holds a 50% interest and is operator of 21 oil and gas permits andapplications at various stages of progression both on and offshore Italy,covering an area in excess of 10,000 km‚². In addition Northern holds a 38.25%shareholding in ATI Oil Plc ("ATI"), the holder of the remaining 50% interests,thus bringing the total Northern net beneficial interest to 69.13%.We have approached this endeavour as a large scale project, building aportfolio of more than twenty licences which would be about one eighth of thetotal number of exploration licences for the country, in our view a majorposition. On this scale it is reasonable to apply a statistical approach to theexploration risk and reward to assess the possible profit expectation of theexploration activities. This approach is designed to ensure that in the Italianarena, which we assess as profitable, we should hold access to sufficientopportunities to accrue a benefit by ensuring that the number of prospects issufficient to overcome any short-term exploration failure.Northern entered into Italy well ahead of recent oil price increases and hasbeen able to build its portfolio of licences nearly always covering playsfollowing up past oil and gas discoveries.ITALY - WHY ARE WE THERE?The Company considers there to be the potential for the discovery of oil fieldsof 50 up to 500 million barrels in size range and gas fields of up to 1 or moretcf.Italy is the third largest producer of oil and gas in Europe (after the UK andNorway), and offers the benefits of having an accessible existing databaseThere are five major hydrocarbon producing basins, of which the Po Basin andAdriatic Sea have well developed gas infrastructures. Elsewhere, major oil andgas fields are located on and offshore Sicily and in the southern Apennines.Production is from a wide range of geological settings.Importantly the fiscal and licensing terms in Italy, are considered to be veryfavourable within our business model as a smaller oil and gas explorationcompany. * Annual licence rentals are only 5 euro per km‚²; * Licences can be applied for in any open area at any time, there are no licensing rounds and applications may be for areas as large as 750 km‚²; * Licences are awarded for an initial six year period, and it can be five years before a firm obligation to drill is required; * The existing regional offshore seismic data is available; * There is a limited production royalty rising to a maximum of only 7% (4% for offshore oil), however no royalties are due on the first annual 20 million cubic metres of gas and 20,000 barrels of oil produced from individual accumulations; * Italian source income is subject to both regional taxes and taxation on corporate profits at rates of up to 35%. The Company considers that, after the oil discoveries made in the late 1980s,there was an excessive concentration on the onshore Southern Apennine thrustarea and a virtual hiatus of effort in the southern offshore zones. Most of theprospects being examined lie in 200-700m of water which in the early 1980spresented frontier level engineering challenges which are now "run of the mill"and the development of which has been greatly enhanced by advances in sub-seacompletion and in reservoir horizontal drilling technologies. Also, therelatively recent termination of the ENI SpA ("ENI") monopoly over the Po Basinat the end of 1997, together with the opening up of the Italian electricitygenerating market, presents a good opportunity for the Company to benefit fromreworking the existing seismic data. Use can now be made of powerful moderncomputer processing to quickly reconstruct seismic sections and map prospects.In some areas the shooting of modern offshore 2D or 3D data is expected toconfirm and to upgrade the prospects. In essence it is reasonable to believethat new technologies could be utilised to our advantage in returning to oldoil discoveries and plays.THE FOCUSItaly has a wide range of oil and gas opportunities, but onshore Northern'sfocus is on the older established oil and gas rich provinces that have beensomewhat sidelined over the last decade. These regions include the prolific PoBasin gas and oil province and the northern Adriatic - Marche onshore gasbasin. The Southern Apennine oil province has been rejected due to both thehigh cost even for poor quality seismic data and perceived local difficulties.Offshore a major effort has been directed at the South West Sicily oil and gasprovince round to the more established south-east of Sicily and a second areain the southern Adriatic over an old oil discovery. In addition one licence isheld offshore within the Tiber Delta area to the west of the Colombo-1 well inwhich Northern participated in 2000.FAST TRACK PLANIn order to accelerate the first drilling activity and to not have all thelicence activities at the same point in the same year a fast track plan hasbeen agreed: 1. Acquire all seismic necessary to bring several Po Basin shallow gas prospects to drill readiness (Nibbia, Longastrino and Savio); 2. Reprocess seismic data in the G.R17.NP area sufficient to show that the play concept may be pursued to advantage through modern geophysical techniques; 3. Prepare the data over E.R51.NP and C.R147.NP for full prospect definition; 4. Reservoir engineering petro-physical analysis of the Giove-2, Medusa-1 and Rovesti-1 wells to determine the case for a re-drill and completion (d57FR.