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Dragon Oil plc

Annual Report for the year ended 31 December 2010


Ticker: DGO

Building a platform for growth

Welcome to Dragon Oil

Our Operations
The Dragon Oil Group operates its principal asset offshore in the Caspian Sea from its onshore base in Turkmenistan. The base is near the town of Hazar, which is located on the western coast of Turkmenistan.

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Our Strategy
The Board and management team continued to focus on our medium-term strategic objectives during the year. Our primary aim is to develop the oil and gas reserves in the Cheleken Contract Area aggressively in order to maximise returns and we invested heavily in securing new rigs and infrastructure.

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Our Performance
We have had a remarkable and successful year at Dragon Oil, having reached a record in terms of revenues generated, exit production rate achieved, the number of wells drilled and completed and major contracts awarded for infrastructure projects.

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Why not go to our website at www.dragonoil.com

Dragon Oil plc Annual Report for the year ended 31 December 2010

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Meet the Board


Dragon Oil places great significance on high standards of corporate governance as a means to emphasise the Groups good business conduct and strong ethical culture. All Board Directors have a responsibility to shareholders to put a robust control structure in place essential for business integrity and performance.

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Financial Review
Revenues for the year were up 25% to US$780 million due to increased gross production as well as stronger realised crude oil prices with Dated Brent averaging around US$80 per barrel during the year offset by a 9% discount achieved under the two marketing routes.

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CSR
Our Mission is to explore and develop oil and gas resources by leveraging technology and a talented workforce as a dependable, ethical and conscientious partner. The centre of our field operations is Hazar where Dragon Oil actively engages with the community.

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Main picture: Offshore operations. Inserts (from left to right): Offshore platform, reservoir discussion session, offshore operations, Dragon Oil Board of Directors, drilling operations, desalination plant.

Financial Statements Financial Statements

Governance

Governance

Responsibility Responsibility

Performance Performance

Strategic Review Strategic Review

Overview

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Contents

Overview

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Strategic Review

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Performance

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We enjoyed a record year in terms of revenues generated and the number of wells drilled and completed as well as we awarded a number of major contracts for infrastructure projects. We completed a milestone upgrade to the infrastructure base, thus eliminating the bottlenecks, which constrained production growth last year. 06 Key Milestones in 2010 08 Our Area of Operation and Marketing Routes

We remain focused on three strategic areas: the accelerated development of the Cheleken Contract Area, gas monetisation opportunities and valueenhancing acquisitions. We have a focused and experienced management team as well as a commitment throughout the organisation to deliver on our objectives. 10 Delivering our Strategy 12 Chairmans Statement 16 Message from the Chief Executive Officer

A 25% increase in revenue to US$780 million and a 55% increase in operating profit to US$488 million are attributed to increased realised oil prices in 2010, increased production and a movement in the lifting position. Earnings per share were 49% higher than in 2009 and net cash from operations was up 19% over 2009. 22 Operating and Financial Review

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Dragon Oil plc Annual Report for the year ended 31 December 2010

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Responsibility

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Governance

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Financial Statements

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The development of the Cheleken Contract Area is a big project for an independent operator, such as Dragon Oil, and entails a significant social responsibility to act accordingly to the laws and in harmony with communitys values. Our strategy revolves around a number of undertakings. 30 Corporate Social Responsibility Report Investing in Our People The Community The Environment HSE Supply Chain Management Communication with Investors Accountability

The Board is committed to applying the principles of corporate governance contained in the Combined Code on Corporate Governance issued by the Financial Reporting Council. The Directors also follow the related guidance and suggested best practices referred to in the Combined Code. 38 40 42 51 57 Meet Your Board Senior Management Team Directors' Report Corporate Governance Statement Directors Remuneration Report

This section represents the Groups accounts and contains notes to the financial statements. 60 62 63 63 64 65 66 67 68 94 95 96 97 Auditors Report Group Balance Sheet Group Income Statement Group Statement of Comprehensive Income Group Cash Flow Statement Company Balance Sheet Company Cash Flow Statement Statement of Changes in Equity Notes to the Financial Statements Supplementary Information Five-Year Financial Summary Glossary/Definitions/Abbreviations Advisors

Pictured: Pipe-laying for the trunkline and in-field pipelines.

Financial Statements Financial Statements

Governance

Governance

Responsibility Responsibility

Performance Performance

Strategic Review Strategic Review

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Overview

Pictured: The Dzheitune (Lam) Block 2.

Building a platform for growth


Industry Backdrop
Following the steep rising trend in 2009, oil prices continued to increase in 2010. Brent gained around 20% during the year and ended at US$95 per barrel, reflecting the recovering global economy. Dragon Oils share price performance outpaced the rising oil price during the year, increasing by over 39% to end the year at 538GBp. Importantly, the high crude oil price level provides us with a strong environment for planning and investment in the medium term.

Drilling Campaign
The 2010 11-well drilling programme yielded a 5.5% increase in average gross daily production to 47,211 barrels of oil per day (bopd). Production growth was constrained by infrastructure bottlenecks, which impacted our planned production growth during 2010, but these issues have now been eliminated following the switch over to the new 30-inch trunkline.

Contents
Key Milestones in 2010 Delivering our Strategy Chairmans Statement Message from the Chief Executive Officer 06 10 12 16 Our Area of Operations and Marketing Routes 08

Strategic Review

Overview

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0609 Overview

Key Milestones in 2010

Quarter 1
2010

Quarter 2
2010

13.05.10 Contracts awarded for the construction of the Dzhygalybeg (Zhdanov) A and Dzheitune (Lam) C platforms, to be delivered in Q1 2012 and Q4 2011, respectively

28.01.10 Contract for lease and management of a new build Super M2 jack-up rig awarded to Yantai Raffles Offshore Ltd.; expected delivery date is Q4 2011

11.06.10 19.04.10 Dzheitune (Lam) B/141 well tested at 1,895 bopd Workover of Dzheitune (Lam) A/125 well completed yielding an incremental production of 562 bopd Dzheitune (Lam) B/145 well tested at 1,054 bopd

Drilling

Infrastructure

Material Events

23.03.10 Dzheitune (Lam) A/142 and 13/143 wells tested at 2,103 and 2,168 bopd, respectively

07.04.10 The Board of Dragon Oil decided not to proceed with a proposed corporate restructuring of the Company after an extensive review of the options for, and implications of, a corporate restructuring April 2010 Short-term swap agreement via Neka, Iran, arranged

16.06.10 12 months marketing contract signed to export crude oil via Baku, Azerbaijan

Quarter 3
2010

Quarter 4
2010
11.01.11 Dzheitune (Lam) B/150 well tested at 1,622 bopd 29.10.10

Key Milestones

Dragon Oil plc Annual Report for the year ended 31 December 2010

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20.07.10 Dzheitune (Lam) 13/144 and 28/146 wells tested at 1,809 and 2,311 bopd, respectively Sidetrack of Dzheitune (Lam) A/129 well performed yielding incremental production of 1,140 bopd

Dzheitune (Lam) B/148 and 28/149 wells tested at 2,639 and 4,379 bopd, respectively

30.12.10 Dzheitune (Lam) 28/151 well tested at 2,656 bopd

Dzheitune (Lam) 28/147 well tested at 2,451 bopd

30-inch 40 km trunkline completed and commissioned Phase 2 expansion of the Central Processing Facility (CPF) completed

14-inch in-field pipeline from the Dzheitune (Lam) Platform B to 28 completed and commissioned January 2011 Dragon Oil is bringing a substantial portion of unprocessed gas onshore together with crude oil via the new integrated network

Inserts (starting from the top left picture): Computer courses at the Centre of Excellence, the Dzheitune (Lam) B platform, offshore operations, storage tankers, CPF, Aladja Jetty terminal, offshore operations.

Financial Statements Financial Statements

Governance

07.09.10

09.12.10

30.12.10

Governance

Responsibility Responsibility

Performance Performance

Strategic Review Strategic Review

Overview

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0609 Overview

Our Area of Operations and Marketing Routes

Our principal producing asset is located in the Cheleken Contract Area in the Caspian Sea, offshore Turkmenistan
The Dragon Oil Group operates its principal asset offshore in the Caspian Sea from its onshore base in Turkmenistan. The base is near the town of Hazar, which is located on the western coast of Turkmenistan. In addition, Dragon Oil has offices in the capital of Turkmenistan, Ashgabat, where both Country Managers are located.

Mediterranean Sea

Oil Export Routes In the past, 80%90% of our crude oil was marketed under a swap agreement with Iran. These arrangements expired in July 2010 and Dragon Oil was able to put in place a new contract for the marketing of our crude oil through Baku, Azerbaijan fulfilling the strategy of maintaining two export routes. The contract runs up to December 2011 FOB Aladja Jetty primarily using BP-operated Baku-Tbilisi-Ceyhan pipeline. We continue to monitor alternative marketing routes closely in order to achieve the most competitive terms and maintain flexibility. There are a limited number of export routes from the Caspian Sea. Apart from the currently used route, other options include via rail from Baku to Batumi on the Black Sea, which we have used in the past, the southern route via Neka in Iran and the northern route via Makhachkala in Russia.

Batumi

IRAN

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Cheleken Field Area


1 2

Our Area of Operations and Marketing Routes

Dragon Oil plc Annual Report for the year ended 31 December 2010

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Current marketing route Other export routes

Dzheitune (Lam)
The Lam Field is located to the South-West of Zhdanov field. Since the commencement of the Production Sharing Agreement (PSA) in 2000, Dragon Oil has drilled 53 new wells on the Lam field as of 29 March 2011, constructed and installed two new platforms with plans to install one more platform in late 2011, refurbished and upgraded existing platforms and performed many successful workovers. First well drilled in 1967 First production in 1978 20 old and 53 new wells in production Nine producing platforms.

Dzhygalybeg (Zhdanov)
The Zhdanov Field is located to the North-East of the Lam field. The initial exploration and prospecting of the Zhdanov structure began in 1965. The first well with commercial oil and gas was drilled in 1966. The field has produced oil and gas from a series of numerous, stacked early to middle Pliocene Red Series sandstone reservoirs. Dragon Oil has completed a number of successful workovers in the Zhdanov Field and plans to install its first new platform, Zhdanov A, in early 2012. First well drilled in 1966 First production 1972 Three old wells still producing.

Turkmenbashi Bay

Pictured: 1 Offshore operations. 2 Aladja Jetty export facilities.

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about our reserves and resources on page 25.

Financial Statements Financial Statements

Governance

Governance

Responsibility Responsibility

Performance Performance

The Dzheitune (Lam) and Dzhygalybeg (Zhdanov) fields are located in the Cheleken Contract Area, offshore Turkmenistan, west of the coastal town of Hazar. The fields comprise two elongate anticlines situated at the eastern end of the Aspheron Ridge. The Apsheron Ridge is a prolific hydrocarbon play extending from the Apsheron Peninsula in Azerbaijan to the Cheleken Peninsula in Turkmenistan, and divides the South Caspian Basin from the Middle Caspian Basin. The 3-D seismic survey was acquired in 2004/2005; the interpretation was completed, while continuous additional studies and refinement are ongoing.

Strategic Review Strategic Review

Overview

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1019 Strategic Review

Delivering our Strategy in 2010

What we said in 2010


Plans to complete up to 11 wells

Progress we have made


We accomplished the 11-well drilling programme, having tested the 11th well in the first week of January 2011.

Our plans for 2011


To drill and complete up to 11 wells.

Target annual production growth of 15%

We achieved a 5.5% growth in the gross average production rate. The growth was below our expectations due to infrastructure bottlenecks, which have since been eliminated with the transition over to the new integrated network completed in December 2010.

Production growth of 10%15% to be targeted.

US$250 million allocated for capital expenditure in oil infrastructure projects

US$250 million spent on infrastructure projects.

Estimated capital expenditure for oil infrastructure of US$250 million.

Continue progress made in monetisation of gas resources

We achieved key milestones, including: The 30-inch 40 km trunkline has been constructed to deliver oil and gas onshore; The Phase 2 expansion of the CPF has been completed with the capacity increased to handle up to 220 million standard cubic feet of gas per day (mmscfd); The Front End Engineering Design (FEED) study for the Gas Treatment Plant (GTP) has been finalised; we are currently looking at optimising design.

Continue discussions on gas monetisation opportunities; Proceed with the plan for construction of the GTP subject to market conditions and the conclusion of the gas sales agreement.

Pursue diversification of asset base with focus maintained on quality and strategic fit

We are yet to conclude an acquisition transaction.

Deliver on our diversification objective.

Key risks
Limited availability of top international contractors capable of offshore operations; Limited supply of jack-up rigs capable of offshore operations within the Caspian Sea region.

How we address risks


Strategic Review Strategic Review
Pictured: Aladja Jetty terminal.

A two-year extension of the contract for the use of the Iran Khazar rig has been signed; Rig 40 will be redeployed this year; The contract for the use of the NIS rig will be extended to cover drilling of up to five wells in 2011; Super M2 jack-up rig expected in Q4 2011; Tendering for additional rigs is ongoing.

Bottlenecks in infrastructure; Rig availability.

Contracts for rigs extended or being extended; Ongoing upgrade and maintenance of platforms and in-field pipelines.

Limited number of construction yards within the Caspian Sea region.

We allocated land in the harbour area to contractors to allow them to assemble platforms near Dragon Oils operations.

Continued weak demand for gas.

We have an open and positive dialogue with the government; We support the countrys initiatives in the area of the development and marketing of the countrys gas resources.

High expectations from sellers; Competitive market environment.

We consider offshore, shallow water and onshore operations; We screen targets with exploration upside.

Financial Statements Financial Statements

We expanded regions of interest to comprise North and West Africa, the Middle East, Central and South-East Asia;

Governance

Governance

Responsibility Responsibility

Limited availability of top international contractors capable of offshore construction;

Initiated contact with new contractors to widen the contractor base;

Performance Performance

Wells may come on production with flow rates below our expectations;

New infrastructure in place allowing us to achieve the 2010 exit rate in excess of 57,000 bopd, also successfully maintained in January-March 2011;

Delivering our Strategy

Dragon Oil plc Annual Report for the year ended 31 December 2010

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Overview

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1019 Strategic Review

Chairmans Statement

2010 has been both a successful and busy year for Dragon Oil. Against the backdrop of a recovering global economy and rising oil prices, we have achieved record results whilst successfully overcoming a number of challenges, and have continued to make progress on our medium-term strategic objectives, laying the groundwork for future success. Results and Performance Overview Overall, I am extremely pleased to report the strong financial and operating performance of the Group for 2010. Record profits for the year of US$386 million have increased Dragon Oils Earnings per Share (EPS) by some 49% over 2009 to 75 US cents per share, while revenues for the year were approximately US$780 million, an increase of 25% over the previous year. In terms of evaluating our performance for the year, the Board has considered three main measures. First, at the outset of 2010 we targeted a reserves replacement ratio of 100% for the year, which we comfortably managed to achieve through organic growth. Following an independent assessment, our oil and condensate reserves in the Cheleken Contract Area in Turkmenistan were upgraded to 639 million barrels as at the end of 2010 from 617 million barrels a year earlier, after taking into account production in 2010. In addition, a portion of gas resources were converted into 1.6 trillion cubic feet (TCF) of gas reserves, corresponding to a further 260 million barrels of oil equivalent (boe). Secondly, our objective was to drill a total of 11 wells in 2010. By the year-end we had drilled 10 of those, successfully completing the initial testing of the 11th well in early January 2011.

Mohammed Al Ghurair, Non-executive Chairman

Against the backdrop of a recovering global economy and rising oil prices, we have achieved record results whilst successfully overcoming a number of challenges, and have continued to make progress on our mediumterm strategic objectives, laying the groundwork for future success.

Revenue Growth
US$m

Earnings per Share (basic)


US cents

1,000

100

780

623

500

71.81

74.94

706

50

0 2010 2010 2008 2009 2008 2009

50.30

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Financial Statements Financial Statements

Governance

Strategic Overview The Board and management team continued to focus on our medium-term strategic objectives during the year. Our primary aim is to develop the oil and gas reserves in the Cheleken Contract Area aggressively in order to maximise returns and we invested heavily in securing new rigs and infrastructure, awarding some US$200 million worth of infrastructure contracts in 2010.

The Board expects the Group to continue to finance the development of Cheleken Contract Area from the funds generated by the asset itself. Furthermore, the Board anticipates that potential acquisitions will be funded from existing financial resources and debt facilities although, if appropriate, the Board would consider the broad range of other options available to it. This flexibility will enable the Group to continue to fund the organic and non-organic growth strategy as well as make dividend payments.

Governance

Dividend Policy Over the last few years Dragon Oil has generated strong revenues through a combination of substantial production growth and, in certain years, high oil prices. In recognition of the Groups performance, strong financial position and cash generation abilities, the Board of Directors of Dragon Oil has recommended the payment of a fullyear maiden dividend of 14 US cents in respect of 2010.

The Board expects the Group to continue to finance the development of the Cheleken Contract Area from the funds generated by the asset itself. Furthermore, the Board anticipates that potential acquisitions will be funded from existing financial resources and debt facilities although, if appropriate, the Board would consider other options available to the Group. This flexibility will enable the Group to continue to fund the organic and non-organic growth strategy as well as to make dividend payments.

Responsibility Responsibility

Industry Backdrop Following the steep rising trend in 2009, oil prices continued to increase in 2010. Brent gained around 20% during the year and ended at US$95 per barrel, reflecting the recovering global economy. Dragon Oils share price performance outpaced the rising oil price during the year, increasing by over 39% to end the year at 538 GBp. Importantly the high crude oil price level provides us with a strong environment for planning and investment in the medium term.

Over the last few years, Dragon Oil has generated strong revenues through a substantial production growth combined with high oil prices. In recognition of the Groups solid performance, strong financial position and cash generation abilities, the Board of Directors of Dragon Oil has recommended the payment of a fullyear maiden dividend of 14 US cents per share in respect of 2010.

Performance Performance

Finally, we targeted production growth of 10% for the year. This proved more difficult to achieve with average gross production increasing by 5.5% in 2010 as we experienced a number of infrastructure bottlenecks as the year went on. However, by the end of 2010 we successfully completed and commissioned a transformational infrastructure upgrade, which not only completely eliminated these bottlenecks but also nearly doubled our potential processing capacity of liquids. The results speak for themselves with exit production reaching 57,013 bopd after the infrastructure was put in place in December 2010 compared to average production for the year of 47,211 bopd. The infrastructure upgrade therefore leaves us well positioned to achieve our target production growth in 2011.

