DES.L Regulatory News (DES)

Desire Petroleum

('Desire', 'The Group' or 'The Company')

Preliminary Results

Desire Petroleum plc (AIM: DES) the exploration company wholly focused on the North Falkland Basin, is pleased to announce its Preliminary Results for the year ended 31 December 2011.

Operational Highlights:

·; Desire farmed out areas PL004b and PL004c to Rockhopper Exploration Ltd (Rockhopper).

·; Oil and gas discovered on successful 14/15-4a farmout well operated by Rockhopper (Desire 40%)

·; Competent Persons Report (CPR) published in October 2011 and currently being updated to incorporate 14/15-4a well data.

·; Graeme Thomson joined Desire as the senior independent non-executive director and chairman of the audit committee.

Financial Highlights:

·; The Group changed its oil and gas accounting policy from a full cost policy to a successful efforts policy.

·; Loss for the period was $42.5 million (2010 restated loss: $113.9 million).

·; Cash resources at the end of the year amounted to $10.6 million, plus an additional $24.5 million held as restricted cash in escrow accounts with Diamond Offshore Drilling and AGR to meet demobilisation liabilities.

·; Sufficiently funded to continue in operational existence for the foreseeable future.

Stephen Phipps, Chairman of Desire Petroleum commented:

"The last twelve months have again been active ones for Desire, culminating with the discovery of oil in the 14/15-4a farmout well. As a result of successfully fast tracking and interpreting key areas of 3D seismic data shot in the first half of the year we were able to farm out areas PL004b and PL004c to Rockhopper which enabled us to participate in the highly successful 14/15-4a farmout well, at no cost to Desire. The Sea Lion discovery plus the associated discoveries in the farmout well reaffirm our belief that there will be further successes in the North Falkland Basin and that a significant oil and gas province is emerging."

Chairman's Statement

Dear Shareholder,

The last twelve months have again been active ones for Desire, culminating, I am delighted to report, with the discovery of oil in the 14/15-4a farmout well, drilled and operated by Rockhopper Exploration Ltd (Rockhopper) in December 2011, in which Desire have a 40% economic interest. This was the undoubted highlight of the year in which we also drilled the Ninky well which ultimately proved to be disappointing. To put our North Falkland drilling campaign into context, the Ninky well was the sixth and final well in our originally planned six well drilling campaign utilising the Ocean Guardian drilling rig, for which we raised capital in 2009 and 2010. However, as a result of successfully fast tracking and interpreting key areas of 3D seismic data shot in the first half of the year we were able to farm out areas PL004b and PL004c to Rockhopper. This enabled us to participate in one further well, the successful 14/15-4a farmout well, at no cost to Desire.

The 14/15-4a farmout well encountered hydrocarbons in the southern extension of the Sea Lion Field, and in the Casper, Beverley and Casper South (Shona) reservoirs. These prospects had been identified from the new 3D seismic data shot and processed earlier in the year. A pre-drill description of these prospects was provided in an independent Competent Persons Report (CPR) published in October 2011 and an update to this CPR is currently being prepared, incorporating the 14/15-4a well data. The updated CPR will be published in the near future.

The Sea Lion discovery plus the associated discoveries in the farmout well reaffirm our belief that there will be further successes in the North Falkland Basin and that a significant oil and gas province is emerging. Within this scenario it is important that Desire has a full understanding of all the prospects on its licences. It was with this in mind that we undertook a joint 3D seismic survey with Rockhopper utilising the Polarcus Nadia. The survey, which was completed in May 2011, shot 1416km² of new data for Desire. The fast track data processed so far, in addition to leading to the success of the farmout well, has significantly enhanced the prospectivity on the East Flank of the basin. The remainder of the 3D data which has recently been received will extend our prospect inventory still further. Full interpretation of all the 3D data is expected to be complete during the second half of 2012.

The demobilisation of the Ocean Guardian drilling rig and associated vessels and equipment in January of this year is likely to lead to at least 12 months without a rig present in the North Falkland Basin. In the meantime we believe that the North Falkland Basin will continue to develop positively. Rockhopper has begun actively to look for partners in the development of the main Sea Lion Complex and the discoveries and exploration potential of our adjacent acreage is likely to be of interest to any potential partners. We retain an open mind as to future development of our acreage position, be it through farmouts or by the contracting of a drilling rig. Although at this time we do not have sufficient funds to restart a drilling campaign on our own, our current cash balances, post demobilisation, of over US$10 million are more than sufficient for the foreseeable future.

On a more pragmatic note the Group has, after much consultation, changed a key accounting policy. The catalyst for this change was the conclusion of the recent drilling campaign, and the 14/15-4a discovery, and has left us with a useful cut off point. Previously we had worked on a full cost policy under which all exploration costs, whether successful or not, were capitalised on the balance sheet. We have in these results moved to a successful efforts policy whereby any unsuccessful exploration costs are expensed to the income statement. The associated adjustments to the balance sheet and income statement have no bearing on our cash balances or our ability to continue to fund operations. Now that the results of the drilling campaign are known, we believe that publishing our accounts on a successful efforts basis gives shareholders more reliable and relevant information going forward. For those of you more interested in the mechanics of this change I encourage you to look at the financial review in the following statement under 'change in accounting policy.'

I am pleased to report that Graeme Thomson has joined us as our senior independent non-executive director. Graeme has a wealth of experience in the oil and gas industry over the last 30 years. He is chairman of the Audit Committee and, along with Eddie Wisniewski, our Finance Director, has been instrumental in effecting the change of accounting policy to the successful efforts basis. Finally, it remains for me to thank my colleagues for their hard work during the year and especially to our three main contractors, AGR Petroleum Services who run our drilling operations, Senergy (GB) Ltd who provide us with our geosciences and Diamond Offshore Drilling (UK) Ltd who operate the Ocean Guardian.

