Last checked at 11 Mar 2008 07:01
Serica Energy plc11 March 2008 Serica Energy plc ("Serica" or the "Company") 2007 ANNUAL REPORT TO SHAREHOLDERS London, 11 March 2008 - Serica Energy plc (TSX Venture & AIM: SQZ) todayannounces its financial results for the three and twelve months ending 31December 2007. The results and associated Management Discussion and Analysisare included below and copies are available at www.serica-energy.com andwww.sedar.com. 2007 Highlights Developments • Successful installation of the production platform on the Kambuna Field offshore North Sumatra with first production and cash flow expected at the end of 2008 • 15% increase in reserves: Kambuna 2P reserves estimated by RPS Energy at 29.7 million barrels of oil equivalent (100% basis) • Excellent terms offered for Kambuna gas: initial tranche of 28 million cubic feet per day ("mmscfd") at approximately US$5.40 per thousand cubic feet ("mcf") and second tranche of 10 mmscfd at over US$6.50 per mcf with a further 10 mmscfd of gas to be marketed • Serica's interest in Kambuna, based on the initial tranche gas sales price of approximately US$5.40 per mcf, valued by RPS Energy as at 31 December 2007 at US$145 million post tax (based on constant oil prices and costs) Appraisal • Two successful appraisal wells drilled in the Columbus field in the North Sea, confirming its commercial potential Forward Drilling Programme • Development drilling on Kambuna underway, with two new production wells currently being drilled and a recompletion of Kambuna #2 • Two appraisal wells in the Bream oil field in Norway to be drilled in 2H 2008 - best estimate of gross contingent resources 59 million barrels • Planning to drill an exploration well off the west coast of Ireland in 2H 2008 - four gas prospects identified on the licence, with total best estimate gross prospective resources estimated at 3 tcf • Vietnam exploration well to be drilled in 2H 2008 following the successful evaluation of new 3D Seismic data • A site survey is to be undertaken in the Chablis field in preparation for appraisal drilling Financial & Corporate • Successfully raised US$52 million in new equity from new and existing shareholders • Completed a US$100 million debt facility with JP Morgan and Bank of Scotland to fund field development activities • Jonathan Cartwright, Finance Director of Caledonia Investments, to join board as a non-executive director in March 2008 Serica's Chief Executive, Paul Ellis commented: "Serica made significant progress in 2007, increasing its proven and probablereserves and confirming that the Columbus field is a candidate for development." "The Kambuna production platform in Indonesia is now installed and thedevelopment wells are being drilled with the company targeting first productionby the end of 2008. Gas sales terms have been agreed for 80% of the Kambunaproduction at excellent prices. Furthermore, the company is due to commencedrilling in Norway, Ireland and Vietnam in the second half of this year with allthree projects offering significant upside potential." "Serica is well funded for 2008 with an exciting forward drilling programme. Itnow has the opportunity to establish a growing reserve base, commence productionand to build further its underlying asset value." Enquiries: Serica Energy plcPaul Ellis, paul.ellis@serica-energy.com +44 (0)20 7487 7300 Chief Executive OfficerChris Hearne, chris.hearne@serica-energy.com +44 (0)20 7487 7300 Finance Director JPMorgan CazenoveSteve Baldwin steve.baldwin@jpmorgancazenove.com +44 (0)20 7588 2828 Tristone Capital Limited Majid Shafiq mshafiq@tristonecapital.com +44 (0)20 7355 5872 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 - CanadaSarah Gingerich sarah@chfir.com +1 416 868 1079 Paul Ellis MA (Oxon) Engineering and Serica's Chief Executive, who has over 35years' experience in the upstream oil and gas industry, has reviewed andapproved the technical information contained in this announcement. 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 therefrom. The TSX Venture Exchange has not reviewed and does not accept responsibility for the adequacy or accuracy of this release. To receive Company news releases via email, please contact sarah@chfir.com and specify "Serica press releases" in the subject line. CHAIRMAN'S REPORT Dear Shareholder During 2007 much progress was achieved in the development of our reserves inIndonesia and the appraisal of our Columbus discovery in the North Sea. With the production platform now successfully installed on the Kambuna fieldoffshore North Sumatra we are expecting gas and condensate sales to commence atthe end of 2008, bringing the first significant cash flow to Serica. As statedin the Chief Executive's Report, the level of reserves which we carry for thisfield has been increased. In the North Sea, two successful appraisal wells drilled in late September andOctober on our Columbus discovery have demonstrated the commerciality of thisgas condensate field and bring it nearer to production. Reserves from thisfield will be booked once a development plan for the field has been approved. In addition to this growth in reserves, the Company has considerable exposure toseveral significant exploration wells, some of which we hope to drill this year. These wells result from extensive seismic work conducted during the year overour blocks in Indonesia, Vietnam, the UK North Sea, Spain and Ireland. Of course we do not expect to find oil or gas with all of our wells. At theturn of the year we drilled our first two wells in the Biliton block inIndonesia. Neither of these wells encountered hydrocarbons and we have writtenoff the costs incurred to-date on this block, amounting to US$8.9 million.Before drilling the wells we decided to farm-out part of our interest to anindustry partner to substantially reduce the financial risk whilst retaining alarge share of the upside potential. As a result the wells were drilled at avery low cost to Serica. The farm out of certain of our interests, such as Biliton, where we perceiveSerica's exposure to be too high, is an important part of our strategy to managethe funds available to the Company and enhance returns for shareholders. In thecurrent high cost environment, therefore, we shall continue with this approachwhere appropriate. The Company is well funded to meet its forward programme. The successfulraising of approximately US$52 million in new equity before expenses increasedour net cash balances at the start of 2008 to over US$70 million. With accessalso to a US$100 million debt facility primarily for field development, theCompany is well placed to continue with its exploration activities and add tothe growth of our oil and gas reserves. It is clearly important that this growth is translated into growth in theCompany's share price. The Board is conscious that the recent volatility in themarket for our shares, may not be giving a clear picture for shareholders. Itis the Board's view that this volatility is caused partly by the limitedliquidity for our shares in the market place. We operate in two markets,Toronto and London. The different nature of these markets makes inter-tradingmore complex, thus reducing liquidity still further. We shall be seeking ways to improve the market liquidity for our shares, andhence provide a better platform for shareholders, whilst also looking foropportunities to broaden the Company's asset base through acquisition anddivestment. In this way we would hope to achieve a share price more in linewith the Company's underlying performance whilst also maintaining our corporateobjective to reduce risk and increase overall opportunity. As a final note, I would like to welcome Jonathan Cartwright, who joins theBoard as a non-executive director on 27 March 2008. Jonathan bringsconsiderable financial experience to the Company and we look forward to workingwith him in our task of building value for shareholders. He is Finance Directorof Caledonia Investments, one of our major shareholders, and is a member of theboard of Bristow Group who are one of the world's leading providers ofhelicopter services to the offshore oil and gas industry. With a strong and experienced Board, field developments and explorationprospects in two distinct areas, most of which we operate, and with soundfinances Serica is ideally placed in the sector. It is our objective to build onthis position during 2008 and I have every expectation that we shall be morethan successful in these efforts. Tony Craven WalkerNon-executive Chairman CHIEF EXECUTIVE OFFICER'S REPORT During the course of 2007, despite the industry-wide shortage of seismic crewsand drilling rigs, we have been able to make progress in both Western Europe andSouth East Asia and, as a result, have taken significant steps towards thedevelopment of our discoveries and the establishment of Serica as an oil and gasproducer in both regions. Serica is the operator of the Kambuna gas-condensate field offshore NorthSumatra, Indonesia, and holds a 65% working interest. Following the acquisitionand interpretation of a 3D seismic survey in the field, an independent ReservesEvaluation by RPS Energy ("RPS") has estimated that the gross Proved andProbable Reserves for the field are 29.7 million barrels of oil equivalent ("boe"). This represents an increase of over 15% in the Proved and Probable Kambuna Reserves, compared to the figure of 25.7 million boe estimated by RPS at the end of 2006, before the 3D seismic data was available. This new reserves estimate excludes any additional reserves that may ultimately be proved to exist in an area immediately to the north of the Kambuna field that has been identified on the 3D seismic data as potentially gas-bearing. Based on these revised reserve estimates, RPS has estimated the net presentvalue of Serica's future revenue from the Kambuna field at 31 December 2007 at a10% discount factor. Based on constant oil prices and costs, an initial gassales price of US$4.50 per mmBtu and a fixed condensate price of US$93.51 perbbl, RPS estimates the net present value to Serica of the proved and probableKambuna reserves, after all Indonesian taxes, to be US$144.7 million. Thisfigure does not take into account the higher gas price that we expect to beachieved for the uncontracted gas, as described below. The first sales contract will be with the Indonesian State Electricity Company,PLN, which will purchase 28 mmscfd of gas at an initial price of US$4.50 permmBtu (approximately US$5.40 per mcf). Following a tender