Why did the Board decide to recommend the payment of dividends? The Board reviews the dividend policy at least annually and has considered introducing a dividend payment for some time. With production in Turkmenistan having reached a significant level and set to grow further, our asset generates stable cash flows; this leaves us in a strong position to pursue the areas accelerated development and continue with our diversification strategy. The Board has decided, given the Groups current production and balance sheet strength, that it is now an appropriate time to start paying a dividend.

In line with our vision to be a diversified independent oil and gas company, we continued to pursue our strategy to acquire new exploration and production assets. The New Ventures Team screened a significant number of new venture proposals during the course of last year and the Board devoted significant time on evaluating suitable acquisition prospects. We were unable to realise our ambition last year mainly due to the high expectations of sellers of potential prospects. Identifying and realising a value-enhancing acquisition remains a strategic priority for the Board going forward, whilst ensuring that we retain a strong balance sheet.

Strategic Review Strategic Review

We also continued to leverage our technological expertise to drive production growth and achieve our targets. We have a talented and experienced reservoir development team who utilise drilling results combined with 3-D seismic imaging and reservoir simulation models, to further enhance and refine our understanding of the complex structure of the two Cheleken Area fields.

Chairmans Statement

Dragon Oil plc Annual Report for the year ended 31 December 2010

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Overview

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1019 Strategic Review

Chairmans Statement continued

The level of future dividends will be decided by the Board at the appropriate time in light of the Groups then performance, capital requirements and its investment needs and opportunities. Next year the annual dividend will be split between an interim and final dividend, and paid approximately half-yearly. Corporate Developments In April 2010, following the review of a possible change to Dragon Oils corporate structure, the Board decided that Ireland remains the most attractive jurisdiction for the holding company of the Group and consequently did not proceed with a corporate restructuring. Dragon Oil continues to enjoy a primary listing on the Irish Stock Exchange and, in accordance with 2009 changes to the UK Listing Regime, Dragon Oils London Stock Exchange listing has been designated as a premium listing since April 2010. In January 2011, Nomura International plc (Nomura) was appointed as Joint Broker to Dragon Oil alongside Davy following an in-depth selection process last year. The Board felt it was an appropriate time to add a second broker given that Dragon Oil is now one of the largest listed European Exploration and Production companies by market capitalisation and given our desire to broaden the Shareholder base and increase engagement with all our stakeholders. The Board looks forward to working with Nomura, as well as Davy, and welcomes the experience, expertise and advice that both brokers bring to the Company.

Investing in Our People In 2010, we continued to invest significantly in the training and recruitment of our local Turkmen employees whose numbers increased by 8% in 2010 to almost 1,000. This is in line with our objective of empowering local employees at all levels to make them an independent and skilled workforce. We launched a substantial staff training and development programme focusing on key skill areas as well as creating a training roadmap for high-potential employees. We also established a new Centre of Excellence, which provides a dedicated facility for local employees training and our vision is to broaden access to this centre to the larger community in Hazar. Board Directors undertook two field visits last year in order to increase our level of direct interaction with local employees. In April 2010, our CEO, two Non-executive Directors, Ahmad Sharaf and Ahmad Al Muhairbi, and I spent two days visiting our Turkmenistan operations in the Cheleken Contract Area while in October last year our CEO, Non-executive Director Ahmad Al Muhairbi and I returned for a follow-up visit. The response to these initiatives was both rewarding and positive, reflecting the importance of direct interaction with our local employees to demonstrate our strong commitment to Turkmenistan and particularly to our Turkmen national employees. We have also pursued our objective to improve health and safety levels for our employees continuously with the recorded Lost Time Incident Frequency Rate falling to 1.46 in 2010 from 1.64 in 2009. This was primarily attributable to the continued implementation of the Health and Safety procedures and processes throughout the organisation.

Investing in Our Community Dragon Oil remains committed to investing in Corporate Social Responsibility (CSR) activities, reflecting our belief that it is our duty and responsibility to take care of the community in which we operate. Key initiatives in 2010 focused on improving education and health in the local Hazar community. We have completed the concept design and scope of work stages for the building of a new US$3 million polyclinic in Hazar and are currently in the process of selecting a contractor. We also began the process of supplying neo-natal equipment, including infant incubators, to the local Hazar hospital while smaller projects included the repair and refurbishment of a local schools sports gym and the refurbishment of the sports ground in Hazar Park. In addition, we have provided boats and equipment to the Hazar Sea Reserve. Relationship with our Hosts, the Government of Turkmenistan The relationship among the Government of Turkmenistan, the State Agency for the Management and Use of Hydrocarbon Resources (Agency) and Dragon Oil remains strong with frequent highlevel meetings and positive interaction. Indeed, in October last year I had the pleasure, together with our CEO, of travelling to Turkmenistan to meet personally with government officials in Ashgabat. Earlier in February last year Dragon Oil participated in the Turkmenistan Investment Forum held in Abu Dhabi and then had the pleasure to host Turkmenistan Government officials in Dubai who attended the forum. On behalf of the Board, I would like to take this opportunity to acknowledge the continued support of our Shareholders and to thank the management team and all of our employees for their dedication and hard work throughout this past year. We look forward to 2011 with renewed confidence.

MOHAMMED AL GHURAIR Non-executive Chairman

Financial Statements Financial Statements

Above: Offshore operations.

Chairmans Statement

Dragon Oil plc Annual Report for the year ended 31 December 2010

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Governance

Governance

Responsibility Responsibility

Performance Performance

Strategic Review Strategic Review

Overview

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1019 Strategic Review

Message from the Chief Executive Officer

We have had a remarkable and successful year at Dragon Oil, having reached a record in terms of revenues generated, exit production rate achieved, the number of wells drilled and completed and major contracts awarded for infrastructure projects. The completion and commissioning in December last year of a major infrastructure upgrade comprising the new 30-inch 40 km trunkline, three interconnecting in-field pipelines and the expanded CPF was a challenging and yet ultimately rewarding undertaking, which touched upon many aspects of the Groups operations. Earlier unexpected delays in the execution of this upgrade led us to experience a number of infrastructure bottlenecks, which constrained production growth for the year. However, the management team mobilised both internal and external resources and relied heavily on Dragon Oil teams in the field to bring this important infrastructure project to a successful conclusion. The experience has prompted us to widen our contractor base for future projects and initiate contacts with new suppliers. The completion of this new integrated network delivered significant improvements as soon as we commenced the switch over from the two existing 12-inch pipelines. The exit rate for 2010 was 57,013 barrels, which was almost 10,000 bopd ahead of the average rate for the whole of 2010. We have begun 2011 with a very robust rate of production, maintaining an average production rate of over 57,000 bopd throughout January. This puts us in a strong position to deliver on the upper end of our production forecast this year. Overview of Operations Revenues for the year were up 25% to US$780 million due to increased gross production and a higher entitlement rate, as well as stronger realised crude oil prices with Dated Brent averaging around US$80 per barrel during the year offset by a 9% discount achieved under the two marketing routes. For 2011, we anticipate being able to increase production by 10%15%.

Dr Abdul Jaleel Al Khalifa, Chief Executive Officer

With a number of infrastructure contracts awarded and progressed in 2010 and more to come in the next two to three years, we are paving the way for strong production growth in the future.

2011 Objectives and Deliverables Up to 11 wells to be completed Production growth of 10%15% to be targeted The Dzheitune (Lam) C platform to be delivered in Q4 2011 The Super M2 jack-up rig expected in December 2011 The Dzheitune (Lam) Block I gathering station to be installed in 2011 The 100-tonne crane vessel to be delivered in Q4 2011

Medium-Term Outlook, 201113 Complete up to 40 new wells, including five appraisal wells Target production growth of 10%15% on average per annum Aggregate infrastructure spend of approximately US$600-700 million excluding gas capex GTP is constructed and becomes operational as envisaged in 2013

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Financial Statements Financial Statements

We ordered a new 100-tonne crane vessel, which is now under construction and is scheduled for delivery in Q4 2011. The addition of this crane vessel to our fleet will enhance the Groups offshore operating capabilities. We are also building a new gathering platform, the Dzheitune (Lam) Block I, in the Western Area of the field. It is currently being launched and is expected to be completed in the first half of this year.

Governance

Investment in Our Infrastructure Base We continue to plan ahead and invest in new infrastructure as well as upgrade the existing facilities. Thus, in 2010, we awarded two separate contracts for the construction of two new wellhead and production platforms in the Dzheitune (Lam) and Dzhygalybeg (Zhdanov) Fields. The Dzheitune (Lam) C platform, to be delivered in Q4 2011, represents a third new platform to be installed by Dragon Oil since becoming the operator in the Cheleken Contract Area in 2000 and will aid us in the continued development of the Western area of the field. Notably, the Dzhygalybeg (Zhdanov) A platform, due to be delivered in Q1 2012, will be the first new platform to be installed by Dragon Oil in the Dzhygalybeg (Zhdanov) Field since we became an operator.

Moreover, to support our drilling campaign beyond 2011, we ordered a new build Super M2 jack-up rig last year from Yantai Raffles Offshore Ltd with an expected delivery date of December this year. The M2 jack-up rig will be constructed as a self-elevating drilling unit in accordance with international marine construction standards. Our intention is to lease it for five years with an option to extend the lease for another two years. This new build jack-up rig is designed to be a more powerful and efficient rig compared to the rigs currently used allowing us to drill deeper and faster.

As any business, we face risks that may impact our operations. One of the most significant risks for us is the availability of rigs. For 2011, we will continue to use three rigs: Rig 40, the NIS rig and the Iran Khazar rig. Rig 40 is our own rig and will be re-employed on the Dzheitune (Lam) 13 platform. We have successfully extended the contract for the use of the Iran Khazar rig for another two years and are in discussions for extension of the contract for the NIS rig to cover drilling of up to five wells this year. To support our drilling operations beyond 2011, we anticipate the delivery of the new build Super M2 jack-up rig in December this year.

Governance

Responsibility Responsibility

Performance Performance

During 2010, we exported 10.8 million barrels of crude oil via two routes as Dragon Oil transitioned smoothly from existing marketing arrangements via Neka, Iran to new export arrangements via Baku, Azerbaijan. In the past, 80%90% of our crude oil was marketed under a swap agreement with Iran. Following the expiration of these arrangements in July last year, Dragon Oil was able to put in place quickly a new contract for the marketing of our crude oil through Baku, Azerbaijan fulfilling our strategy of maintaining two export routes. We have extended this contract up to December 2011, ensuring that we have secure and stable marketing arrangements in place for our production in the current year. At the same time we are closely monitoring marketing routes with an eye on commercially attractive options to supplement our current arrangements.

Drilling Campaign The 2010 11-well drilling programme yielded a 5.5% increase in average gross daily production to 47,211 bopd. Production growth was constrained by infrastructure bottlenecks, which impacted our planned production growth during 2010, but these issues have now been eliminated following the switch over to the new 30-inch trunkline. We employed four rigs last year, on the basis of a combination of full-time and shortterm contracts, and will continue to use three of those in 2011. The contract for the lease and management of the NIS rig is expected to be extended to cover the drilling of all development wells on the Dzheitune (Lam) 28 platform. A two-year contract extension for the lease and management of the Iran Khazar rig has been signed, bringing the total contract length for this rig with Dragon Oil to eight years. Rig 40 will be re-employed after a successful six-well drilling programme on the Dzheitune (Lam) 13 platform.

How confident are you of the production guidance for 2011? Last year, the production growth was below our expectations because we experienced infrastructure bottlenecks that had constrained the production growth but had been eliminated with the transition over last December to the integrated network comprising a new 30-inch 40 km trunkline, associated in-field pipelines and the expanded CPF The switch over to the new system . freed the production flow and is evidenced by the fact that we were able to achieve an exit rate of 57,013 bopd last year, up nearly 15% on the year before. Moreover, production last December was almost 10,000 bopd ahead of the rate for the whole of 2010 and was maintained throughout January and February this year. This puts us in a strong position to deliver on the upper end of our production forecast this year.

Strategic Review Strategic Review

With a number of infrastructure contracts awarded and progressed in 2010 and more to come in the next two to three years, we are paving the way for strong production growth in the future.

Message from the Chief Executive Officer

Dragon Oil plc Annual Report for the year ended 31 December 2010

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Overview

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1019 Strategic Review

Message from the Chief Executive Officer continued

What is your diversification strategy? Why do you not acquire more assets in Turkmenistan? We continue to look actively for assets, which have the potential to offer both near and medium-term production and reserves. The Group has expanded the regions of interest to include North and West Africa, the Middle East, Central Asia (former Soviet Union Republics, especially around the Caspian Sea) and to a lesser degree South-East Asia. While Dragon Oils expertise lies with developing and operating oil and gas reservoirs offshore, such experience could also be applicable to shallow water offshore and onshore operations. Moreover, we consider targets that besides being development opportunities also bear an exploration upside. We look to do a meaningful size acquisition, which would add in excess of 50 million of barrels in reserves and would offer an opportunity for longer-term growth through exploration. A good example will be a pre-development asset with discoveries already made or an asset in the early stages of production. Most of available assets in Turkmenistan are onshore gas assets and according to recent media reports will not be offered for exploration and production to foreign oil companies. Equally important is the fact that we would like to spread our country risk by diversifying our portfolio geographically. Through partnerships, joint ventures or farm-ins, Dragon Oil can offer its proven technical and operational expertise, supported by over 10 years development of the Cheleken Contract Area, while in areas where we operate, i.e. the Caspian Sea and the Middle East, our experience and links with contractors and strong Host government relationships could be invaluable.

Upgrade of Reserves and Monetisation of Gas Following the recent assessment by an independent energy consultant the yearend reserves were upgraded to 639 million barrels of oil and condensate. At the same time a proportion of gas resources was converted based, amongst other factors, on the planned capacity of the Gas Treatment Plant (GTP) into 1.6 TCF of gas reserves corresponding to 260 million boe; the remaining gas resources were 1.4 TCF The increase . in oil and condensate reserves comes from both an increase in reserves in the Dzheitune (Lam) West area, as we progressively learn more about the reservoir from drilling results, as well as from the additional condensate, which will be stripped from gas once the GTP is constructed and becomes operational as envisaged in 2013. Our current gas production is 120 million standard cubic feet of gas per day (mmscfd) and we bring most of this onshore via the new 30-inch trunkline. Virtually all gas is currently flared pending the completion of the Hazar compressor station and the connecting pipeline between the station and our CPF , although a small proportion is delivered to Hazar for domestic use to help the local community. As soon as the facilities at the compressor station are completed by the government we will be in the position to supply unprocessed gas to the Turkmen system and cease gas flaring. In 2010, we engaged with the government on gas monetisation opportunities and in 2011 we expect these discussions to continue. We have an open and positive dialogue with the government and we support the countrys initiatives in the area of the development and marketing of the countrys gas resources.

M&A activity Though we have yet to close an acquisition transaction, the New Ventures Team has been working hard to identify a suitable target. Many options were considered and we continue to work towards the objective of portfolio diversification this work necessarily takes place behind the scenes in order not to undermine our negotiating position with competitors and counterparties. We have broadened the regions we are looking at to comprise North and West Africa, the Middle East and Central and South-East Asia, while expanding our criteria to consider targets which not only offer development opportunities, but also bear an exploration upside. Dividend policy I am delighted to report that the Board of Dragon Oil has recommended the payment of a full-year maiden dividend in respect of 2010. This is a testament to the Groups solid performance, strong financial position and signals the confidence of the Board and senior management team in the Groups future growth potential. The Group has significant financial resources and cash generation abilities enabling us to continue the development of the Cheleken Contract Area and pursue the acquisition of new assets whilst also commencing the payment of dividends.

We put a strong emphasis on human capital and will continue to empower both the local and expatriate workforce and provide them with open and rewarding career opportunities. The Group puts significant effort into site HSE supervision, safety training and the provision of the necessary protective equipment. Our prime responsibility is to protect our employees and contractors from work-related injuries and illnesses by regularly assessing the health and safety risks associated with our operations and providing extensive training in safety measures.

DR ABDUL JALEEL AL KHALIFA Chief Executive Officer

Above: Desalination plant.

Financial Statements Financial Statements

Governance

Governance

Responsibility Responsibility

A few words for 2011 We remain focused on three strategic areas: the accelerated development of the Cheleken Contract Area, gas development opportunities and valueenhancing acquisitions, which grow our reserves base. I believe we have a focused and experienced management team as well as a commitment throughout the organisation to deliver on our objectives.

However, we have taken steps to initiate contacts with new contractors. As an example, we awarded a contract for a new build Super M2 jack-up rig and the subsequent lease and management of the rig in January last year to a new contractor from the Far East. Following a competitive tender, a contractor from China with a consortium of international service providers was selected as the preferred contractor. Building on this experience, also in 2010 we conducted a number of competitive tenders for infrastructure projects, including the construction of the two new wellhead and production platforms, Dzheitune (Lam) C and Dzhygalybeg (Zhdanov) A. The contracts were awarded to two separate contractors based in the Caspian Sea and a Eurasian country, respectively. The former has extensive experience in working in the Caspian Sea region, while the latter has completed a significant number of projects in Turkmenistan specifically.

Performance Performance

Human Resources Initiatives and HSE At Dragon Oil we are proud to be one of the largest independent oil and gas operators in Turkmenistan with the majority of our workforce, not surprisingly, originating from Turkmenistan. Our employer status and importance for the community impose big responsibilities on the Company to be a dependable, ethical and conscientious partner. Our Human Resources Strategy is focused on educating and empowering our Turkmen national employees, both in the field and in our country office in Ashgabat, whilst fully supporting them from our headquarters in Dubai, UAE. We are proud to have local Turkmen holding the Country Managers post in Ashgabat and certain supervisory positions in the field.

Engagement with the Community The development of the Cheleken Contract Area is a big project for an independent operator, such as Dragon Oil, and entails a significant social responsibility to act accordingly and in harmony with the countrys laws and the communitys values. Our CSR strategy revolves around a number of undertakings where we aim to contribute in a meaningful way to the welfare of the community of Hazar to foster economic prosperity and well-being. The desalination unit continues to supply fresh water to the community and we are currently in the process of selecting a contractor to build a US$3 million polyclinic in Hazar to support the local community.