-NP and d58FR.-NP). PO BASIN - IN SHORT TERM PURSUIT OF SHALLOW GAS DISCOVERIESThis region, which only opened up to competition in 1997, provides the companywith the opportunity to drill several shallow gas targets of 25-125bcf in thenext two years whilst preparing the approach to drilling the possible deeperoil plays. The basin is within an Alpine compression belt underlying theItalian industrial heartland. The finding of a large number of gas fields, andseveral light oilfields has resulted in the establishment of a sizeable gaspipeline infrastructure. From 1953 until 1997 the Po Basin was the exclusivepreserve of the state company ENI but is now opened up to competition incompliance with EU law. That process saw ENI relinquish 75% of its explorationareas. The Po Basin contributes more than 30% of the country's natural gas andnearly 50% of its oil.SAVIO, LONGASTRINO, LA SACCA AND PUNTA MARINA - Chances to drill shallow gassub-thrust structures and on-lap plays in front of the known thrusts and in thelows behind.More detailed seismic processing works will be carried out prior to drilling atan early date. The Savio licence, granted in a March 2004 decree, lies in thesouth eastern and most prolific gas producing part of the Po Basin and coversan area of 459 km‚². The targets in the area are relatively shallow gasaccumulations in the Middle and Lower Pliocene sands.Now using the greatly improved processing power of modern computer systems itis possible to reprocess the existing seismic data to better definestratigraphic and pinchout traps. In recent years both stratigraphic andstructural traps on the flanks of the large thrust induced anticlines that havebeen explored with success and with discoveries of small to medium size gasreserves. Several asymmetric anticlines cross the area in a NW/SE trend anddespite several dry wells in the area, potential exists for gas fields in thenorthern part of the licence. This is to be evaluated through the purchase andreprocessing of the numerous seismic lines crossing the area utilisingamplitude versus offset (AVO) analysis and bright spot indications, which ledAgip to discover the Dosso degli Angeli field to the east. Though this methodreduces the risk it does not guarantee success in all cases. Prospectssupported by AVO analysis coinciding with geological factors will be theprimary targets.In 2002 ENI made a new discovery, Agosta, adjacent to Longastrino and anapplication for a production concession has been filed. Many of the major gasfields in the area, largely discovered in the period 1950-1970, are onasymmetric anticlines draped over thrust features, and are near to or havereached exhaustion. Several are now being turned into subsurface gas storagefacilities. Some of the largest in the vicinity are Dosso degli Angeli,Angilli, Ravenna and Alfonsine which between them had recoverable reserves ofhalf to one trillion cubic feet.Adjacent to the north the San Marco licence was awarded earlier than Savio, andis where Grove Energy Limited in January 2005 reported a 15mmcfd gas discoveryin its Abbadesse -1 well at 2,600-2,800 metres depth. The same play trend hasbeen extrapolated into the north of the Savio licence.NIBBIA - Targeting shallow Tertiary channel gas plays and a deep oil potentialbeing actively explored by BG Group Plc ("BG") and ENI in the adjacent areas.This permit, with an area of 253 km‚², is in the western Lombardy zone of theprolific Po Basin, 15 km to the west of ENI's large Villafortuna light oilfield, a deep play not actively pursued during the period of lower oil prices.It is only recently that a Tertiary Miocene channel play has been recognisedand pursued by BG and ENI. Northern believes that the Nibbia permit is wellplaced within the play zone.The primary objective is to locate shallow, 1,500 - 3,000 metre gas bearingchannel sands in the Miocene, as at the Dasena field 15 km to the south west.BG and ENI are believed to be pursuing the same channel sands in the proposedRobbio-1 well just to the south of Northern's licence, where a prospect hasseemingly been identified as a result of a 2003 3-D seismic survey.The other