Serica Energy Regulatory News (SQZ)

31 Mar 2006 07:30

Serica Energy plc31 March 2006 Serica Energy plc ("Serica" or the "Company") SUMMARY 2005 FULL YEAR RESULTS AND FORWARD PROGRAMME Serica today announces its 2005 full year results. A summary of these resultsis included below, and the full 2005 Annual Report and Accounts are available atwww.serica-energy.com and www.sedar.com. In the North Sea, the Global Santa Fe 140 drilling rig has been secured for theCompany's first exploration well on Block 23/16f in partnership with EndeavourEnergy UK Limited. Drilling in Block 23/16f is expected to take place in thefourth quarter of 2006 following completion of site preparations. In Indonesia,the Company is currently concluding arrangements for a rig to commence its 2006/7 drilling programme in the Biliton Block. Drilling on the Glagah Kambuna and Asahan Offshore Blocks in Indonesia awaitsthe outcome of a large 3D seismic programme scheduled to commence in the thirdquarter of 2006. The Company continues to explore avenues to identify rig slotsin the currently tight rig market in order to bring forward drilling on Serica'sother exploration prospects. 2005 Highlights Operational • Two operated wells completed in Indonesia were gas discoveries: • Kambuna-2 well tested at good flow rates, demonstrating commercial potential and highlighting further upside of the block • Togar-1A well encountered high quality gas-bearing sands • Awarded two new North Sea exploration blocks, Block 14/15a and Block 23/ 16f, in the UK 23rd Licensing Round • Appointment of Paul Ellis as Chief Executive Officer Financial • Completed listing on AIM in December 2005 and raised £64 million before costs, through JPMorgan Cazenove • Serica has adopted International Financial Reporting Standards for its 2005 results (previously Canadian GAAP) Forward Programme • Kambuna Field Plan of Development submitted to the Indonesian authorities, targeting first production in 2008. Discussions ongoing with third parties regarding gas sales agreements • Plan of Development for Tanjung Perling Field to be submitted during first half 2006 • Drilling rigs identified for wells to be drilled in the UK and Indonesia: • First well on North Sea Block 23/16f to be spudded in Q4 2006 • Concluding arrangements for a rig to commence the Indonesian drilling programme • A large 3D seismic programme covering parts of both the Glagah Kambuna and Asahan blocks contracted to commence in Q3 2006 Tony Craven Walker, Chairman, commented: "As a result of the drilling success and the completion of fund raising, 2005was an excellent year for the Company. With the appointment of Paul Ellis asChief Executive Officer to complete our management team, Serica is well placedto build upon this success through the ambitious exploration and fielddevelopment programme that is planned for this year and next." 31 March 2006 Background Notes Serica is an international oil and gas exploration company with operations inIndonesia, the UK North Sea and Spain. The Company's ordinary shares are listedin London on AIM and on the Canadian TSX Venture Exchange under the symbol "SQZ". The 2005 Annual Report and Accounts are available at www.serica-energy.comand www.sedar.com. Enquiries: Serica Energy plcPaul Ellis, Chief Executive Officer pellis@serica-energy.com +44 (0)20 7487 7300Chris Hearne, Finance Director chearne@serica-energy.com +44 (0)20 7487 7300 Pelham Public Relations -UKJames Henderson james.henderson@pelhampr.com +44 (0)20 7743 6673Alisdair Haythornthwaite alisdair.haythornthwaite@pelhampr.com +44 (0)20 7743 6676 CHF - CanadaJan Moir jan@chfir.com +1 416 868 1079Heather Colpitts heather@chfir.com +1 416 868 1079 Forward Looking Statements This disclosure contains certain forward looking statements that involvesubstantial known and unknown risks and uncertainties, some of which are beyondSerica Energy plc's control, including: the impact of general economicconditions where Serica Energy plc operates, industry conditions, changes inlaws and regulations including the adoption of new environmental laws andregulations and changes in how they are interpreted and enforced, increasedcompetition, the lack of availability of qualified personnel or management,fluctuations in foreign exchange or interest rates, stock market volatility andmarket valuations of companies with respect to announced transactions and thefinal valuations thereof, and obtaining required approvals of regulatoryauthorities. Serica Energy plc's actual results, performance or achievementcould differ materially from those expressed in, or implied by, these forwardlooking statements and, accordingly, no assurances can be given that any of theevents anticipated by the forward looking statements will transpire or occur, orif any of them do so, what benefits, including the amount of proceeds, thatSerica Energy plc will derive there from. CHAIRMAN'S STATEMENT I am delighted to report that Serica has started 2006 in a strong operationaland financial position. With the successful raising of £64 million of newcapital before expenses and the listing of the Company's shares in London onAIM, to complement our existing quotation on the TSX Venture Exchange market inCanada, the Company is now well placed to create shareholder value through itsambitious exploration drilling and field development programmes. I should liketo thank shareholders for their support during the recent funding and to welcomenew shareholders who joined us at the time of the AIM listing. During the year we strengthened the management team with the appointment of PaulEllis as Chief Executive Officer who will work closely with Chris Atkinson, theChief Operating Officer and Chris Hearne, the Finance Director. Paul has over35 years' experience in the areas of exploration, production, development andmanagement of international oil and gas ventures. He has held seniorappointments with major upstream oil and gas companies and with independentexploration companies. We made good progress in Indonesia, where we achieved exploration success, andin the UK. In Indonesia, the successful outcome of our 2005 drilling programmehas demonstrated both the commercial potential of the Kambuna Field and thesignificant gas prospectivity of the adjacent Asahan Block. The Company hasalready submitted plans for the development of Kambuna to the Indonesianauthorities, with production scheduled for 2008, and is in discussions withthird parties interested in purchasing the gas. In addition, new seismicinformation has indicated that the Tanjung Perling Field, in the south of theAsahan Block, may be commercial and a development plan is also being preparedfor this field. We start these new developments, and our exploration drilling and seismicprogrammes, at a time of high oil and gas prices but also at a time of high rigactivity. This increased rig demand worldwide has led to a very tight drillingmarket. Nevertheless, in this competitive market the Company has secured a rig for itsfirst well in North Sea Block 23/16f, to be spudded in the fourth quarter thisyear. In Indonesia the Company is concluding arrangements for a rig for its2006/7 drilling programme in the Biliton Block. We continue to review optionsto bring forward exploration drilling on our other blocks but we are cautious toavoid incurring excessive drilling costs in the current overly tight market. In summary, 2005 was an eventful year for the Company with a positive outcome.We have seen successes in Indonesia with our first two wells drilled as operatorand have secured the funding required to build on these early successes. I amimmensely pleased with these achievements and optimistic for the future. Tony Craven Walker Chairman CHIEF EXECUTIVE OFFICER'S REPORT I am pleased to present this as my first report since joining the Company lastSeptember. It is two years now since Serica was formed and listed on the TSX VentureExchange and, in that time, the Company has made significant progress. FromSerica's small starting position at the end of 2003, the Company's portfolio hasgrown to include a broad spread of interests in the North Sea and Indonesia, itstwo main areas of focus. Both these areas provide the basis for future growth.An independent study commissioned by the Company at the time of its introductionto AIM identified 22 exploration prospects in the Company's