Message from the Chief Executive Officer

Dragon Oil plc Annual Report for the year ended 31 December 2010

19

How have you sought to diversify your contractors to avoid the problems experienced with the trunkline last year? Over the past two years, delays, which we have experienced with certain infrastructure projects have prompted us to expand our contractor base and introduce new rigorous standards for hiring suppliers and service providers. Historically the number of contractors operating in the Caspian Sea has been limited and restricted to companies based in the region.

Strategic Review Strategic Review

Overview

Pictured: Offshore platform.

Production
In 2010, average daily production on a working interest basis increased by 5.5% to 47,211 bopd (2009: 44,765 bopd) based on the 11-well drilling programme. Production growth, however, was constrained by infrastructure bottlenecks, which were eliminated once we completed the major infrastructure upgrade at the end of 2010.

Human Capital
Last year we invested significantly, and will continue to do so in the future, in the training and development of our Turkmen employees, whom we believe to be the key to our future in-country success. In particular, we completed the new Centre of Excellence in Hazar, Turkmenistan, which will offer training courses to our employees as well as a broader curriculum to the local community.

Contents
Operating and Financial Review Corporate Social Responsibility Report 22 30

Responsibility

Performance

Focusing on results and our human capital

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Operating and Financial Review

Production In 2010, average daily production on a working interest basis increased by 5.5% to 47,211 bopd (2009: 44,765 bopd) based on the 11-well drilling programme. Production growth, however, was constrained by infrastructure bottlenecks, which were eliminated once we completed the major infrastructure upgrade at the end of 2010. This consisted of the integrated network of a new 30-inch 40 km trunkline and 14-18 and 20-inch inter-field pipelines and the expanded CPF As a consequence, our . exit rate at the end of 2010 was up 14.7% to 57,013 bopd compared to the level seen in 2009. In 2010, the entitlement production was approximately 61% of gross production (2009: 58%). Entitlement barrels are dependent, amongst other factors, on the fiscal terms of the Production Sharing Agreement (PSA), operating and development expenditure in the period and the realised crude oil price. Marketing Dragon Oil sold 10.8 million barrels of crude oil in 2010 (2009: 10.5 million barrels). This is 3% higher than the volume sold during the previous year due to increased production and changes in lifting position. In 2010, approximately 60% (2009: 10%) of crude oil was exported via Baku, Azerbaijan; the balance was marketed under the swap agreement with Iran and a subsequent three-month extension, which expired in July 2010. The Group currently exports all of its entitlement barrels through Baku, Azerbaijan. The terms of the contract are FOB the Aladja Jetty, primarily using the BP-operated BTC (Baku-Tbilisi-Ceyhan) pipeline. The marketing contract is valid up to December 2011.

Above: Aladja Jetty terminal.

In 2010, Dragon Oil was able to put in place quickly a new contract for the marketing of our crude oil through Baku, Azerbaijan fulfilling the strategy of maintaining two export routes. There were no interruptions to our operations while we were undergoing this change. We are closely monitoring alternative marketing routes with an eye on commercially attractive options to supplement our current arrangements.
Production Growth
(on a working interest basis) barrels of oil per day
50,000

Marketing of crude oil


million barrels of oil

15

44,765

47,211

40,992

37,500

25,000

7.5

10.5

10.8

10

12,500

0 2010 2010 2008 2009 2008 2009

view online

dragonoil.annualreport2010.com

Well A/142 13/143 B/141 B/145 13/144 28/146 28/147 B/148 28/149 28/151 B/150

Rig

Completion date

Depth (metres) 3,961 3,450 4,502 3,344 3,434 3,200 3,400 3,858 3,295 3,512 3,980

Type of completion Dual Dual Dual Single Single Single Single Dual Dual Dual Dual

Initial test rate (bopd) 2,103 2,168 1,895 1,054 1,809 2,311 2,451 2,639 4,379 2,656 1,622

Above: Drilling operations.

Financial Statements Financial Statements

Governance

Given that the Caspian Sea is a land locked sea, we face a limited number of export routes. Currently our crude oil is exported west primarily via the BP-operated Baku-Tbilisi-Ceyhan pipeline all the way to Turkey. Other options include export via rail from Baku to Batumi on the Black Sea, which we have used in the past, the southern route via Neka, Iran and the northern route via Makhachkala in Russia.

Governance

Responsibility Responsibility

Iran Khazar March Rig 40 March Astra April Astra June Rig 40 July NIS July NIS September Iran Khazar October NIS October NIS December Iran Khazar January 2011

In 2010, we achieved average realised oil prices of US$72, which were at a 9% discount to Dated Brent. This reflects a combination of 60% of volumes exported via Baku, Azerbaijan and 40% exported via Neka, Iran under the previous Iranian swap arrangements, which expired in July last year. Since we are currently exporting all of our entitlement barrels through Baku, Azerbaijan under the current contract, we expect the average discount to Brent to widen this year.

Performance Performance

Since the commencement of its PSA for the Cheleken Contract Area, Dragon Oil had marketed 80%90% of its entitlement barrels through a crude oil swap agreement with a subsidiary of the National Iranian Oil Company, Naftiran Company Limited (NICO) while maintaining flexibility by exporting the balance via an alternate route. The Iranian swap agreement expired on 31 March 2010 and Dragon Oil subsequently entered into a three-month swap contract with NICO, which expired in July 2010. All operations under the swap arrangements with NICO ceased at that time. Concurrently, Dragon Oil was able to put new marketing arrangements in place to secure the exporting of its crude oil without interruptions.

The Group was in an overlift position of approximately 0.2 million barrels of crude oil at the end of 2010 (31 December 2009: 0.2 million). Drilling and Operations Dragon Oil completed an 11-well drilling programme during 2010 and the first week of January 2011. The following table summarises the results of this drilling programme, which took place in the Dzheitune (Lam) field:

Do you expect to be able to renew the current agreement on the same terms? Are there any other routes you could consider? We have secured the marketing arrangements to export our crude oil via Baku, Azerbaijan until the end of 2011. As for 2012 and beyond, we continue to negotiate with various parties and monitor alternative marketing routes closely in order to achieve the most competitive terms and maintain flexibility. At the moment, although all of our crude oil is exported via Baku, Azerbaijan, a small volume of our production is not committed to this route and can be re-directed via an alternate route should an opportunity arise or if we want to add flexibility to our current arrangements.

Strategic Review Strategic Review

To gain further access to international markets and maintain flexibility in operations, Dragon Oil continues to review alternative routes for exporting its crude oil.

Operating and Financial Review

Dragon Oil plc Annual Report for the year ended 31 December 2010

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Operating and Financial Review continued

The workover programme in 2010 included a workover of the Dzheitune (Lam) A/125 well, yielding an incremental production of 562 bopd and a sidetrack of the Dzheitune (Lam) A/129 well, yielding an incremental production of 1,140 bopd. Both operations were performed by the Iran Khazar rig. Moreover, two wells on the Dzheitune (Lam) 13 platform were perforated using wireline operations yielding a combined incremental production of approximately 700 bopd. Dragon Oil continues to employ drilling rigs on the basis of a combination of full-time and short-term contracts depending on their availability and commercial terms. The 2011 drilling programme is based on the use of three rigs: Rig 40 will drill two wells from the Dzheitune (Lam) 13 platform extending its successful six-well drilling campaign; the slots for these wells have already been added. The platform-based Naftna Industrija Srbije Naftagas (NIS) rig is currently drilling on the Dzheitune (Lam) 28 platform with the aim of completing up to five wells in 2011. The Groups original plan to drill seven wells using the NIS rig during its contract term has been expanded to include two more wells (nine wells in total) on the Dzheitune (Lam) 28 platform, the slots for which are currently being added. Early in 2011, Dragon Oil agreed in principle a two-year extension for the use of the Iran Khazar rig. The extension of the contract enables the rig to continue drilling from the Dzheitune (Lam) B platform and to complete four wells this year. Since the first contract for the employment of this rig by Dragon Oil in the Cheleken Contract Area was signed in 2005, we have successfully completed 23 wells from the Dzheitune (Lam) platforms 21, 28, 10, A and B, as well as a number of workovers by the Iran Khazar rig.

The Astra jack-up rig was used in the first half of 2010 on the newly-installed Dzheitune (Lam) B platform. The use of the Astra rig or its replacement remains an option in the future, pending favourable contractual terms and availability. In January 2010, Dragon Oil awarded a contract to Yantai Raffles Offshore Ltd. for the lease and management of a new build Super M2 jack-up rig (M2 jack-up rig) in the Cheleken Contract Area. This jack-up rig is being constructed as a self-elevating drilling unit in accordance with international marine construction standards. We anticipate the completion and mobilisation of the M2 jack-up rig to the Cheleken Contract Area in December 2011. Upon delivery, the lease and management contract is expected to commence for an initial duration of five years, with an option to extend it for a further period of up to two years. Infrastructure 2010 was an active year for Dragon Oil in terms of infrastructure projects accomplished and around US$200 million worth of contracts were awarded. We achieved an important landmark with the completion and commissioning of the major infrastructure upgrade, including the new 30-inch trunkline, a number of interconnecting in-field pipelines and the Phase 2 expansion of the CPF . The new 30-inch 40 km trunkline now allows us to bring most of the unprocessed gas onshore together with crude oil as we switch over from the two existing 12-inch pipelines. At the moment, we continue to flare gas pending the completion of the compressor station and a connecting pipeline between the station and our CPF; at the same time we supply a small proportion of gas to Hazar for domestic use. We are awaiting the completion of the facilities, anticipated in 1H 2011, to let us supply unprocessed raw gas to the Turkmen system. The capacity of the CPF has been almost doubled to allow the handling of up to 100,000 barrels of liquids per day with capacity to handle up to 220 mmscfd of gas. The new 30-inch trunkline has

a capacity similar to the expanded CPFs and, unlike the existing 12-inch pipelines, has built-in mechanisms to perform pigging operations to clean the trunkline and minimise wax accumulation, especially in winter months. As part of last years major project to upgrade the infrastructure, three additional inter-field pipelines were constructed in the Dzheitune (Lam) Field: from Platform A to Block II (20inch), from Platform 28 to Platform A (18-inch) and from Platform B to Platform 28 (14-inch). The use of these new pipelines has allowed us to increase the throughput capacity and will accommodate the future development of the Western area of the Cheleken Contract Area. We are currently putting a new gathering platform into the water, the Dzheitune (Lam) Block I, in the West area of the field. It will replace the existing Block I and act as a gathering station, thus, providing additional throughput capacity for the crude oil flow in this part of the field. The Group is adding a new 100-tonne crane vessel to our fleet, which will enhance our offshore operating capabilities. The vessel will be employed to support drilling and infrastructure projects. It is currently under construction with anticipated delivery in Q4 2011. In 2010, Dragon Oil awarded contracts for the construction of two new wellhead and production platforms, the Dzheitune (Lam) C and Dzhygalybeg (Zhdanov) A, to contractors with considerable experience in the Caspian Sea region. Both of the drilling platforms are designed to support jack-up rigs, while the Dzhygalybeg (Zhdanov) A platform will also be able to support a land rig and will comprise an accommodation facility with a connecting bridge from the drilling platform. Each platform will have up to eight slots for drilling with an option to extend the drilling programmes depending on the results from the first few wells. The designated locations are the Dzheitune (Lam) Field between the Dzheitune (Lam) B and 28 platforms for the Dzheitune (Lam)

million barrels
750

Within the framework of a standardisation process that would enhance the Groups operating capabilities, Dragon Oil is initiating a generic Front End Engineering Design (FEED) study to determine a template for the construction of platforms in the Cheleken Contract Reserves and Resources

Another study is being launched to review the existing throughput capacity of the channel in the harbour area and the Aladja Jetty. Based on the findings of the study, we expect to undertake dredging activities with the aim of enhancing the Groups operational and crude oil loading capacity.

500

250

0 2010 2008 2009

Proved and Probable Remaining Recoverable Reserves Gross field reserves to 1 May 2035 2C Resources

Gas Reserves and Resources 639 1.6 1.4 617 3.1


3.2
TCF

Gross gas contingent resources

4.0

Financial Statements Financial Statements

Governance

Based on the results of the recent assessment by an independent energy consultant, the Group has upgraded its reserves to 639 million barrels of oil and condensate at the year-end and 1.6 TCF of gas reserves corresponding to 260 million boe. Recognition of gas reserves is based on a plan for development, a reasonable expectation of a market for the expected sales quantities of gas and the availability of infrastructure either in place or planned to be installed. The increase in oil and condensate reserves is due to increased reserves in the Dzheitune (Lam) West area and the additional condensate, which will be stripped from gas once the GTP is constructed and becomes operational.

New Business Opportunities and Yemen Participation In 2010, Dragon Oils New Ventures Team identified a significant number of potential acquisition assets, which to a certain degree matched the criteria set by the Company, and pursued a variety of options, such as joint ventures, corporate acquisitions or project farmins. Although we are yet to deliver on the diversification objective, we continue to look actively for assets, which have the potential to offer both immediate and near-term production and reserves, with the upside of longer-term growth potential through exploration. The Group expanded the regions of interest to comprise North and West Africa, the Middle East, Central Asia (former

2.0

1.0

0 2010 2008 2009

Reserves Resources Resources in previous years

Governance

Responsibility Responsibility

3.0

3.1

1.6

1.4

Performance Performance

As at 31 December 2010 Oil and condensate million Gas barrels TCF

As at 31 December 2009 Oil and condensate million Gas barrels TCF

Strategic Review Strategic Review

C platform and the eastern part of the Dzhygalybeg (Zhdanov) Field for the Dzhygalybeg (Zhdanov) A platform. The platforms are due to be completed in late 2011 and early 2012, respectively.

Area. This template would be utilised to improve an offshore platform design in order to optimise drilling and reduce platform construction costs.

Oil and Condensate Reserves (Proved and Probable Remaining Recoverable Reserves)

636

617

639

Operating and Financial Review

Dragon Oil plc Annual Report for the year ended 31 December 2010

25

Overview

26

2229 Performance

Operating and Financial Review continued

On what basis did you book gas reserves? Following an assessment by an international independent consultant, we were able to convert 1.6 TCF of gas resources into gas reserves last year. In December 2011, we completed the infrastructure projects necessary to bring the gas onshore, namely the 30-inch 40 km trunkline and Phase 2 expansion of the CPF In the meantime, . the government of Turkmenistan has invested in the compressor station and the pipeline, which runs to our CPF The completion of these facilities . is anticipated in 1H 2011 and would allow us to introduce unprocessed gas into the Turkmen system. Our contractors finalised a FEED study for the construction of the GTP and we are currently looking at optimising the design of the plant and will proceed with the construction subject to market conditions and the conclusion of the gas sales agreement. The amount of the gas resources converted into gas reserves was determined by the planned capacity of the GTP . The monetisation of the gas resources is of strategic importance to the Group and we have reasonable expectations that a gas sales agreement will be forthcoming. At the same time, our belief is supported by the fact that Turkmenistan is keen to develop its natural resources and export of natural gas is a key part of the Countrys energy policy. Over the past few years, Turkmenistan has undertaken measures to seek additional marketing routes, which are at various stages of consideration or construction at the moment. Nevertheless, the strategy to access new markets is a positive step forward for both Turkmenistan and its operators, both state-owned and independent, such as Dragon Oil. We support the countrys initiatives in the area of the development and marketing of the countrys gas resources and will continue to engage with the government on gas monetisation opportunities.

Soviet Union Republics) and to a lesser degree South-East Asia. While Dragon Oils expertise lies with developing and operating oil and gas reservoirs offshore, such experience could also be applicable to shallow water offshore and onshore operations. Moreover, we consider targets that besides being development opportunities also bear an exploration upside. The exploration programme in Yemen since acquiring minor interests in three Blocks (R2, Block 35 and 49) in 2007 has not borne success and, consequently, the interests in Block R2 and Block 49 have both been relinquished. Our participation in Block 35 is currently under review. Monetisation of the Gas Resources The Group is currently producing 120 mmscfd of associated gas, most of which is brought onshore via the new 30-inch trunkline for separation at the CPF; while a small portion is delivered to the neighbouring town of Hazar for local use. Based on the latest certification by an independent energy consultant, the Groups gas reserves are 1.6 TCF with the remaining 1.4 TCF classified as 2C gas contingent resources. The conversion of the portion of gas resources into 1.6 TCF of gas reserves was on the basis of the completion of the infrastructure necessary to bring gas onshore, expansion of the processing capacity and the planned capacity of the GTP . The monetisation of these gas resources is of strategic importance to the Group and during 2010, the Group made significant progress towards this objective with the achievement of the key milestones, including: (i) The 30-inch 40 km trunkline has been constructed to deliver oil and gas onshore; (ii) The Phase 2 expansion of the CPF has been completed with the capacity increased to handle up to 220 mmscfd of gas; and

(iii) The FEED study for the GTP has been finalised; we are currently looking at optimising costs and will proceed with the plan for construction of the GTP . We will soon be in the position to deliver unprocessed gas to the Turkmen system upon completion of the compressor station and connecting pipe near the CPF Once the GTP is operational, we . will be able to strip the condensate from gas and blend it with our crude oil, thus achieving a better quality crude blend for marketing. Equally important will be the fact that we will be able to process raw gas to various export specifications. In 2010, we engaged with the government on gas monetisation opportunities and in 2011 we expect these discussions to continue. At the same time, Turkmenistan has actively worked on a number of new marketing routes. Although such routes are at different stages of consideration or construction, the strategy to access new markets is a positive step forward for both Turkmenistan and its operators, both state-owned and independent, such as Dragon Oil. We have an open and positive dialogue with the government to overcome short-term market conditions and we support the countrys initiatives in the area of the development and marketing of the countrys gas resources. Dividend policy The Board of Directors of Dragon Oil recommends the payment of a full-year maiden dividend of 14 US cents per share in respect of 2010 in recognition of the Groups solid performance, strong financial position and cash generation abilities. Since becoming the operator in the Cheleken Contract Area in 2000, the Group has invested substantially in its infrastructure base and over the last few years has been able to finance the development of the Area from the funds generated by the asset itself. It is our strategy to fund potential

The full-year maiden dividend proposed is 14 US cents per share for the year 2010. The dividend will be paid on 27 May 2011 to Shareholders on the register as of 3 May 2011. The Annual General Meeting (AGM) will be held on 18 May 2011 at the London Hilton Hotel. The following is the dividend timetable for the Shareholders information: 21 February 2011: Declaration of final dividend 27 April 2011: Ex-Dividend Date 3 May 2011: Record Date 18 May 2011: AGM 27 May 2011: Dividend Payment Date. The 2010 dividend of 14 US cents per share is a final dividend, which will be paid subject to Shareholder approval at the forthcoming AGM to be held on 18 May 2011. In subsequent years, the dividend will be split between an interim and final dividend and paid approximately half-yearly. The dividend will be declared in US dollars, the Groups functional currency. The exchange rate for the pound sterling or euro amounts payable will be determined by reference to the exchange rates applicable to the US dollar on the closest practicable date to the dividend payment date. The closing date for the receipt of currency election forms is 3 May 2011, the record date for the dividend. By default Shareholders (other than Shareholders holding their shares within CREST) with registered addresses in the UK will be paid their dividends in pounds sterling. Those with registered addresses in European countries, which have adopted the euro,

Dividends can be paid directly into a UK bank account to Shareholders who elect for their dividend to be paid in pounds sterling and to an Irish bank account where Shareholders elect to receive their dividend in euro. A dividend reinvestment plan is not available under the policy. Currency election and dividend mandate forms are available on Dragon Oils website www.dragonoil.com. Irish Dividend Withholding Tax (DWT) must be deducted from all dividends paid by an Irish resident company, unless a Shareholder is entitled to an exemption and has submitted a properly completed exemption form to the Companys Registrar, (by post) Capita Registrars, PO Box 7117, Dublin 2, Ireland (or by hand) Capita Registrars, Unit 5, Manor Street Business Park, Manor Street, Dublin 7, Ireland by 3 May 2011, the dividend record date. DWT is deducted at the standard rate of Income Tax (currently 20%). Nonresident Shareholders and certain Irish companies, trusts, pension schemes, investment undertakings and charities may be entitled to claim exemption from DWT. Copies of forms applicable to all exemption types may be obtained online from the Irish Revenue Commissioners (www.revenue.ie/en/tax/dwt/forms/index. html). Individuals who are resident in Ireland for tax purposes are not generally entitled to an exemption from Irish DWT.