objective is to define the tilted pre-Cretaceous fault blocks andadjacent grabens which determine the location of the porous carbonate reservoirrocks and the nearby troughs in which oil has been generated. In the past thishas been difficult as the whole region has been subjected to later Alpinethrust movements.Northern has been approached by companies interested in a farm-in to thislicence.GATTINARA - A major deep oil play in the Alpine thrust belt.A now uncontested application has been made to licence an area of 462 km‚² in anarea to the NNE of Nibbia and close to the border with Switzerland. One knownmapped prospect with the potential for about 300 million bbl of recoverable oilhas been identified within the application area. Two other leads exist instacked south facing Alpine thrusts. This is analogous to the Molossa oil andcondensate field to the east of Milan and the Gattinara area contains the sameoil source rocks as the Villafortuna oil field. In these days of higher oilprices we consider this to be a very attractive oil play in the heart of Europeand it should be of interest to both northern Italian and Swiss industry andinvestors.Onshore Adriatic CoastCERASA - Working to substantiate a 50-100bcf gas target in an area of shallowergas fields.This licence covers an area of 382 km‚² located within the well establishedMarche Basin, a region of Lower Pliocene gas production in a south easternextension of the Po Basin province. The Cerasa licence was awarded to Northernin competition with the Italian company Petren. There are three substantiallydepleted shallow gas fields in the licence area; Fano, Marotta and SanCostanza. These are simple anticlinal traps at 500 - 850 metre depths producingfrom sands of 20 - 30% porosity and merit consideration for gas storagefacilities. We have identified several other features displaying similaramplitude anomalies. The task is to plan a sufficiently cheap drilling method.Utilising the existing seismic data base we have also identified a large on-laptrap in the south of the licence area with the potential for up to 100 bcf ofgas.Offshore Tiber DeltaE.R51.NP - Encouraged by the Colombo-1 experiences of Northern in 2000.Northern consider there to be a good potential for gas fields in the Plioceneand underlying Miocene turbidites in similar geological settings to parts ofSicily where the 3tcf Gagliano gas field has been found.This licence of 724 km‚² has been taken in the thickening off-shore portion ofthe same deltaic basin in which Hardman Resources, with Northern as a ten percent partner, drilled the Colombo-1 sub-economic gas discovery in 2000 on theadjacent Fiume Tevere permit. Traps within and against Tertiary turbidite fansprovide a major gas exploration play throughout the Mediterranean region.Italy, a stable EU member state with a strong gas distribution industry,provides a good location in which to pursue it. Ministerial owned seismic data,shot by ENI for Zone "E", has been utilized and five leads have beenidentified. The play concept is solely for gas in both Pliocene sands and siltsand the underlying thrusted Miocene-Oligocene turbidite series which areproductive in similar geological situations in ENI's giant Gagliano (NorthSicily) and Luna (Calabrian coastal basin) fields.OFFSHORE SICILY - An opportunity to deploy newer deeper water technology in aprolific basin and also prove the offshore potential on-trend to a billionbarrel oil field.In the west the Apennine-Maghrebian thrust belt is covered by three licencesand a further three licence applications. It is hoped that modern seismic,particularily 3D, will lead to the uncovering of oil prospects similar in sizeand nature to Agip and Shell's Monte Alpi Val d'Agri complex on trend insouthern Italy estimated at over one billion barrels recoverable. Elsewhere themain endeavour is to re-examine oil discoveries and prospects in the light ofhigher oil prices and significant advances in deeper water technology since theend of the last exploration phase in the mid-1980s. This is a prolific oilproducing province with about 1 billion barrels of recoverable reserves in fouroil fields found to date (Ragusa, Gela, Vega and Perla). The oil is producedfrom Mesozoic karst and shelf edge Miocene carbonate reservoir formations inhorst block structures. In addition there has been the 2002 discovery by Agipof the Panda gas field in a Pliocene turbidite formation. The Company believesthat further fields can be found from reprocessing of the existing seismic dataand upgraded by recording modern data if necessary. The same or similarprospects may exist in Maltese, Tunisian and Libyan waters, but Italy isgreatly preferred as offering more favourable licensing conditions, politicalstability and larger markets.Licences G.R17-NP, d19GR.