process, severaloffers for a further 12 mmscfd of gas have been received at initial pricesbetween US$5.20 and US$5.80 per mmBtu (approximately US$6.25 to US$7.00 permcf). These tenders have been subject to commercial evaluation and we expect anaward to be made shortly. Both of these sales contracts will include take orpay provisions and gas price escalation at a rate of 3% per annum. These contracts account for a total of 40 mmscfd and leave a further 10 mmscfdof gas to be contracted once the development wells have been drilled and anupdated reservoir model has been presented to the Indonesian regulator todemonstrate the expected field production capacity of 50 mmscfd and around 5,000bpd of condensate. The excellent prices achieved for our gas reflect the fact that gas for theIndonesian domestic market is in short supply, resulting in the greater use ofoil as fuel for electricity generation. Given the present level of oil prices,the cost of generation has risen significantly and electricity supply has beenrestricted. In January 2008 we installed the Kambuna production platform in the field andcommenced development drilling, using the GSF136 jack-up rig. The platform willinitially support three Kambuna production wells and has the capacity to supportat least one additional well. The existing Kambuna No.2 well, that we drilledand suspended in 2005, is now being recompleted for production and we arecurrently drilling two further development wells. Kambuna No.3 will be adeviated production well that will enter the reservoir on the crest of thestructure close to the original discovery well. Kambuna No.4 will be a deviatedproduction well that will enter the reservoir in the southern area of the field. Additionally, this well will test whether the gas-water contact (not found inthe existing wells) may be significantly lower than the lowest known gasencountered in Kambuna No.2. If this is the case, the Kambuna field reservescould be subject to further upward revision. In Western Europe, Serica holds interests in two potential near-term fielddevelopments. We hold a 50% interest as operator of UK North Sea Block 23/16f,in which we drilled the Columbus gas-condensate discovery in 2006 and a 20%interest in the Bream oil field, offshore Norway. We also hold a 100% interestin the Chablis gas field appraisal project in the UK southern North Sea. During 2007 we drilled two Columbus appraisal wells, 23/16f-12 and 23/16f-12z,that successfully delineated the Columbus field within Block 23/16f.Development studies have indicated that the field could be produced via a subseatie-back to a host platform and we believe that production from Columbus couldstart in late 2010. We have already carried out an engineering study with BPregarding a potential tie-back of Columbus to BP's Lomond field, which liesimmediately to the south of the Columbus field and a further engineering studyis being conducted regarding offtake via BP's ETAP gas and oil transportationsystem. It has been considered possible that the Columbus field may extend to the southinto Block 23/21, operated by BG Group. To demonstrate whether this extensionexists, an appraisal well is required in Block 23/21, but the timing of thiswell is not clear. The 23/16f partners, having already drilled three wells inthe Columbus field, have therefore decided to prepare alternative plans todevelop the field without the involvement of the Block 23/21 group at thisstage. It has taken some time to address the environmental, logistical and commercialissues associated with drilling in Serica's near-shore UK Southern Gas BasinBlock 48/16b, which contains the Chablis gas discovery. We will shortly becarrying out a site survey for the appraisal well to be drilled in the Chablisfield. In Norway, our operator, BG Group, is planning to drill an appraisal well in theBream oil field in the second half of 2008, comprising a vertical well followedby a horizontal sidetrack to demonstrate well productivity. The gross bestestimate Contingent Resources of the Bream field have been estimated to lie inthe range of 22 to 120 million barrels of oil. The appraisal well is designedto narrow this range and to provide the data necessary to demonstrate fieldcommerciality. In addition to our development and appraisal projects, we shall be continuingexploration work in several areas during the coming year. In Ireland, we are planning to carry out a site survey in preparation fordrilling an exploration well off the west coast in Licence PEL 01/06, in whichSerica holds a 100% interest. We have identified four large gas prospects inthe licence with estimated total unrisked Prospective Resources ranging from 800bcf to 6 tcf with a best estimate of 3 tcf. These would be attractive prospectsanywhere in the world, but have even greater significance in Ireland because thecountry imports nearly 90% of its energy supplies and oil makes up the majorityof the imports. A rig has been identified for drilling this summer and we arecurrently seeking a farminee to share the costs and risks of the drillingprogramme. In Vietnam, evaluation of the new 3D seismic data has confirmed theprospectivity of our PSC 06/94 and a well is planned in the second half of 2008. Serica holds a 33% interest in the PSC. In Indonesia, in the Biliton PSC, offshore Java, we were naturally disappointedthat the two exploration wells drilled at the end of 2007 were unsuccessful, butwe had always viewed the prospects as having a high exploration risk and hadtherefore sought a farminee. We were successful in attracting a farminee todrill both wells at little cost to Serica, and we now hold a 45% interest in thePSC and remain the operator. In the Kutai PSC we are interpreting the existing3D seismic data covering an area of over 2,000 square kilometres and can alreadysee a large number of prospective features within the PSC, some of which shouldbecome drilling targets. In Spain, we farmed out a 25% interest in our Spanish exploration Permits toBeach Petroleum, an Australian E&P company prior to undertaking a seismicprogramme. The 315 kilometre 2D seismic programme has been carried out and thequality of the data acquired is excellent. Interpretation of the data isunderway and it appears likely that one or more prospects will be identified onthe Permits. We have until November 2008 to elect to drill a well and therebyextend the life of the Permits, in which Serica is the operator and holds a 75%interest. Serica set out in 2007 to confirm the potential of the Columbus discovery and toadvance the development of the Kambuna field, while evaluating the prospectivityof the new licences awarded to the Company in 2006 and early 2007. We succeededin all these areas - successful appraisal of Columbus, gas sales terms agreedfor Kambuna, exploration and appraisal drilling planned in Norway, UK, Irelandand Vietnam. With first production expected from the Kambuna field in Decemberand with significant exploration and appraisal wells to be drilled, 2008promises to be a year in which Serica further demonstrates the underlying valueof its assets. Paul Ellis Chief Executive Office REVIEW OF OPERATIONS Serica holds exploration, appraisal and development interests in some of themajor oil and gas provinces of Western Europe and South East Asia. In Europe,the Company has licences in the UK North Sea, the East Irish Sea, Norway,Ireland and Spain. In South East Asia, Serica has production sharing contractsin Indonesia and Vietnam. REVIEW OF OPERATIONS - WESTERN EUROPE In Western Europe Serica holds offshore licence interests in the UK North Seaand East Irish Sea, in Ireland and Norway and has onshore licence interests inSpain. The following table summarises the Company's interests in Western Europe. Block(s) Description Role % Location UK14/15a Exploration Operator 50% Central North Sea23/16f Columbus appraisal Operator 50% Central North Sea23/16g Exploration Operator 50% Central North Sea48/16b Chablis appraisal Operator 100% Southern Gas basin48/17d Chablis appraisal Operator 100% Southern Gas basin54/1b Oak discovery Operator 50% Southern Gas basin113/26b Exploration Operator 100% East Irish Sea113/27b (part) Exploration Operator 100% East Irish Sea Ireland27/4 Exploration Operator 100% Slyne Basin27/5 (part) Exploration Operator 100% Slyne Basin27/9 Exploration Operator 100% Slyne Basin Norway407 Bream appraisal Partner 20% Egersund Basin406 Exploration Partner 20% Egersund Basin SpainAbiego Exploration Operator 75% Pyrenees/Ebro BasinBarbastro Exploration Operator 75% Pyrenees/Ebro BasinBinefar Exploration Operator 75% Pyrenees/Ebro BasinPeraltilla Exploration Operator 75% Pyrenees/Ebro Basin United Kingdom Central North Sea - Block 14/15a This block covers an area of approximately 108 square kilometres in the CentralNorth Sea. Serica is the block operator and has a 50% interest. Several leadshave been identified at Upper Jurassic, Lower Cretaceous and Paleocene levelswithin this prospective part of the Outer Moray Firth Basin. The work programmein 2007 included the reprocessing of available 3D seismic data, which isscheduled to complete in the first quarter of 2008 with the objective ofconfirming prospects that are ready for drilling. Columbus Discovery - Block 23/16f This block covers an area of approximately 52 square kilometres in the CentralNorth Sea. Serica operates Block 23/16f and holds a 50% interest in the Licence.In December 2007 Serica relinquished the adjacent part-blocks 23/16e and 23/17bas no prospects of material size could be identified. Following Serica's December 2006 Columbus discovery well 23/16f-11, appraisaldrilling commenced in the third quarter of 2007. Two Columbus appraisal wells,23/16f-12 and 23/16f-12z, were drilled and both were successful. Well 23/16f-12 was drilled as a vertical well approximately three kilometresnorth of the Columbus discovery well and encountered gas/condensate-bearingPaleocene sands at a higher elevation than those tested in well 23/16f-11.Reservoir pressure measurements indicated that these sands are separate to thosediscovered in well 23/16f-11 and the full extent of this new accumulation is notyet known. The net pay sand encountered in the well was approximately 40vertical feet. To further evaluate the Columbus discovery, the 23/16f-12 well was thensidetracked to a bottom-hole location approximately 2.2 kilometres north of theColumbus discovery well and encountered gas/condensate-bearing Paleocene sandssimilar to those found in 23/16f-11. Evaluation of down-hole pressure