Outlook for 201113 The Iran Khazar jack-up rig and the platform-based NIS rig are drilling two development wells in the Dzheitune (Lam) field, B/153 and 28/152, respectively. These two wells are due to be put into production around the end of Q1 2011. In 2011, we expect the Iran Khazar rig to drill and complete four wells on the Dzheitune (Lam) B platform. The NIS rig will continue to drill from the Dzheitune (Lam) 28 platform and is anticipated to complete up to five wells under the optimised drilling programme. Rig 40 will be re-deployed on the Dzheitune (Lam) 13 platform with the aim of drilling and completing two wells. In total, Dragon Oil plans to complete 11 development wells in 2011. Our medium-term business plan, for the period 2011 to 2013, envisages the completion of up to 40 new wells, including five appraisal wells, to support a target rate of production growth averaging 10% to 15% per annum. The forecast oil infrastructure spend is expected to be approximately US$600700 million over the period. The level of capital expenditure is subject to approval of projects under the PSA and the availability of contractors in the Caspian Sea region.

Financial Statements Financial Statements

Governance

Governance

Responsibility Responsibility

Performance Performance

acquisitions from existing cash financial resources and debt facilities or, where appropriate, through other options available to the Company. Over the last few years Dragon Oil has generated strong revenues through a combination of substantial production growth and, in certain years, high oil prices. The Board believes these factors enable the Group to continue to fund the organic and non-organic growth strategy as well as make dividend payments. The Boards focus will remain on the Groups growth and, as such, the level of future dividend payments will reflect the Groups then performance, capital requirements and its investment needs and opportunities.

will be paid in euro. Shareholders with registered addresses in all other countries will be paid in US dollars. Shareholders may, however, elect to be paid their dividends in a currency other than their default currency, and will have a choice of US dollars, euro or pounds sterling provided such election is received by our registrar the record date for the dividend. As the above arrangements can be inflexible for institutional Shareholders, where shares are held in CREST, dividends are automatically paid in US dollars unless a currency election is made. CREST members should use the facility in CREST to make currency elections. Currency elections must be made in respect of entire holdings and partial elections are not permitted.

Our guiding principle of People First continues to drive our focus on training, empowering and trusting our talented workforce. It also drives our commitment towards the people in the community. The desalination plant and the planned polyclinic are only examples of such efforts.

Strategic Review Strategic Review

Our People In 2010, the Group increased its average headcount to 1,104, a 9% increase over the previous year. The Group continued with its objective of strengthening our expertise, cultural diversity and talent through hiring experienced and competent people.

Operating and Financial Review

Dragon Oil plc Annual Report for the year ended 31 December 2010

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Overview

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2229 Performance

Operating and Financial Review continued

For gas development, we envisage additional capital expenditure for the 201113 period in the range of US$150-170 million for the onshore GTP and associated facilities. Commencement of this project is dependent on market conditions and the conclusion of the gas sales agreement. Key financial data US$ million (unless stated) Revenue Cost of sales Gross profit Operating profit Profit for the year Earnings per share, basic (US cents) Earnings per share, diluted (US cents) Net assets Net cash from operations Net cash used in investing activities Debt Financial Summary Dragon Oil has strengthened its balance sheet further in the last twelve months with a growth of 23% in net assets to US$2 billion. This increase mainly comprises US$267 million in non-current assets and US$199 million in cash and cash equivalents and term deposits. The Group has no debt and is able to finance its operations with net cash generated from its operations in Turkmenistan. A 25% increase in revenue to US$780 million and a 55% increase in operating profit to US$488 million are attributed largely to increased realised oil prices in 2010, increased production and a movement in the lifting position. Earnings per share were 49% higher than in 2009 and net cash from operations was up 19% over 2009. The year 2010 saw an increase of 23% in net assets represented largely by higher expenditure in oil and gas interests and an increased cash balance at the year-end. Income Statement Revenue Gross production levels in 2010 averaged 47,211 bopd (2009: 44,765 bopd) on a working interest basis. The entitlement production was approximately 61% (2009: 58%) of the gross production in 2010. The Groups share of entitlement production is determined by reference to cost oil and profit oil in accordance with the terms of the PSA. The entitlement barrels continue to be determined by, amongst other factors, the level of development expenditure and the realised oil prices. Revenue for the year was US$780 million compared with US$623 million in 2009. The increase of 25% over the previous year is primarily attributable to a 17% increase in the average realised price and a 3% increase in the volume of crude oil sold over the previous year. The average realised price during the year was US$72.3 per barrel (2009: US$61.6 per barrel). Realised oil prices were at a 9% discount to Brent during the year (2009: at par with Brent).The increase in sales volumes is attributed primarily to increased entitlement and movement in lifting position. The PSA includes provisions such that parties to the agreement may not lift their respective crude oil entitlements in full and as such underlifts or overlifts of crude oil may occur at period-ends. At the year-end, the Group was in an overlift position of approximately 0.2 million barrels that is recognised and measured at market value (31 December 2009: overlift of 0.2 million barrels). Operating profit The Group generated an operating profit of US$488 million (2009: US$314 million), 55% higher than in the previous year. Cost of Sales comprises operating and production costs and the depletion charge. The Groups Cost of Sales was 2010 780.4 (264.7) 515.7 487.7 386.1 74.9 74.7 2,092.9 594.7 (721.9) 0.0 2009 623.5 (282.3) 341.2 314.4 259.0 50.3 50.2 1,703.2 500.3 (682.3) 0.0 Change 25% (6%) 51% 55% 49% 49% 49% 23% 19% 6% nil

US$265 million in 2010 compared to US$282 million in 2009, a decrease of about 6%. The decrease is primarily due to a movement in the lifting position and lower marketing costs, offset by a lower crude oil inventory at the year-end. Lower marketing costs in 2010 are due to the higher volume, of about 60% (2009: 10%), of crude oil exported on FOB basis ex-Aladja Jetty, with the balance marketed under the swap agreement with Iran and its subsequent three-month extension, which expired in July 2010. The depletion and depreciation charge during the year was marginally lower by about 1% at US$188 million (2009: US$189 million) primarily due to the conversion of a portion of gas resources into reserves and recognition of additional oil and gas reserves assessed by the independent energy consultant, offset by the incremental upward revision in estimates of field development costs and the increased entitlement barrels during the year. Administrative expenses (net of other income) at US$28 million were higher by about 4% (2009: US$27 million), due primarily to an increase in CSR activities and head office costs during 2010, which were comparable with one-off charges related to the ENOC approach, the investigationintothe irregularities and expenses related to proposed corporate re-structuring in 2009.

1,500

1,138

1,000

500

Basic EPS of 74.9 US cents for the year were 49% higher than the previous year (2009: 50.3 US cents). Balance Sheet Investments in property, plant and equipment were higher by US$268 million primarily due to capital expenditure of US$460 million (2009: US$317 million) incurred on oil and gas interests, offset mainly by the depletion and depreciation charge during the year. The expenditure during the year was on drilling and infrastructure projects in Turkmenistan. Of the total capital expenditure on oil and gas interests for 2010, 55% was attributable to infrastructure (2009: 50%). The infrastructure spend during the year included the completion of the 30-inch trunkline and associated inter-field pipelines, as well as the Phase 2 expansion of the CPF and the construction of the gathering station and two wellhead platforms.

784

1,012

1,000

500

0 2010 2008 2009

Financial Statements Financial Statements

Governance

Governance

Responsibility Responsibility

1,163

During 2008, the effective tax rate applicable to the Groups operations in Turkmenistan was increased by 5% to 25% by the Hydrocarbon Resources Law of 2008. The Group has continued to apply this rate in determining its tax liabilities as at 31 December 2010. The Group is in discussions with the authorities in Turkmenistan about the applicability of this rate to periods prior to 2008, but it does not believe that these prior periods are affected by this increase. A provision has been made in respect of the additional tax that could become payable if the increased tax rate were applied to prior periods based on the expected value approach.

Current liabilities rose by US$127 million due to increases of US$47 million in trade and other payables, US$47 million for abandonment and decommissioning liability owing to increased production and US$37 million towards current tax liability, offset by the movement of US$4 million in overlift creditors. Cash flows Net cash generated from operations during the year increased by US$94 million to US$595 million (2009: US$500 million). The increase was primarily attributable to the higher sales price realised during the year for the sale of crude oil and the change in the working capital position. Cash used in investing activities was US$722 million (2009: US$682 million), comprising capital expenditure of US$424 million (2009: US$269 million) and placement of term deposits of US$325 million (2009: US$444 million), offset by interest received on cash and cash equivalents and term deposits of US$27 million (2009: US$31 million). Cash generated by financing activities was US$2 million (2009: US$0.05 million) on account of proceeds from the issue of share capital resulting from the exercise of share options.

from operations from investing from financing

Cash Balance
(excluding the abandonment and decommissioning fund) US$m
1,500

Performance Performance

opening cash

closing cash

Strategic Review Strategic Review

Profit for the year Profit for the year was US$386 million (2009: US$259 million), 49% higher than the previous years level. The profit includes finance income of US$27 million (2009: US$31 million) and a higher taxation charge of US$129 million (2009: US$86 million). Finance income decreased in 2010 despite the higher cash and cash equivalents and term deposits maintained during the year due to lower interest yields.

Current Assets and Liabilities Current assets rose by US$244 million primarily due to an increase of US$325 million in term deposits, US$41 million for trade receivables and US$4 million for inventories, which were partly offset by a decrease in cash and cash equivalents. The cash and cash equivalents and term deposits at the year-end were US$1,337 million, including US$174 million held for abandonment and decommissioning activities. Amounts of US$1,195 million are held in term deposits of maturities greater than three months.

Cash Flow
US$m
2,000

595

27

(424)

1,337

Operating and Financial Review

Dragon Oil plc Annual Report for the year ended 31 December 2010

29

Overview

30

3035 Responsibility

Corporate Social Responsibility Report

Human Resources

Investing in Our People


Our guiding principle People First continues to drive our focus on training, empowering and trusting our talented workforce throughout the organisation. We have seen the high retention rate of 94% maintained in 2010 (2009: 94%); this is a testament to the strong emphasis the Group puts on its human capital.

Pictured: Offshore operations.

94%

201011 project:

US$3m
polyclinic in Hazar

Lost time incidents:

Develop and empower our Turkmen national human capital; Contribute in a meaningful way to the welfare of the community in Hazar to foster economic prosperity and well-being; Undertake projects, which help to improve the living standards of both our employees and Hazar citizens in general, with a particular focus on health and education; Promote social development and support education; Undertake projects, develop and implement policies to protect the environment in the Cheleken; Prioritise HSE by putting significant efforts into site HSE enforcement; and Strengthen our relationship with suppliers by introducing the Code of Conduct into every contract.

Financial Statements Financial Statements

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Governance

Responsibility Responsibility

Performance Performance

Strategic Review Strategic Review

Retention rate:

Our Mission is to explore and develop oil and gas resources by leveraging technology and a talented workforce as a dependable, ethical and conscientious partner. The development of the Cheleken Contract Area is a big project for an independent operator, such as Dragon Oil, and entails a significant social responsibility to act accordingly and in harmony with the laws and the communitys values. The centre of our field operations is near the town of Hazar where Dragon Oil actively engages with the community in our firm belief that it is our duty to take care of the community we operate in. Our CSR strategy revolves around a number of undertakings where we aim to:

Corporate Responsibility Statement

Dragon Oil plc Annual Report for the year ended 31 December 2010

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Overview

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3035 Responsibility

Corporate Social Responsibility Report continued

Investing in Our People At Dragon Oil we are proud to be one of the largest independent oil and gas operators in Turkmenistan. As a consequence, the majority of our workforce originates from Turkmenistan, making the Group the single biggest employer in Hazar, the town closest to our operations in the Cheleken Contract Area. Our employer status and importance for the community impose big responsibilities on the Group to be a dependable, ethical and conscientious partner. Our Human Resources (HR) Strategy is geared towards educating and empowering our Turkmen national employees, both in the field near the town of Hazar and in our country office in Ashgabat, whilst fully supporting them from our headquarters in Dubai, UAE. Dragon Oils Human Resources strategy focuses on the following primary goals: We are committed to developing our employees skills and abilities through training and development; We aim to empower our Turkmen national employees and make them an independent skilled workforce through the transference of international skills; We aim to fast-track employees whom we identify as having high potential with targeted training programmes and career development plans; We work hard to hire and retain the best possible pool of qualified candidates in Turkmenistan and Dubai, UAE; and We look at ways to extend our educational reach to the local community.

Inserts from the top: Computer training courses at the Centre of Excellence, Dragon Oil employee, after work activities at the camp.

The commitment to develop Turkmen national employees skills and abilities is the core priority of our HR strategy. To that aim, the Group introduced and implemented a new Training and Development plan for both professional and inexperienced employees. The Group identified people who would most benefit from such training and offered highly focused on-the-job training in the field and our headquarters in Dubai. In 2010, a higher number of employees also completed certified training programmes. Dragon Oil is committed to selecting and offering the best available training to its workforce. Turkmen national employees regularly undertake professional training programmes abroad as well as regular internships at our headquarters in Dubai. The latter also supports operations in the field and aims to promote the sharing of knowledge through extensive training, continuous learning and access to senior management. In early 2010, we worked with an international consultant to build a competency model process to ensure availability of competent staff and provide training based on actual needs of each employee. The focus was on the operations employees, such as onshore and offshore production, drilling, maintenance, marine activities, etc. The Group aims to empower its Turkmen national employees at all levels and make them an independent and skilled workforce. Dragon Oil is pursuing a policy of educating and developing Turkmen national employees with the aim of promoting them to senior positions within the organisation. With that goal in mind, in 2010 the Group identified a number of high-potential local employees who in the course of the next two to three years will undergo highly-focused, external as well as internal training within their respective chosen careers. This will allow the best performers to develop and will enable the Group to complete a succession planning programme. A number of these employees have already been promoted during the past year as part

We aim to recognize an employees achievements and reward them both in a financial way and by announcing the recognition throughout the Group; The recognition and reward, in their turn, create a strong motivational factor for others to follow the example; and Such encouragement fosters talent and career development while creating a healthy competitive work environment. Since the introduction of the scheme in 2009, the Group has seen an effect on improved morale among the employees as shown in the improved results of the 2010 HR feedback survey conducted within the organisation. In 2010, Dragon Oil established a new training centre, the Centre of Excellence, at our site in Hazar to provide training and development to our local employees. Our vision, however, is not only to use it for local training purposes but consider and allow the larger community in Hazar to access the training centre through the provision of a broader and more advanced curriculum in the future, which will help to bring an international level of knowledge and skills to the local community.

Financial Statements Financial Statements

Governance

Governance

Our guiding principle People First continues to drive our focus on training, empowering and trusting our talented workforce throughout the organisation. We have seen the high retention rate of 94% maintained in 2010 (2009: 94%); this is a testament to the strong emphasis the Group puts on its human capital.

Responsibility Responsibility

Performance Performance

The Employee of the Month programme continued to run for a second year and is proving highly successful. The programme recognizes and rewards employees who perform above and beyond their core duties and show excellent ability in unfamiliar or unexpected situations. The objectives of this programme are manifold:

At the end of 2010, the Group engaged with a multinational HR consultancy firm to develop and re-structure a Pay Scale and Structure based on a detailed Job Evaluation exercise and a bespoke survey in the region with peer companies in the oil and gas industry to provide constructive feedback and recommendation. The outcome of this exercise will be the implementation of a dynamic and robust organisational structure, which could respond to challenges in the most efficient manner and would help employees to move up in their career development in a structured manner. The salary survey has also provided us with the information on the current market trends and best options to reward our employees.

Strategic Review Strategic Review

of the first stages of the programme, which aims to develop national talents to hold responsible positions of power and authority to represent the Group in matters of business and full in-charge responsibility.