-NR, d20GR.-NP and Licence Application d22GR.-NP,d23GR.-NP and d24GR.-NPThis is a strategic move to licence over 4,000 km‚² covering the Apennine -Maghreb thrust belt offshore in Italian waters with the potential for findingvery large fields. The thrust belt contains the giant Val d'Agri oil field inthe southern Apennines, the Gagliano gas condensate field in central Sicily,the Tellian fold belt and oil fields in Algeria, where it is known as the Atlasthrust belt. Live oil seeps have been recorded over both the Italian andTunisian portions of the thrust belt. Much of this area was licenced in the1980s to ENI and Shell. With water depths up to 700 metres, this was towardsand beyond the then limit of offshore platform based technologies.The area is possibly one of the last in Europe in which the proverbial"elephant" oil field may be discovered. The Company is pursuing this playoffshore, whilst rejecting it onshore, as it expects to gain from the lowercost and better definition obtainable from offshore seismic data. Even theexisting 2-D seismic before reprocessing suggests a series of undrilled leadson a NE - SW trend. It is probable that they can be sufficiently defined fordrilling utilising more modern reprocessing and even 3-D seismic. This viewseems to be supported by the plans of PGS to record a speculative seismicsurvey in the adjacent Tunisian waters. The primary objective is for oil andgas in Miocene and Cretaceous carbonates as at the Nilde oil field to the east.There is a secondary objective for gas in the Oligocene turbidite fans in whichthe large 3tcf. Gagliano gas field was found onshore Sicily. It is reportedthat the Algerian authorities are currently offering to licence two blocks onthe same geological trend.The first task of re-processing key seismic lines is under way. It isanticipated that modern processing will provide a much clearer structuralpicture in the complex stacked thrust belt. We are considering the recording ofnew "trial" seismic lines later in 2005 when PGS intend to record a 3-D surveyover the offshore Tunisian part of the thrust belt where a speculative 2-Dseismic survey was recorded in 2004 and has proven the extension of this highlyprospective trend into Tunisian waters.Licence Application d21GR.-NPThree prospects close to the now abandoned Nilde oil field have been mapped andnow will be fully re-evaluated for their drilling and development potential inthe light of modern completion technologies. This application covers a 712 km‚²offshore area surrounding ENI's now depleted Nilde and satellite light oilfield. A number of wells with gas and condensate shows have been drilled andabandoned. The application has covered the area up-dip and within the trend ofthe reservoir fairway to the northeast of the oil shows in the ENI/Shell Nora-1well. One structural and one truncation lead have been identified towards theedge of the reservoir fairway as well as a further lead identified directly ontrend with Nilde. To the north west three leads of a more exploratory naturehave been identified in a thrust system running parallel to the Nildestructure, where the reservoir trend is as yet unproven.Licence C.R147.NPThis offshore licence is located north of the Italian volcanic island ofPantelleria and against the Tunisian boundary and a licence held by Grove. Itis 637 km‚² in area and covers the extension of the Gulf of Hammamet oilprovince into Italian waters where the Zibbibo oil field has been found by Agipand a production concession is currently awaited. This fairway of Birsa Miocenesandstones and Ain Grab calcarenite formations extends through the licence andnorthwards of the 36‚° API Nilde oilfield. Oil prospects in this area havebecome more attractive with the developments in technology for horizontaldevelopment wells and sub-sea completions. The next move is to re-process theseismic and verify the previous mapping before drawing up a drilling proposal.Detailed mapping of 1984 seismic data revealed two structures of considerablerelief each with the potential for 30 - 40 million bbls of recoverable reservesof light oil. No wells have been drilled within the licence area. The Tazerkaand Birsa oil fields across the border in Tunisia produced oil at rates ofabout 10,000 bopd each from sands and carbonates of Miocene age.Licence C.R146.NPRe-processing of old seismic data is necessary to enhance the prospectivity ofthe licence. This 620 km‚² licence is located on trend with the Vega field andup against the Italian - Maltese boundary. Oil is found in the Inici Platformcarbonate reservoir sourced from the adjacent Liassic Streppenosa shale, an oilrich source rock. The field is situated at the carbonate platform margin edgewhich extends across the licence. One large undrilled structure and a satellitehave been defined and mapped from the seimic. Only the Spigola Mare-1 well hasbeen drilled in the licence encountering gas shows in the Liassic Rabbito notreaching the main Inici carbonates. Recent seismic interpretations show thatthe well was not drilled on a structure.Licence Application d347CR.