dataindicated that the sands encountered in the sidetrack are in pressurecommunication with those in the discovery well. The net pay sand in thesidetrack was approximately 70 vertical feet, compared with 56 vertical feet in23/16f-11. The sidetrack well 23/16f-12z has been suspended for potential usein the development of the Columbus field. The successful outcome of the two new wells supports the commercial developmentof Columbus and data from these wells is being used to advance field developmentstudies. The Columbus field lies in close proximity to existing productioninfrastructure, providing the potential to commence production as soon asthroughput agreements have been reached and the development wells can betied-in. It is likely that initial field development will be based around horizontal orhigh-angle production wells, tied back to a host production platform. Serica iscurrently studying options including a possible tie-back to the producing Lomondfield, which lies about six kilometres from the Columbus discovery well. At thehost platform, the gas and condensate will be separated and processed to exportpipeline specifications. Last year, we reported best estimate Columbus Contingent Resources net to Sericaof 8.4 million boe, on the basis of our expected interests of 25% in Block 23/16f and 25% in part of Block 23/21, subject to completion of an acreage exchangewith BG Group. This agreement was not completed and, as a result, Sericaretained its original 50% interest in 23/16f and expects that its net ContingentResources in Columbus will be greater than those reported last year, althoughthe studies to integrate data from the three wells in the field with a newlyacquired 3D seismic survey have not yet been completed. Central North Sea - Block 23/16g Serica has a 50% interest in this 7.4 square kilometre Central North Sea blockand is the operator. The block contains a Paleocene sand prospect calledLivingstone, similar to and on trend with the Columbus discovery in Serica'sadjacent Block 23/16f to the south. A new 3D seismic data set has recently been acquired covering both blocks andthis data is being integrated with the new Columbus well data in order to selectthe best location in which to test this gas-condensate prospect. If successful,a Livingstone discovery well could potentially be used for production and tiedin to the Columbus development. Chablis Discovery Area - Blocks 48/16b and 48/17d These contiguous blocks cover a total area of 88 square kilometres in theSouthern North Sea. Serica is the operator and holds an interest of 100% inboth blocks. Block 48/16b contains the undeveloped Chablis discovery, drilledin 2001 by ConocoPhillips. Block 48/17b was awarded to Serica in the UK 24thOffshore Licensing Round and may potentially contain part of the Chablisaccumulation. The issues concerned with drilling in the shallow water near-shore Chablis fieldarea have mostly been resolved and Serica will shortly carry out a site surveyin preparation for drilling a potential appraisal well later in the year. Oak Discovery - Block 54/1b Block 54/1b covers an area of 106 square kilometres in the Southern Gas Basin.Serica is operator of the block and holds a 50% interest. Well 54/1b-6 was drilled in the fourth quarter 2006 and encountered agas-bearing Leman sandstone reservoir that produced at a stabilized flow rate ofapproximately 10 mmscfd during a drill-stem test. However, subsequentlaboratory analysis of gas samples taken during the test indicated that asignificant proportion of the gas is made up of inert components - just over 50%of the gas was found to be carbon dioxide and nitrogen. There are several fields to the north and east of the Oak field with similar gascompositions, several of them in Dutch waters where a new operator is studyingthe exploitation of such fields by installing offshore gas treatment to removethe inert gases and then transport the hydrocarbons for sale in the Netherlandsthrough the existing extensive offshore pipeline system. The potential isspeculative but, during 2008, Serica plans to participate in these studies inorder to determine whether commercial development of Oak may ultimately befeasible. East Irish Sea - Blocks 113/26b and 113/27b (part) These blocks cover an area of 145 square kilometres and lie immediately to thenorth of the Millom and Morecambe gas fields. The prospective reservoir is theSherwood Sandstone of Triassic age that is also the producing reservoir in theMillom and Morecambe fields. Serica has identified a number of leads on theseblocks and is carrying out a 3D seismic reprocessing project in order to confirmfuture exploration well locations. Serica is the operator and has a 100% interest in the licence. Ireland Slyne Basin - Blocks 27/4, 27/5 (west) and 27/9 Serica is the operator and holds a 100% interest in these blocks, which cover anarea of 611 square kilometres in the Slyne Basin off the west coast of Irelandand lie 42 kilometres south of the Corrib gas field, currently being developedby Shell. The blocks are covered by existing 3D seismic data that has now been reprocessedand has confirmed the presence of four significant gas prospects. Anindependent report by RPS Energy has estimated unrisked Prospective Resourcesnet to Serica in the range of 800 bcf to 6 tcf with a best estimate of 3 tcf forthe four prospects in total. Serica expects to drill the first of theseprospects in the summer of 2008 and will soon be carrying out a site survey overthe identified drilling targets. Norway Egersund Basin - Licences PL406 and PL407 Serica was awarded a 20% interest in both of these offshore licences in February2007. The licences are contiguous and lie in the Egersund Basin, about 120kilometres southwest of the port of Stavanger, Norway's fourth largest city. Licence PL406 covers an area of approximately 900 square kilometres and includesthe 18/10-1 oil discovery well drilled in 1980, which was tested at 1,800 bopd.The licence contains exploration prospects that appear analogous to theundeveloped Bream oil field in Serica's Licence PL407, immediately to the north. Licence PL407, covers an area of approximately 725 square kilometres. Itincludes the 1972 Bream oil discovery and the 1973 Brisling oil discovery, whichwere tested at rates up to 1,000 bopd and 2,200 bopd respectively. In the early seventies oil prices were around $3/bbl and this, combined with thetechnology available at the time, did not allow commercial development. Thethree discoveries remained undeveloped for over thirty years, since theNorwegian authorities did not make the area available for licensing again until2006. On the basis of the modern 3D seismic data now available covering the Bream and18/10-1 discoveries, an independent report by RPS Energy has estimated that,using modern drilling and completion technology, including horizontal productionwells, the gross Contingent Resources of the Bream field may lie within a rangeof 22 to 120 mm bbl, with a best estimate of 59 mm bbl. The 18/10-1 discoveryis estimated to have gross Contingent Resources of 5 to 41 mm bbl, with a bestestimate of 18 mm bbl. Serica's 20% share of these best estimate ContingentResources would amount to a total of 15 mm bbl. The operator of Licence PL407, BG Norge AS, is planning to drill vertical andhorizontal appraisal wells in the Bream field in 2008, with a view to submittinga Plan of Development early in 2009. The operator of PL406, Premier Oil NorgeAS, is planning to acquire a 500 km2 3D seismic survey early in 2008 to identifythe best locations for exploration drilling in 2009. Any discovery made inPL406 could potentially be produced through facilities designed for thedevelopment of the Bream field. Spain The Company holds a 75% interest in the Abiego, Barbastro, Binefar andPeraltilla exploration Permits onshore northern Spain. The Permits cover an areaof approximately 1,100 square kilometres between the Ebro Basin and the Pyreneesand could potentially contain significant quantities of gas, which would find aready market in Spain. In early 2007, Serica entered into a farm out agreement with Beach PetroleumLimited, under which Beach has earned a 25% interest in the Permits, with Sericaretaining a 75% interest and operatorship. A 315 kilometre 2D seismic surveycommenced in late 2007 and was completed in January 2008. The data is ofexcellent quality, revealing deep features that can now be mapped with far moreconfidence than was possible previously and prospects are being identified. Dueto the comprehensive nature of the environmental assessments required beforedrilling in this area, these have already been commissioned although a decisionon drilling is not required until later this year. REVIEW OF OPERATIONS - SOUTH EAST ASIA In South East Asia, Serica holds interests in Indonesia and in Vietnam. The following table summarises the Company's interests in South East Asia. Theinterests shown may assume the completion of agreements which await finalgovernment approval. Block(s) Description Role % Location IndonesiaGlagah Kambuna TAC Kambuna Operator 65% Offshore development North SumatraBiliton PSC Exploration Operator 45% Offshore Java SeaKutai PSC Exploration Operator 78% Kutai basin VietnamBlock 06/94 Exploration Partner 33.3% Nam Con Son Basin Indonesia Glagah Kambuna TAC The Glagah Kambuna Technical Assistance Contract ("TAC") covers an area ofapproximately 380 square kilometres and lies offshore North Sumatra. Serica hasa 65% working interest and operates the TAC. The TAC contains the undeveloped Glagah No.1 and Kambuna No.1 discovery wellsand a successful appraisal well drilled by Serica in 2005, Kambuna No.2. Sericais progressing the development of the gas-condensate bearing Upper Belumai Sandreservoir of the Kambuna field and the first Plan of Development was approved bythe state oil and gas company Pertamina in 2006. A 3D seismic survey covering the Kambuna field was acquired in late 2006 anddetailed processing and interpretation were carried out during 2007. Using the results of the new 3D seismic data, consultants RPS Energy havecarried out a new reserves report of the Kambuna field. This report estimatesthat the gross Proved plus Probable Reserves of the field are 119 bcf of salesgas and 9.9 mm bbl of condensate, a total of 29.7 mm boe, with an upside grossProved plus Probable plus Possible Reserves of 45.6 mm boe. The presentestimate of Proved plus Probable Reserves is 15% higher than the estimateprepared by RPS Energy last year, before the 3D survey results were