Yours sincerely,

Stephen Phipps

Financial Review

Change in accounting policy

During the year the Group changed its oil and gas accounting policy from a full cost policy (under which all exploration costs are capitalised irrespective of the success or failure of specific parts of the overall exploration activity) to a successful efforts policy (under which unsuccessful exploration costs are expensed to the income statement in the period in which it is determined that the exploration has failed to locate commercially recoverable hydrocarbons). Having completed the current phase of drilling activity, the Board is of the view that the cost of unsuccessful exploration should not be added to the costs attributable to the development of commercial reserves as it distorts the reporting of the future underlying performance of those assets.

The change in accounting policy requires a restatement of prior period results. The impact of the change in policy, together with the accounting policy in full, can be found in Note 1 of the financial statements, towards the end of this literature under 'Notes to the Financial Statements (continued).'

Income Statement

The loss for the period decreased from $113.9 million (restated) in the previous period to $42.5 million in the current period. The reduced loss is mainly due to a decrease in exploration and evaluation expense. The 2011 exploration and evaluation expense of $41.7 million largely consisted of Ninky well costs and 3D seismic expenditure incurred in the year. In 2010 the expense of $110.4 million (restated) included expenditures and provisions on the Liz, Rachel, Rachel North and Dawn wells.

Administrative expenses for the period increased from $892,000 to $1,537,000. This was mainly due to an increase in the number of executive directors in the year, from one to three, one of whom had been a non-executive director, and the appointment of a non-executive director during the year.

There was also an increase in office and admin expenses associated with the implementation of new IT and accounting systems across the Group.

The exchange movement for the period showed a gain of $648,000 compared with a loss of $2,757,000 in the previous period, and arises primarily on the Group's Sterling cash and restricted cash balances. The Group continues to match its cash and restricted cash holdings with the currency of anticipated future expenditures and so the presentation currency result will be exposed to sterling-dollar currency fluctuations.

Although the period end exchange rate of $1.554/£ was little changed from the rate at the start of the year ($1.566/£) the average rate for the year reached $1.60/£ meaning that for much of the year the Group's Sterling balances were more valuable in US dollar terms.

Investment revenues of $105,000 in the year were lower than 2010 levels due to a reducing cash balance during the period.

Balance Sheet

The Group capitalised $38 million of exploration and evaluation expenditure in the year, mainly on the Ninky well, and on concluding the 3D seismic survey that commenced in 2010. As a result of the accounting policy change to successful efforts, the only oil and gas intangible costs carried forward at the balance sheet date are those in respect of the farm in area PL004b, where the Group believes that contingent hydrocarbon resources exist, and where the process for determination of commercial reserves is not yet complete. All other intangible oil and gas costs have been expensed in the Income Statement. The costs carried forward in respect of PL004b of $73,000 are currently very low, as the Group's share of the drilling cost of the 14/15-4a discovery well, estimated at a gross $31.5 million, was fully carried by Rockhopper Exploration.

Gross provisions at the period end of $26.4 million relate to anticipated commitments for the demobilisation of drilling rig and equipment at the conclusion of the drilling campaign. The cash for these anticipated liabilities is largely set aside in escrow accounts.

The Group's cash resources at the year end amounted to $10.6 million, plus an additional $24.5 million held as restricted cash in escrow accounts with Diamond Offshore Drilling and AGR to meet demobilisation liabilities of drilling rig and equipment respectively.

There was no fundraising undertaken during the year. No share options were exercised in the period, although a number of share options lapsed in May 2011. Consequently, there was no increase in share capital or share premium in 2011.

Financial outlook

The Group's available cash and restricted cash resources at the year end are sufficient to meet the Group's demobilisation commitments, and to continue in operational existence for the foreseeable future. The cash resources are not sufficient to drill further wells, and the Board will continue to review all financing options such that the Group is positioned to act when that opportunity arises.

Eddie Wisniewski

Finance Director

Technical Review

1. Introduction

This has been a very active and successful year for Desire, with participation in a first oil discovery, completion of our operated drilling campaign and a major 3D seismic survey. We are pleased to have completed a further farm-out of part of our PL004 licence, which allowed us to participate in the 14/15-4a well, without incurring any costs. As a result of this successful well, Desire now has an interest in several oil and gas discoveries in the Sea Lion area; the Sea Lion Main Complex (SLMC) reservoir, Casper, Casper South (Shona) and Beverley. The operator is pursuing an active programme to develop the SLMC reservoir, while the other discoveries are under evaluation and are likely to be considered for satellite development to the main Sea Lion project. These discoveries provide encouragement that the North Falkland Basin is emerging as a significant oil and gas province, and that further success can be expected from our growing prospect inventory.

2. Drilling Results

During 2011, Desire operated one exploration well on the Ninky prospect and participated in one exploration/appraisal well on the Sea Lion Extension, Beverley and Casper South (Shona) prospects.

a) 14/15-3 (Ninky)

The 14/15-3 well was drilled to a total depth of 2620m, within the Barremian F sequence. The well was targeting a combined structural/stratigraphic trap updip of 14/15-2, with potential reservoirs in the Barremian source rock sequence. Reservoir quality was found to be disappointing with only 5.6m of net sandstone encountered within a gross thickness of 35m for the two targets. A thin interval of oil pay was indicated on wireline logs but no valid reservoir pressures were obtained, indicating that the reservoir is low permeability at this location.

b) 14/15-4a (Sea Lion Extension/Beverley/Casper South (Shona)/Casper)

The farm-out well 14/15-4a was operated by Rockhopper Exploration and reached a total depth of 2575m. The well was located to the north of Ninky and was targeted at multiple reservoirs within the Barremian source rock sequence, including a possible extension to the Sea Lion discovery. The well was very successful and encountered 56m of net oil and gas pay within a gross reservoir interval of 89m. Hydrocarbons were encountered in the southern extension of the Sea Lion Field, Casper, Beverley and Casper South (Shona) reservoirs. These prospects had been identified from the new 3D seismic data on the basis of a fast-track volume processed in Q2 2011. A pre-drill description of these prospects was provided in an independent Competent Persons Report (CPR) published in October 2011. Following the success of the 14/15-4a well, the CPR over the discovery area will be updated with the well results and the final version of the 2011 3D seismic data. These results are expected to be available during the first half of 2012.