portfolio whichcould be potentially commercial. This is a considerable portfolio for a company of Serica's size to haveaccumulated in such a short period of time. Its interests in the North Sea andIndonesia cover the technical risk spectrum, giving exposure both to lower riskappraisal projects and to higher risk, high impact projects whilst alsoproviding a balance of geological and political risk. It is an enviableportfolio for a small company to have. The first two wells drilled by the Company on its Asahan and Glagah Kambunablocks in Indonesia at the end of 2005 reflect the quality of the Company'sacreage. Serica is operator with a 55% interest in both of these blocks. Thefirst well, Kambuna-2, tested gas at good flow rates and has demonstrated thecommercial potential of the Kambuna Field as well as indicating furtherconsiderable upside to that field. The second well, Togar-1A, a wildcatexploration well drilled to test a direct hydrocarbon indicator on the adjacentAsahan Block, encountered high quality gas bearing sands in line with ourexpectations and proves the Company's technology, increasing significantly ouroptimism for commercial discoveries to be made on the block. Following these positive results and the successful funding, the Companysubmitted a Plan of Development for the Kambuna Field to the Indonesianauthorities at the turn of the year with a targeted production date of 2008.Discussions have already commenced with third parties who have expressedinterest in acquiring the gas. A 3D seismic survey over the Kambuna Field andadjacent Company acreage will be acquired later this year. More recently, theanalysis of new seismic data acquired by the Company has shown that the TanjungPerling gas accumulation, which lies to the south of Kambuna in our adjacentAsahan Block, has commercial potential. We are therefore preparing a Plan ofDevelopment for the Tanjung Perling Field to be submitted to the Indonesianauthorities this year. During 2005, further prospects were added to the Company's inventory with theaward of two North Sea licences in the UK 23rd Licensing Round, Block 14/15a andBlock 23/16f, both operated by Serica which has an interest of 50% in eachblock. Serica now has an interest in eight blocks and part blocks in the NorthSea, all of which it operates. Notwithstanding a tight rig market, the Companyhas put arrangements in place to drill an exploration well in Block 23/16f inthe fourth quarter of 2006, less than a year from the award of the licence. The sharp increase in exploration drilling activity worldwide caused by high oiland gas prices has resulted in offshore drilling rigs becoming harder to obtainand rig owners are seeking long term contracts at very high day rates. Sericais adapting to these changed circumstances and will be entering into rig-sharingagreements with other operators and favouring farm-in partners who have rigsunder contract. In addition to the semi-submersible rig secured for the drilling of the firstexploration well in UK Block 23/16f, the Company is finalising arrangements fora rig for its 2006/7 Indonesia drilling programme in the Biliton Block. Wecontinue to explore avenues to identify rig slots to bring forward drilling onother prospects. A large 3D seismic programme covering parts of both the GlagahKambuna and Asahan blocks is planned to take place in mid year before selectingthe drilling locations in those blocks. One of the factors that differentiates Serica from other small explorationcompanies is that Serica operates all but one of its licence blocks and hasworking interests of between 50% and 100% in all but one block. This givesSerica financial and operational flexibility and allows it, in the event offarming-out, to retain a significant interest and exposure to the potentialupside. Serica's strategy is the creation of significant shareholder value through highimpact exploration and near term development. To achieve this goal, the Companyaims to maintain a portfolio of prospects that will provide opportunities eachyear for drilling low risk appraisal wells together with higher risk, highimpact wells. To this end the Company will make applications for explorationlicences in existing and new areas of interest and will seek to undertake newventures such as farm-ins, acreage trades and corporate transactions, focusingon those opportunities which have the potential to add significant value. Ourfocus for this year is to progress our current exploration and developmentprogrammes whilst being open to new opportunities to create value forshareholders. Paul Ellis Chief Executive Officer REVIEW OF OPERATIONS - Overview Serica has operations in three different areas of the world. Two of theseareas, Indonesia and the UK North Sea, are major oil and gas producing regionsand the third, onshore northern Spain, is an area that has yet to be fullyexplored using modern exploration techniques. The Company achieved success in 2005 with new acreage awarded in the North Seaand two gas discovery wells in Indonesia: Kambuna-2 and Togar-1A. The Companyis currently studying the development of two offshore gas fields, the KambunaField in the Glagah Kambuna TAC and the Tanjung Perling Field in the adjacentAsahan PSC, and has commenced gas sales negotiations for both fields, in whichit holds interests of 55% and is the operator. Indonesia During 2005, the Company mobilised a drilling rig to drill two wells offshoreSumatra. Kambuna-2 was drilled in September in the Glagah Kambuna TechnicalAssistance Contract ("TAC") and Togar-1A was drilled in the Asahan OffshoreProduction Sharing Contract ("PSC") in October. Kambuna-2 demonstrated thecommercial potential of the Kambuna Field and a Plan of Development to supplygas to onshore Sumatra starting in 2008 was submitted to Pertamina in December.Gas sales negotiations have now been initiated for gas from the Kambuna Field. The Togar-1A well discovered gas but not in sufficient quantities to justify astand-alone development. However, it may be possible to produce the Togar Fieldas a satellite to other potential field developments. A new 2D seismic surveywas completed in the Asahan Offshore PSC and locations for future explorationwells are being established. In the Biliton PSC further 2D seismic data was acquired and a basin modellingstudy was completed to examine the likely flow of hydrocarbons from the sourcerocks to the mapped prospects on the block. Drilling locations are beingdetermined and a three-well exploration programme is now being planned. United Kingdom Serica has been actively involved in the North Sea for five years and continuedto improve its portfolio of interests with the award of two Central North Sealicences in the UK 23rd Licensing Round: Block 23/16f and Block 14/15a. TheCompany is already preparing to drill a well in Block 23/16f to test "Magellan",a prospect on which drilling is expected to commence in the fourth quarter of2006. During the year considerable efforts were made in the technical evaluation ofour blocks in the Southern Gas Basin and we are now making preparations for thedrilling of the "Oak" gas prospect in Block 54/1b and the "Chablis" appraisalwell in Block 48/16b, both operated by Serica. Spain The Company holds a 100% interest in four exploration permits coveringapproximately 1,116 square kilometres onshore northern Spain. The permits arelocated within the Autonomous Community of Aragon and lie approximately 60kilometres southeast of the existing Serrablo Gas Field. Geological evaluation of the permits has confirmed a functioning petroleumsystem and a series of exploration leads have been mapped. It has further beendetermined that additional 2D seismic data will need to be acquired in 2007 toconvert these leads into prospects for drilling. Indonesia Serica has been active in Indonesia for four years and has interests in threePSCs and one TAC. The portfolio has been assembled through acquisition anddirect negotiation and the Company continues to seek further explorationopportunities in this highly prospective country. During 2005, Serica contracted the semi-submersible drilling rig "Galaxy Driller" to drill two wells: the Kambuna-2 appraisal well in the Glagah Kambuna TAC andthe Togar-1A exploration well in the Asahan Offshore PSC. Both wellssuccessfully encountered gas-bearing reservoirs. The Company also acquired 2D seismic