available. During 2007, the first phase of the development programme for the Kambuna gas/condensate field commenced: the field production platform was built and in thefirst quarter 2008 was positioned over the Kambuna No. 2 well and piled to theseabed. The GSF136 jack-up drilling rig is now drilling the Kambuna developmentwells No. 3 and No. 4 and will then complete all three wells for production.Onshore and offshore facilities and a 14-inch offshore pipeline will beinstalled later this year, with production targeted to commence by the end of2008. Following the agreement of terms for the sale of 28 mmscfd of gas to theIndonesian State electricity generation company Perusahan Listrik Negara("PLN"), at an initial price of US$4.50 per million Btu (approximately US$5.40per million cubic feet), offers for a further 12 mmscfd of gas have beenreceived at prices between US$5.20 and US$5.80 per million Btu (approximatelyUS$6.25 to US$7 per million cubic feet) escalating at 3% per annum for bothagreements. The sale of a further 10 mmscfd of gas is expected to be agreed later this yearafter a revised reservoir model is submitted to the authorities following thecompletion of the new Kambuna development wells currently being drilled. TheKambuna development wells are expected to produce at a total rate of 50 mmscfd,delivered at Pangkalan Brandan, about eight kilometres onshore and the site of aPertamina gas plant and refinery. In addition to the gas, Serica will initiallybe marketing 4,000-5,000 barrels per day of condensate at a price close to thatof crude oil. Gas demand is strong in North Sumatra but supply from existing gas sources isinsufficient and the main power station near Medan is reported to be burningaround 25,000 barrels of fuel oil and diesel per day. Medan is the thirdlargest city in Indonesia and the Kambuna production will go a long way torelieve the lack of gas-fuelled power in the area. Biliton PSC The Biliton PSC covers an area of approximately 3,940 square kilometres in theJava Sea between the Indonesian islands of Java and Kalimantan. Serica is theoperator of the PSC and originally held a 90% interest in the block. In March 2007, Serica entered into a farm-out agreement under the terms of whichNations Petroleum has earned a 45% interest in the Biliton PSC by paying acontribution to Serica's back costs and bearing the majority of the costs ofdrilling the first two wells in the PSC. Serica now holds a 45% interest in thePSC and retains the operatorship. Between November 2007 and January 2008, using the GSF136 drilling rig, wildcatexploration wells Batara Ismaya No. 1 and Batara Indra North No. 1 were drilled,but neither well contained hydrocarbons and both were therefore plugged andabandoned. Serica had always recognised that the high potential of Biliton came with asignificant exploration risk, since the block is around 200 kilometres away fromthe established oil and gas fields of East Java. However, there is still anundrilled prospect on the block and Serica will be considering approaches tofarm-in to the Biliton PSC. Kutai PSC The Kutai PSC in East Kalimantan was awarded to Serica in January 2007 andcovers an area of around 4,700 square kilometres in the Mahakam Delta, mainlyoffshore. Serica originally held an interest of 52.5% in the PSC and is theoperator. In January 2008 Serica announced that it had acquired an additional25.5% working interest and now holds a 78% interest in the PSC. The PSC is divided into several blocks, the majority of which are first phaserelinquishments by the current main operators in the basin, Total, Chevron andVICO. The PSC lies in and around several giant fields, including Tunu (1,600million boe) and Attaka (800 million boe), in the prolific Mahakam River deltaboth onshore and offshore. The PSC is adjacent to the Mahakam PSC operated byTotal and which contains some of Indonesia's largest gas and condensate fields,with total daily production of around 2.5 billion cubic feet of gas and 90,000barrels of oil and condensate. Total has an active exploration programme and inOctober 2007 announced two new discoveries in the southern part of the Mahakamblock, a few kilometres from the Kutai PSC. In 2007, an airborne elevationsurvey was carried out as part of the planning for a 2D seismic survey to becarried out in the onshore part of the PSC. Over 2,000 square kilometers of existing modern 3D seismic data is now beinginterpreted by Serica in order to identify prospects and determine drillinglocations for our first exploration campaign in the Mahakam Delta. On the basisof the early interpretation of this large volume of 3D data it appears thatseveral potentially commercial prospects are likely to be identified. A newoffshore 3D seismic survey is also being planned and drilling in the Kutai PSCwill commence in 2009. Vietnam Block 06/94 PSC Serica has a 33.33% interest in the Block 06/94 PSC, which is operated by PearlEnergy and lies in the Nam Con Son Basin about 350 kilometres offshore SouthVietnam. The block covers an area of approximately 4,100 square kilometres andis the part of Block 06/1 which British Petroleum was contractually obliged torelinquish in 1994 at the end of its contractual exploration period, afterdiscovering the major Lan Tay and Lan Do gas fields. These fields commencedproduction in 2002, following the construction of a new gas and liquids pipelineto the Vietnamese mainland. During 2007 a 730 square kilometre 3D seismic survey was carried out and, basedon the interpretation of this data, a rig has been contracted and a well isplanned to be drilled in 2H08 in the south-western part of the block. A further1,000 square kilometre 3D seismic survey is expected to be acquired in May 2008and a 2D seismic survey is also planned. The operator of the adjacent Block 12/E, Premier Oil, has announced that it isseeking bids for an FPSO for the development of its Blackbird and Dua oilfields. Serica expects to be able to identify both oil and gas prospects withinBlock 06/94. GLOSSARY bbl barrel of 42 US gallonsbcf billion standard cubic feetboe barrels of oil equivalent (barrels of oil, condensate and LPG plus the heating equivalent of gas converted into barrels at a rate of 6,000 standard cubic feet per barrel)bopd or bpd barrels of oil or condensate per dayFPSO Floating Production, Storage and Offtake vessel (often a converted oil tanker)LNG Liquefied Natural Gas (mainly methane and ethane)LPG Liquefied Petroleum Gas (mainly butane and propane)mcf thousand cubic feetmm bbl million barrelsmmBtu million British Thermal Unitsmmscfd million standard cubic feet per dayPSC Production Sharing ContractReserves Estimates of discovered recoverable commercial hydrocarbon reserves calculated in accordance with the Canadian National Instrument 51-101Contingent Estimates of discovered recoverable hydrocarbon resources for which commercial production is not yetResources assured, calculated in accordance with the Canadian National Instrument 51-101Prospective Estimates of the potential recoverable hydrocarbon resources attributable to undrilled prospects,Resources calculated in accordance with the Canadian National Instrument 51-101TAC Technical Assistance Contracttcf trillion standard cubic feet 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 2007. 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 based in Western Europe and South East Asia, withinterests in the UK, Norway, Spain, Ireland, Indonesia and Vietnam. The Grouphas no current oil and gas production, with the main emphasis placed upon itsnear term developments and future exploration drilling programmes. In the year,work has continued on managing its portfolio of interests, advancing itsIndonesian development towards first production, and completing a successfuldrilling programme in the UK North Sea. At a Group Board level, Ian Vann and Steven Theede joined as non-executivedirectors in the summer, and in October, Serica confirmed the retirement ofJames Steel as a non-executive director of the Company. Ian and Steve bring awealth of valuable experience in the international oil and gas business to theBoard of Serica. Western Europe: United Kingdom, Ireland, Norway and Spain Early in the year, the formal award of new licences in both the UK and Norwaywas completed. In the UK, Serica was awarded Block 23/16g in the Central North Sea, Block 48/17d in the Southern North Sea and Blocks 113/26b and 113/27b (part) in the EastIrish Sea. Serica is the operator of all four blocks and has a 100% interest ineach block except 23/16g, where it has a 50% interest. In Norway, Serica was awarded a 20% interest in two large licences in the 2006Awards in Predefined Areas ('APA') Licence Round. The licences are contiguousand cover a total area of approximately 1,625 square kilometres in the EgersundBasin, about 120 kilometres southwest of Stavanger. The licences contain theundeveloped Bream, Brisling and 18/10-1 oil discoveries. In Licence 407, anappraisal well is planned to be drilled in the Bream field in the second half of2008 and, in Licence 406, a 3D seismic survey will be acquired early in 2008.Serica has a 20% interest in both of these licences. In UK Block 23/16f, appraisal of the Company's Columbus discovery commenced inthe third quarter of 2007. Two Columbus appraisal wells, 23/16f-12 and 23/16f-12z, were drilled and both were successful. Well 23/16f-12 was drilled as avertical well approximately three kilometres north of the Columbus discoverywell and encountered gas/condensate-bearing Paleocene sands at a higherelevation than those tested in well 23/16f-11. To further evaluate the Columbusdiscovery, the 23/16f-12 well was then sidetracked to a bottom-hole locationapproximately 2.2 kilometres north of the Columbus discovery well andencountered gas/condensate-bearing Paleocene sands similar to those found in 23/16f-11. The successful outcome of the two new wells supports the commercialdevelopment of Columbus and data from these wells will be used to advance fielddevelopment studies. The Columbus field lies in close proximity to existingproduction infrastructure, providing the potential to commence production assoon as throughput agreements have been reached and the development wells can betied-in. Serica is currently studying development options for the Columbusfield. In June 2007, Serica agreed with BG International Limited not to complete apreviously announced acreage exchange, as a result of which Serica retained its50% interest in Block 23/16f. In Ireland, Serica is the