During the year, the Group also looked at ways to improve our local employees living standards by giving financial awards based on their achievements such as salary adjustments, increments, promotions and bonus, medical insurance coverage to all employees, as well as introducing transportation allowances for the employees living outside Hazar and revised rates of per diem to help facilitate their training journeys outside Turkmenistan.

Corporate Responsibility Statement

Dragon Oil plc Annual Report for the year ended 31 December 2010

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Overview

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3035 Responsibility

Corporate Social Responsibility Report continued

The Community
Within the framework of our community engagement strategy, our objective is to undertake projects of various scale that have a tangible positive impact on the community and ultimately help to improve peoples living standards. Thus, the construction of the desalination plant in 2009 served a dual purpose of providing water to our operations and improving the communitys access to portable water. Our major project for 2010-2011 is the construction of a polyclinic with the objective of providing better healthcare to both our employees and Hazar citizens in general. Dragon Oil has completed the concept design and scope of work stages and is currently conducting a tendering process to select the contractor. Another ongoing project is the provision of neo-natal equipment for the Hazar Hospital Maternity department with the remaining outstanding equipment due to be supplied in Q1 2011. Smaller projects carried out in 2010 included work to repair and refurbish the sports gym at the local School #3 as well as to refurbish the local communitys sports ground in Hazar Park.

The Environment
With the completion of our major infrastructure upgrade last December, we are now in a position to bring most of our 120 mmscf daily gas production onshore via the new 30-inch 40km trunkline. At the moment, virtually all of this gas is flared pending the completion of the Hazar compressor station by the Turkmen authorities and the connecting pipeline between the station and our CPF We . expect these facilities to be operational in 2011 enabling us to put an end to flaring as we will be able to deliver unprocessed gas directly into the Turkmen system. Currently a small proportion of the gas is delivered to Hazar for domestic use, helping the local community. The focus of our environment-related work was the procurement of equipment and boats for the Hazar Sea Reserve, which was successfully completed last year. In 2010, we launched and subcontracted the Environmental Management System and Waste Management Plan to a specialised third party consultant.

HSE
The Group puts significant effort into site HSE supervision, safety training and the provision of the necessary protective equipment. Dragon Oil recognises and understands the inherent potential risks associated with the production of hydrocarbons, not least in the harsh winter conditions experienced in the Caspian Sea. Our prime responsibility is to protect our employees and contractors from work-related injuries and illnesses. We regularly assess the health and safety risks associated with our operations, review safety policies and procedures, carry out emergency drills and provide extensive training in safety measures. In 2010, we conducted corporate Emergency Response training for Dragon Oil both in Turkmenistan and Dubai. 2010 Lost time incidents Total hours worked (millions) Lost time incident frequency 2 5.2 1.46 2009 4 4.5 1.64 2008 4 4.2 1.9 2007 2 4.1 2.02 2006 8 3.2 2.48

Supply Chain Management


In 2009, we implemented the Code of Conduct throughout Dragon Oil to ensure adherence to best standard practices in our operations. Last year, we started on the process of ensuring that our contractors acknowledge and comply with our Code of Conduct as well. For every project, we conduct a competitive bidding process where we set out specific requirements that focus on quality, timeliness and integrity of implementation. We select suppliers based on the best available offer taking into account reliability, experience and previous track record of working with the contractor.

Corporate Responsibility Statement

Dragon Oil plc Annual Report for the year ended 31 December 2010

35

Communication with Investors


We place great importance on effective communication with our investors, both institutional and retail, as well as analysts. We maintain a policy of transparency, continuity and timely dissemination of information and we value investors and analysts continuing support and feedback. The senior management team, comprising the CEO, Director of Finance and General Manager of Petroleum Development, conducted both one-on-one and group meetings with institutional investors in London, Edinburgh and Dublin in 2010 meeting over 40 institutions, some of these funds on a number of occasions. Additionally senior management conducts a significant number of conference calls on a regular basis with institutional investors around the world. Our AGM was held in London in May 2010. We introduced a new format for the AGM, which featured a management presentation to investors for the first time. This was well received by those retail investors who attended and we plan to repeat this format for the coming year. 2011 AGM will take place in London on 18 May 2011 at the London Hilton Hotel.

Accountability
Dragon Oil places great significance on high standards of corporate governance as a means to emphasise the Groups good business conduct and strong ethical culture. The Group looks to ensure that there are adequate and appropriate processes and procedures to protect the value in the Group and create maximum transparency. Key areas come under the responsibility of the following members of the management who report to the CEO as holding the overall responsibility: Human Resources is the responsibility of Hussain Al Alaiwy, Director of Human Resources; HSE is the responsibility of Adel Al Nadhari, HSE Manager who reports to the Chief Operating Officer; Governance is the responsibility of Alex Ridout, Legal Counsel and Company Secretary; Risk management and Investor Relations are the responsibility of Tarun Ohri, Director of Finance; and Supply chain management is the responsibility of Ahmad Assadi, Contracts and Purchasing Manager.

Financial Statements Financial Statements

Governance

Governance

Responsibility Responsibility

Performance Performance

Strategic Review Strategic Review

Overview

Pictured: Me essi cum et utatur, ctotas aut eosam in sit quate experum aut laceper aecuptatem plam, occupta.

Pictured: Offshore rig.

Producing Results

Contents
Meet Your Board Senior Management Team Directors Report Corporate Governance Statement Directors Remuneration Report Independent Group Auditors report Group Accounts Group Balance Sheet Group Income Statement Group Statement of Comprehensive Income Group Cash Flow Statement Company Balance Sheet Company Cash Flow Statement Statement of Changes in Equity Notes to the Financial Statements 1 2 3 4 5 6 7 8 9 General information Financial risk management Critical accounting judgements and estimates The Company income statement Segment information Property, plant and equipment Intangible assets Investments in and loans to subsidiary undertakings 38 40 42 51 57 60 62 to 67 62 63 63 64 65 66 67 68 to 93 68 76 78 78 78 79 79 80 10 Financial instruments by category and Credit quality of financial assets 11 Inventories 12 Trade and other receivables 13 Cash and bank balances 14 Share capital 15 Share premium 16 Capital redemption reserve 17 Other reserve 18 Trade and other payables 19 Revenue 20 Cost of sales and administrative expenses 21 Finance income 22 Profit before income tax 23 Current and deferred income tax 24 Earnings per share 25 Cash generated from/(used in) operating activities 26 Commitments and contingent items 27 Related party transactions 28 Group companies 29 Subsequent event Movement in Oil and Condensate Reserves Five-Year Financial Summary Glossary/Definitions/Abbreviations Advisors 81 82 83 83 85 85 85 86 86 86 86 87 88 89 90 90 91 92 93 94 95 96 97

Summary of significant accounting policies 68

Financial Statements

Governance

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3859 Governance

Meet Your Board

4 2

6 1

1. Mohammed Al Ghurair Non-executive Chairman Mr Al Ghurair, born 24.03.1952, is presently the Non-executive Chairman for the Group. He was appointed to the Board of Dragon Oil plc on 25 April 2007 and was appointed as Chairman on 26 September 2008. He has served on the Board for almost four years. He has a degree in Mechanical Engineering and is a prominent executive Director in a number of leading companies in the Middle East, including Dubai Aluminium, ENOC and the Saudi International Petrochemical Company. Mr Al Ghurair is a member of Dragon Oils Remuneration and Nominations Committees. 2. Dr Abdul Jaleel Al Khalifa Executive Director Dr Al Khalifa, born 02.07.1957, is presently the CEO for the Group. He was appointed to the Board of Dragon Oil plc on 26 September 2008 and has served on the Board for approximately two and a half years. He joined the Company from Saudi Aramco where he managed a wide range of E&P departments, based in Dhahran, Saudi Arabia for 12 years. He has a doctorate in petroleum engineering from Stanford University and is a respected public speaker on the oil and gas industry. He also has a keen interest in humanitarian efforts, being a founder member of the industrys Humanitarian Support Alliance NGO (IHSANH2O).

3. Ahmad Sharaf Non-executive Director Mr Sharaf, born 16.10.1966, is the Non-executive Vice-Chairman for the Group. He has extensive experience in the upstream oil and gas industry, having spent 15 years working with ConocoPhillips in its international operations in the United States and Middle East.He left ConocoPhillips in 2005 and joined Dubai Holding where he held leadership positions in the energy, health care and real estate sectors of the Group. In 2010, Mr Sharaf was appointed Chief Strategy Officer of Dubai Holding. Mr Sharaf is Chairman of Dubai Mercantile Exchange, a member of the Board of the ENOC and a member of the ENOC Audit Committee. He serves as a Member of the Board of Visitors and a Group Member of the Global Partnerships Committee of the Fuqua School of Business, Duke University. Mr Sharaf was appointed to the Board of Dragon Oil plc in April 2007 and became a member of Dragon Oils Remuneration and Nominations Committees in 2008. Mr Sharaf earned a B.Sc and M.Sc in Petroleum Engineering from the Colorado School of Mines and an MBA from Duke Universitys Fuqua School of Business. 4. Nigel McCue Senior Independent Non-executive Director Mr McCue, born 12.09.1951, has over 30 years experience in the petroleum industry. He is a Director and CEO of Lamprell plc, a company that provides construction and specialist services to the offshore and onshore oil and gas industry. He is the Chairman of Jura Energy Corporation, a company listed on the Toronto Stock Exchange, and is a member of its Compensation Committee. Previously, Nigel was a Director and CFO of Lundin Oil AB and prior to that he held various positions with Chevron Overseas Inc. and Gulf Oil Corporation. Mr McCue is Dragon Oils Senior Independent Non-executive Director. He is a member of the Remuneration and Nominations Committees and is currently the Chairman of the Audit Committee. He was appointed to these committees on 19 June 2008. He was appointed to the Board of Dragon Oil plc on 22 April 2002 and in April 2011 will have served nine years on the Board.

5. Saeed Al Mazrooei Non-executive Director Mr Al Mazrooei, born 24.12.1960, received a Masters degree in gas engineering and management from Salford University in the UK and has focused on various aspects of the gas industry since he joined Arco International in 1985. Mr Al Mazrooei currently holds the position of CEO for Emirates Aluminium, as well as a number of Directorships in other Middle Eastern companies. Mr Al Mazrooei is a member of Dragon Oils Audit Committee and is the Chairman of the Remuneration Committee. He was appointed to these committees on 19 June 2008. He was appointed to the Board of Dragon Oil plc on 22 May 2007 and as such has served for almost four years. 6. Ahmad Al Muhairbi Non-executive Director Mr Al Muhairbi, born 07.09.1959, has a strong background in upstream oil and gas, with a comprehensive knowledge of well technology having obtained a degree in petroleum engineering. Mr Al Muhairbi has been involved in petroleum field development and production since 1988 previously with Margham Dubai Establishment and now with Dubai Supply Authority. Mr Al Muhairbi is a member of Dragon Oils Audit Committee and is the Chairman of the Nominations Committee. He has served on the Board for almost four years, having been appointed to the Board of Dragon Oil plc on 22 May 2007.

Meet Your Board

Dragon Oil plc Annual Report for the year ended 31 December 2010

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Financial Statements Financial Statements

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Governance

Responsibility Responsibility

Performance Performance

Strategic Review Strategic Review

Overview

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3859 Governance

Senior Management Team


01 06

Hussain Al Ansari Chief Operating Officer Hussain has 23 years experience in petroleum industry having worked with ARCO International, ENOC, Dolphin energy and Mubadala Petroleum Services Co. He has a Bachelors Degree in Chemical Engineering from the University of California at Santa Barbara.
02

Alex Ridout Head of Legal and Company Secretary Alex is a qualified solicitor of the Supreme Court of England & Wales and worked in several London law firms before moving to the Middle East to act as Regional Counsel for Baker Hughes and then Dragon Oil in 2006.
07

Emad Buhulaigah General Manager of Petroleum Development Emad has 28 years experience working with Gulf Oil, Saudi Aramco, Chevron and Shell. He has a Masters degree in petroleum engineering from the University of Southern California.
03

Ahmad Assadi Contracts and Purchasing Manager Ahmad holds a Bachelor of Science degree in Mechanical Engineering and MBA in Finance. He comes to Dragon Oil having worked for over 25 years in commercial and logistics background within the oil and gas industry with Abu Dhabi Gas Liquefaction Limited (ADGAS) Abu Dhabi.
08

Tarun Ohri Director of Finance Tarun has over 20 years experience in finance, accounting and audit predominantly in oil-related industries in Qatar and the UAE. He is an associate of the Institute of Chartered Accountants of India with a CISA qualification.
04

William Mandolidis Corporate Planning Manager William is a chemical engineering graduate from the University of Toronto, with 30 years of oil and gas experience with companies including Shell Canada, Wascana Energy, Nexen Energy and Wood Group ESP in a variety of senior , managerial positions.
09

01 06 02 07 03 08 04 09 05

Mark Sawyer Business Development and New Ventures Manager Mark has 28 years of broad international experience in the energy industry sector, including responsibility for E&P business development and gas marketing for a large US multi-national energy company. His last role prior to joining Dragon Oil was Vice President, Business Development with Tatweer Investments and Chief Business Development Officer for Dubai Energy.
05

Jamel Kahoul Projects Manager Jamel comes to Dragon Oil having worked for over 35 years in corporate and project management within the oil and gas industry. His last position prior to joining Dragon Oil was Area Engineering Manager with Abu Dhabi Company for Onshore Oil Operations (ADCO).

Hussain Al Alaiwy Director of Human Resources Hussain holds a Bachelors degree in Mechanical Engineering from the University of Alabama, USA. He comes to us with more than 26 years of experience in operational, engineering and project management from working for Saudi Aramco.

10

14

Faisal has over 25 years of experience in Reservoir Engineering and Development as well as Logistics and Marine Operations. Prior to joining Dragon Oil, he worked for Zakum Development Company (ZADCO) Abu Dhabi, UAE. Faisal holds a Bachelor of Science degree in Physics and Mathematics from the University of Lewis and Clark, Portland, USA.
11

Marwan holds a Bachelor of Science degree in Computer Science and a Masters degree in Quality Management from the University of Wollongong, UAE. He has over 10 years of experience in IT operations and Project Management. Prior to joining Dragon Oil, Marwan was Manager Information Technology Operations with Thuraya Telecommunications Company.
15

12

Ridha Rouatbi Drilling Manager Ridha holds a PhD in Hydrology from the University of Montpellier, France and a Degree in Drilling and Production Engineering from Ecole du Petrole, France. He has more than 35 years of experience in the oil industry and came to Dragon Oil after having spent 24 years in Abu Dhabi Marine Operating Company (ADMAOPCO) in various senior positions.
13

Eldar graduated from the Polytechnic Institute of Turkmenistan with an Honours Degree in Petroleum Engineering and had 8 years experience in field operations before being appointed as Country Manager in November 2008.
17

Adel Al Nadhari HSE Manager Adel has substantial proven expertise in upstream oil and gas operations, mainly in the fields of maintenance and HSE. His last position prior to joining Dragon Oil was HSE&Q Manager at TOTAL ABK-Abu Dhabi

Kheder worked as the Head of the Technical Services Department in the Alfourat Petroleum Company in Syria from 1990-2003, when he joined Dragon Oil as a Field Manager.
18

10 15 11 16 12 17 13 18 14

Magdy El Ashry Field Manager Magdy joined Dragon Oil with extensive experience in managing oil and gas operations with many major companies such as Amoco, Gupco, Adma-Opco and finally Apetco where he was working as General Manager and Managing Director.

Financial Statements Financial Statements

Governance

Governance

Kheder Mekha Field Manager

Responsibility Responsibility

Ali worked for over 28 years in Gas Processing, Engineering and Project Management with Saudi Aramco. Ali holds a Master Degree in Construction Engineering Management and a Bachelor Degree in Chemical Engineering from the King Fahd University of Petroleum and Minerals. His last role prior to joining Dragon Oil was in Saudi Aramco leading the design, construction and commissioning of a mega gas processing project.

Rashid Redjepov Country Manager Rashid trained as an economist and worked for over 12 years in various aspects of the upstream oil and gas industry of Turkmenistan, both in the public and the private sectors, before being appointed as Country Manager in November 2008.
16

Eldar Kazimov Country Manager

Performance Performance

Ali Al Matar Engineering Manager

Strategic Review Strategic Review

Faisal Al Ansari Reservoir Development Manager

Marwan Al Mazrooqi Head of IT

Senior Management Team

Dragon Oil plc Annual Report for the year ended 31 December 2010

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Overview

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Directors Report

Evaluating and Addressing Risk within the Business Dragon Oils business is subject to many different risks and it is critical that those inherent risks are identified and analysed on an ongoing basis with a view to evaluating their impact on the business. Only then can the Group take appropriate action to manage or mitigate them in a manner, which is in the best interests of the Group. Dragon Oil carries out a detailed annual business planning and budget process, as is standard in best business practices; this includes setting annual objectives and targets covering key performance objectives. These objectives are set at the Group level as well as at all operational levels with identification and mitigation of the key risks to the delivery of these targets. Operations will be expected to monitor and report on actual performance to senior management including variances to targets; reviews will include an assessment of the risks

and measures being implemented to manage these potential risks. Risk Management Review Process The Board in conjunction with the management commenced a detailed review of the risks in 2010 to further integrate the risk management strategy into the business planning process. This will continue in 2011 with a view to further refining this integration process. The Board along with the senior management team has developed mitigating strategies in relation to the various risks and they are committed to implementing the same. Dragon Oil has internal controls and company procedures, which form part of its risk management strategy. Detailed procedures support the risk management process across the Group and the application and consistency of these procedures are regularly reviewed by the Groups Internal Audit function.

Ultimately, the Audit Committee is responsible for overseeing and ensuring compliance with these internal controls and regularly reports to the Board. Individual managers are responsible for ensuring compliance by them and their departments with internal controls and identifying the various risks within their areas of responsibility. Key Risks for the Business In accordance with the Companies (Amendment) Act 1986 (as amended by Statutory Instrument 116 of 2005 European Communities (IFRS and Miscellaneous Amendments) Regulations 2005), the Company is required to give a description of the principal risks and uncertainties facing the Group. The principal risks and uncertainties, together with the actions in mitigation, are set out in the table below.

Headline risk Primary risks Oil price volatility

Description and potential impact

Mitigation

Oil prices have been strong in 2010 but may be highly volatile. Wide fluctuations in oil price can impact Groups cash flows and profitability.