data in the Asahan Offshore and BilitonPSCs and is now finalising the interpretation of both areas and selectingdrilling locations. The following table summarises the Company's interests in Indonesia. Contract Working Interest Role LocationGlagah Kambuna TAC 55% Operator Offshore North SumatraAsahan Offshore PSC 55% Operator Offshore North SumatraBiliton PSC 90% Operator Offshore Java SeaLematang PSC 10% Partner Onshore South Sumatra Glagah Kambuna TAC The Glagah Kambuna TAC comprises an area of approximately 380 square kilometresand lies offshore North Sumatra immediately adjacent to the Asahan Offshore PSC.Serica has a 55% working interest and is the operator of the block. Prior to 2005, the Glagah Kambuna TAC contained two discovery wells: theGlagah-1 well drilled by Caltex in 1985 and the Kambuna-1 well drilled by BowValley in 1986. In September 2005, Serica drilled its first operated well, theKambuna-2 appraisal well. The well was drilled to a depth of 7,963 ft and testedgas at 17.5 mmscfd and over 1,500 bpd of 55degrees API gravity condensate. Thiswell demonstrated the commercial potential of the Kambuna Field and the Companyhas submitted a Plan of Development to Pertamina, the Indonesian State PetroleumCompany. As part of this development plan the Company has contracted Veritas DGC toacquire a 3D seismic survey of up to 470 square kilometres commencing inmid-2006. The survey will cover not only the Kambuna Field but also a largearea covering additional prospects lying both in the Glagah Kambuna TAC and inthe Asahan Offshore PSC. Following the interpretation of the new data andselection of well locations, drilling will take place in 2007. Field development, in 50 metres of water, will be straightforward and potentialmarkets for Kambuna gas include the PLN power plant at Belawan and the city ofMedan, one of Indonesia's largest cities. Serica is in negotiations withPertamina and PT Perusahaan Gas Negara ("PGN"), the Indonesian state-owned gascompany with respect to a gas sales agreement for the Kambuna Field, withproduction expected to commence in 2008. Asahan Offshore PSC The Asahan Offshore PSC comprises an area of approximately 2,185 squarekilometres offshore North Sumatra and lies immediately adjacent to the GlagahKambuna TAC. Serica has a 55% working interest and is the operator of the PSC. The Asahan Offshore PSC contains the Tanjung Perling and Togar discovery wells.The Tanjung Perling Field, approximately 20 kilometres offshore, was discoveredby Pertamina and Japex in 1974 but was uncommercial at that time. New seismicdata was acquired by Serica in 2004 and 2005 that confirmed the extent of theaccumulation and Serica plans in 2006 to submit a Plan of Development for theTanjung Perling Field to BPMIGAS, the Indonesian government agency for upstreamoil and gas business. The Company recently executed a Memorandum ofUnderstanding with PGN, relating to the delivery of gas from the Tanjung PerlingField starting in 2008. The Togar-1A well, drilled in October 2005, was the Company's second operatedwell and was a small gas discovery. The well successfully confirmed the use ofseismic direct hydrocarbon indicators as an effective exploration tool in theAsahan Block, which contains a number of other prospects that are currentlybeing evaluated for exploratory drilling. Togar itself may be exploited via afuture larger development on the block. The Asahan Offshore PSC is in relatively shallow water, around 50 metres, andthe ultimate development of its gas fields will take advantage of readilyavailable conventional technology. Biliton PSC The Biliton PSC covers an area of approximately 6,575 square kilometres in theJava Sea between the Indonesian islands of Java and Kalimantan. The Company hasa 90% working interest in Biliton and is the operator of the PSC. The Biliton PSC lies in a virtually unexplored Indonesian basin which has manyof the characteristics of analogous basins nearby which have to date producedsubstantial volumes of oil and gas. Only one exploration well has been drilledin the area, the Parang-G1 well drilled by Ashland Petroleum in 1974. Althoughthis well did not find reserves of oil or gas it did encounter oil shows. In1990, British Petroleum carried out a seabed survey that showed the presence ofnine potential oil seeps within the current block boundary. Both the shows inthe well and seep information demonstrate that hydrocarbons have been generatedwithin the area. During 2004 and 2005, Serica acquired approximately 4,500 line kilometres of 2Dseismic data which is currently being interpreted. It is expected that up tothree prospects will be selected for an exploration drilling programme in 2006/7. These wells will test independent features, with relatively shallow targetdrilling depths and are expected to be drilled in a three well back-to-backcampaign. --------------- Lematang PSC The Lematang PSC, onshore South Sumatra, covers an area of approximately 407square kilometres, divided into two separate blocks. It lies within theprolific South Palembang Basin where oil and gas were first discovered in thelate 19th century. Serica has a 10% working interest in the Lematang PSC, whichis operated by PT Medco Energi E&P ("Medco"). Several exploration wells were drilled between 1987 and 1997, resulting in thediscovery of two gas fields, Harimau and Singa. The Harimau Field has beenproducing since 1991 and is now approaching the end of its life. In 2004, Medco submitted a Plan of Development for the Singa Field to BPMIGAS.The plan of development includes a 40 kilometre pipeline to Pagar Dewa, thestarting point for the South Sumatra to West Java gas pipeline project beingundertaken by PGN. Serica's share of operating and development costs under the Lematang PSC iscurrently being carried by other partners and it is expected that the Company'scost carry will be sufficient to cover all costs of the development of the SingaField in 2006 but that an additional US$6.5 million will be required by theCompany to fund its share of development costs in 2007. United Kingdom Serica has been active in the North Sea for over five years and has assembled,through its participation in the UK 22nd and 23rd Licensing Rounds as well asthrough acquisitions, a portfolio of eight blocks in the North Sea's SouthernGas Basin and Central Graben. All of the North Sea properties held by theCompany, whether in the Southern or Central North Sea, are within 15 kilometresof existing infrastructure that could potentially transport any discoveredhydrocarbons to shore and to the European market. The following table summarises the Company's interests in the North Sea. Block(s) Working Interest Role LocationBlock 48/16b 100% Operator Southern Gas BasinBlocks 48/16a, 47/20b 100% Operator Southern Gas BasinBlock 54/1b 100% Operator Southern Gas Basin Block 14/15a 50% Operator Central North SeaBlocks 23/16e, 23/17b 50% Operator Central North SeaBlock 23/16f 50% Operator Central North Sea Block 48/16b and Blocks 48/16a, 47/20b Block 48/16b and Blocks 48/16a, 47/20b are contiguous and cover a total of 377square kilometres in the Southern Gas Basin. Serica has a 100% interest inthese blocks, which contain one undeveloped discovery named Chablis and severalundrilled prospects. The Chablis Field was discovered by the 48/16b-2 well,drilled by ConocoPhillips in 2001 but not production tested. Serica has undertaken detailed geophysical and petrophysical studies of Chablisin order to define an appraisal plan. The field is close to existinginfrastructure with two alternative transportation options for gas production.Whilst well 48/16b-2 demonstrated the presence of hydrocarbons, there remainsuncertainty as to the quantity of hydrocarbons recoverable and an appraisal wellwill improve Serica's understanding of the gas accumulation. Serica is planningto drill an appraisal well up-dip from the existing discovery. In addition to Chablis in Block 48/16b, Serica is also evaluating a number offeatures in Blocks 48/16a and 47/20b, in particular the Sancerre prospect, withthe aim of identifying possible satellites to Chablis. Block 54/1b Block 54/1b covers 106 square kilometres in the Southern Gas Basin. Serica isoperator and has a 100% interest in the block which it was awarded in 2004 inthe UK 22nd Licensing Round. The Company has already fulfilled the workobligation on the block