operator and holds a 100% interest in Blocks 27/4, 27/5 (west) and 27/9, which cover an area of 611 square kilometres in the SlyneBasin off the west coast of Ireland and lie 42km south of the Corrib gas fieldcurrently being developed by Shell. The blocks are covered by existing 3Dseismic data that has now been reprocessed and has confirmed the presence offour significant prospects. Serica will shortly carry out a site survey andexpects to drill the first of these prospects in the summer of 2008. In Spain, prior to carrying out a seismic survey, Serica entered into anagreement with Beach Petroleum Limited, under which the Company farmed out a 25%interest in its four exploration Permits onshore northern Spain, retaining a 75%interest and operatorship. The 315 kilometre 2D seismic survey, which commencedin the third quarter 2007, has recently been completed and the data is currentlybeing evaluated. South East Asia: Indonesia and Vietnam In the Glagah Kambuna TAC, the first phase of the development programme for theKambuna gas/condensate field commenced. The field production platform was builtand in the first quarter of 2008 was positioned over the Kambuna No. 2 well andpiled to the seabed. The GSF136 jack-up drilling rig is now drilling the Kambunadevelopment wells No. 3 and No. 4 and will then complete all three wells forproduction. Onshore and offshore facilities and a 14-inch offshore pipeline willthen be installed, with production targeted to commence by the end of 2008. Thetransfer of Serica's book costs of US$19.2 million in respect of Kambuna, fromexploration and evaluation assets to development assets, classified underproperty, plant and equipment, occurred effective 31 December 2007. Following the agreement of terms for the sale of gas to the Indonesian Stateelectricity generation company Perusahan Listrik Negara ("PLN"), at an initialprice of US$4.50 per million Btu (approximately $5.40 per million cubic feet)escalating at 3% per annum, tenders for a further quantity of gas have now beenreceived at considerably higher prices. In addition to the gas, Serica willinitially be marketing 4,000-5,000 barrels per day of condensate at a priceclose to that of crude oil. The Company anticipates that production from thefield will commence in December 2008. In the Biliton PSC, in March 2007, Serica entered into a farm-out agreementunder the terms of which Nations Petroleum earned a 45% interest by paying acontribution to Serica's back costs and bearing the majority of the costs ofdrilling two wells in the PSC. Serica retains a 45% interest and operates thePSC. Two exploration wells were drilled in the Biliton PSC in December 2007 andJanuary 2008 using the GSF 136 drilling rig. Neither well containedhydrocarbons and each was therefore plugged and abandoned. Serica had alwaysrecognised that the high potential of Biliton came with a significantexploration risk, since the block is around 200 kilometres away from theestablished oil and gas fields of East Java. Costs associated with the BilitonPSC have been written off in these financial statements. In Vietnam, a 730 kilometre 3D seismic survey was carried out and, based on theinterpretation of this data, a well is planned to be drilled in 2H08 in thesouth-western part of the block. The operator of the adjacent Block 12/E,Premier Oil, has announced that it is seeking bids for an FPSO for thedevelopment of its Blackbird and Dua oil fields. Serica expects to be able toidentify both oil and gas prospects within Block 06/94. Debt facility In November 2007 the Company entered into a US$100 million senior secured debtfacility with JPMorgan Chase Bank, N.A. and The Governor and Company of the Bankof Scotland. The facility, which has an initial term of twelve months, with theCompany having an option to extend for a further six months, will be used tofund appraisal and development expenditures for the Kambuna field in Indonesiaand the Columbus field in the UK North Sea as well as for Norwegian appraisalexpenditure and general corporate purposes. Post year end In January 2008 the Company announced the completion of a placing of 24,770,354new ordinary shares to the AIM Market and the TSX-V in Canada. The total fundsraised for the Company was approximately US$49 million after expenses. Thefunding available from the loan facility, in conjunction with the finance raisedin the recent January 2008 placing will provide sufficient resources to progresswith the Company's forward programme. In February 2008 Serica announced that it had acquired an additional 25.5%working interest in the Kutai PSC in East Kalimantan, Indonesia. Serica, theoperator of the Kutai PSC, now holds a 78% interest. The PSC was awarded toSerica in January 2007 and covers an area of around 4700 square kilometres inthe Mahakam Delta, mainly offshore. There is a large amount of existing modern3D seismic data on the block that Serica is currently analysing and interpretingin order to determine drilling locations for 2009. Serica remains very focused on creating shareholder value through its fielddevelopment and exploration drilling programmes. As the Company continues tobuild on the exploration success that it has seen in the North Sea andIndonesia, its objectives are to bring the benefits of that success back toshareholders and to lay the foundations for future growth. The results of Serica's operations detailed below in the MD&A, and in thefinancial statements, are presented in accordance with International FinancialReporting Standards ("IFRS"). Results of Operations Serica generated a loss of US$13.6 million for 2007 compared to a loss ofUS$14.4 million for 2006. 2007 2006 US$000 US$000 Sales revenue - 61 Expenses: Administrative expenses (7,897) (6,641)Foreign exchange gain 394 1,715Pre-licence costs (375) (4,205)Asset write offs (9,282) (12,870)Share-based payments (1,962) (1,918)Change in fair value of share warrants - 1,154Depreciation and depletion (149) (95) Operating loss before net finance revenue and tax (19,271) (22,799) Profit on disposal - 2,311Finance revenue 2,814 4,931Finance costs (321) - Loss before taxation (16,778) (15,557) Taxation credit for the year 3,149 1,182 Loss for the year (13,629) (14,375) Basic and diluted loss per share (US$) (0.09) (0.10) Revenues from oil and gas production are recognised on the basis of theCompany's net working interest in its properties. In 2007 the Company had norevenue. Revenue in 2006 was generated from Serica's 10% interest in theLematang PSC which contained the Harimau field. These revenues are fromdiscontinued operations following the disposal of the Lematang PSC interest in2006. Direct operating costs for the field during that period were carried byMedco Energi Limited. Administrative expenses of US$7.9 million for 2007 increased from US$6.6 millionfor 2006. The general increase from 2006 reflects the growing scale of theCompany's activities, including further recruitment, over the past twelvemonths. No significant foreign exchange movements impacted 2007 results. The significantforeign exchange gain of US$1.7 million earned in 2006 chiefly arose from theincrease in US$ equivalent value of pounds sterling cash deposits held, as thepound continued to strengthen against the dollar during the year. Pre-licence costs include direct cost and allocated general administrative costincurred on oil and gas interests prior to the award of licences, concessions orexploration rights. The Company did not incur significant pre-licence expense in2007, and the decrease in the charge from US$4.2 million in 2006 to US$0.4million in 2007 is largely caused by data acquisition costs specific to the 2006Norway licence applications (US$2.7 million) and Vietnam pre-licence activity,absent in 2007. Asset write offs of US$9.3 million comprise US$9.0 million of largelypre-drilling costs in regard to the Biliton PSC and the Q4 2007 US$0.3 millioncharge against relinquished UK North Sea licences P1180 23/16e and 23/17b. TheQ4 Biliton PSC asset write offs include charges against exploration andevaluation assets (US$7.7 million), goodwill (US$0.4 million), inventory (US$0.6million) and related long term other receivables (US$0.3 million). 2006 assetwrite offs of US$12.9 million comprised US$12.7 million in regard to the AsahanOffshore PSC and the Q3 2006 US$0.2 million charge against relinquished UK NorthSea licence P1180, Blocks 48/16a and 47/20b. Share-based payment costs of US$2.0 million reflect allocations of chargesrelated to share option grants made during the course of 2005, 2006 and 2007 andcompare with costs of US$1.9 million for 2006. In 2006 a fair value gain was recorded, as the fair value liability of warrantsoutstanding as at 31 December 2005 fell prior to their exercise in 2006. Thishad no impact in 2007 and no cash impact on any reported results. Depletion and depreciation charges for 2006 and 2007 represent office equipmentonly and are negligible. Those costs of petroleum and natural gas propertiesclassified as exploration and evaluation assets are not currently subject tosuch charges pending further evaluation. The Kambuna asset costs now classifiedas development costs and held within plant, property and equipment as at 31December 2007, will be depleted once production commences. The profit on disposal of US$2.3 million in 2006 was generated on the sale ofthe 10% interest in the Lematang PSC to Lundin Petroleum AB for US$5 million. Finance revenue, comprising interest income of US$2.8 million for 2007, compareswith US$4.9 million for 2006. The decrease from last year is due to the reducedcash deposit balances held following expenditure on various drilling programmes. The first drawdown on the senior secured debt facility occurred soon after thefacility was arranged in Q4 2007. Finance costs consist of interest payable andissue costs spread over the term of the bank loan facility. The taxation credit of US$3.1 million in 2007 represents the following; acurrent tax credit from actual and expected tax recoveries on Norwegianexpenditure to date (US$6.1 million); a US$0.4 million credit from the releaseof the deferred tax liabilities attached to Biliton; a partial offset of thecurrent tax credit in respect of Norwegian expenditure by a deferred income taxcharge of US$3.4 million from the timing differences arising from capitalisedexploration expenditure. The taxation credit of US$1.2 million in 2006 arosefrom the release of the deferred tax liabilities attached to the Lematang PSC(US$0.5 million) and Asahan (US$0.7 million). Expenditures during 2005, 2006 and 2007 have reduced any potential currentincome tax expense arising for 2007 and 2006 to US$ nil. The net loss per share decreased from US$0.10 to US$0.09 in 2007. Summary of Quarterly Results Quarter ended: 31 Mar 30 Jun 30 Sep 31 Dec US$000 US$000 US$000 US$0002007Sales revenue - - - -(Loss)/profit for the quarter (1,595) (1,587) 1,237 (11,684)Basic and diluted loss per share US$ (0.01) (0.01) - (0.08)Basic earnings per share US$ - - 0.01 -Diluted earnings per share US$ - - 0.01 - 2006Sales revenue 25 36 - -Profit/(loss) for the quarter 1,037 1,839 (3,795) (13,456)Basic and diluted loss per share US$ - - (0.03) (0.09)Basic earnings per share US$ 0.01 0.01 - -Diluted earnings per share US$ 0.01 0.01 - - The fourth quarter 2007 loss includes asset write offs of US$9.0 million inregard to the Biliton PSC. The fourth quarter 2006 loss includes asset write offs of US$12.7 million inregard to the Asahan Offshore PSC. 