 3. 3D Seismic Update

A joint 3D seismic programme with Rockhopper Exploration, utilising the Polarcus Nadia, was completed in May. Overall, an additional 1416 km2 of data were acquired within Desire licences and adjacent open areas. The new seismic data are being integrated with reprocessing of the 2004 3D survey to provide a contiguous, merged volume over PL003, PL004 and most of PL005. Fast-track volumes were processed over the Sea Lion areas and Ann/Orca Ridge area during 2011, the results of which were published in our October CPR. The final processed 3D merge volume was delivered in early February 2012 and this will be the basis for a re-assessment of our prospect inventory. Results for this work are expected to be available later in 2012.

4. Prospect Inventory

The prospect inventory was updated in October following interpretation of the fast-track seismic data. Several of the mapped prospects were tested successfully by the 14/15-4a well. The remaining prospects from the fast-track area are on the Eastern Flank of the basin (Jayne, Casper/Shona East) and overlying the Orca Ridge (Ann/Orca South). These prospects have combined mean prospective resources of 319 MMstb of which 207 MMstb is net to Desire, with a chance of success typically around 31%. These are attractive prospects which we expect to target in a future drilling campaign. The full prospect inventory, incorporating all of the new 3D seismic data, is expected to yield additional prospects (not yet identified) and will allow us to evaluate fully other prospects previously identified from 2D seismic (eg Pam, Helen). The success of the recent drilling campaign demonstrates the potential of the North Falkland basin and underpins our belief that further discoveries will be made in the area. Desire holds extensive licences in the basin and this provides a firm basis for our continued success.

5. Licence Update

Our current licence commitments in PL003, PL004 and PL006 have been fully met and we expect to take these licences into the next phase of exploration/appraisal. Relinquishment obligations are under discussion with the regulatory authority, as are the outstanding drilling obligations on PL005 (Tranche F) and PL007 (Tranche L). We expect to resolve these licence issues before the end of 2012. Denholm Oil and Gas Ltd, the operator of PL034, has submitted a notice to the Department of Mineral Resources in the Falkland Islands that it intends to relinquish the licence in its entirety at the end of the first licence term in August 2012.

6. Licence Details

On PL003 Denholm will earn a 35% interest in the Ann sub-area after fulfilling the terms of a farmout agreement.

Report of the Directors

The Directors present their report and audited financial statements of the Group for the year ended 31 December 2011.

Principal activity

The principal activity of the Group for the year continued to be that of oil and gas exploration.

Business review

The Company is required by the Companies Act to set out in this report a fair review of the business of the Group during the financial year ended 31 December 2011 and the position of the Group at the end of the year, and a description of the principal risks and uncertainties facing the Group. The information that fulfils the requirements of the business review can be found within the Chairman's Statement, the Financial Review and the Technical Review shown on the Desire website. These include details of the expected future developments in the business of the Group. The Directors do not believe that there are any significant key performance indicators that are relevant to the Group at present.

Dividends

The Directors do not recommend payment of a dividend (2010:$Nil)

Share capital

There were no changes to share capital during the year.

Directors and their interests

The Directors, all of whom, with the exception of Mr K Black and Mr G Thomson, served throughout the year are shown in the table underneath 'Directors' contracts.'. Mr K Black was appointed on 30 March 2011. Mr G Thomson was appointed on 15 July 2011.

The interests of the Directors who served during the year in the ordinary shares of the Company are shown in the Report of the Remuneration and Nomination Committees.

Dr I Duncan and Mr E Wisniewski will retire by rotation at the Annual General Meeting and, being eligible, offer themselves for re-election. In addition, Mr G Thomson, who was appointed since the last Annual General Meeting, retires and offers himself for election.

Details of the Directors' interests in contracts with the Group are set out in note 26 to the accounts.

Special business - Annual General Meeting resolutions

Items 6 and 7 of the Notice of the forthcoming Annual General Meeting contain resolutions which renew and extend existing authorisations for a further year. The Directors believe that they should have the authorities proposed under items 6 and 7 in order to take advantage of business opportunities as they arise, thus maintaining a desirable degree of flexibility.

Item 6

Under the Companies Act 2006, the Directors are prohibited from allotting securities of the Company without prior authorisation from shareholders to do so. The effect of this resolution is to give the Directors authority until the 2013 Annual General Meeting to allot relevant securities up to an aggregate nominal amount of £342,285.

Item 7

The Companies Act 2006 also provides that, unless shareholders otherwise consent, all new equity securities to be offered for cash must first be offered to existing shareholders in proportion to their individual holdings. The effect of this resolution is to give the Directors authority, until the 2013 Annual General Meeting, to allot equity securities for cash, other than to existing shareholders, up to a limited aggregate nominal amount of £171,142.

Substantial shareholdings

As at 22 March 2012 the Company had been notified of the following holdings of 3% or more of its issued share capital:

Corporate governance 

The UK Corporate Governance Code is not mandatory for companies traded on the Alternative Investment Market of the London Stock Exchange. However, the Directors are committed to applying the requirements of the Code where they are considered appropriate. This statement explains how the Group has applied the principles of the Code throughout the year. The Board meets regularly throughout the year and is responsible for the overall Group strategy, acquisition and divestment policy, approval of major capital expenditure and consideration of significant financing matters. It reviews the strategic direction of individual group companies, their annual budgets, their progress toward achievement of these budgets and their capital expenditure programmes.

Status of non-executive directors

Mr G Thomson is the senior independent non-executive director. With the exception of Mr G Thomson, none of the non-executive directors would be deemed independent under the Code. However, the non-executive directors have considerable experience in the Oil and Gas sector which the Company draws upon on a regular basis. In addition, the non-executive directors are sufficiently independent of management so as to be able to exercise independent judgement and bring an objective viewpoint and, thereby, protect and promote the interests of shareholders.