by acquiring 3D seismic data. The key reservoir target in this block is the Rotliegend Leman Sandstone inwhich gas has been found in several locations close to Block 54/1b including theDavy Field, approximately five kilometres to the west. Reservoir quality in theblock is expected to be good, with sand thickness anticipated to be from 400 to750 ft. Serica has completed a detailed analysis of the block using 3D seismic andregional well data, from which it has identified the Oak prospect, a RotliegendSandstone feature with a direct hydrocarbon indicator that appears to delineatea potential gas accumulation immediately up-dip from well 54/1b-2. Sericaintends to drill the Oak prospect in late 2006, depending on the availability ofa suitable drilling unit. Block 14/15a Block 14/15a covers 108 square kilometres in the Central North Sea. Serica isoperator and has a 50% interest in the block. Serica and its partner, PaladinExpro Limited (now part of Talisman Energy Inc), were awarded the block in 2005in the UK 23rd Licensing Round. Block 14/15a lies in the Outer Moray Firth area of the Central North Sea,immediately north of the established Piper, Claymore, Tartan, Highlander andLowlander oil fields. The current 3D seismic data has been used to identifyseveral leads on the block and, in order to refine the interpretation, Sericawill undertake a seismic reprocessing project involving pre-stack depthmigration of the existing 3D data. Leads have been defined at upper Jurassic, lower Cretaceous and Paleocene levelsand the reprocessing project aims to mature some of the leads into drillableprospects. Blocks 23/16e, 23/17b and Block 23/16f Blocks 23/16e, 23/17b and Block 23/16f are contiguous and cover 76 squarekilometres in the Central Graben area of the North Sea. Serica is operator andhas 50% interests in Blocks 23/16e and 23/17b, which Serica and its partners,Endeavour Energy and Wham Energy, were awarded in the UK 22nd Licensing Round.Serica is also operator and has a 50% interest in Block 23/16f, which it and itspartner, Endeavour Energy, were awarded in the UK 23rd Licensing Round. An exploration well, 23/16a-2, drilled by Britoil in 1988 and lying in the areanow covered by Block 23/16f, produced light crude oil on test at a rate of 96bpd from Tertiary sands of the Forties and Andrew formations. This discovery isnow called "Henry" and the most likely reason for poor flow in the Henrydiscovery well is believed to be formation damage and the reservoir quality inthe vicinity of the well. In areas of the block outside the 23/16a-2 well location, there are characterchanges on the seismic data that can be inferred to indicate the presence ofthicker channel sands with improved reservoir characteristics. Serica has mappedthe Henry discovery and the Columbus prospect in the Forties Sandstone and aprospect called Magellan in the underlying Andrew Sandstone. A deeper lead,Shackleton, has also been identified in the Lower Cretaceous. Serica has secured a drilling rig to drill a well in Block 23/16f in the fourthquarter of 2006 to test the Magellan prospect. MANAGEMENT'S DISCUSSION AND ANALYSIS The following management's discussion and analysis ("MD&A") of the financial andoperational results of Serica Energy plc and its subsidiaries (the "Group")should be read in conjunction with Serica's consolidated financial statementsfor the year ended 31 December 2005. References to the "Company" include Serica and its subsidiaries where relevant.All figures are reported in US dollars ("US$") unless otherwise stated. Overall Performance Serica's activities are centred on Indonesia, the UK and Spain. The Group haslimited current oil and gas production with the main emphasis placed uponexploration and its future drilling programmes. During 2005, work has continuedon building the Group's financial position and adding to its properties. Two operated wells were completed in Indonesia and both were gas discoveries.The Kambuna-2 well tested at good flow rates, demonstrating commercial potentialand highlighting further upside of the block and the Togar-1A well encounteredhigh quality gas-bearing sands. In the UK Serica was awarded two new North Seaexploration blocks, Block 14/15a and Block 23/16f, in the UK 23rd LicensingRound. During the year Serica acquired an additional 15% interest in the AsahanOffshore PSC from PT Medco Energi International TBK subject to the necessarygovernment approvals. The consideration of US$1,000,000 was payable in cash. Inaddition Serica farmed out 25% working interests in the Glagah Kambuna TAC andthe Asahan Offshore PSC to Duinord Petroleum Inc. in return for a 50% cost carryon the 2005 two-well programme plus some US$1,000,000 in back costs. Following completion of a reorganisation on 1 September 2005 (the "Reorganisation"), whereby the common shares of Serica Energy Corporation wereautomatically exchanged on a one-for-one basis for ordinary shares of theCompany, the ordinary shares were successfully admitted to the LondonAlternative Investment Market ("AIM") on 13 December 2005. The $112 million before costs, raised in conjunction with the AIM listing, hasenabled Serica to end the year with a robust balance sheet with net assets of$131 million, and sufficient funding to progress with its forward programme.This includes the Kambuna Field Plan of Development submitted to the Indonesianauthorities, targeting first production in 2008, and the Plan of Development forthe Tanjung Perling Field to be submitted during first half 2006. In addition adrilling rig has been contracted for a first well on North Sea Block 23/16f tobe spudded in the fourth quarter 2006 and the Company is concluding arrangementsfor a rig for its 2006/7 Indonesian drilling programme. The results of Serica's operations are detailed below, and Serica has chosen toadopt International Financial Reporting Standards ("IFRS") and henceforth theresults presented in this MD&A and the financial statements will be presented inaccordance with IFRS. The transition date is 1 January 2004 and the first yearreported under IFRS is the year ended 31 December 2005. Accordingly,comparatives have been restated from Canadian GAAP to comply with IFRS. Thereconciliations to IFRS from the previously published Canadian GAAP financialstatements are provided in note 30 to the audited financial statements. UnderIFRS the Reorganisation was considered to be a reverse takeover by Serica EnergyCorporation and as such the financial statements of the Group represent acontinuation of Serica Energy Corporation. Results of Operations Serica generated a loss of US$4.1 million for 2005 compared to US$7.7 millionfor 2004. 2005 2004 US$000 US$000Sales revenue 124 156 Expenses: Administrative expenses (5,340) (4,735) Reverse acquisition and listing expenses - (1,290) Pre-licence costs (695) (61) Share-based payments (1,013) (167) Depletion, depreciation & amortisation (30) (14) Release of decommissioning provision - 122 Gain on disposal of shareholding - 141 Finance revenue 526 170Loss before taxation (6,428) (5,678) Taxation credit/(charge) 2,309 (2,064) Loss for the year (4,119) (7,742) Revenues from oil and gas production are recognised on the basis of theCompany's net working interest in its properties. Revenues throughout eachperiod were generated from Serica's 10% interest in the Harimau producing gasand gas condensate field. Whilst steady during 2005, the decrease in salesrevenues from US$0.16 million for 2004 to US$0.12 million for 2005 reflected thegradual decline in production levels partly offset by higher sales prices.Direct operating costs for the field during these periods were carried by MedcoEnergi Limited. Administrative expenses of US$5.3 million for 2005 increased from US$4.7 millionfor 2004. The increase reflects the expansion of the Company and its resources. Share-based payment costs of US$1.0 million reflects share option grants madeduring the course of 2004 and 2005 and compares with a cost of US$0.17 millionfor 2004. Negligible depletion, depreciation and amortisation charges for 2005represent office equipment only. The costs of petroleum and natural gasproperties are not currently subject to such charges pending further evaluation. Net interest income of US$0.53 million for 2005 compares with US$0.17 millionfor 2004. The increase from last year was due to higher cash balances. Therehave