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 2006 2007 US$000 US$000Current assets: Inventories 6,991 6,785 Trade and other receivables 21,906 30,872 Tax receivable 3,387 31 Cash and cash equivalents 22,638 77,306Total Current assets 54,922 114,994 Less Current liabilities: Trade and other payables (23,604) (30,619) Net Current assets 31,318 84,375 At 31 December 2007, the Company had net current assets of US$31.3 million whichcomprised current assets of US$54.9 million less current liabilities of US$23.6million, giving an overall decrease in working capital of US$53.1 million in theyear. Inventories increased from US$6.8 million to US$7.0 million over the period. Trade and other receivables at 31 December 2007 included a US$9.4 millionupfront deposit payment for the Global Santa Fe drilling rig for Indonesianoperations, and significant recoverable amounts from partners in Joint Ventureoperations in the UK, Indonesia and Spain. Other smaller items includedprepayments and sundry UK and Indonesia working capital balances. Cash and cash equivalents fell from US$77.3 million to US$22.6 million. TheCompany received US$5.0 million proceeds from the 2006 Lematang asset disposal,raised additional new funds of US$1.6 million through the exercise of shareoptions and earned interest income of US$2.8 million, but incurred significantcosts in 2007 from exploration work (principally the Q4 UK drilling programme onthe Columbus discovery, preparation and start up costs of the Indonesiandrilling programme, spend in Vietnam, Norway, Spain and Kutai) together withongoing administrative costs. Trade and other payables chiefly include significant trade creditors andaccruals from the Indonesian drilling programme and amounts due to thesub-contractor operating the Q4 Columbus drilling programme. Other smaller itemsinclude sundry creditors and accruals for administrative expenses and othercorporate costs. Long-Term Assets and Liabilities An extract of the balance sheet detailing long-term assets and liabilities isprovided below: 31 December 31 December 2007 2006 US$000 US$000 Exploration and evaluation assets 71,874 40,681Property, plant and equipment 19,543 342Goodwill 768 1,200Financial assets 4,680 - Long-term other receivables 1,224 351 Financial liabilities (9,582) -Deferred income tax liabilities (3,910) (955) During 2007, total investments in petroleum and natural gas properties,excluding property, plant and equipment and represented by exploration andevaluation assets, increased from US$40.7 million to US$71.9 million. The netUS$31.2 million increase consists of US$58.3 million of additions, less US$7.7million of Biliton asset write offs and US$0.3 million of relinquished licencecosts and the transfer of US$19.2 million of Kambuna costs from exploration andevaluation assets to property, plant and equipment which occurred effective 31December 2007. The US$58.3 million of additions were incurred on the following assets: In South East Asia, US$9.7 million was spent in Indonesia on; drilling activitypreparation, G&A on the Glagah Kambuna TAC (US$5.6 million), signature bonusesand seismic on the Kutai concessions (US$3.1 million), and US$1.0 million (netof US$1.0 million of back costs received in Q1) on Serica's share of Bilitondrilling costs incurred on the two Biliton wells that exceeded the agreed carryby Nations Petroleum. US$6.7 million was spent in Vietnam on entry costs andseismic data acquisition. In the UK & Western Europe, significant expenditure was incurred on Columbus2007 drilling and other Block 23/16f cost (US$23.6 million), US$3.6 million inSpain (chiefly on a 2D seismic survey), US$4.4 million in Norway (on seismicdata acquisition and other exploration) and US$2.0 million in the UK and Irelandon exploration work and other G&A. The 2007 additions in UK & Western Europe also include costs capitalised whenthe anticipated recovery previously credited against exploration and evaluationassets as at 31 December 2006, was reversed in Q2 2007 following theannouncement in June of the agreement between Serica and BG not to complete theBG/Serica cross assignment deal announced in 2006. Serica's capitalised cost nowreflects its 50% share of costs incurred on the Block 23/16f in 2006, ratherthan the 25% previous interest. The US$19.2 million increase in property, plant and equipment from US$0.3million in 2006 results from the reclassification of Kambuna from explorationand evaluation assets to development assets effective 31 December 2007.Property, plant and equipment also includes immaterial balances of US$0.4million for office fixtures and fittings and computer equipment. Goodwill, representing the difference between the price paid on acquisitions andthe fair value applied to individual assets, fell by US$0.4 million from US$1.2million to US$0.8 million following the write off of costs allocated to Biliton. Financial assets include US$4.7 million of restricted cash deposits. Long-term other receivables of US$1.2 million are represented by value added tax("VAT") on Indonesian capital spend, which would be recovered from futureproduction. Financial liabilities are represented by the first drawdown under the seniorsecured debt facility, which occurred in Q4 2007. This includes accrued interestpayable and is disclosed net of the unamortised portion of allocated issuecosts. The deferred income tax liability increase of US$3.0 million from US$0.9 millionto US$3.9 million, occurred from timing differences arising following therecognition of the Norwegian tax recovery asset. An increase of US$3.4 millionwas partially offset by a US$0.4 million liability decrease in relation toBiliton, which was released following the write off of Biliton costs. Shareholders' Equity An extract of the balance sheet detailing shareholders' equity is providedbelow: 31 December 31 December 2007 2006 US$000 US$000 Total share capital 158,871 157,283Other reserves 13,729 11,767Accumulated deficit (56,685) (43,056) Total share capital includes the total net proceeds (both nominal value and anypremium on the issue of equity capital). Issued share capital during 2007 was increased by the exercise of 1,110,001share options of the Company at prices ranging from Cdn$1.00 to Cdn$2.00. Other reserves include those equity amounts in respect of the movement incumulative expense of share-based payment charges, and the element of the fairvalue liability of share purchase warrants eliminated upon exercise of thosewarrants. Capital Resources At 31 December 2007, Serica had US$31.3 million of net working capital, US$9.6million of long term debt and no capital lease obligations. At that date theCompany had commitments to future minimum payments under operating leases inrespect of rental office premises, office equipment and motor vehicles for eachof the following years as follows: US$00031 December 2008 38131 December 2009 38931 December 2010 83 During the year the Company contracted the Sedco 704 drilling rig for 96 daysduring 2007 and 2008 for UK & NW Europe operations. As at 31 December 2007 theCompany has a commitment for a remaining 40 days at a gross cost of US$13.5million. The operations currently identified for use of the rig are ventureswhere joint venture partners are expected to pay a share of the costs. The Company also has obligations to carry out defined work programmes on its oiland gas properties, under the terms of the award of rights to these properties,over the next twelve months as follows: Year ending 31 December 2008 US$43,442,000 These obligations reflect the Company's share of interests in the defined workprogrammes and are not formally contracted at 31 December 2007. The Company isnot obliged to meet other joint venture partner shares of these programmes. In the absence of revenues generated from oil and gas production Serica willutilise its existing cash balances, together with the US$100 million seniorsecured debt facility, to fund the immediate needs of its investment programmeand ongoing operations. After the year end the cash balances existing at 31December 2007 were supplemented by a net US$49 million raised from the shareplacing announced in January 2008. 