Going concern

At the balance sheet date the Group had available cash and restricted cash resources of $35 million, which it considers adequate to meet its anticipated liabilities and continue for the foreseeable future.The financial statements have been prepared on a going concern basis as the Directors are optimistic that the Group will be able to raise funds when required in order to fund further exploration activities.The Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future, being twelve months from the date of the approval of the financial statements. For this reason, the Board continues to adopt the going concern basis in the preparation of the financial statements.

Qualifying third party indemnity provisions

The Company's articles of association contain qualifying indemnity provisions under which each Director shall be entitled to be indemnified by the Company in respect of certain liabilities which may attach to him or her in their capacity as a Director of the Company. These provisions were in force throughout the year and remain in force at the date of this report.

Audit Committee

The Audit Committee was chaired by Mr S L Phipps until 15 July 2011 and by Mr G Thomson from that date, and included Mr A G Windham and Mr R Lyons as members throughout the year. The Committee convenes at least twice a year and its terms of reference include the review of the Annual and Interim Accounts, accounting policies of the Company and its subsidiaries, internal management and financial controls, and the planning, scope and results of the Auditor's programme of work. UHY Hacker Young Manchester LLP attend the meetings at the invitation of the Committee.

Remuneration Committee and Nomination Committee

Both Committees comprise at least two non-executive directors and meet as required during the year.

The Remuneration Committee is chaired by Mr A G Windham and included Mr R Lyons as a member throughout the year, and Mr G Thomson from 15 July 2011.

The Nomination Committee is chaired by Mr R Lyons and included Mr A G Windham as a member throughout the year, and Mr G Thomson from 15 July 2011.

The Committees' responsibilities include the consideration and approval of the terms of service, nomination, remuneration and benefits of the Company's Directors.

The Board, as a whole, determines the remuneration of the non-executive directors (with Directors absenting themselves from discussions regarding their own remuneration as appropriate).

Internal control

The Board, which presently comprises the Chairman, the Chief Executive, the Finance Director, the Exploration Director and non-executive directors, meets formally on a regular basis. The Directors are responsible for ensuring that the Group maintains adequate internal control over the business and its assets. There is an agreed schedule of matters requiring referral to the Board. These matters include the Group's corporate strategy, acquisitions and disposals, approval of major capital expenditure, treasury policy and risk management policies. Procedures have been formalised where the Directors may need to take independent professional advice. The Audit Committee has reviewed the necessity for the establishment of an internal audit function, but considers that, due to the nature and size of the Group at present, it would not be appropriate for the Group to have its own internal audit department.

On the wider aspects of internal control, relating to operational and compliance controls and risk management, as included in provision E2.2 of the Code, the Board, in setting the control environment, identifies, reviews, and reports on the key areas of business risk facing the Group. These procedures have been in place throughout the current financial year.

There is close day-to-day involvement by the Directors in all of the Group's activities. This includes the comprehensive review of both management and technical reports, the monitoring of foreign exchange and interest-rate fluctuations, commitment to the Health, Safety and the Environment Management System, government and fiscal-policy issues, employment and information technology requirements and cash control procedures. Attendance at joint venture meetings and site visits are made whenever appropriate. In this way, the key risk areas can be monitored effectively and specialist expertise applied in a timely and productive manner.

Any system of internal control can provide only reasonable, and not absolute assurance that the risk of failure to achieve business objectives is eliminated. The Directors having reviewed the effectiveness of the system of internal controls and risk management, consider that the system of internal control operated effectively throughout the financial year and up to the date the financial statements were signed.

Performance evaluation

A formal performance evaluation of the Board, its Committees and its Directors was not undertaken during the year due to the nature and size of the Group at present.

The Board is satisfied that the Board and its Committees are operating in an effective and constructive manner.

Relations with shareholders

The Group is active in communicating with both its institutional and private investors. The Annual General Meeting, at which Directors are introduced and available for questions, provides further opportunities for dialogue.

Creditor payment policy

It is the policy of the Group to ensure that all of its suppliers of goods and services are paid promptly and in accordance with contractual and legal obligations. At 31 December 2011 there were 4 days (2010 - 55 days) purchases remaining unpaid.

Political contributions and charitable donations

The Group made no political or charitable donations during the year (2010 - $Nil).

Auditors

Each of the persons who is a Director at the date of approval of this annual report confirms that:

A so far as the Director is aware, there is no relevant audit information

of which the Company's Auditors are unaware, and

B the Director has taken all steps that they ought to have taken as a

Director in order to make themselves aware of any relevant audit

information and to establish that the Company's auditors are aware

of that information.

This confirmation is given and should be interpreted in accordance with the provisions of s418 of the Companies Act 2006.

UHY Hacker Young Manchester LLP have expressed their willingness to continue in office as auditors and a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting.

This report was approved by the Board on 1 April 2012 and signed on its behalf by

Mrs A R Neve BA Secretary

Report of the Remuneration and Nomination Committees

Remuneration Committee and Nomination Committee

The Committees met as required during the year.

The Chairman and other Directors may also attend meetings but are not involved in any matter relating to themselves.

The Group considers that it has, to the extent appropriate given the Company's particular circumstances, applied the UK Corporate Governance Code throughout the year regarding remuneration committees. In formulating remuneration policy the Committees give due consideration to the best practice provisions section of the Code.

Remuneration policy

The remit of the Committees is to advise on all aspects of the remuneration packages of Directors.

The policy of the Committees is to ensure that the remuneration packages offered are competitive and designed to attract, retain and motivate Directors of a high calibre, with a significant proportion of the remuneration package linked to performance.

The Directors' emoluments are not pensionable.

Details of Directors' emoluments are set out in note 6 to the financial statements.