been no gains on disposals this year whilst a gain of US$0.14 million aroseduring the equivalent period of last year on the sale of shares in a companylisted on the TSXV. The taxation credit for the year arose from a reduction in the deferred taxliability following the redemption of the ENI Loan Note, with no reciprocalincrease in current tax. Expenditures during 2005 have reduced any potentialcurrent income tax expense arising for the year to US$ nil. The net loss per share fell from US$0.16 to US$0.05 due to the substantialincrease in the number of shares in issue, and the decrease in the net loss forthe year compared to 2004. Summary of Quarterly Results Quarter ended: 31 Mar 30 Jun 30 Sep 31 Dec US$000 US$000 US$000 US$0002005Sales revenue 31 32 36 25Loss for the quarter 1,455 1,486 775 403Basic and diluted loss per share US$ 0.02 0.02 0.01 0.01 2004Sales revenue 38 44 41 33Loss for the quarter 2,123 1,570 3,276 773Basic and diluted loss per share US$ 0.05 0.03 0.07 0.01 Working Capital, Liquidity and Capital Resources Current Assets and Liabilities An extract of the balance sheet detailing current assets and liabilities isprovided below: 31 December 31 December 2004 2005 US$000 US$000Current assets: Inventories 878 259 Financial assets - 7,204 Trade and other receivables 2,106 1,920 Cash and cash equivalents 109,750 1,729Total Current assets 112,734 11,112 Less Current liabilities: Trade and other payables (7,136) (1,315) Net Current assets 105,598 9,797 At 31 December 2005, the Company had net current assets of US$105.6 millionwhich comprised current assets of US$112.7 million less current liabilities ofUS$7.1 million, giving an overall increase in working capital of US$95.8 millionin the year. The Company raised additional substantial new funds through theexercise of warrants and the raising of £64 million (US$112 million) beforecosts through a placing on AIM in 2005. Net outgoings in 2005 coveredoperational expenses and exploration work. This is mostly reflected in anincrease in trade and other payables, the bulk of which related to drilling onthe Glagah Kambuna TAC and on the Asahan Offshore PSC. Long-Term Assets and Liabilities An extract of the balance sheet detailing long-term assets and liabilities isprovided below: 31 December 31 December 2005 2004 US$000 US$000 Intangible exploration assets 23,591 10,589Goodwill 2,382 2,382Property, plant and equipment 26 6Long-term other receivables 1,758 302 Long-term other payables (151) (155)Deferred income tax liabilities (2,137) (4,446) During 2005, total investments in petroleum and natural gas properties,represented by intangible exploration assets, increased to US$23.6 million. Ofthe 2005 investments, US$12.5 million was spent in Indonesia principally ondrilling activity on the Asahan and Glagah Kambuna concessions, US$0.4 millionin the UK on exploration work and a further US$0.1 million in Spain. Goodwill, representing the difference between the price paid on acquisitions andthe fair value applied to individual assets, remained unchanged at US$2.4million. Long-term other receivables of US$1.8 million represent value added tax ("VAT")on Indonesian capital spend, which is expected to be recovered once the fieldscommence production. Long-term other payables comprise mainly VAT payable in Indonesia. The deferredincome tax liability was reduced following the redemption of the ENI Loan Note. Shareholders' Equity An extract of the balance sheet detailing shareholders' equity is providedbelow: 31 December 31 December 2005 2004 US$000 US$000Total share capital 148,745 33,047Other reserves 1,269 256Accumulated deficit (18,947) (14,828) Total share capital represents shares at nominal value and share premium. Totalshare capital includes the total net proceeds (both nominal value and anypremium on the issue of equity capital). Issued share capital during 2005 was increased by the exercise of 12,494,400warrants and share options of the Company at prices ranging from Cdn$0.50 toCdn$1.20. In addition 67,368,421 ordinary shares at £0.95 per ordinary sharewere issued upon admission to trading on AIM. Capital Resources At 31 December 2005, Serica had US$105.6 million of net working capital and nosignificant long-term debt. At that date the Company had commitments to futureminimum payments under operating leases in respect of rental office premises,office equipment and motor vehicles for each of the following years as follows: US$00031 December 2006 27531 December 2007 19831 December 2008 18331 December 2009 17731 December 2010 36 The Company had no long-term debt, capital lease obligations, purchaseobligations or other long-term obligations. In view of the limited revenues currently generated from oil and gas production,Serica will utilise existing financial resources as required to fund itsinvestment programme and ongoing operations. Off-balance Sheet Arrangements The Company has not entered into any off-balance sheet transactions orarrangements. Critical Accounting Estimates The Company's significant accounting policies are detailed in note 2 to theattached audited 2005 financial statements. International Financial ReportingStandards have been adopted for 2005 and for 2004 comparatives. Details areprovided in note 30 in the audited 2005 financial statements. The cost ofexploring for and developing petroleum and natural gas reserves are capitalised.Unproved properties are subject to periodic impairment tests whilst the costsof proved properties are depleted over the life of such producing fields. Ineach case, calculations are based upon management assumptions about futureoutcomes, product prices and performance. Financial Instruments The Group's financial instruments comprise cash and cash equivalents, accountspayable and accounts receivable. It is the management's opinion that the Groupis not exposed to significant currency, interest or credit risks arising fromits financial instruments other than as discussed below: Cash and cash equivalents, which comprise short-term cash deposits, aregenerally held within the currency of likely future expenditures to minimise theimpact of currency fluctuations. The majority of funds are currently held in USdollars to match the Group's exploration and appraisal commitments. The holdingof £11.1 million at year-end reflected a proportion of UK licence commitmentsand administrative expenditures expected in £ sterling. Following the recent fund-raising, Serica is holding significant net cash.Whilst this does leave exposure to interest rate fluctuations, given the levelof expenditure plans over 2006/7 this is managed in the short-term throughselecting treasury deposit periods of one to six months. The low levels of sales revenue leave little customer credit risk. Cash andtreasury credit risks are mitigated through spreading the placement of fundsover a range of institutions each carrying acceptable published credit ratingsto minimise counterparty risk. It is the management's opinion that the fair value of its financial instrumentsapproximate to their carrying values, unless otherwise noted. Warrants and Share Options As at 31 December 2005, the following warrants and options were outstanding: - Expiry Date Amount Value Cdn$Warrants 6 Aug 2006 6,427,500 7, 713,000 28 Jul 2006 1,521,876 1,826,251 Share options Aug 2009 500,000 555,000 Feb 2009 947,500 1,895,000 May 2009 100,000 200,000 Dec 2009 365,000 365,000 Jan 2010 600,000 600,000 Jun 2010 1,700,000 3,060,000 Value £ Nov 2010 696,000 675,120 Business Risk and Uncertainties Serica, like all exploration companies in the oil and gas industry, operates inan environment subject to inherent risks. Many of these risks are beyond theability of a company to control, particularly those associated with theexploring for and developing of economic quantities of hydrocarbons: volatilecommodity prices; governmental regulations; and environmental matters. Nature and Continuance of Operations The principal activity of the Company is to identify, acquire and subsequentlyexploit oil and gas reserves primarily in Asia and Europe. The Company's financial statements have been prepared with the assumption thatthe Company will be able to realise its assets and discharge its liabilities inthe normal course of business rather than through a process of forcedliquidation. The Company currently has relatively minor operating