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 2007 financial statements. International Financial ReportingStandards have been adopted. The cost of exploring for and developing petroleumand natural gas reserves are capitalised. Unproved properties are subject toperiodic review for impairment whilst the costs of proved properties aredepleted over the life of such producing fields. In each case, calculations arebased upon management assumptions about future outcomes, product prices andperformance. Financial Instruments The Group's financial instruments comprise cash and cash equivalents, bank loansand borrowings, accounts payable and accounts receivable. It is management'sopinion that the Group is not exposed to significant currency, interest orcredit risks arising from its financial instruments other than as discussedbelow: Serica has exposure to interest rate fluctuations; given the level ofexpenditure plans over 2008/9 this is managed in the short-term throughselecting treasury deposit periods of one to six months. Cash and treasurycredit risks are mitigated through spreading the placement of funds over a rangeof institutions each carrying acceptable published credit ratings to minimisecounterparty risk. Where Serica operates joint ventures on behalf of partners it seeks to recoverthe appropriate share of costs from these third parties. The majority ofpartners in these ventures are well established oil and gas companies. In theevent of non payment, operating agreements typically provide recourse throughincreased venture shares. It is management's opinion that the fair value of its financial instrumentsapproximate to their carrying values, unless otherwise noted. Share Options As at 31 December 2007, the following employee share options were outstanding: - Expiry Date Number Exercise cost Cdn$Share options Jun 2008 400,000 720,000 Feb 2009 247,499 494,998 May 2009 100,000 200,000 Dec 2009 275,000 275,000 Jan 2010 600,000 600,000 Jun 2010 1,100,000 1,980,000 Exercise cost £ Nov 2010 561,000 544,170 Jan 2011 1,275,000 1,319,625 May 2011 180,000 172,800 June 2011 270,000 259,200 Nov 2011 120,000 134,400 Jan 2012 1,056,000 1,077,120 May 2012 405,000 421,200 Aug 2012 1,200,000 1,182,000 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. Disclosure Controls and Procedures and Internal Controls over FinancialReporting Serica's management, including the Chief Executive Officer and Chief FinancialOfficer, has reviewed and evaluated the effectiveness of the Company'sdisclosure controls and procedures (as defined in Multilateral Instrument 52-109of the Canadian Securities Administrators) as of 31 December 2007. Managementhas concluded that, as of 31 December 2007, the disclosure controls andprocedures were effective to provide reasonable assurance that materialinformation relating to the Company and its consolidated subsidiaries would bemade known to them by others within those entities, particularly during theperiod in which this report was being prepared. Management has designed internal controls over financial reporting to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withIFRS. There have been no changes in the Company's internal controls overfinancial reporting during the year that have materially affected, or arereasonably likely to materially affect, the Company's internal controls overfinancial reporting. 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 no operating revenues and, during theperiod ended 31 December 2007 the Company incurred losses of US$13.6 millionfrom continuing operations. At 31 December 2007 the Company held cash and cashequivalents of US$22.6 million and a financial asset of restricted cash ofUS$4.7 million. Following the year end the Company raised an additional US$49million net of expenses as the result of a Placing of 24,770,354 ordinary sharesin the Company. Outstanding Share Capital As at 7 March 2008, the Company had 176,418,310 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 11 March 2008 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 therefrom. Serica Energy plcGroup Income Statementfor the year ended 31 December 2007 2007 2006 Notes US$000 US$000 Sales revenue 3 - 61 Cost of sales - - Gross profit - 61 Administrative expenses 5 (7,897) (6,641)Foreign exchange gain 394 1,715Pre-licence costs (375) (4,205)Asset write offs 13,15 (9,282) (12,870)Share-based payments (1,962) (1,918)Change in fair value of share warrants - 1,154Depreciation and depletion 6 (149) (95) Operating loss before net finance revenue and tax (19,271) (22,799) Profit on disposal 17 - 2,311Finance revenue 9 2,814 4,931Finance costs 10 (321) - Loss before taxation (16,778) (15,557) Taxation credit for the year 11 a) 3,149 1,182 Loss for the year (13,629) (14,375)Loss per ordinary share (US$)Basic and diluted LPS 12 (0.09) (0.10) Serica Energy plcBalance SheetAs at 31 December 2007 Group Company 2007 2006 2007 2006 Notes US$000 US$000 US$000 US$000Non-current assetsExploration & evaluation assets 13 71,874 40,681 - -Property, plant and equipment 14 19,543 342 - -Goodwill 15 768 1,200 - -Investments in subsidiaries 16 - - 130,684 119,682Financial assets 18 4,680 - 4,680 -Other receivables 18 1,224 351 - - 98,089 42,574 135,364 119,682Current assetsInventories 19 6,991 6,785 - -Trade and other receivables 20 21,906 30,872 117,373 76,120Tax receivable 20 3,387 31 - -Cash and cash equivalents 21 22,638 77,306 7,172 49,098 54,922 114,994 124,545 125,218 TOTAL ASSETS 153,011 157,568 259,909 244,900 Current liabilitiesTrade and other payables 22 (23,604) (30,619) (6,376) (1,045) Non-current liabilitiesFinancial liabilities 23 (9,582) - (9,582) -Deferred income tax liabilities 11 (3,910) (955) - - TOTAL LIABILITIES (37,096) (31,574) (15,958) (1,045) NET ASSETS 115,915 125,994 243,951 243,855 Share capital 25 158,871 157,283 123,599 122,011Merger reserve 16 - - 112,174 112,174Other reserves 13,729 11,767 13,729 11,767Accumulated deficit (56,685) (43,056) (5,551) (2,097) TOTAL EQUITY 115,915 125,994 243,951 243,855 Approved by the Board on 11 March 2008 Paul Ellis Chris HearneChief Executive Officer Finance Director ________________________________ _____________________________________ Serica Energy plcStatement of Changes in EquityFor the year ended 31 December 2007 Group Share capital Other Accum'd Total reserves deficit US$000 US$000 US$000 US$000 At 1 January 2006 148,745 4,153 (28,681) 124,217Conversion of warrants 8,530 - - 8,530Conversion of options 35 - - 35Issue of shares (net) (27) - - (27)Share-based payments - 1,918 - 1,918Loss for the year - - (14,375) (14,375)Fair value of warrants converted - 5,696 - 5,696At 31 December 2006 157,283 11,767 (43,056) 125,994 Conversion of options 1,588 - - 1,588Share-based payments - 1,962 - 1,962Loss for the year - - (13,629) (13,629) At 31 December 2007 158,871 13,729 (56,685) 115,915 Share Other Accum'd Total capital reserves deficitCompany Merger reserve US$000 US$000 US$000 US$000 US$000 At 1 January 2006 113,473 112,174 4,153 (4,433) 225,367Conversion of warrants 8,530 - - - 8,530Conversion of options 35 - - - 35Issue of shares (net) (27) - - - (27)Share-based payments - - 1,918 - 1,918Profit for the year - - - 2,336 2,336Fair value of warrants converted - - 5,696 - 5,696 At 31 December 2006 122,011 112,174 11,767 (2,097) 243,855 Conversion of options 1,588 - - 1,588Share-based payments - - 1,962 1,962Loss for the year - - - (3,454) (3,454) At 31 December 2007 123,599 112,174 13,729 (5,551) 243,951 Serica Energy plcCash Flow StatementFor the year ended 31 December 2007 Group 2006 Company 2006 2007 US$000 2007 US$000 US$000 US$000Cash flows from operating activities:Operating loss (19,271) (22,799) (5,011) (1,376) Adjustments for:Depreciation and depletion 149 95 - -Asset write offs 9,282 12,870 - -Share-based payments 1,962 1,918 1,962 1,918Change in fair value of share warrants - (1,154) - (1,154)Changes in working capital (5,008) (10,813) (1,899) (122)Cash generated from operations (12,886) (19,883) (4,948) (734) Taxes received 2,717 35 - - Net cash outflow from operations (10,169) (19,848) (4,948) (734) Cash flows from investing activitiesInterest received 2,873 4,999 1,497 3,872Purchase of property, plant and equipment (185) (411) - - Purchase of intangible exploration assets (58,766) (24,190) - -Funding provided to group subsidiaries - - (45,054) (68,126)Funding provided for work programmes (4,680) - (4,680) -Disposals of intangible exploration assets 5,000 - - - Net cash used in investing activities (55,758) (19,602) (48,237) (64,254) Cash proceeds from financing activities:Net loan financing 9,671 - 9,671 -Net proceeds from issue of shares - (1,559) - (1,559)Proceeds on exercise of warrants/options 1,588 8,565 1,588 8,565 Net cash from financing activities 11,259 7,006 11,259 7,006 Net decrease in cash and cash equivalents (54,668) (32,444) (41,926) (57,982)Cash and cash equivalents at 1 January 77,306 109,750 49,098 107,080Cash and cash equivalents at 31 December 22,638 77,306 7,172 49,098 Serica Energy plc Notes to the Financial Statements 1. Authorisation of the Financial Statements and Statement of Compliance with IFRS The Group's and Company's financial statements for the year ended 31 December2007 were authorised for issue by the Board of Directors on 11 March 2008 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 principal activity of the Company and the Group is toidentify, acquire and subsequently exploit oil and gas reserves primarily inAsia and Europe. The Company's ordinary shares are traded on AIM and the TSXV. 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 2007. 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 2007 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 deficit dealt with in the financial statements of the parentCompany was US$3,454,000 (2006: profit US$2,336,000). On 1 September 2005, the Company completed a reorganisation (the"Reorganisation"). whereby the common shares of Serica Energy Corporation wereautomatically exchanged on a one-for-one basis for ordinary shares of SericaEnergy plc, a newly formed company incorporated under the laws of the UnitedKingdom. In addition, each shareholder of the Corporation received beneficialownership of part of the 'A' share of Serica Energy plc issued to meet therequirements of public companies under the United Kingdom jurisdiction. UnderIFRS this reorganisation was considered to be a reverse takeover by SericaEnergy Corporation and as such the financial statements of the Group represent acontinuation of Serica Energy Corporation. 2. Accounting Policies Basis of Preparation The accounting policies which follow set out those policies which apply inpreparing the financial statements for the year ended 31 December 2007. 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. Use of Estimates and key sources of estimation uncertainty The preparation of financial statements in conformity with IFRS requiresmanagement to make estimates and assumptions that affect the reported amounts ofassets and liabilities as well as the disclosure of contingent assets andliabilities at the balance sheet date and the reported amounts of revenues andexpenses during the reporting period. Actual outcomes could differ from thoseestimates. The key sources of estimation uncertainty that has a significant risk of causingmaterial adjustment to the carrying amounts of assets and liabilities within thenext financial year are the estimation of share-based payment costs and theimpairment of intangible exploration assets (E&E assets). The estimation ofshare-based payment costs requires the selection of an appropriate valuationmodel, consideration as to the inputs necessary for the valuation model chosenand the estimation of the number of awards that will ultimately vest, inputs forwhich arise from judgements relating to the continuing participation ofemployees (see note 27). The Group determines whether E&E assets are impaired in cost pools when factsand circumstances suggest that the carrying amount of a cost pool may exceed itsrecoverable amount. As recoverable amounts are determined based upon riskedpotential, or where relevant, discovered oil and gas reserves, this involvesestimations and the selection of a suitable discount rate. The capitalisationand any write off of E&E assets necessarily involve certain judgements withregard to whether the asset will ultimately prove to be recoverable. Basis of Consolidation The consolidated financial statements include the accounts of Serica Energy plc(the "Company") and its wholly owned subsidiaries Serica Energy Corporation,Serica Energy Holdings B.V., Asia Petroleum Development Limited, PetroleumDevelopment Associates (Asia) Limited, Serica Energia Iberica S.L., SericaHoldings UK Limited, Serica Energy (UK) Limited, PDA Lematang Limited, APD(Asahan) Limited, APD (Biliton) Limited, APD (Glagah Kambuna) Limited, SericaEnergy Pte Limited, Serica Kutei B.V. ,Serica Nam Con Son B.V. and Serica EnergyNorge AS. 