Directors' contracts

The Directors' Service contracts are for an indefinite period but can be terminated with six months notice by either party.

Details of the Directors' contracts are summarised as follows:

* Fees of non-executive directors are included in related party transactions in note 26.

Directors' interests

The interests (all of which are beneficial) of the Directors in office at the end of the year in the ordinary shares of the Company are shown below, together with their share options under the Desire Petroleum Plc Unapproved Share Option Scheme and their share appreciation rights.

Mr S L Phipps' and Mrs A R Neve's interests in 33,532,633 (31 December 2011 and 2010 - 33,532,633) shares are through their shareholding in Phipps & Company Limited.

Mr S L Phipps and Mrs A R Neve have an interest in 2,840,000 (31 December 2011 and 2010 - 2,840,000) shares through their interest in the Phipps & Company Retirement Benefit Scheme.

The interest of Dr I G Duncan includes 107,143 (31 December 2011 and 2010 - 107,143) shares held by Chase Energy Limited of which he is a director and shareholder. His interest also includes 92,571 (31 December 2011 and 2010 - 92,571) shares held by Hargreave Hale Nominees Limited.

Mr G Thomson, who was appointed a Director on 15 July 2011, held no shares as of 1 April 2012 or during the year.

Share options

Share options held by the Directors in office at the end of the year, are shown in the table below.

Share Appreciation Rights ('SARs')

In 2005, the Company introduced a new incentive plan that would permit the grant of awards over up to 5% of the issued share capital of the Company. The Remuneration Committee sought advice from external independent remuneration consultants as to its design and implementation, and in 2006 the Company adopted the new Desire Incentive Plan 2006 (the "Plan").

The Plan will operate for the potential benefit of both executive and non-executive Directors. The Committee is aware that, under normal circumstances, it would be unusual for non-executive directors to participate in share-based incentive arrangements. However, the Committee believes that offering participation in such arrangements to non-executive directors should be continued. This approach reflects the specific roles and responsibilities of the non-executive directors which are wider than is typically the case at other companies, an approach that keeps head office full-time staff levels and costs to a minimum. It also ensures that each member of the Board is fully aligned with both their colleagues' interests and with the interests of all other shareholders.

The awards under the Plan are structured as "Share Appreciation Rights" ("SARs"). SARs are designed to deliver a net gain equal to the increase in the price of a share between grant and exercise. The number of shares actually issued following exercise will therefore be less than the number of shares to which the grant relates as referred to below.

SARs have been granted to the Directors, as shown in the table below.

As described above upon exercise of the SARs, the relevant Awardee will be issued with shares with a market value at the date of exercise equivalent to the notional gain that the Awardee would have made, being the amount by which the aggregate market value on exercise of the number of shares in respect of which the SAR is exercised, exceeds the aggregate base price of that number of shares. The base price of a SAR will be the middle-market quotation of a share on the dealing day immediately preceding the date of grant.

SARs can be satisfied by either the issue of new shares, the transfer of existing shares or the cash equivalent.

No further awards of SARs will be made to the listed Awardees. No consideration is payable on the grant of a SAR.

On 16 January 2012, SARs over approximately 0.117% of the issued shares of the Company, representing 400,000 shares, were awarded to Mr K Black at a base price of 22.5p (being the closing mid market price of an Ordinary Share on the dealing day immediately preceding the date of grant). The SARs will become exercisible on 16 January 2015.

The market price of the shares on 31 December 2011 was 21.5p and the range during the year was 11.75p to 46.75p

Other than shown above, no Director had any interest in the shares of the Company or its subsidiary at 31 December 2011.

Approval

This Report was approved by the Board on 1 April 2012

Mr A G Windham

Chairman of the Remuneration Committee

Mr R Lyons

Chairman of the Nomination Committee

STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ACCOUNTS

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable laws and regulations.

Company law requires the Directors to prepare such financial statements for each financial year. Under the law the Directors are required to prepare Group financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and have also chosen to prepare the Parent Company financial statements under IFRS as adopted by the European Union. Under company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to:

● properly select and apply accounting policies;

● present information, including accounting policies, in a manner that provide relevant, reliable, comparable and understandable information;

● provide additional disclosures when compliance with the specific requirements in IFRS are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and

● make an assessment of the Company's ability to continue as a going concern.

The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Directors' responsibility statement

We confirm to the best of our knowledge:

● the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

● the review, which is incorporated into the directors' report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

By order of the Board

S Phipps

Chairman

INDEPENDENT REPORT OF THE AUDITORS

Registered Auditor

UHY Hacker Young Manchester LLP

St. James Building

79 Oxford Street

Manchester M1 6HT

1 April 2012

To the shareholders of Desire Petroleum Plc

We have audited the financial statements of Desire Petroleum Plc for the year ended 31 December 2011 which comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, Balance Sheets, Consolidated and Company Statement of Changes in Equity, the Consolidated and Company Cash Flow Statement and the related notes 1 to 27. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRS) as adopted by the European Union.

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 Directors' Responsibilities Statement, 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 an 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 (APB'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 the financial and non-financial information in the annual report 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 of the

Parent Company's affairs as at 31 December 2011 and of the Group's and the Parent Company's loss for the year then ended;

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

 ● the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

Opinion on other matter prescribed by the Companies Act 2006

In our opinion the information given in the Directors' Report for the financial year 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:

● adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or

● the Parent Company financial statements are not in agreement with the accounting records and returns; or

● certain disclosures of Directors' remuneration specified by law are not made; or

● we have not received all the information and explanations we require for our audit.

Mark Robertson(Senior Statutory Auditor)

For and on behalf of

UHY Hacker Young Manchester LLP

Chartered Accountants and Statutory Auditors

Manchester

Consolidated Income Statement

Movements on reserves are shown in note 22 to these Accounts.

There is no difference between the results as disclosed above and the results on an historical cost basis.

All operating income and operating gains and losses relate to continuing activities.