The Group actively monitors its exposure to oil prices and may use appropriate hedging instruments from time to time to mitigate such price risks. The Group continues to seek alternative marketing opportunities that would be deployed should the current arrangements experience interruption.

Oil export routes limited from the Caspian Sea region

Long-term swap agreement with Iran and its subsequent three-month extension ceased in mid-2010. All of the Groups entitlement volumes are currently exported out of the Caspian Sea region to international markets via Baku, Azerbaijan. Disruption in the export routes will impact the Groups revenue and cash flows. The Groups revenues are dependent on the continued performance of its operating facilities at its single producing asset, offshore Turkmenistan. Performance and future success dependent on the Groups ability to attract, retain and motivate highly skilled and qualified personnel.

Sole producing asset in Turkmenistan

Constant review of acquisitions and other investment opportunities is continuing by the dedicated New Ventures Team.

Skilled and talented human capital

Competitive compensation packages for key staff, including long-term incentives. Training and development of all staff is a key focus for the Group.

Headline risk Operational risks Uncertain, estimated resources/reserves and future net revenues

Description and potential impact

Mitigation

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Dragon Oil plc Annual Report for the year ended 31 December 2010

43

The Groups inherent risks include continued discovery, production and processing of hydrocarbons in economically viable quantities in the areas in which the Group is interested. Reservoirs within the Cheleken Contract Area are technically challenging and complex, meaning that future production may vary significantly from projections. Gas development is dependent upon many factors including demand for gas, execution of a gas sales agreement, accessibility to gas transportation network, construction of the GTP and overall economic conditions. They affect Dragon Oils ability to develop its gas reserves. Limited supply of rigs capable of offshore operations within the Caspian Sea region. This could impact the Groups development programmes and impose higher drilling costs. Limited availability of top international contractors capable of offshore operations and construction yards within the Caspian Sea region. Most drilling services performed by a single drilling services contractor. Infrastructure projects contracted to regional contractors, rather than large international companies. Typical environmental risk associated with oil extraction and recovery, such as the risk of an oil spill. Group has also to meet specific Turkmenistan environmental standards. An oil spill in the Caspian Sea could adversely impact our infrastructure, production capability and profitability. A significant element of the Groups production, processing and export infrastructure has been in place for many years and could be subject to increased risk of breakdown or failure. Breakdown can impair the production capability.

Use of specialist consultants and advisors, as well as a talented and experienced reservoir development team. Collection and review of extensive historical data on which to base future production projections.

Gas development

Limited number of drilling rigs

Super M2 jack-up rig planned to be delivered in Q4 2011. Also, process of securing additional jack-up and platform-based rigs is under way. Programme to actively diversify away from limited number of contractors has been successful over the last two years, with many new companies now working for the Group, and this programme will continue.

Restricted choice of contractors

HSE hazards and impact assessment

Asset integrity

Financial Statements Financial Statements

Governance

The Group has adequate resources in place and expertise to upgrade or renew the infrastructure in use as per ambitious capital expenditure programme.

Governance

Extensive monitoring and review of HSE policies and procedures as well as contracts with specialist service providers for the cleanup of oil spills. Regular HSE training for operational staff together with annual HSE exercises across the Group.

Responsibility Responsibility

Performance Performance

The Group has infrastructure in place to deliver unprocessed gas into the Turkmen network. There are specific plans to construct the GTP and finalise discussions for the gas sales agreement with the authorities.

Strategic Review Strategic Review

Overview

44

3859 Governance

Directors Report continued

Headline risk Political and legal risks Political

Description and potential impact

Mitigation

Changes in legal systems may occur, which might have a significant, adverse impact on the ownership and/or operation of the PSA.

Considerable experience in operating in Turkmenistan. Fiscal and legal systems are stable and predictable. Strong and wellestablished government relationships. Application of EU sanctions discussed and reviewed with specialist lawyers, resulting in few changes to the Groups business.

Sanctions

European Union passed Regulation 961/2010 of 25 October 2010, imposing sanctions against Iranian entities. Also, the US Iran Sanctions Act of 1996 may impose sanctions, which may impact on non-US firms engaged in business with Iranian counterparties. Both have potential impact on Dragon Oil arising from its use of a jack-up rig owned by an Iranian counter-party; additional impact if the Group re-commenced the swap agreement for export of crude oil through Iran. Activities are dependent upon the grant and maintenance of appropriate licences, permits and regulatory consents (e.g. PSA) may be withdrawn arbitrarily or made subject to limitations. The withdrawal, non-renewal or a change in the economic and other terms of such licences could materially adversely affect the Groups business, prospects and financial condition.

Licences

Considerable experience in operating in Turkmenistan. Strong and well-established government relationships, both at central and local levels.

Financial and control risks Financial and exchange rates The principal financial risks facing the Group (as well as the financial policies and controls) are addressed in the Groups consolidated financial statements on pages 76 to 77. The insurance programme of the Group may not provide adequate cover for claims in certain circumstances. Moreover, there can be no assurance that the Group will be able to maintain adequate insurance in the future at rates that it considers reasonable. Risk of fraud and/or breaches of internal controls by employees may be difficult to recognise or detect or trace, particularly if collusion is involved. This may result in material reputation, financial, legal, commercial or regulatory exposures to the Group. Strong balance sheet with no debt. Financial polices and controls are in place to ensure that exposures are adequately managed.

Insurance cover

Strategic review of insurance strategy is undertaken on an annual basis to improve insurance cover with respect to its operations, in accordance with international oil and gas practices.

Internal controls

System of risk management and internal controls as detailed under Internal Control in the Corporate Governance section of this Report, on page 56.

On behalf of the Board Mohammed Al Ghurair and Abdul Jaleel Al Khalifa Directors of Dragon Oil plc 21 February 2011

Business Review A full review of the Groups activities during the year, recent events and future developments is contained in the Chairmans Statement on pages 12 to 15, the Message from the Chief Executive Officer (CEO) on pages 16 to 19 and the Operating and Financial Review on pages 22 to 29.

Director details Mohammed Al Ghurair (Non-executive Director and Chairman, member of the Nominations and Remuneration Committees) (UAE) Ahmad Sharaf (Non-executive Director and Vice-Chairman, member of the Nominations and Remuneration Committees) (UAE) Abdul Jaleel Al Khalifa (Executive Director and CEO) (Saudi Arabia) Nigel McCue (Senior Independent Non-executive Director, Chairman of the Audit Committee, member of the Remuneration and Nominations Committees) (UK) Ahmad Al Muhairbi (Independent Non-executive Director, Chairman of the Nominations Committee, member of the Audit Committee) (UAE) Saeed Al Mazrooei (Independent Non-executive Director, Chairman of the Remuneration Committee, member of the Audit Committee) (UAE)

Events during 2010

Re-elected on 5 May 2010

Re-elected on 5 May 2010

Financial Statements Financial Statements

Governance

Governance

Responsibility Responsibility

Election of Directors The following individuals served as Directors during the period from 1 January 2010 up to 31 December 2010:

Performance Performance

Principal Activity The Groups principal activity is the exploration, development and production of oil and gas in Turkmenistan and Yemen. The Group holds 100% interest in the Cheleken Contract Area, offshore Turkmenistan. The Turkmenistan PSA was signed with a state agency of the Government of Turkmenistan in November 1999 and became effective in May 2000. The PSA has a 25-year term, which expires in May 2025 with an exclusive right on the part of Dragon Oil

The Board of Directors of the Company has recommended a payment of a fullyear maiden dividend for 2010 of 14.0 US cents per share (2009: nil) subject to Shareholder approval at the AGM to be held on 18 May 2011 at the London Hilton Hotel.

Strategic Review Strategic Review

Other Regulatory Information The Directors present their report and the audited consolidated financial statements for the Group and audited financial statements for the Company for the year ended 31 December 2010. These will be laid before the Shareholders at the Annual General Meeting (AGM) of the Company, which is scheduled to be held on 18 May 2011.

to negotiate an extension for a further period of not less than 10 years. In relation to the Groups minority interests in the Republic of Yemen (which it acquired in December 2007), the interests in Blocks 49 and R2 have been relinquished due to lack of commerciality. The Group retains its interest in Block 35 and its interest has increased slightly to 11.7% in light of the withdrawal of other partners from the Block in 2010. Information on the Groups various subsidiaries is set out on page 92.

Results and Dividends The results of the Group for the year ended 31 December 2010 are set out in the Groups income statement on page 63. Profit attributable to equity holders of the Company was US$386 million (2009: US$259 million).

Directors Report

Dragon Oil plc Annual Report for the year ended 31 December 2010

45

Overview

46

3859 Governance

Directors Report continued

Since their original appointment, Mohammed Al Ghurair and Ahmad Sharaf have been and continue to be nominee Directors of the majority Shareholder, ENOC. In accordance with the Articles of Association, Mohammed Al Ghurair and Abdul Jaleel Al Khalifa will retire and, being eligible, will offer themselves for re-election at the 2011 AGM. As Nigel McCue will have been a Director for more than nine years as from 22 April 2011, he will retire annually and a resolution for his re-election will be proposed at the 2011 AGM. The Board regularly reviews its own performance and, if deemed necessary, may look to strengthen its membership by appointing additional Directors with additional expertise or experience, which can be of value to the Company. However, as at 21 February 2011, there are no future plans for appointing any new Directors to the Company. Directors Interests The interests of the Directors in the share capital of the Company, all of which are beneficial, are as set out in the table on pages 58 to 59.

Statement of Directors Responsibilities The Directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations. Irish Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group and Parent Company Financial Statements in accordance with IFRS as adopted by the European Union. The financial statements are required by law to give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss of the Group for that period. In preparing these financial statements the Directors are required to: Select suitable accounting policies and then apply them consistently; Make judgements and estimates that are reasonable and prudent; State that the financial statements comply with IFRS as adopted by the European Union; and Prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the Group will continue in business, in which case there should be supporting assumptions or qualifications as necessary. The Directors confirm that they have complied with the above requirements in preparing the financial statements.

The Directors are also required by applicable law and the Listing Rules issued by the Irish Stock Exchange to prepare a Directors report and reports relating to Directors remuneration and corporate governance. In accordance with the Transparency (Directive 2004/109/EC) Regulations 2007 (the Transparency Regulations), the Directors are required to include a management report containing a fair review of the business and a description of the principal risks and uncertainties facing the Group. The Directors are responsible for keeping proper books of account that disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements comply with the Companies Acts 1963 to 2009 and, as regards the Group Financial Statements, Article 4 of the International Accounting Standards (IAS) Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The measures taken by the Directors to secure compliance with the Groups obligation to keep proper books of account are the use of appropriate systems, controls, processes and the employment of competent persons. The books of account are maintained at the Groups head office in Dubai, UAE. The Directors are responsible for the maintenance and integrity of the Companys web site. Legislation in the Republic of Ireland concerning the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

the financial statements, prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities and financial position of the Company and the Group and of the profit of the Group; and the Directors report contained in the annual report includes a fair review of the development and performance of the business and the position of the Company and Group, together with a description of the principal risks and uncertainties that they face.

ENOC JP Morgan Chase & Co Artio Global Management L.L.C. Baillie Gifford & Co

265,265,515 36,124,740 31,556,358 30,973,431

51.44% 7.01% 6.12% 6.01%

Above: Offshore operations.

Financial Statements Financial Statements

Governance

Governance

Responsibility Responsibility

No. of Ordinary Shares Issued

% of Share Capital

Performance Performance

Auditors PricewaterhouseCoopers have expressed their willingness to continue in office and are eligible for reappointment. They will continue in office in accordance with Section 160(2) of the Companies Act, 1963 and would be deemed to be reappointed as the Groups Auditors in the absence of a resolution for their removal. A resolution to authorise the Directors to determine the auditors remuneration will be proposed at the 2011 AGM.

Share Capital Details of the Companys share capital are set out in Note 14 to the consolidated financial statements on pages 83 to 85. Major Shareholdings in the Company As at 21 February 2011, Dragon Oil plc had been notified of the following significant shareholdings, which are in excess of 3%:

Strategic Review Strategic Review

Directors Statement pursuant to the Transparency Regulations Each of the Directors, whose names and functions are listed on page 39, confirms that, to the best of each of their respective knowledge:

Going Concern Statement and Future Funding After reviewing the Groups plans for 2011 and future years, the Directors are confident that the Group will have adequate financial resources to continue in operational existence for the foreseeable future. They have therefore continued to adopt the going concern basis in preparing the accounts.

Charitable and/or Political Donations During the year ended 31 December 2010, the Group made charitable donations in the amount of US$2,723 to Al Noor Centre (2009: US$33,360 to Al Noor Centre and Al Ain Centre for Care and Rehabilitation) and no political donations were made (2009: nil).

Directors Report

Dragon Oil plc Annual Report for the year ended 31 December 2010

47

Overview

48

3859 Governance

Directors Report continued

Close Company Provisions The Directors are of the opinion that Dragon Oil plc is not a close Company as defined by the Taxes Consolidation Act 1997. Directors Report: Disclosures Required by the European Communities (Takeover Bids (Directive 2004/25/EC)) Regulations 2006 Shares and rights Particulars of the authorised and issued share capital of the Company are set out in Note 14 to the financial statements on pages 83 to 85. Holders of Ordinary Shares are entitled: to receive notice of, to attend, to speak and to vote (in person or by proxy), at general meetings having, on a show of hands, one vote, and, on a poll, a vote for each Ordinary Share held, and to appoint a proxy so to attend, speak and vote. The Articles of Association and the Irish Companies Acts permit the Directors to seek information from Shareholders as to the beneficial ownership of Ordinary Shares. Where a Shareholder does not comply with such a notice, the right to vote the shares of that Shareholder may be restricted; to receive, 21 days at least before an AGM, a copy of the annual report and financial statements presented at that general meeting, which will be made up to a date no earlier than nine months before the date of that general meeting; where dividends are paid by the Directors or recommended by the Directors and declared by a resolution at a general meeting, to receive those dividends in cash or by distribution of special assets, including new shares in the Company; and in a winding-up of the Company, and subject to payments of amounts due to creditors and to any holders of shares ranking in priority to the Ordinary Shares, repayment of the capital paid up on the Ordinary Shares by and a proportionate part of any surplus of the Company.

Rights attaching to transferred Ordinary Shares remain with the transferor until transferees name is entered on the Register of Members of the Company. The instrument of appointment of a proxy must be received by the Company not less than 48 hours before the meeting or adjourned meeting, or, in the case of a poll, not less than 48 hours before the taking of the poll. All shares allotted pursuant to any employees share scheme are Ordinary Shares carrying the same rights as other Ordinary Shares and have no special rights or rights not exercisable directly by the employees. Transfer of shares There are no restrictions on the transfer of shares in the Company and no requirements to obtain approval of the Company, or of other holders of securities in the Company, for a transfer of shares in the Company, save that: the Directors may decline to register a transfer of Ordinary Shares on which the Company has a lien or in the case of a single transfer of Ordinary Shares in favour of more than four persons jointly; transfers of Ordinary Shares in certificated form are transferable subject to production of the original share certificate and the usual form of stock transfer duly executed by the holder of the Ordinary Shares and stamped with the requisite stamp duty; Ordinary Shares in uncertificated form are transferable in accordance with the rules or conditions imposed by the operator of the relevant system, which enables title to be evidenced and transferred without a written instrument and in accordance with the Companies Act, 1990 (Uncertificated Securities) Regulations, 1996; and

the Articles of Association and the Irish Companies Acts permit the Directors to seek information from Shareholders as to the beneficial ownership of Ordinary Shares. Where a Shareholder does not comply with such a notice, the transfer of the shares of that Shareholder may be restricted. There are no limitations on the holding of securities. Share options are personal and not assignable. The Company is not aware of any arrangements between Shareholders, which may result in restrictions on the transfer of securities or on voting rights. Significant Shareholders Shareholders known or disclosed (as at the date of this Report) to the Company as holding 3% or more of the Ordinary Shares or voting rights therein are set out above on page 47. No person holds securities carrying special rights with regard to control of the Company. Appointment and replacement of Directors Directors may be appointed by the Directors or by the Shareholders. No person, other than a Director retiring at a general meeting is eligible for appointment by the Shareholders unless either recommended by the Directors or, not less than seven nor more than 42 days before the date of the general meeting, written notice by a Shareholder of the intention to propose the person for election and notice in writing signed by the person of his willingness to act are received by the Company. Directors appointed by the Directors automatically retire at the next AGM and are eligible for election by the Shareholders at that meeting. Nonexecutive Directors in office for nine years or more automatically retire at each AGM and are eligible for re-election. Directors (other than Directors in office for nine years or more) elected (or re-elected) by the Shareholders retire automatically on the basis that one-third of such Directors retire at each AGM.

(i) pre-emptively; and/or (ii) other than pre-emptively, of a character and/or with a nominal value not exceeding such percentage as is chosen by the Directors; (g) generally authorising the Directors, for a period to expire no later than the conclusion of the next AGM of the Company, to exercise the power of the Company to make market purchases of the Companys shares with a nominal value not exceeding 10% of the nominal value of the shares in issue. Special business All other business transacted at an AGM and all business transacted at an Extraordinary General Meeting are deemed to be special business. Matters, which must be done by the Company in general meeting pursuant to the Companies Acts 1963 to 2009 include the following matters: (a) amending the Memorandum and Articles of Association; (b) changing the name of the Company; (c) increasing the authorised share capital, consolidating or dividing share capital into shares of larger or smaller amounts or cancelling shares, which have not been taken by any person; (d) reducing the issued share capital; (e) approving the holding of the AGM outside the State; (f) commencing the voluntary winding up of the Company; (g) re-registering the Company as a company of another type; (h) approving a substantial property transaction between the Company and a Director;

There are no agreements between the Company and its Directors or employees providing for compensation for loss of office or employment (whether through resignation, purported redundancy or otherwise) that occurs because of a takeover bid. Amendment of Articles of Association The Articles of Association may be amended by special resolution of the Shareholders, being a resolution proposed on not fewer than 21days notice as a special resolution and passed by more than 75% majority of those voting on the resolution. Powers of the Board of Directors The Directors are responsible for the management of the business of the Company and may exercise all the power of the Company subject to the provisions of the Companys Memorandum and Articles of Association. The Directors powers to allot, issue, repurchase and reissue Ordinary Shares are dependent on the terms of the resolutions from time to time in force so empowering the Directors. Share Capital Authorities By Resolution 7 passed at the Companys 2010 AGM, the Directors were granted authority to allot shares equivalent to 5% of the total issued share capital of Dragon Oil plc, which could be issued for cash other than pre-emptively. As at 21 February 2011, this authority had not been exercised. The allotment-for-cash authority is due to expire on 18 May 2011 and a resolution in the same terms is being proposed at the 2011 AGM.