-NPNotwithstanding the nearby ENI/BG/Monte Edison Panda gas discovery, our maininterest is to re-work and re-process the existing seismic data in the area toupgrade the mapping of structural leads similar to the Palma-1 oil discoveryclose to the shelf edge. The main objectives lie in the northern part of thislicence to follow up the nearby and on trend 43‚° API oil discovery at Palma-1drilled in 1982 by Conoco in the Inici reservoir formation. This was hard toimage using the existing older seismic data, but two leads have been mapped andwe intend to conduct work to upgrade them. This offshore application for anarea of 391 km‚² was made in November 2003 with the southern boundary close toand on trend and north-west of the Panda gas field discovered in 2002 by ENI/BG/Monte Edison, some 10km away. Panda is another example of the main productiveItalian gas play with gas charged Pliocene sands abutting the impermeableshales of the "Gela Nappe". This is a persistent gas trapping system throughoutthe fore-deep running from the Po Valley, through the Bradano basin into Sicilywhich accounts for most of the Italian gas reserves.SOUTHERN ADRIATIC - Two applications to seize the opportunity to re-appraisethree oil discoveries.Licence Applications d57FR.-NP and d58FR.-NPThese applications cover 1,469 km‚² to include the ENI's Rovesti-1 light oil andEnterprise Oil's Giove-2 and Medusa-1 untested heavy oil discoveries togetherwith the area south east towards and to the south of Agip's deepwater Aquilaoil field. The licence will be predominantly in Zona F beyond the 200 metreisobath and towards the boundary with Albania. We have interpreted threestructural trends believed to be of interesting prospectivity.The immediate interest centres on a full petro-physical and economicre-appraisal of the potential of these oil discoiveries. The Giove-2 welllogged a gross oil column of 93 metres below a 12 metre gas column in Tertiaryreefal carbonates.REVIEW OF OPERATIONS: SPAINProgress towards reperforating in new formations - OverviewOur exploration efforts in Spain have concentrated on finding a partner for ourlicences and putting together a programme of appraisal wells where theproduction from these discoveries can be transported to the Ayoluengo oil fieldfor processing. The potential for improved production from the Ayoluengo fieldis the key to an integrated approach to the future of oil production in theSedano Basin and we are looking for a strategic partner who wishes to work withus in both these areas. Discussions are ongoing with parties who recognise thepotential in the licences.Ayoluengo oilfield and the La Lora licence - a frustrating yearWe have been prevented by the seeming intransigence of our Spanish partners inmaking progress on any activity with respect to the redevelopment of theAyoluengo field in 2004 following a technical review of the field. However aprogramme of re-perforation of the existing 11 production wells in the fieldhas been agreed for 2005 by the partners and plans are in progress to implementa first phase programme of 4 wells. The increased oil price has given theopportunity for the partners to approve expenditure from operating profit toassess the potential for increasing oil production.We look forward to implementing work in the field and applying the results ofthe re-perforation programme to our understanding of the considerable remainingpotential of the field given the confidence that new investment in the fieldwill result in the gains predicted from our technical studies. Thereperforation activity is currently awaiting the granting of an explosivestorage licence to our selected contractor.Upgrading of our health, safety and environmental initiatives is continuing in2005.Exploration Licences: Huermeces, Valderredible, Basconcillos-HFollowing completion of a technical review of the licences our efforts havebeen on finding a partner for the drilling of three appraisal wells that willenable a rig to be mobilised to the region.As the re-perforation programme at Ayoluengo will provide an assessment of thepotential for the re-completion of abandoned production wells in the field orthe drilling of new wells, projects also requiring a rig, we are placing greatimportance on completing the re-perforation programme at Ayoluengo ahead ofmobilising a rig to the region such that a comprehensive and cost effectivedrilling programme can be formulated to include the Ayoluengo