Consolidated Statement of Comprehensive Income

Balance Sheets

The Group The Company

These Accounts were approved by the Board of Directors and authorised for issue on 1 April 2012.

They were signed on its behalf by:

S Phipps

Chairman

Company Registration No: 3168611

Consolidated and Company Statement of Changes in Equity

Equity attributable to equity holders of the Company

Consolidated and Company Cash Flow Statement

Material non-cash transactions

As restricted cash is excluded from cash and cash equivalents, then payments for oil expenditure costs from restricted cash are treated as non-cash transactions. In addition to the purchase of tangible and intangible assets stated above, there was $44,449,000 (2010 - $103,868,000) paid from restricted cash.

Notes to the Financial Statements

1 Accounting policies

The Accounts are based on the following significant accounting policies which have been consistently applied:

Basis of preparation

The results for the year ended 31 December 2011 have been prepared in accordance with IFRS as adopted by the EU.

Change in accounting policy

Oil and gas assets

In the year, the Group has changed its oil and gas assets accounting policy from a full cost policy to a successful efforts policy.

During the year the Directors undertook a review of the Group's accounting policies and have determined that, having completed the current phase of drilling activity, the cost of unsuccessful exploration should not be added to the costs attributable to the development of commercial reserves as it distorts the reporting of the future underlying performance of those assets. Accordingly, the Group has adopted the successful efforts method of accounting in these financial statements, which provides more reliable and relevant information on the underlying performance of the Group than the full cost method of accounting that was previously applied.

Under the full cost method of accounting, all costs associated with exploring for and developing oil and gas reserves are capitalised, irrespective of the success or failure of specific parts of the overall exploration activity. Under the successful efforts method of accounting, pre-licence costs are expensed immediately to the income statement, and the costs of unsuccessful exploration and evaluation (E&E) expenditure are expensed to the income statement in the period in which it is determined that the exploration has failed to locate commercially recoverable hydrocarbons.

In accordance with IAS8 (Accounting Policies, Changes in Accounting Estimates and Errors) the change has been made retrospectively and the comparatives have been restated accordingly.

The tables below show the impact of the change in accounting policy:

Consolidated Income Statement

Notes to the Financial Statements (continued)

Consolidated Balance Sheet

Basis of consolidation

The Group accounts consolidate the accounts of the Parent Company and its subsidiary undertaking, all of which were made up to 31 December 2011.

Going concern

The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. Further detail is contained in the business review.

Goodwill and intangible assets

a) Goodwill

When the fair value of the consideration for an acquired undertaking exceeds the fair value of its separable net assets, the difference is treated as purchased goodwill and is capitalised. When the fair value of the consideration for the acquired undertaking is less than the fair value of its separable net assets, the difference is taken directly to the income statement. Goodwill is not amortised but is reviewed at least annually for impairment.

b) Acquired intangibles

Intangible assets, which are capable of being recognised separately and measured reliably on acquisition of a business, are capitalised at fair value on acquisition. Where these assets have a finite life, they are amortised over the period that they are expected to generate benefits, but generally not exceeding ten years.

Notes to the Financial Statements (continued)

c) Computer software 

Computer software costs are amortised over their expected useful lives, as follows:

Computer software 33% straight line basis

d) Exploration and evaluation assets

The Group applies the successful efforts method of accounting, as set out in the Statement of Recommended Practice "Accounting for Oil and Gas Exploration, Development, Production and Decommissioning Activities" and as permitted by IFRS 6 "Exploration for and Evaluation of Mineral Resources".

Intangible exploration and evaluation assets

Under the successful efforts method of accounting, all licence acquisition, exploration and appraisal costs are initially capitalised in well, field or general exploration cost centres as appropriate, pending determination. Expenditure incurred during the various exploration and appraisal phases is then written off unless commercial reserves have been established or the determination process has not been completed.

Pre-licence costs

Costs incurred prior to having obtained the legal rights to explore an area are expensed directly to the income statement as they are incurred.

Exploration and evaluation ('E&E') costs

Costs of E&E are initially capitalised as E&E assets. Payments to acquire the legal right to explore, costs of technical services and studies, seismic acquisition, exploratory drilling and testing are capitalised as intangible E&E assets.

Such intangible costs include directly attributable overhead, including the depreciation of property, plant and equipment utilised in E&E activities, together with the cost of other materials consumed during the exploration and evaluation phases.

Tangible assets used in E&E activities are classified as property, plant and equipment. However, to the extent that such a tangible asset is consumed in developing an intangible E&E asset, the amount reflecting that consumption is recorded as part of the cost of the intangible asset.

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

Treatment of E&E assets at conclusion of appraisal activities

Intangible E&E assets related to each cost centre are carried forward, until the existence, or otherwise, of commercial reserves has been determined subject to certain limitations including review for indications of impairment. If commercial reserves have been discovered, the carrying value, after any impairment loss, of the relevant E&E assets, is then reclassified as development and production assets within property, plant and equipment. If, however, commercial reserves have not been found, the capitalised costs are charged to expense.

Impairment

In accordance with IFRS 6, E&E assets are reviewed regularly for indicators of impairment and costs written off where circumstances indicate that the carrying value of the asset exceeds the recoverable amount.

Where there has been a charge for impairment in an earlier period, that charge will be reversed when there has been a change in circumstances to the extent that the discounted future net cash flows are higher than the net book value at the time. In reversing impairment losses, the carrying amount of the asset will be increased to the carrying value that would have been determined had no impairment loss been recognised in prior periods.

Notes to the Financial Statements (continued)

Development and production assets

Development and production assets, classified within property, plant and equipment, are accumulated on a field-by-field basis and represent the costs of developing the commercial reserves discovered and bringing them into production, together with the E&E expenditures transferred from intangible E&E assets.