Important Events since 31 December 2010 Details of the important events that have occurred since 31 December 2010 can be found in the Operating and Financial Review on pages 22 to 29. General Meetings Matters of ordinary business General meetings of the Company are convened in accordance with and governed by the Articles of Association and the Companies Acts 1963 to 2009. The AGM has the power to consider the following matters, which are deemed to be items of ordinary business: (a) declaring a dividend; (b) the consideration of the accounts, balance sheets and the reports of the Directors and Auditors; (c) the election of Directors in the place of those retiring by a rotation or otherwise or ceasing to hold office; (d) the reappointment and fixing of the remuneration of the Auditors; (e) generally authorising the Directors, for a period to expire no later than the conclusion of the next AGM of the Company, to allot relevant securities, within the meaning of the 1983 Act, with a nominal value not exceeding the authorised but unissued share capital of the Company;

Financial Statements Financial Statements

Governance

Governance

Responsibility Responsibility

Performance Performance

Strategic Review Strategic Review

Any Director may be removed by ordinary resolution (50%+1 majority) of the Shareholders passed at a general meeting. No person aged 75 may be appointed a Director and any Director aged 75 must retire at the AGM following his 75th birthday.

Purchase of Companys Own Shares By Resolution 7, passed at the Companys 2010 AGM, the Directors were granted authority to make market purchases of the Companys Ordinary Shares up to 10% of the number of issued Ordinary Shares in Dragon Oil plc, at market price. This authority is due to expire on 18 May 2011. As at 21 February 2011, this authority had not been exercised by Dragon Oil plc but the Directors are proposing a resolution in the same terms at the 2011 AGM and will take advantage of the flexibility afforded by the resolution, if passed, as they deem appropriate. As at 21 February 2011, Dragon Oil plc held no shares in treasury.

(f) generally authorising the Directors, for a period to expire no later than the conclusion of the next AGM of the Company, to allot equity securities within the meaning of section 23 of the 1983 Act:

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Dragon Oil plc Annual Report for the year ended 31 December 2010

49

Overview

50

3859 Governance

Directors Report continued

(i) approving a guarantee or security for a loan or similar transaction made by the Company to a Director or connected person of a Director; and (j) approving the draft terms of a crossborder merger. Other matters, such as the consideration of reports and the approval of share option schemes, may also be done at a general meeting as items of special business. 2011 Annual General Meeting The Board uses the AGM of Dragon Oil plc for the purpose of communicating with all its investors alike and welcomes their participation. It is the Companys policy that all Directors should attend if possible, subject to business or personal reasons. It is also the Companys policy to involve Shareholders fully in the affairs of the Group at the AGM and to give them an opportunity to ask questions about the Groups activities and prospects. The Senior Independent Non-executive Director will also be available at the AGM to meet with the Shareholders.

Details of the resolutions to be proposed at the AGM are given in a letter attached to the Notice of AGM, which is published separately and sent to Shareholders with this report. As more particularly detailed in the Notice of AGM, the Board is recommending the payment of a fullyear maiden dividend in respect of 2010 and adoption of new long-term incentive plans for the employees of the Group. The Directors consider that all of the resolutions set out in the Notice of AGM are in the best interests of the Company and its Shareholders as a whole and recommend that Shareholders vote in favour of each of them. On behalf of the Board MOHAMMED AL GHURAIR and ABDUL JALEEL AL KHALIFA Directors of Dragon Oil plc 21 February 2011

Above: Offshore operations.

Corporate Governance Statement

Dragon Oil places great significance on high standards of corporate governance as a means to emphasise the Groups good business conduct and strong ethical culture. The Group looks to ensure that there are adequate and appropriate processes and procedures to protect the value in the Group and create maximum transparency. All members of the Board recognise that, as Directors, they have a responsibility to Shareholders to put a robust control structure in place essential for business integrity and performance. Dragon Oil currently has a primary listing on the Irish Stock Exchange and, since 6 April 2010, in accordance with 2009 changes to the UK Listing Regime, a premium listing on the London Stock Exchange. Its shares are traded on the Irish and London Stock Exchanges and the Company complies with its obligations under the listing rules of both the Irish Stock Exchange and the UK Listing Authority (together the Listing Rules) accordingly. The Board is currently committed to applying the principles of corporate governance contained in the Combined Code on Corporate Governance issued by the Financial Reporting Council (the Combined Code), which is referred to in the Listing Rules and is available on the website of the Financial Reporting Council at www.frc.org.uk. The Directors also follow the related guidance and suggested best practices referred to in the Combined Code. However, the Board acknowledges that the Financial Reporting Council issued the new UK Corporate Governance Code in June 2010 (the CGC, which is available at http://www.frc.org.uk/ corporate/ukcgcode.cfm) and the CGC will apply to the Group for the 2011 financial year. In addition, as an Irishincorporated entity, the Company will be required to comply with the new corporate governance provisions set out in the new Irish Corporate Governance Annex to the CGC (ICGA). The Board has carried out a review of the Groups corporate governance practices and expects to make consequent changes to the Groups corporate governance framework during 2011, to comply with the provisions of the CGC and ICGA.

Application of the Combined Code The Directors are committed to maintaining high standards of corporate governance and this statement describes how the Group has applied the Combined Code in 2010. The Board considers that the Group has complied with the provisions set out in the Combined Code throughout the last financial year under review; however, where the Group is not in compliance with the provisions of the Combined Code, that non-compliance is explained below at page 55. The Board The Board approves the Groups strategy, rolling five-year business plans, key projects, major investment plans and an annual budget (see the Operating and Financial Review at pages 22 to 29). It regularly reviews operational and financial performance against stated key performance indicators, as well as many other topics of relevance according to the requirements of the business. While the figures provided are estimates only, please see the table below for an indication of the range of topics discussed at Board meetings during 2010, together with the approximate time spent discussing them. In accordance with best practices and the requirements of the Combined Code, there is a formal schedule of matters reserved for consideration by the Board, which includes the overall Group strategy with respect to field exploration and development, major capital expenditure projects, acquisitions and disinvestments and financial policies. Save for the matters reserved, the Board delegates its authority for the management of the Groups business primarily to the CEO and certain other matters are delegated to the Audit, Remuneration and/or Nominations Committees, each of which is described in more detail below. The Board considers succession planning as part of its overall strategy for the Group, which will be assessed as and when required.

Topics at Board meetings

Corporate Governance Statement Directors Report

Dragon Oil plc Annual Report for the year ended 31 December 2010

51

Operational issues including infrastructure bottlenecks, marketing, reservoir development and management 19% Financial matters including financial statements, budgeting and planning and financing generally 16% External issues including investor relations, investigation, presentations, Host Government relations 21% Personnel matters including executive remuneration, HR policies, recruitment and incentives 7% Other matters 4%

Financial Statements Financial Statements

The Board regularly reviews its own performance and, if deemed necessary, may look to strengthen its membership by appointing additional Directors with additional expertise or experience, which can be of value to the Company. However, as at 21 February 2011, there are no future plans for appointing any new Directors to the Company.

Governance

Composition, succession and development The Board of Dragon Oil plc currently comprises the Non-executive Chairman, the CEO and four Non-executive Directors. Each of the Non-executive Directors has a good knowledge of the oil and gas industry. The technical expertise of the Directors in the oil and gas industry, combined with their experience, has been harnessed in the past and will continue to be used in the best ways possible to address the challenges that Dragon Oil faces on a day-to-day basis. The Directors have skill sets, which are diverse and complement each other so that issues are considered from a range of perspectives. Biographical details of each of the Directors are included within the Directors Report at pages 38 to 39.

Governance

Responsibility Responsibility

Performance Performance

Strategic issues including diversification, restructuring, acquisitions, performance measures, corporate governance 33%

Strategic Review Strategic Review

Overview

52

3859 Governance

Corporate Governance Statement continued

Continued progress was made on developing the updated mission and vision for the Group. Notwithstanding the above, the Board recognises that there were areas, which were not addressed fully during 2010, in particular Board succession planning and training and personal development for several Directors. These are matters of importance and the Board intends to address them during 2011. Independent Non-executive Directors The Senior Independent Non-executive Director is Mr Nigel McCue, who has held this role since 22 May 2007. In this position, Mr McCue is available to Shareholders who have concerns that cannot be resolved through discussion with the Chairman. Mr McCue has served on the Board since 22 April 2002; however, the Board still considers that he is independent notwithstanding his

length of service and the fact that he continues to hold share options, which were granted to him in 2004 and did not vest until 2008. No further share options have been granted to Mr McCue. The Board values his experience, both from a financial and a business perspective, as well as his comprehensive knowledge of the Dragon Oil business and history. The Chairman has discussed the matter of Mr McCues continuing position on the Board and the Board is very pleased to propose that Mr McCue remains on the Board as the Senior Independent Nonexecutive Director. The independent Non-executive Directors bring a wide range of skills and competencies including local and international business experience to the Group. They exercise independent judgement on issues put before the Board including key operating and

financial strategies, performance and risk management through their participation. The Board considers Nigel McCue, Ahmad Al Muhairbi and Saeed Al Mazrooei to be independent in character and judgement and there are no relationships or circumstances, which are likely to affect (or could appear to affect) the independent Non-executive Directors judgement. The basis and criteria for assessing the independence of a Director is as set out in paragraph A3.1 of the Combined Code. Chairman of the Board and Chief Executive Officer The Board splits the responsibility of running the Board and running the business between the Chairman and the CEO in accordance with the tables below.

The Chairman manages the Board and also leads implementation of Board decisions.With the following responsibilities, he: drives the strategic leadership for the Group including vision and direction; ensures that the Boards views are communicated to Shareholders in conjunction with the CEO; ensures that the Board operates smoothly and efficiently for effective decision-making; leads the Board and Committee performance evaluation process; and works constructively with the CEO to implement Board decisions and the business strategy.

The CEO has the Boards delegated authority on all matters of management and is accountable for the same (where they are not reserved for the Board) although the CEO has the support of key managers and the Executive Committee in executing and accomplishing business objectives. With the following responsibilities, he: executes the Groups business plans and objectives; establishes organisation structure, plans and policies and effectively implements the same; recommends the Groups business plans and budgets prior to Board approval; monitors and appraises performance of all key personnel; reviews operational and financial performance of the Group against established goals; is primarily responsible for external relationships with host governments; and communicates with Shareholders, investors, analysts in conjunction with the Chairman.

Meetings and attendance Board Number of meetings Mohammed Al Ghurair Abdul Jaleel Al Khalifa Nigel McCue Saeed Al Mazrooei Ahmad Al Muhairbi Ahmad Sharaf
(1)

5 5/5 5/5 4/5 5/5 5/5 5/5

4 n/a(2) n/a(2) 4/4 4/4 4/4 n/a(2)

1 1/1 n/a(2) 1/1 1/1 n/a(2) 1/1

1 1/1 n/a(2) 1/1 n/a(2) 1/1 1/1

Notes: During 2010, certain Directors who were not Committee members attended meetings of the Audit, Remuneration and/or Nominations Committees by invitation. These details have not been included in the table. n/a not applicable (where a Director is not a member of the Board or the Committee on the relevant date) as the table reflects only attendance by members. Executive Committee The CEO has established the Executive Committee to assist and support him in the implementation of the Groups business strategy and plans. The Executive Committee is made up of the CEO, the General Manager of Petroleum Development, the Director of Finance, the HR Director, the Corporate Planning Manager, the Company Secretary and the Contracts and Purchasing Manager, with the Company Secretary acting as secretary to this Committee. The Executive Committee is the primary management-level body and makes the key decisions on matters relating to the day-to-day management of the Group. In 2010, the Executive Committee met a total of 13 times and discussed key topics including the budget and future work plan, risk management, appointment of the new joint corporate broker and the major infrastructure and drilling projects. Insurance cover The Group maintains such Directors and Officers Liability insurance as is appropriate in nature and level for a listed Company of the type and size of the Group. Performance Evaluation The Board evaluated its own performance in 2010, as well as the performance of its principal Committees and the Chairman discussed the performance of individual Directors with each of them. A questionnaire was circulated to the Directors concerning the performance of the individual Directors, the Board as a whole and of the Committees. The responses were collated and summarised by the Company Secretary. Open and frank discussions were held at the Board level concerning the results. The Board is planning to use an external facilitator for its performance evaluation process in 2011 in line with the CGC. The Board recognises that certain matters which had been highlighted previously were not adequately addressed during 2010 and for that reason the evaluation scores for the Board and for the Committees were down as compared to the last years scores. However, as a general point, the evaluation process concluded that the Board as a whole and its principal Committees had functioned well during 2010. The Chairman, and the Board as a whole, considered that each of the individual Directors had also performed well, bringing considerable expertise and valuable comments to the matters discussed by the Board. The combination of skills on the Board was felt to be appropriate and worked well.

The formal agenda, which regularly included presentations from senior management personnel, for each scheduled Board or Committee meeting is set by the Chairman or the Committee Chairman (as the case may be), in consultation with the Company Secretary. All necessary information is supplied to the Directors on a timely basis to enable them to discharge their duties effectively. Formal minutes of all Board and Committee meetings are circulated to all Directors and considered for approval at the next available meeting. External advice All Directors have access to independent professional advice at the Groups expense, as and when required. All Directors have access to the advice and services of the Company Secretary, who has responsibility for ensuring that the Board procedures are followed and for governance matters. The appointment of the Company Secretary is one of the matters reserved for the Board. Alex Ridout has advised the Board in the role of Company Secretary since June 2006.

Financial Statements Financial Statements

Governance

Governance

Responsibility Responsibility

The Directors met regularly throughout the year and the Board of the Company met a total of five times in 2010, all of meetings took place in Dubai, UAE In addition, the AGM took place in London, England, in May 2010. In addition, the Board members are in frequent contact at Board meetings of subsidiary operating companies and between meetings with a view to progressing the Groups business.

Performance Performance

(2)

Strategic Review Strategic Review

Audit Remuneration Committee(1) Committee(1)

Nominations Committee(1)

Corporate Governance Statement

Dragon Oil plc Annual Report for the year ended 31 December 2010

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Overview

54

3859 Governance

Corporate Governance Statement continued

Matters highlighted for improvement as a result of the evaluation process included the following (including those left over from the previous year): 1. Board composition and succession planning; 2. focus on investor perspectives and issues; 3. Board objectives and measures; 4. training and personal development for Directors; and 5. updating and improving the performance evaluation process. Notwithstanding the above, the Board recognises that there are areas for further improvement notably succession planning. This particular issue was discussed both by the Nominations Committee and the Board in general during 2010. Dragon Oils exceptional growth in recent years has brought its own challenges and the Board acknowledges that it must continue to enhance its own structure and composition to meet them. Committees The Board has established the Audit, Remuneration and Nomination Committees, all of which have written terms of reference setting out their authority and duties. As part of the requirements set out in the Combined Code, the Group makes available the terms of reference of the Nominations, Remuneration and Audit Committees of the Board on its website, www.dragonoil.com. Audit Committee The Audit Committee is central to the Groups business strategy and risk management philosophy. The Audit Committees primary responsibility is to monitor the integrity of the Groups financial statements and to recommend the appointment of the external Auditor (as well as review their independence, objectivity and the effectiveness of the audit process); however, the Committee also plays an active and proactive role in the review of the internal financial controls and the monitoring and review of the effectiveness of the internal audit function.

The Audit Committee met a total of four times during the year (compared to seven times in 2009) and attendance at the meetings was as per the table above. Key topics for discussion by the Audit Committee included the 2009 financial statements and the 2010 interim financial statements. The membership of the Audit Committee currently comprises Mr Nigel McCue (Chairman), Mr Ahmad Al Muhairbi and Mr Saeed Al Mazrooei. The Company Secretary acts as secretary to the Audit Committee. The Board considers that each of the members has the requisite skills and attributes to enable the Committee to discharge its responsibilities and that one member of the Audit Committee, Mr McCue, has recent and relevant financial expertise. The performance evaluation process concluded that the Audit Committee had functioned well during 2010 although the following matters were highlighted to be addressed: 1. feedback from advisors and stakeholders on key issues to be advised; 2. more presentations from HR Director to Audit Committee; and 3. personal development for Committee members. The external Auditors, PricewaterhouseCoopers (PwC), have unrestricted access to the Chairman of the Audit Committee. PwC performed non-audit services for the Group to the extent of about 64% of the total remuneration as disclosed in Note 22 to the financial statements in respect of audit of subsidiaries, review of the Group interim financial statements and other assurance services as well as in the form of corporate tax advice in various jurisdictions in which the Group operates.

In 2010, the Audit Committee reviewed the independence of PwC to reassure itself that PwC continued to provide high quality and objective advice without conflict. After due process, the Audit Committee determined that PwC provided an excellent and professional service and was able to continue to act independently from the Groups operations. Topics at Audit Committee meetings

External audit matters including presentations and external Auditor independence 35% Financial statements and related matters 29% Internal audit matters including presentations and internal Auditor services 27% Other matters 9%

Remuneration Committee The identity of the members of the Remuneration Committee and a full review of the Remuneration Committees activities during the year are contained in the Directors Remuneration Report at pages 57 to 59. Nominations Committee The membership of the Nominations Committee currently comprises Mr Ahmad Al Muhairbi (Chairman), Mr Ahmad Sharaf, Mr Nigel McCue and Mr Mohammed Al Ghurair. The Company Secretary acts as secretary to the Nominations Committee. The Committee considers the composition of the Board and makes recommendations on the appointment of new Directors and certain senior management positions, as well as making recommendations to the Board on succession planning.