revenues and,during the period ended 31 December 2005 the Company incurred losses of US$4.1million from continuing operations. At 31 December 2005 the Company held cashand cash equivalents of US$109.8 million. Outstanding Share Capital As at 23 March 2006, the Company had 142,669,829 ordinary shares issued andoutstanding. Additional Information Additional information relating to Serica can be found on the Company's websiteat www.serica-energy.com and on SEDAR at www.sedar.com Approved on Behalf of the Board Paul Ellis Christopher HearneChief Executive Officer Finance Director 31 March 2006 Forward Looking Statements This disclosure contains certain forward looking statements that involvesubstantial known and unknown risks and uncertainties, some of which are beyondSerica Energy plc's control, including: the impact of general economicconditions where Serica Energy plc operates, industry conditions, changes inlaws and regulations including the adoption of new environmental laws andregulations and changes in how they are interpreted and enforced, increasedcompetition, the lack of availability of qualified personnel or management,fluctuations in foreign exchange or interest rates, stock market volatility andmarket valuations of companies with respect to announced transactions and thefinal valuations thereof, and obtaining required approvals of regulatoryauthorities. Serica Energy plc's actual results, performance or achievementcould differ materially from those expressed in, or implied by, these forwardlooking statements and, accordingly, no assurances can be given that any of theevents anticipated by the forward looking statements will transpire or occur, orif any of them do so, what benefits, including the amount of proceeds, thatSerica Energy plc will derive there from. Serica Energy plc Group Income Statement for the year ended 31 December 2005 2005 2004 Notes US$000 US$000Sales revenue 3 124 156 Cost of sales - - Gross profit 124 156 Administrative expenses (5,340) (4,735)Reverse acquisition and listing expenses - (1,290)Pre-licence costs (695) (61)Share-based payments (1,013) (167)Depreciation, depletion and amortisation 5 (30) (14)Release of decommissioning provision - 122Gain on disposal of shareholding 15 - 141 Operating loss before finance revenue and tax (6,954) (5,848) Finance revenue 8 526 170Loss before taxation (6,428) (5,678) Taxation credit/(charge) for the year 9 a) 2,309 (2,064)Loss for the year (4,119) (7,742) Loss per ordinary share (US$)Basic and diluted LPS 10 (0.05) (0.16) Serica Energy plc Balance Sheet As at 31 December 2005 Group Company 2005 2004 2005 Notes US$000 US$000 US$000 Intangible exploration assets 11 23,591 10,589 -Goodwill 12 2,382 2,382 -Property, plant and equipment 13 26 6 -Investments in subsidiaries 14 - - 119,649Other receivables 16 1,758 302 - 27,757 13,279 119,649Inventories 17 878 259 -Financial assets 18 - 7,204 -Trade and other receivables 19 2,106 1,920 957Cash and cash equivalents 20 109,750 1,729 107,080 112,734 11,112 108,037 TOTAL ASSETS 140,491 24,391 227,686 Current liabilitiesTrade and other payables 21 (7,136) (1,315) (2,003) Non-current liabilitiesOther payables (151) (155) -Deferred income tax liabilities 9 (2,137) (4,446) - TOTAL LIABILITIES (9,424) (5,916) (2,003) NET ASSETS 131,067 18,475 225,683 Share capital 23 148,745 33,047 113,473Merger reserve 14 - - 112,174Other reserves 1,269 256 1,269Accumulated deficit (18,947) (14,828) (1,233) TOTAL EQUITY 131,067 18,475 225,683 Approved by the Board on 31 March 2006 Paul Ellis Chris HearneChief Executive Officer Finance Director________________________________ _____________________________________ Serica Energy plcStatement of Changes in EquityFor the year ended 31 December 2005 Group Share capital Special Other reserves Deficit Total warrants US$000 US$000 US$000 US$000 US$000At 1 January 2004 13,000 5,327 99 (7,086) 11,340 Issue of shares 13,714 - - - 13,714Conversion of warrants 6,245 (5,327) - - 918Exercise/(forfeiture) of options 88 - (10) - 78Share-based payments - - 167 - 167Loss for the year - - - (7,742) (7,742) At 1 January 2005 33,047 - 256 (14,828) 18,475 Conversion of warrants 10,190 - - - 10,190Issue of 'A' share 90 - - - 90Issue of shares (net) 105,418 - - - 105,418Share-based payments - - 1,013 - 1,013Loss for the year - - - (4,119) (4,119) At 31 December 2005 148,745 - 1,269 (18,947) 131,067 Company Share capital Merger Other Deficit Total reserves reserve US$000 US$000 US$000 US$000 US$000 At incorporation - - - - -Share reorganisation 7,475 112,174 886 (886) 119,649Issue of 'A' share 90 - - - 90Issue of shares (net) 105,418 - - - 105,418Conversion of warrants 490 - - - 490Share-based payments - - 383 - 383Loss for the period - - - (347) (347) At 31 December 2005 113,473 112,174 1,269 (1,233) 225,683 Serica Energy plc Cash Flow Statement For the year ended 31 December 2005 Group Company 2005 2004 2005 Notes US$000 US$000 US$000 Cash flows from operating activities:Operating loss (6,954) (5,848) (579) Adjustments for:Depreciation, depletion and amortisation 30 14 -Gain on disposal of shareholding - (141) -Share-based payments 1,013 167 383Release of decommissioning provision - (122) -Foreign exchange loss/(gain) on investment 417 (288) -Changes in working capital 2,184 78 326Cash generated from operations (3,310) (6,140) 130 Taxes received 179 168 - Net cash flow from operations (3,131) (5,972) 130 Cash flows from investing activities:Interest received 292 30 -Purchases of property, plant and equipment (50) (3) -Purchase of intangible exploration assets (14,048) (2,559) -Disposals of intangible exploration assets 1,046 - -Acquisitions, net of cash acquired - (3,746) -Proceeds from disposal of investment 6,772 410 - Net cash used in investing activities (5,988) (5,868) - Cash proceeds from financing activities:Net proceeds from issue of shares 106,950 78 106,950Proceeds on exercise of warrants 10,190 9,239 - Net cash from financing activities 117,140 9,317 106,950 Net increase/(decrease) in cash and cash equivalents 108,021 (2,523) 107,080Cash and cash equivalents at 1 January 1,729 4,252 - Cash and cash equivalents at 31 December 20 & 24 109,750 1,729 107,780 Serica Energy plc Notes to the Financial Statements 1. Authorisation of the Financial Statements and Statement of Compliancewith IFRS The Group's and Company's financial statements for the year ended 31 December2005 were authorized for issue by the Board of Directors on 31 March 2006 andthe balance sheets were signed on the Board's behalf by Paul Ellis and ChrisHearne. Serica Energy plc is a public limited company incorporated and domiciledin England & Wales. The Company's ordinary shares are traded on AIM and theTSXV. The Group's financial statements have been prepared in accordance withInternational Financial Reporting Standards ("IFRS") as adopted by the EU asthey apply to the financial statements of the Group for the year ended 31December 2005. The Company's financial statements have been prepared inaccordance with IFRS as adopted by the EU as they apply to the financialstatements of the Company for the period ended 31 December 2005 and as appliedin accordance with the provisions of the Companies Act 1985. The Group andCompany's financial statements are also consistent with IFRS as issued by theIASB. The principal accounting policies adopted by the Group and by the Companyare set out in note 2. The Company has taken advantage of the exemption provided under section 230 ofthe Companies Act 1985 not to publish its individual income statement andrelated notes. The loss dealt with in the financial statements of the parentCompany was US$347,000. On 1 September 2005, the Company completed a reorganisation (the "Reorganisation"). whereby the common shares of Serica Energy Corporation were automaticallyexchanged on a one-for-one basis for ordinary shares of Serica Energy plc, anewly formed company incorporated under the laws of the United Kingdom. Inaddition, each shareholder of the Corporation received beneficial ownership ofpart of the 'A' share of Serica Energy plc issued to meet the requirements ofpublic companies under the United Kingdom jurisdiction. Under IFRS thisreorganisation was considered to be a reverse takeover by Serica EnergyCorporation and as such the financial statements of the Group represent acontinuation of Serica Energy Corporation. 