field and thedrilling on these licences.REVIEW OF OPERATIONS: GUYANEA small investment with great potentialThe company concluded an agreement in 2004 with Wessex International, aprivately owned company registered in Texas, whereby Northern acquired a 1.25%beneficial interest in a permit covering the whole of the offshore beyond the12 mile coastal limit territory of Guyane, previously French Guiana. The Permitcovers some 65,000 km‚². Hardman Resources Limited is the Operator and holds a97.5% interest in the Permit.In 2003 Hardman completed a 7500km 2-D seismic survey regarded as being ofexcellent quality to supplement 3,945km of 2-D seismic data recorded in the1970's by Elf, Shell and Esso. This resulted in six prospects or leads each inexcess of one billion barrels of potential recoverable reserves being definedwith a further 15 leads in the 100 to 500 million barrel range of reservepotential. This is a virtually unexplored basin with only two previous wellsdrilled offshore. It has been estimated that the Matamata Prospect (Lead A)alone could contain recoverable reserves in the order of 500 million to 5.6billion barrels with the estimated mean recoverable reserves calculated to be2.4 billion barrels which would result in 30 million barrels net to thecompany.Under the terms of the Agreement Northern acquired its interest in the Permitfor a consideration of US$17,500 on signature and a further ‚£40,000 whenHardman conclude farm-out arrangements. Northern has also agreed to lend thecompany that holds the 2.5% interest US$200,000 in order to help finance thedrilling and testing of a well at an interest rate of 2% per annum.Whilst Guyane is in the EU it is not within our current core area of activity.This is however an opportunity that should not be passed up and as anon-operator partner the project will make only small demands on managementresources. In addition, as an offshore operator in Italy we hope to gainvaluable operational experience in Guyane which might be relevant to futureoffshore projects. This strategy worked well in the case of the 5%participation in the Avington-2 oil discovery of 2003.REVIEW OF OPERATIONS: THE NETHERLANDSA MAJOR BRIDGEHEADSubject to approvals from Netherlands Government Authorities, a substantial newarea of operations has now been established. The intent is to place olddiscoveries of oil and gas into production as soon as possible, many havingsuspended wells on existing sites.PAPEKOPWork on The Netherlands began in early 2004 following a 1% royalty agreementgranted to Concessions International Inc. over the Papekop discovery drilled in1994 by Nederlandse Aardolie Maatschappij B.V. ("NAM"), a joint Royal DutchShell/ExxonMobil company. The 2D and 3D seismic data were acquired and analysedin conjunction with the well test results. With the increased oil and gasprices since then the case for immediate development was examined and as aresult a Northern application for an immediate Production Concession was madein December 2004.The application was contested in April 2005 on the last applicable date. Thebid examination process is now underway and for that reason no further commentis offered on the scheme for development.Combined Proven plus Probable Reserves have been assigned to be in the orderof:- 23 billion cubic feet of gas; and- 5.8 million barrels of oil.NAM AGREEMENTSIn late 2004 negotiations were initiated with NAM which in June 2005 resultedin a joint venture Agreement covering eight suspended gas discoveries, somewith oil legs.An initial package of up to eight undeveloped oil and gas discoveries will,following Northern's exercise of an option, be transferred to our Netherlandssubsidiary NP Netherlands B.V. ("NPN") who will immediately assume operatingresponsibility after receipt of government approvals. NPN will develop thediscoveries and receive 100% pay-back of its cost plus an uplift of 30%,thereafter splitting all future profits equally with NAM.Six of the discoveries have suspended wells that were successfully tested. Thegross in-place volumes are currently estimated at 170 billion cubic feet of gas(53 bcf net to NPN) and 41 million barrels of oil (12.4million barrels net toNPN).Based on these figures a preliminary assessment of reserves has been madewhich, subject to further evaluation, would lead to an expectation ofrecoverable Proven plus Probable reserves in the order of:- 27 billion cubic feet of gas; and- 2.5 million barrels of oil.The Agreement and a further agreement concerning Steenwijk-1, provide for NPNto acquire 50% of NAM's interests in a number of additional onshore explorationareas where NAM has identified gas prospects. Gross in-place volumes of gashave been estimated at between 0.8 and 1.2 trillion cubic feet, in a total areaequivalent to