Depreciation of producing assets

The net book values of producing assets are depreciated on a field-by-field basis using the unit-of-production method by reference to the ratio of production in the year and the related proven and probable reserves of the field, taking into account the future development expenditure necessary to bring those reserves into production.

e. Consortia and farm out agreements

In addition to holding licences on its own account, the Group is a member of consortia (a joint arrangement). The Group's proportionate share of the consortia costs are included in intangible assets or PPE, as appropriate. During the year, the Group continued with farm out agreements with third parties in respect of certain licences. The Group's proportionate share of the costs is included in intangible assets and PPE as appropriate.

Where the Group acts as operator to a joint arrangement and has a direct legal liability to third party creditors or a similar entitlement in respect of debtors then the gross liabilities and receivables (including amounts due to or from non-operating partners) are included in the Group balance sheet.

Where the Group acts as a non-operating participant to a joint arrangement, the entitlement or liability in respect of its share of working capital balance relating to the joint arrangement is analysed across the underlying elements of working capital such as stocks, debtors, cash and creditors.

f. Decommissioning costs

Provision for the future cost of decommissioning an installation is recognised as part of the total investment to gain access to future economic benefit. The asset is established and included as part of the overall cost pool. Provision is made when the Group has an obligation to dismantle and remove a facility or an item of plant and to restore the site on which it is located, and when a reasonable estimate of that liability can be made.

The decommissioning asset is recognised and capitalised as the related facilities are installed, simultaneously with the recognition of the provision. The incremental amount capitalised on each phase of installation should equal the incremental amount provided in respect of each phase.

Property, plant and equipment (PPE)

a. Exploration and Evaluation expenditure

Tangible assets acquired as exploration and evaluation assets are capitalised as such and, to the extent that the asset is consumed in developing an intangible asset, the amount reflecting the consumption is capitalised as the cost of an intangible asset.

b. Other

Property plant and equipment are stated at cost or valuation less depreciation. Depreciation is provided at rates calculated to write off the cost or valuation, less estimated residual value of each asset, over its expected useful life, as follows:

Equipment and fixtures 33% straight line basis

Investments

Investments in subsidiary undertakings are shown at cost less provisions for estimated impairments in value.

Notes to the Financial Statements (continued)

Foreign currencies 

a. Functional and presentation currency

Items included in the financial statements of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). The functional and presentation currency is US dollars, and the 2011 Annual Report is presented in US dollars as this reflects the primary economic environment in which the Group operates.

b. Transactions and balances

Transactions denominated in foreign currencies are translated into the functional currency at the exchange rate prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange

rates ruling at the year-end. Foreign exchange gains and losses resulting from the settlement of such transactions, and from the translation at year-end exchange rates of monetary assets

and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying investment

hedges. Exchange differences arising from the translation of the balance sheets and income statements of foreign operations into US dollars are recognised as a separate component of equity on consolidation. When a foreign operation is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale.

Revenue Recognition

a) Interest revenue

Interest income is recognised when it is probable that economic benefits will flow to the Group and the amount of revenue can be measured reliably. Interest income is accrued on a time basis.

Taxation 

a) Current income tax

Current tax, including UK corporation tax, is provided on amounts expected to be paid or recovered using the tax rates and laws that have been enacted or substantially enacted by the balance sheet date.

b) Deferred income tax 

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined using tax rates and laws that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.Deferred income tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary differences are controlled by the Group, and it is probable that the temporary differences will not reverse in the foreseeable future.

Cash and cash equivalents 

Cash and cash equivalents includes cash in hand, deposits held at call with banks and bank overdrafts. Bank overdrafts are shown within current liabilities on the balance sheet.

Restricted cash

Where cash is deposited with financial institutions, securing various guarantees and performance bonds associated with the Group's operating activities, it is treated as a financial asset of the Group and released on maturity of the guarantee or performance bond.Where cash balances are not under the exclusive control of the Company, such amounts are disclosed as restricted cash.

Notes to the Financial Statements (continued)

Share based payments

The Group operates equity-settled, share based compensation plans. The economic cost of awarding shares and share options is recognised as an expense in the income statement equivalent to the fair value of the benefit awarded. The fair value is determined by reference to option pricing models. The charge is recognised in the income statement over the vesting period of the award.

Financial instruments

The Group uses certain financial instruments in its operating and investing activities that are appropriate to its strategy and circumstances.

Financial instruments currently comprise cash and short-term receivables and payables. The Group regularly reviews the funding opportunities available to it in order to finance its operations, including considering the use of borrowings, as well as equity, to fund short-term cash requirements.

The main risks arising from the Group's present use of financial instruments are currently foreign exchange movements relating to the Group's non-US dollar cash resources. The addition of any borrowings to the Group's portfolio of financial instruments will introduce interest rate risk.

Operating segments

The Group considers itself to have a single purpose, the exploration and exploitation of its licences in the North Falkland Basin, and therefore concludes that it has only one business segment and only one geographic segment.

Adoption of new and revised Standards

In the current year, the following significant new and revised Standards and Interpretations have been adopted none of which have affected the amounts reported in these financial statements.

IAS 24 Related Party Disclosures

IAS 32 Financial Instruments: Presentation

The following amendments were made as part of Annual Improvements to IFRS (May 2010).

IFRS 1 First-time Adoption of International Financial Reporting Standards

IFRS 3 Business Combinations

IFRS 7 Financial Instruments: Disclosures

IAS 1 Presentation of financial statements

IAS 27 Consolidated and separate financial statements

IAS 34 Interim financial reporting

Notes to the Financial Statements (continued)

At the date of authorisation of these financial statements, the following significant Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective:

IFRS 1 First-time Adoption of International Financial Reporting Standards

IFRS 7 Financial Instruments: Disclosures

IFRS 9 Financial Instruments

IFRS 10 Consolidated Financial Statements

IFRS 11 Joint Arrangements

IFRS 12 Disclosure of Interest in Other Entities

IFRS 13 Fair Value Measurement

IAS 1 Presentation of Financial Statements

IAS 12 Income Taxes

IAS 19 Employee Benefits

IAS 27 Consolidated and Separate Financial Statements

IAS 28 Investments in Associates

The Directors do not expect that the adoption of the standards listed above will have a material impact on the financial statements of the Group in future periods.