2. Accounting Policies Basis of Preparation Following the formation of Serica Energy Corporation through a merger ofPetroleum Development Associates (Oil & Gas) Limited ("PDA") and Kyrgoil HoldingCorporation ("KGO") on 29 January 2004, the Group's financial statements for theyear ended 31 December 2004 were prepared in accordance with Canadian GenerallyAccepted Accounting Principles ("Canadian GAAP"). The adoption of IFRS by companies listed on AIM is mandatory for periodsbeginning after 1 January 2007, with comparative information for the previousyear. However earlier adoption of IFRS has been encouraged. The Group and theCompany have chosen to adopt IFRS to coincide with the listing on AIM in Londonand henceforth their financial statements will be presented in accordance withIFRS. The transition date is 1 January 2004 and the first year reported underIFRS is the year ended 31 December 2005. This is the first year in which the Group has prepared its financial statementsunder IFRS and the comparatives have been restated from Canadian GAAP to complywith IFRS. The reconciliations to IFRS from the previously published CanadianGAAP financial statements are summarised in note 30. The Company was incorporated on 12 May 2005, and did not commence its activitiesuntil after the Reorganisation on 1 September 2005. No comparatives, therefore,have been presented for the balance sheet, cash flow statement and statement ofchanges in equity in the 2005 financial statements of the stand alone Company. The accounting policies which follow set out those policies which apply inpreparing the financial statements for the year ended 31 December 2005. The Group and Company financial statements are presented in US dollars and allvalues are rounded to the nearest thousand dollars (US$000) except whenotherwise indicated. New standards and interpretations During the year the IASB and IFRIC have issued certain standards andinterpretations with an effective date after the date of these financialstatements. The Directors do not anticipate that the adoption of thesestatements and interpretations will have a material impact on the Group'sfinancial statements in the period of initial application. The Group has adopted early IFRS 6 'Exploration for and Evaluation of MineralResources' in its current financial statements. The impact of this adoption hasresulted in pre-licence and relinquished costs being expensed in the incomestatement and is covered in note 30 of the financial statements. Basis of Consolidation The consolidated financial statements include the accounts of the Company andits wholly owned subsidiaries Serica Energy Corporation, Asia PetroleumDevelopment Limited, Petroleum Development Associates (Asia) Limited, SericaEnergia Iberica S.L., Firstearl Limited, Serica Energy (UK) Limited, PDALematang Limited, APD (Asahan) Limited, APD (Biliton) Limited, APD (GlagahKambuna) Limited and Serica Energy Pte Limited. Together these comprise the"Group". All significant inter-company balances and transactions have been eliminatedupon consolidation. Foreign Currency Translation The functional and presentational currency of Serica Energy plc and all itssubsidiaries is US dollars. Transactions in foreign currencies are initially recorded at the functionalcurrency rate ruling at the date of the transaction. Monetary assets andliabilities denominated in foreign currencies are retranslated at the foreigncurrency rate of exchange ruling at the balance sheet date and differences aretaken to the income statement. Non-monetary items that are measured in terms ofhistorical cost in a foreign currency are translated using the exchange rate asat the date of initial transaction. Non-monetary items measured at fair value ina foreign currency are translated using the exchange rate at the date when thefair value was determined. Exchange gains and losses arising from translationare charged to the income statement as an operating item. Business Combinations and Goodwill Business combinations are accounted for using the purchase method of accounting.The purchase price of an acquisition is measured as the cash paid plus the fairvalue of other assets given, equity instruments issued and liabilities incurredor assumed at the date of exchange, plus costs directly attributable to theacquisition. Goodwill on acquisition is initially measured at cost being the excess ofpurchase price over the fair market value of identifiable assets, liabilitiesand contingent liabilities acquired. Following initial acquisition it ismeasured at cost less any accumulated impairment losses. Goodwill is notamortised but is subject to an impairment test at least annually and morefrequently if events or changes in circumstances indicate that the carryingvalue may be impaired. At the acquisition date, any goodwill acquired is allocated to each of thecash-generating units (business segments) expected to benefit from thecombination's synergies. Impairment is determined by assessing the recoverableamount of the cash-generating unit to which the goodwill relates. Where therecoverable amount of the cash-generating unit is less than the carrying amount,an impairment loss is recognised. Reverse takeovers Certain acquisitions whereby the substance of the acquisition is that theacquirer is the entity whose equity interests have been acquired, and theissuing entity is the acquiree, are considered to represent a reverse takeover.The legal subsidiary being acquired is the acquirer if it has the power togovern the financial and operating policies of the legal parent so as to obtainbenefits from its activities. Reverse takeovers are treated as a business combination whereby the consolidatedfinancial statements prepared following the takeover represent a continuation ofthe financial statements of the legal subsidiary acquired. Joint Venture Activities The Group conducts petroleum and natural gas exploration and productionactivities jointly with other venturers who each have direct ownership in andjointly control the assets of the ventures. These are classified as jointlycontrolled assets and consequently, these financial statements reflect only theGroup's proportionate interest in such activities. In accordance with industry practice, the Group does not record its share ofcosts that are 'carried' by third parties in relation to its farm-in agreements.Similarly, while the Group has agreed to carry the costs of another party to aJoint Operating Agreement ("JOA") in order to earn additional equity, it recordsits paying interest that incorporates the additional contribution over itsequity share. Serica currently has a 10% working interest in the Lematang PSC, 55% workinginterests in both the Asahan Offshore PSC and the Glagah Kambuna TAC and a 90%working interest in the Biliton PSC. In the Lematang PSC, the Group is being carried by Medco International VenturesLimited for its share of all costs arising under the PSC up to a maximum ofUS$2.8 million. The Group currently has paying interests of 61.2% in the Asahan PSC, 61.4% inthe Glagah Kambuna TAC and 100% in the Biliton PSC. Upon the successful development of an oil or gas field in a contract area, thecumulative excess of paying interest over working interest in that contract isgenerally repaid out of the field production revenue attributable to the carriedinterest holder. Oil and Gas Properties The Group's entire capitalised oil and gas costs relate to properties that arein the exploration and evaluation stage. This includes the Kambuna Field forwhich a Plan of Development has been submitted including plans for appraisalduring 2006. As allowed under IFRS 6 and in accordance with recent clarification issued bythe International Financial Reporting Interpretations Committee, the Group hascontinued to apply its existing accounting policy to exploration and evaluationactivity, subject to the specific requirements of IFRS 6. The Group willcontinue to monitor the application of these policies in light of expectedfuture guidance on accounting for oil and gas activities. Pre-licence Award Costs Costs incurred prior to the award of oil and gas licences, concessions and otherexploration rights are expensed in the income statement. Exploration and Evaluation The costs of exploring for and evaluating oil and gas properties, including thecosts of acquiring rights to explore, geographical