Operational Update

31 March 2011

Falkland Oil and Gas Limited

("FOGL" or "the Company")

Operational Update

FOGL, the oil and gas exploration company focused on its extensive licence areas to the South and East of the Falkland Islands announces further progress on its rig contract negotiations and certain changes to its licence arrangements.

Rig contract close to finalisation

Further to our announcement on 15 March, the company is close to finalising a rig contract for its deep water exploration programme.

Changes to licence arrangements

On 30 March 2011 FOGL signed a binding Heads of Agreement with our joint venture partner, BHP Billiton that provides for the exit of BHP Billiton from the Northern licence area once certain conditions have been satisfied, including approval of the Falkland Islands Government to both the assignment of BHP Billiton's 51% interest and transfer of operatorship to FOGL.

In relation to this withdrawal BHP Billiton will contribute towards the costs of drilling the Loligo well, by placing funds in an escrow account. The funds are to be drawn by FOGL against the costs of drilling the Loligo well. In the event that the Loligo well encounters hydrocarbons, BHP Billiton will have the option to back in to the Loligo development area only, for a maximum 40% non-operating interest in the discovery, in return for making a cash contribution to FOGL's future exploration and appraisal costs. Such a reassignment of interests will also be subject to approval by the Falkland Islands Government.

The settlement with BHP Billiton will, together with other funds available to FOGL, provide FOGL with total cash resources of US$110 million. These cash resources will be sufficient to fund the Loligo well, other exploration expenditures and allow the Company to fulfil the Phase 1 work commitment of the Northern licence area.

Operations

FOGL is also considering additional drilling options. The site survey programme is progressing well, with surveys already completed on three locations. FOGL is considering the most appropriate means of financing and advancing these options and is in discussion with several parties that are interested in farming in to our licences.

Tim Bushell, Chief Executive of FOGL, said:

"We are pleased to have made good progress in our rig contract negotiations and to have reached an amicable agreement with our joint venture partner that gives FOGL control over its deepwater exploration programme, commencing with the drilling of the Loligo prospect".

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