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, or groups of cash generating units expected to benefitfrom the combination's synergies. Impairment is determined by assessing therecoverable amount of the cash-generating unit, or groups of cash generatingunits to which the goodwill relates. Where the recoverable amount of thecash-generating unit is less than the carrying amount, an impairment loss isrecognised. 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. Full details of Serica's working interests in those petroleum and natural gasexploration and production activities classified as jointly controlled assetsare included in the Review of Operations. 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. Exploration and Evaluation Assets As allowed under IFRS 6 and in accordance with clarification issued by theInternational 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, geological 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; Indonesia, Vietnam, UK & North West Europe and Spain. E&E assets are not amortised prior to the conclusion of appraisal activities butare assessed for impairment in cost pools when facts and circumstances suggestthat the carrying amount of a cost pool may exceed its recoverable amount.Recoverable amounts are determined based upon risked potential, and whererelevant, discovered oil and gas reserves. When an impairment test indicates anexcess of carrying value compared to the recoverable amount, the carrying valueof the cost pool is written down to the recoverable amount in accordance withIAS 36. Such excess is expensed in the income statement. Costs of licences are expensed in the income statement if licences arerelinquished, or if management do not expect to fund significant futureexpenditure in relation to the licence. 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 within property, plant andequipment, and tested for impairment. If commercial reserves have not beendiscovered then the costs of such assets will be retained within the relevantgeographical E&E segment until subject to impairment or relinquishment. Asset Purchases and Disposals When a commercial transaction involves the exchange of E&E assets of similarsize and characteristics, no fair value calculation is performed. Thecapitalised costs of the asset being sold are transferred to the asset beingacquired. 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 2006 or 2007. 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 - Development Assets Capitalisation Development and production assets are accumulated into single field cost centresand represent the cost of developing the commercial reserves and bringing theminto production together with the E&E expenditures incurred in findingcommercial reserves previously transferred from E&E assets as outlined in thepolicy above. Depreciation Development assets are not depreciated until production commences. Costsrelating to each single field cost centre are depleted on a unit of productionmethod based on the commercial proven and probable reserves for that costcentre. The depletion calculation takes account of the estimated future costs ofdevelopment of recognised proven and probable reserves, based on current pricelevels. Changes in reserve quantities and cost estimates are recognisedprospectively from the last reporting date. Impairment A review is performed for any indication that the value of the Group'sdevelopment and production assets may be impaired. For development assets when there are such indications, an impairment test iscarried out on the cash generating unit. Each cash generating unit is identifiedin accordance with IAS 36. Serica's cash generating units are those assets whichgenerate largely independent cash flows and are normally, but not always, singledevelopment or production areas. If necessary, additional depletion is chargedthrough the income statement if the capitalised costs of the cash generatingunit exceed the associated estimated future discounted cash flows of the relatedcommercial oil and gas reserves. Property, Plant and Equipment - Other 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, cash and cash equivalents,financial liabilities and equity 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 Financial assets are initially recognised at fair value plus transaction coststhat are directly attributable to the acquisition or issue of the financialasset. Amortised cost is calculated by taking into account any discount orpremium on acquisition over the period to maturity. For investments carried at amortised cost, gains and losses are recognised inincome when the investments are de-recognised or impaired, as well as throughthe amortisation process. Cash and cash equivalents Cash and cash equivalents include balances with banks and short-term investmentswith original maturities of three months or less at the date acquired. Financial liabilities Financial liabilities include interest bearing loans and borrowings, andoutstanding share warrants which are carried at fair value. Changes in fairvalue are recognised in the income statement for the period. Obligations for loans and borrowings are recognised when the Group becomes partyto the related contracts and are measured initially at the fair value ofconsideration received less directly attributable transaction costs. After initial recognition, interest-bearing loans and borrowings aresubsequently measured at amortised cost using the effective interest method. Gains and losses arising on the repurchase, settlement or otherwise cancellationof liabilities are recognised respectively in finance revenue and finance cost. 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. Finance Revenue Finance revenue chiefly comprises interest income from cash deposits on thebasis of the effective interest rate method and is disclosed separately on theface of the income statement. Finance Costs Finance costs of debt are allocated to periods over the term of the related debtat a constant rate on the carrying amount. Arrangement fees and issue costs areamortised and charged to the income statement as finance costs over the term ofthe debt. 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 an appropriate pricing model based upon the optionprice, the share price at the date of issue, volatility and the life of theoption. It is assumed that all performance criteria are met. No expense is recognised for awards that do not ultimately vest, except forawards where vesting is conditional on a market condition. In this case suchawards are treated as vesting provided that all other performance conditions aresatisfied. At each balance sheet date before vesting, the cumulative expense is calculated,representing the extent to which the vesting period has expired and management'sbest estimate of the achievement or otherwise of non-market conditions and ofthe number of equity instruments that will ultimately vest or, in the case of aninstrument subject to a market condition, be treated as vesting as describedabove. The movement in cumulative expense since the previous balance sheet dateis recognised in the income statement, with a corresponding entry in equity.Estimated associated national insurance charges are expensed in the incomestatement on an accruals basis. Share Warrants The fair value of each outstanding warrant is estimated using a Black Scholespricing model based upon the warrant exercise price, the share price, volatilityand the life of the warrant. 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 thetiming of the reversal of the temporary differences can be controlled by theGroup and it is probable that the temporary differences will not reverse in theforeseeable future; and • temporary differences arising from the initial recognition of an asset orliability in a transaction that is not a business combination and, at the timeof the transaction, affects neither the income statement nor taxable profit orloss. 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. New standards and interpretations not applied IASB and IFRIC have issued the following standards and interpretations with aneffective date after the date of these financial statements: International Accounting Standards (IAS/IFRSs) IFRS 2 'Amendment to IFRS 2 - Vesting Conditions and Cancellations' - Effectivedate 1 January 2009 IFRS 3 'Business Combinations (revised January 2008)' - Effective date 1 July2009 IFRS 8 'Operating Segments' - Effective date 1 January 2009 IAS 1 'Presentation of Financial Statements (revised September 2007)' -Effective date 1 January 2009 IAS 23 'Borrowing Costs (revised March 2007) - Effective date 1 January 2009 IAS 27 Consolidated and Separate Financial Statements (revised January 2008) -Effective date 1 July 2009 International Financial Reporting Interpretations Committee (IFRIC) IFRIC 11 'IFRS2 - Group and Treasury Share Transactions' - Effective for periodsstarting 1 March 2007 IFRIC 12 'Service Concession Arrangements' - Effective date 1 January 2008 IFRIC 13 'Customer Loyalty Programmes' - Effective date 1 July 2008 IFRIC 14 'IAS 19 - The Limit on a Defined Benefit Asset, Minimum FundingRequirements and their Interaction' - Effective date 1 January 2008 The Directors do not anticipate that the adoption of these statements andinterpretations will have a material impact on the Group's financial statementsin the period of initial application. 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