and geophysical studies,exploratory drilling and directly related overheads, are capitalised andclassified as intangible exploration assets (E&E assets). These costs areallocated to cost pools based upon three geographical segments; Indonesia, UKand Spain. E&E assets are not amortised prior to the conclusion of appraisal activities butare assessed for impairment in cash-generating units defined on a geographicalsegment basis when facts and circumstances suggest that the carrying amount of acash-generating unit may exceed its recoverable amount. Recoverable amounts aredetermined based upon risked potential, or where relevant, discovered oil andgas reserves. When an impairment test indicates an excess of carrying valuecompared to the recoverable amount, the carrying value of the cost pool iswritten down to the recoverable amount in accordance with IAS 36. Such excess isexpensed in the income statement. Costs of relinquished licences are expensed in the income statement. The E&E phase is completed when either the technical feasibility and commercialviability of extracting a mineral resource are demonstrable or no furtherprospectivity is recognised. At that point, if commercial reserves have beendiscovered, the carrying value of the relevant assets, net of any impairmentwrite-down, is classified as a development asset and tested for impairment. Ifcommercial reserves have not been discovered then the costs of such assets willbe expensed in the income statement. Costs to-date in respect of the Singa Field have been carried by a third partyand consequently no costs are held within fixed assets. Development Costs Serica has no costs classified as development costs. Decommissioning Liabilities for decommissioning costs are recognised when the Group has anobligation to dismantle and remove a production, transportation or processingfacility and to restore the site on which it is located. Liabilities may ariseupon construction of such facilities, upon acquisition or through a subsequentchange in legislation or regulations. The amount recognised is the estimatedvalue of future expenditure determined in accordance with local conditions andrequirements. A corresponding tangible item of property, plant and equipmentequivalent to the provision is also created. The Group did not carry anyprovision for decommissioning costs during 2005. Any changes in the present value of the estimated expenditure is added to ordeducted from the cost of the assets to which it relates. The adjusteddepreciable amount of the asset is then depreciated prospectively over itsremaining useful life. Property, Plant and Equipment Computer equipment and fixtures, fittings and equipment are recorded at cost astangible assets. The straight-line method of depreciation is used to depreciatethe cost of these assets over their estimated useful lives. Computer equipmentis depreciated over three years and fixtures, fittings and equipment over fouryears. Inventories Inventories are valued at the lower of cost and net realisable value. Cost isdetermined by the first-in first-out method and comprises direct purchase costsand transportation expenses. Investments In its separate financial statements the Company recognises its investments insubsidiaries at cost. Financial instruments Financial instruments comprise financial assets, financial liabilities andequity instruments. Trade and other receivables, which generally have 30-90 day terms, arerecognised and carried at original invoice amount less an allowance for anyuncollectible amounts. Bad debts are written off when identified. Financial assets comprise investments and are initially recognised at cost,being the fair value of the consideration given and including acquisitioncharges associated with the investment. Investments that are intended to beheld-to-maturity, such as bonds, are subsequently measured at amortised costusing the effective interest method. Amortised cost is calculated by taking intoaccount any discount or premium on acquisition, over the year to maturity. For investments carried at amortised cost, gains and losses are recognised inincome when the investments are derecognised or impaired, as well as through theamortisation process. Cash and cash equivalents include balances with banks and short-term investmentswith maturities of three months or less at the date acquired. Revenue Recognition Revenue is recognised to the extent that it is probable that the economicbenefits will flow to the Group and the revenue can be reliably measured.Revenue from oil and natural gas production is recognised on an entitlementbasis for the Group's net working interest. Share-Based Payment Transactions The Company operates equity settled schemes under which employees may be awardedshare options from time-to-time. The fair value of each option at the date ofthe grant is estimated using the Black-Scholes option-pricing model based uponthe option price, the share price at the date of issue, volatility and the lifeof the option. The estimated fair value of the option is amortised to expenseover the option's vesting period on a straight-line basis with a correspondingincrease to equity. It is assumed that all performance criteria are met.Estimated associated national insurance charges are expensed in the incomestatement. No expense is recognised for awards that do not ultimately vest, except forawards where vesting is conditional on a market condition. In which case suchawards are treated as vesting provided that all other performance conditions aresatisfied. Where an option is forfeited without meeting the vesting conditions, theassociated prior charges are credited to the income statement with an equivalentreduction to equity. Equity Equity instruments issued by the Company are recorded at the proceeds received,net of direct issue costs. Income Taxes Deferred tax is provided using the liability method and tax rates and laws thathave been enacted or substantially enacted at the balance sheet date. Provisionis made for temporary differences at the balance sheet date between the taxbases of the assets and liabilities and their carrying amounts for financialreporting purposes. Deferred tax is provided on all temporary differences exceptfor: • temporary differences associated with investments in subsidiaries,where the timing of the reversal of the temporary differences can be controlledby the Group and it is probable that the temporary differences will not reversein the foreseeable future; and • temporary differences arising from the initial recognition of an assetor liability in a transaction that is not a business combination and, at thetime of the transaction, affects neither the income statement nor taxable profitor loss. Deferred tax assets are recognised for all deductible temporary differences, tothe extent that it is probable that taxable profits will be available againstwhich the deductible temporary differences can be utilised. Deferred tax assetand liabilities are presented net only if there is a legally enforceable rightto set off current tax assets against current tax liabilities and if thedeferred tax assets and liabilities relate to income taxes levied by the sametaxation authority. Earnings Per Share Earnings per share is calculated using the weighted average number of ordinaryshares outstanding during the period. Diluted earnings per share is calculatedbased on the weighted average number of ordinary shares outstanding during theperiod plus the weighted average number of shares that would be issued on theconversion of all potentially dilutive shares to ordinary shares. It is assumedthat any proceeds obtained on the exercise of any options and warrants would beused to purchase ordinary shares at the average price during the period. Wherethe impact of converted shares would be anti- dilutive, these are excluded fromthe calculation of diluted earnings. Use of Estimates The preparation of financial statements in conformity with generally acceptedaccounting practice requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities as well as the disclosureof contingent assets and liabilities at the balance sheet date and the reportedamounts of revenues and expenses during the reporting period. Actual outcomescould differ from those estimates. This information is provided by RNS The company news service from the London Stock Exchange