2 Estimates, assumptions and judgements

In the application of the Group's accounting policies, described in note 1, the Directors are required to make judgements, estimates and assumptions about assets, liabilities and disclosures that are not readily available from other sources. The estimates and associated

assumptions are based on experience and other factors that are considered to be relevant. These may include expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates and the estimates and underlying assumptions are regularly reviewed.

The most significant areas relate to the amount of and timing of drilling rig and equipment demobilisation costs, which is based on contractual terms and forecasts, and the writing off,

to the income statement, of exploration costs, which is based on management assessment of the likelihood of commercial reserves (as disclosed in note 12).

3 Production costs incurred

Pre-production costs incurred, or provided, in oil and gas exploration activities were as follows:

Falkland Islands

4 Exploration and evaluation expense Falkland Islands

Notes to the Financial Statements (continued)

5 Administrative expenses

6 Directors remuneration

* Fees of non-executive directors are included in related party transactions in note 26.

Further information on the remuneration of Directors and their share awards can be found in the Remuneration and Nomination Committee's report.

The total remuneration of the highest paid Director was $362,000 (2010: $853,000) comprised of $362,000 (2010: $261,000) annual salary plus gain on exercise of share options of $Nil (2010: $592,000). The aggregate gain on the exercise of share options by all Directors was $Nil (2010: $592,000).

Information on related-party transactions is disclosed in note 26 to these Accounts.

Notes to the Financial Statements (continued)

7 Employment costs

The Group does not operate a bonus scheme, a pension scheme, or a Long Term Incentive Scheme (LTIS).

8 Investment revenues

9 Taxation

Notes to the Financial Statements (continued)

c) Factors that may affect future tax charges

The Company is carrying forward an amount of tax-deductible expenditure under the assumption that it will have income from oil exploration in the future.

The amount currently available for offset against future revenue is estimated at $190 million.

No deferred tax is provided on this expenditure as it is not reasonably certain that the income from this source will materialise.

10 Loss per share

The calculation of basic loss per ordinary share is based on a loss of $42,500,000 (2010: restated loss $113,861,000) and on 342,285,172 (2010: 328,527,337) ordinary shares, being the weighted-average number of ordinary shares in issue during the year.

As the Group reports a loss for the current and comparative year, then in accordance with IAS 33, the share options and Share Appreciation Rights in issue are not considered dilutive. Details of such instruments that could potentially dilute basic earnings per share in the future are included in note 21.

11 Loss for the financial period

Desire Petroleum Plc has not presented its own income statement, as permitted by section 408 of the Companies Act 2006. The loss for the financial period dealt with in the accounts of the holding company amounts to $42,500,000 (2010: restated loss of $113,861,000).

12 Intangible fixed assets

Notes to the Financial Statements (continued)

At the balance sheet data, the $73,000 carried forward as exploration and evaluation assets, relates to costs incurred on license PL004b, where a successful farm in well was drilled.

The Group carries contingent oil and gas resources on this license, pending determination of commercial reserves.

In all other cost centres, the Group currently has no firm plans to return to the prospects, so all other costs have been written off in accordance with the accounting policy.

The Group's exploration and evaluation assets all relate to the Falkland Islands

Notes to the Financial Statements (continued)

13 Property, plant and equipment

The Group and Company's exploration and evaluation assets all relate to the Falkland Islands.

Notes to the Financial Statements (continued)

14 Investments

At 31 December 2011 the Company held 100% of the ordinary shares of Gaelic Resources Plc, a dormant company incorporated in the Republic of Ireland.

15 Trade and other receivables

The Group The Company

The Directors consider that the carrying amount of receivables approximates to their fair value. Included within other receivables is an amount of $16,621,000 (2010: $13,162,000) which relates to partner contributions toward the demobilisation provision.

16 Restricted cash

The Group The Company

The amount is treated as restricted cash as the balance of cash is not under the exclusive control of the group.

17 Cash and cash equivalents

The Group The Company

Notes to the Financial Statements (continued)

18 Trade and other payables

The Group The Company

The Directors consider that the carrying amount of payables approximates to their fair value.

19 Provisions

During the period the Group made an additional provision for the estimated demobilisation cost of drilling rig and equipment.

The other provision relates to a provision made at the previous year end to write off the additional costs of the Dawn well that had not been incurred at that year end.

20 Financial Instruments

The Group's policies as regards to financial instruments are set out in the accounting policies. The Group does not trade in financial instruments. The risks and uncertainties facing the Group include, but are not limited to:

Credit risk and counter-party risk

The Group's principal financial assets are cash at bank and other receivables. The Group's credit risk is primarily attributable to amounts included in other receivables. The maximum credit-risk exposure relating to financial assets is represented by the carrying values as at the Balance Sheet date. The Group manages its counter-party risk by holding its cash with a range of recognised banks and institutions.

Notes to the Financial Statements (continued)

Currency rate risk

The Group currency risk is primarily attributable to GBP cash deposits held at the bank. These deposits are held in GBP as the Group incurs expenditure in this currency. Foreign exchange movements on monetary assets and liabilities are taken to the income statement and the potential exposure is set out in the table below.

Capital risk management

The Group manages its capital to ensure that the Group will be able to continue as a going concern while maximising the return to shareholders through the use of equity. The overall strategy remains unchanged from 2010.

The capital structure consists of cash and cash equivalents and equity. The Group is not subject to any externally imposed capital requirements.

Liquidity risk

The Group manages liquidity risk via maintaining adequate cash reserves, and by continuously monitoring forecast and actual cash flows relating to oil exploration and administrative costs.

Notes to the Financial Statements (continued)

21 Share capital

The Company has one class of ordinary shares which carry no rights to fixed income.

Share options