seven UK North Sea Blocks. This is 340bcf to 520bcf net to NPN,allowing for partners, other than NAM, where applicable. NPN will have theright to earn these interests by drilling and covering the combined NAM and NPNexpenses of up to seven exploration wells, of which NPN has already committedto one, and will be obligated to an additional two upon exercise of its option.The agreements provide for NPN to recover all dry hole costs out of the pre-taxrevenues from future discoveries and share the profits from the jointly heldstakes with NAM on an equal basis.Northern believes that these two projects, assuming the award of Papekop,provide an acceptable entry threshold into the onshore part of the PermianBasin in the Netherlands, especially as the company has additional projects inprogress.CONTACTS:Derek Musgrove, Managing DirectorChris Foss, Company SecretaryNorthern Petroleum PlcTel. 020 7743 6080Chris Roberts / Ben SimonsHansard CommunicationsTel. 020 7245 1100Consolidated Profit and Loss AccountFor the year ended 31 December 2004 Year Year ended ended 31 31 December December 2004 2003 Notes ‚£'000 ‚£'000 Total Total Group turnover 2 468 437 Group cost of sales Production costs (332) (334) Depreciation, depletion and amortisation (124) (125) (456) (459) Group gross profit/(loss) 12 (22) Administrative expenses (786) (581) Other operating income 108 61 Group operating loss (666) (542) Share of operating profit in associates 3 - Operating loss for the group before interest (663) (542)and other income Interest receivable 161 43 Profit on sale of fixed asset investments 3a) 16 - Amounts written off current asset 3b) - (546)investments Loss on ordinary activities before taxation (486) (1,045) Tax on loss on ordinary activities (5) (16) Retained loss for the group (491) (1,061) Basic and diluted loss per share 4 (0.20)p (0.62)pAll amounts relate to continuing activities.Consolidated Statement of Total Recognised Gains and LossesFor the year ended 31 December 2004 Year ended Year ended 31 December 31 December 2004 2003 Notes ‚£'000 ‚£'000 Loss for the financial year (491) (1,061) Profit on deemed disposal of subsidiary to - 67minority interests Exchange differences on retranslation of (3) 19net assets of subsidiary undertakings Total recognised gains and losses (494) (975)Loss for the financial year includes the Group's share of associates' profitafter tax of ‚£3,000.Consolidated Balance SheetAt 31 December 2004 2004 2003 Notes ‚£'000 ‚£'000 Fixed assets Intangible assets 5 625 593 Negative goodwill 6 - (10) Tangible assets 7 566 330 Investments in joint ventures: Share of gross assets of 3 -joint ventures Share of gross liabilities (3) -of joint ventures - - Share of net assets of 249 -associates Total fixed assets 1,440 913 Current assets Stocks 137 139 Debtors 667 467 Investments - 226 Cash at bank and in hand 5,140 2,945 5,944 3,777 Creditors: amounts falling 810 644due within one year Net current assets 5,134 3,133 Creditors: amounts falling 53 53due after more than one year Provisions for liabilities 109 110and charges Total assets less 6,412 3,883liabilities Minority shareholders' - 59interest - equity 6,412 3,824 Capital and reserves Called up share capital 8 7,119 6,574 Share premium account 9,332 6,795 Profit and loss account (10,039) (9,545) Shareholders' funds - 6,412 3,824equity The accounts were approved by the Board of directors on 22 June 2005 and weresigned on its behalf by:R H R LathamD R MusgroveConsolidated Statement of Cash FlowsAs at 31 December 2004 Year ended Year ended 31 December 31 December 2004 2003 Notes ‚£'000 ‚£'000 Net cash outflow from operating activities 9(a) (573) (247) Returns on investments and servicing of financing Interest received 161 43 Taxation Overseas taxation paid (7) (28) Capital expenditure and financial investments 9(b) (462) (648) Cash outflow before financing (881) (880) Financing Issue of ordinary shares for cash (net of 3,082 2,035expenses) Increase in cash in the year 2,201 1,155 Reconciliation of net cash flow to movement 9(c) & 9 in net funds (d) Increase in cash in the year 2,201 1,155 Exchange adjustments (6) (16) Net funds 1 January 2,945 1,806 Net funds 31 December 9(c) & 9 5,140 2,945 (d) Notes to the AccountsFor the year ended 31 December 20041. BASIS OF PREPARATIONThe financial information presented in this announcement does not constitutestatutory accounts within the meaning of s240 of the Companies Act 1985. Theinformation has however been extracted from the Company's statutory accountsfor the year ended 31 December 2004 which were approved by the Board on 22 June2005 and on which the Company's auditors have given an unqualified opinion.2. SEGMENTAL INFORMATIONAll turnover in 2004 relates to income from the Group's oil and gas assets, andis