Compliance with the Combined Code The Board considers that the Group has complied with the provisions set out in the Combined Code throughout the financial year under review. However, where the Group is not in compliance with the provisions of the Combined Code, that non-compliance is explained below: A. Directors A.1.3/6.1. During 2010, there have not been any one-on-one meetings between the Chairman and the other Non-executive Directors without the CEO present, between the Senior Independent Director and the other Non-executive Directors without the Chairman present, or to evaluate the performance of the Chairman specifically. The Board has concluded that it operates in an open and transparent manner. A.3.1/B.1.3. Mr Nigel McCue holds share options in the Company. The Board considers that Mr McCues independence is not prejudiced or compromised by the holding of share options in the Company. Mr McCue will have served nine years on the Board of Dragon Oil in April 2011 but he will be submitted for re-election by the Shareholders at the 2011 AGM. The Board considers that Mr McCues independence is not prejudiced or compromised despite the longevity of his service. Mr McCue has extensive knowledge of the Groups business and positively challenges management data and assumptions.

Financial Statements Financial Statements

Related Party Transactions The Group has its head office in Dubai, UAE, which it rents from ENOC. Furthermore, the Group avails itself of a limited number of services from ENOC, including internal audit. All such services are provided on an arms length basis and are subject to a written contract on commercial terms. Details are set out in Note 27 of the consolidated financial statements on pages 91 to 92.

Governance

Dragon Oil has used the services of Davy brokers for over twelve years as a key advisor. In 2010, it undertook a process to appoint a new joint corporate broker and in January 2011, it appointed Nomura International plc in that role.

Governance

D. Relations with Shareholders D.2.3. The Chairman of the Audit Committee was unable to attend the 2010 AGM due to prior commitments. It is the Companys policy that all Directors should attend if possible, subject to business or personal reasons.

Responsibility Responsibility

B.2.1. As has been the case since June 2008, the Remuneration Committee has a membership of two Independent Non-executive Directors and two Directors that are nominee Directors of the majority Shareholder. Given the limited total number of Directors on the Board, it is necessary to use all available Directors to diversify the membership of the different Board committees. In addition, all members of the Remuneration Committee challenge constructively any proposal submitted to the Committee.

Performance Performance

There was one meeting of the Nominations Committee during 2010. As noted above, the Nominations Committee (and the Board in general) recognises that succession planning at the Board level is of paramount importance to the development of the Group and the Nominations Committee will be reviewing whether it is necessary to strengthen the Board membership by appointing additional Directors with additional expertise or experience, which can be of value to the Company. However, as at 21 February 2011, there are no future plans for appointing any new Directors to the Company.

A.7.2. Non-executive Directors were appointed for indefinite terms according to their letters of appointment but are subject to retirement by rotation in accordance with the Companys Articles of Association at least every three years (except for Directors who have been in office for nine years or more who are subject to retirement and re-election annually). This is the Groups normal policy and letters of appointment for Non-executive Directors include a three months notice period. B. Remuneration B.1.6. The CEO has a formal contract of employment with an indefinite term of service but with an express termination notice period of three months. This is in line with normal employment contracts for the UAE where the CEO is based.

The Group maintains a regular dialogue with institutional investors directly or through its brokers. We host results meetings and simultaneous conference calls to present our financial results to the market community with particular focus on the sell-side analysts. In 2010, the senior management team, comprising the CEO, Director of Finance and General Manager of Petroleum Development, conducted both one-on-one and Group meetings with institutional investors in London, Edinburgh and Dublin. Over the course of the year, the management met over 40 institutions, some of them on a number of occasions. In addition, Nigel McCue attended numerous meetings with certain large institutional Shareholders to listen to their views in order to help develop a balanced understanding of the issues and concerns. The Board receives investor relations reports summarizing key investor meetings and activities followed by the investor and analyst feedback. Additionally, the senior management conduct a significant number of conference calls on a regular basis with institutional investors around the world.

Strategic Review Strategic Review

Communication with Shareholders We place great importance on effective communication with our investors, both institutional and retail, as well as analysts. We maintain a policy of transparency, continuity and timely dissemination of information and we value investors and analysts continuing support and feedback.

Corporate Governance Statement

Dragon Oil plc Annual Report for the year ended 31 December 2010

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Overview

56

3859 Governance

Corporate Governance Statement continued

The Group issues its financial and operational results, drilling updates and other news releases promptly via Regulatory News Service, the Company news service from the London Stock Exchange. The news releases appear simultaneously on our website www. dragonoil.com on the Home Page and throughout the website. The Email Alerts function within the Investor Relations section under the Regulatory News allows Shareholders and other interested parties to subscribe to news updates. In August 2010, we re-launched the content of and added functionality to the website to make it more user-friendly and comprehensive. The Group archives all key information and documentation on its website with a dedicated Investor Centre for its Shareholders. Dragon Oil holds its AGM in London, UK and welcomes Shareholder participation. At 2010 meeting, we introduced a new format for the meeting, which featured a management presentation to investors for the first time. This was well received by those retail investors who attended and we plan to repeat this format in 2011. The AGM is an opportunity for individual Shareholders to put questions directly to the Board members and the senior management during and after the formal session. Notice of AGM is sent to Shareholders at least 20 working days before the meeting. New Shareholders are sent a hard copy of the Annual Report together with the financial accounts and given an option to receive the information electronically or in hard copy. The majority of the Shareholders receive information from the Company electronically. Internal Control The Groups risk and controls framework covers all material risks and controls including those of an operational, financial and compliance nature. Internal control procedures consist, inter alia, of formal delegation of financial authorities by the Board to the executive management. These control processes are complemented by effective monitoring mechanism and reporting.

The Directors are responsible for the implementation and review of the Groups system of internal control appropriate to the various business environments in which it operates. The system has been designed to enable the Group to identify, evaluate and manage significant risks faced by the Group and includes the safeguarding of the assets from inappropriate use or loss or fraud, the identification and management of liabilities, the maintenance of proper records to ensure quality internal and external reporting and compliance with the applicable laws and regulations governing its conduct of business. The key internal control and risk management measures that the Directors have implemented in the parent and its subsidiary undertakings in relation to the financial reporting process and the process for preparing the consolidated accounts are as follows: Risk assessment procedures; Employment of competent persons; Use of an appropriate Enterprise Resource Planning (ERP) system for processing transactions; Consideration of appropriateness of accounting policies through the Audit Review Papers; Segregation of duties, authorisation limits and independent review; Monthly control reconciliations; Management review of key judgements and estimates; Use of specialists, e.g. for valuations, as appropriate; Budgetary control, variance analysis and monthly performance reviews; An internal audit function; A properly constituted and effective audit committee; and Regular communication with external Auditors.

Any system of internal control can provide only reasonable and not absolute assurance that material financial irregularities will be detected or that the risk of failure to achieve business objectives is eliminated. The Directors, having reviewed the effectiveness of the system of internal financial, operational and compliance controls and risk management, consider that the system operated effectively throughout the financial year and up to the date that the financial statements were signed. Assurance The Board, through the Audit Committee, obtains assurance against risks through audits conducted by the Internal Audit Department (IA). The IA is established in consultation with the Audit Committee to provide assurance primarily on the adequacy of the system of internal controls in the Group. The IA plan governs IAs activities during each calendar year and must be approved by the Audit Committee. In addition, any of the Audit Committee members or the CEO can request IA to conduct such special assignment as they deem fit. IA reports functionally to the Audit Committee and administratively to the CEO. Each year, the Audit Committee reviews and assesses IAs annual report as part of the Groups three-year IA Work Cycle Plan. During 2010, IA was able to undertake most of the planned audit reviews in areas such as oil accounting and measurement, and contracts and purchasing. Several internal audits were deferred because of resourcing constraints. The Audit Committee has reviewed the internal audit reports and presentations and external Auditors recommendations on internal control in its meetings and has monitored the progress in implementation of the recommendations. The focus areas for IA in 2011 will be an audit of HSE matters, a review of the marketing and sales processes, as well as spot reviews for an EPIC project and the HR processes. On behalf of the Board ALEx RIDOUT Company Secretary of Dragon Oil plc 21 February 2011

Directors Remuneration Report

Financial Statements Financial Statements

The Remuneration Committee is primarily responsible for determining and agreeing with the Board, the framework or broad policy for the remuneration of the Chairman, CEO and certain senior members of the executive management. The Remuneration Committee also reviews and assesses proposals for long-term incentive plans, including the grant of share options to employees under the Groups 2009 Share Option Scheme, which was adopted at the Companys 2009 AGM. Participation is at the discretion of Directors for eligible employees. Further details of the Committees activities may be seen in the Committees terms of reference.

Service Contracts for Executive Directors The Executive Directors remuneration package comprises three key elements: guaranteed compensation, the annual bonus and the long-term incentives. This is in line with standards for Executive Directors remuneration packages within the oil and gas industry; in addition, the Committee takes into account the local remuneration practices within the UAE when setting the Executive Directors remuneration package. The package is evenly weighted between fixed pay and variable pay.

Governance

Governance

Remuneration Committee The membership of the Remuneration Committee currently comprises Mr Saeed Al Mazrooei (Chairman), Mr Nigel McCue, Mr Ahmad Sharaf and Mr Mohammed Al Ghurair. Other Directors may attend and have attended by invitation of the Remuneration Committee. The Company Secretary acts as secretary to the Remuneration Committee. The Remuneration Committee met once in 2010 and attendance at Committee meeting was as per the table on page 53.

The remuneration of the independent Non-executive Directors takes the form solely of fees, the level of which has been approved by the Chairman and the sole Executive Director, in consultation with key management personnel and pursuant to advice from independent third party human resources consultants. Each letter of appointment and/or contract of employment sets out certain restrictions on the ability of the Director to participate in businesses, which would conflict with the interests of the Company and/or to entice or solicit from the Group any senior employees of the Group in the 24-month period after cessation of the Directors appointment.

Responsibility Responsibility

This report has been prepared so as to be consistent with the Directors Remuneration Report Regulations 2002, although these Regulations do not apply to the Company. These Regulations require the Auditors of a UKincorporated quoted company to report to such Companys Shareholders on part of the Directors Remuneration Report and to state whether, in their opinion, that part of the report has been properly prepared. The report is therefore divided into separate sections to disclose the audited and unaudited information.

Remuneration Policy The Groups underlying objective is to ensure that individuals are appropriately rewarded relative to their responsibility, experience and value to the Group. The Remuneration Committee is mindful of the need that, in a competitive environment, the Group needs to be able to attract, retain and motivate executives and employees who can perform to the highest levels of expectations. Directors are not appointed for specific terms and all Directors are subject to retirement from the Board by rotation at annual general meetings. The Remuneration Committee applies a similar philosophy in determining the CEOs remuneration as is applied in respect of all senior management employees.

Performance Performance

During 2010, the Group management has used the services of various independent HR consultants, namely Mercer Human Resources Consulting, Hay Group and Towers Watson (the HR Consultants), to provide it with independent remuneration advice and the Remuneration Committee has been provided with full details of the same, to assist it in determining remuneration packages. None of the HR Consultants provides any other services to the Group except advice on and assistance with the implementation of the remuneration policy.

The Executive Directors permanent contract of employment can be terminated by either the Director or the Company on three months notice. Service Contracts for Non-executive Directors The independent Non-executive Directors have letters of appointment that can be terminated by either the Director or the Company on three months notice. There is no legally binding commitment as to the term of office; however, any appointment or reappointment will be subject to the Companys Articles of Association that provide for retirement by rotation at least every three years.

Corporate Governance Statement

Strategic Review Strategic Review

The Remuneration Committee recognises that the executive management team has performed very well over the last 12 months and this is reflected in the Companys share price, which increased by over 39% during the course of 2010. Accordingly, the Remuneration Committee is careful to ensure that Dragon Oils policy on remuneration for all key personnel but in particular for its Executive Directors enables the Group to attract and retain high quality individuals.

The Company has fully complied with the Irish Stock Exchanges requirement in relation to the disclosure of Directors remuneration contained in LR 6 Appendix 1 to the Listing Rules. No Director votes on or discusses the terms of his own remuneration.

The Executive Directors maximum annual bonus for 2010 was 70% of annual salary which is assessed by reference to an objective assessment of the Groups financial and operational performance, as well as review of the performance of the individual in question. For details on the methodology in allocating share options, please refer to pages 58 to 59 below.

Directors Remuneration Report

Dragon Oil plc Annual Report for the year ended 31 December 2010

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Overview

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3859 Governance

Directors Remuneration Report continued

AUDITED Directors Remuneration Share options value of services Benefits provided US$000 US$000 430 248

Fees 2010 US$000 Executive Director Abdul Jaleel Al Khalifa Non-executive Directors Mohammed Al Ghurair Nigel McCue Ahmad Sharaf Ahmad Al Muhairbi Saeed Al Mazrooei

Salary 2010 US$000 395

Bonus 2010 US$000 188

Total 2010 US$000 1,261

Total 2009 US$000 1,186

187 137 122 137 135 718

395

188

430

248

187 137 122 137 135 1,979

191 183 138 179 192 2,069

Directors Interests The interests of the Directors in the share capital of the Company, all of which are beneficial, are as set out below. The tables include all interests up to and including 21 February 2011: At 1 January 2010 Ordinary Share shares options(1) Executive Director Abdul Jaleel Al Khalifa Directors Nigel McCue Company Secretary Alex Ridout 360,000 At 31 December 2010 Ordinary Share shares options(1) 480,000 At 21 February 2011 Ordinary Share shares options(1) 480,000

125,000 125,000 10,000 135,000

250,000 610,000 183,333 793,333

125,000 125,000 10,000 135,000

250,000 730,000 233,333 963,333

125,000 125,000 10,000 135,000

250,000 730,000 233,333 963,333

(1)

The share options are options for Ordinary Shares in Dragon Oil plc, granted in accordance with the 2002 Share Option Scheme or the 2009 Share Option Scheme, as may be applicable, and which options are exercisable in accordance with the applicable Scheme.

Date of grant Directors Abdul Jaleel Al Khalifa Nigel McCue

06.04.09 13.04.10 31.12.04

360,000 250,000 610,000 120,000 120,000

360,000 120,000 250,000 730,000 106,667 26,666 50,000 50,000 963,333

177.0 478.25 69.0

07.04.10 14.04.13 01.01.08

05.04.19 11.04.20 30.12.14

50,000 793,333 170,000

Vesting period Performance Indicators increasing the level of average annual production achieving an enterprise-wide reserve replacement ratio completing set individual performance targets or goals General conditions such as control of option grant flow rate generally and limits on participation. As a final comment, the Board has noted the changes in the market and specifically with regard to the use of LTIPs in recent years, not least because of the global recession. In light of this, the Board is considering the submission of resolutions to be tabled at the forthcoming 2011 AGM relating to the establishment of two new long-term incentive plans. It is planned that these will be the 2011 Performance Share Plan

Share Option Plans Share options are awarded to attract, retain and provide its Directors and key employees with a long-term performance incentive to deliver growth and Shareholder value. The Board views the use of long-term incentive plans as integral in its strategy to achieve this goal. Dragon Oil plc previously awarded share options to its Directors and to its employees in accordance with the Groups 2002 Share Option Scheme. It is not anticipated that any further options will be granted under this scheme. The 2009 Share Option Scheme was adopted and approved by the Shareholders at the 2009 AGM. The key difference between the 2002 Share Option Scheme and the 2009 Share Option Scheme is the requirement on the Board to link vesting of share options

The Board has to consider measures, which are required in order to be competitive with the LTIPs being offered by peer companies within the oil and gas sector. Pension Scheme The Group complies with all applicable laws and regulations relating to pensions and end of service gratuities, in the countries in which it operates. By order of the Board SAEED AL MAZROOEI Chairman of the Remuneration Committee 21 February 2011

Financial Statements Financial Statements

Governance

Governance

Responsibility Responsibility

Throughout 2010 none of the Directors share options lapsed. The opening market price of the Ordinary Shares in Dragon Oil plc on 2 January 2010 was Stg. 387p, the closing price of the Ordinary Shares on 31 December 2010 was Stg. 538p, and the market prices in the Ordinary Shares ranged between Stg. 381.8p and Stg. 539p during the year.

under the 2009 Share Option Scheme with certain performance indicators. The share options which were awarded in 2010 were awarded in accordance with and will be governed by the 2009 Share Option Scheme, which conditions included the following:

and the 2011 Employee Stock Purchase Plan. The former is designed to replace the Companys existing options plans for key personnel whereas the latter will focus on the participation by all employees in ownership of the Company. In both cases, it is anticipated that the new plans will enable the Group to attract and retain the highest quality employees at all levels, while at the same time complying with high corporate governance standards and aligning the Group with shareholders best interests.

Performance Performance

Company Secretary Alex Ridout 14.12.06 Alex Ridout 06.04.09 Alex Ridout 06.04.09 Alex Ridout 13.04.10

106,667 26,666 50,000

170.84 177.00 177.00 478.25

15.12.09 04.04.11 07.04.12 14.04.13

13.12.16 02.04.18 05.04.19 11.04.20

Strategic Review Strategic Review

As at 1 Jan 2010

Granted Exercised Cancelled during during during the year the year the year

As at Exercise 31 Dec price 2010 (Stg. p)

Average market price at exercise date

Exercisable from

Exercisable up to

Directors Remuneration Report

Dragon Oil plc Annual Report for the year ended 31 December 2010

59

Overview

60

6093 Financial Statements

Independent Auditors Report to the Members of Dragon Oil plc


We have audited the Group and Parent Company financial statements (the financial statements) of Dragon Oil plc for the year ended 31 December 2010 which comprise the Group and Parent Company Balance Sheets, Group Income Statement, Group Statement of Comprehensive Income, Group and Parent Company Cash Flow Statements, Group and Parent Company Statements of Changes in Equity and the related notes. These financial statements have been prepared under the accounting policies set out therein. Respective responsibilities of directors and auditors The Directors responsibilities for preparing the Annual Report and the financial statements, in accordance with applicable Irish law and International Financial Reporting Standards (IFRSs) as adopted by the European Union, are set out in the Statement of Directors Responsibilities. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the Parent Companys members as a body in accordance with Section 193 of the Companies Act, 1990 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We report to you our opinion as to whether the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union. We report to you our opinion as to whether the Parent Company financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union as applied in accordance with the provisions of the Companies Acts, 1963 to 2009. We also report to you whether the financial statements have been properly prepared in accordance with Irish statute comprising the Companies Acts, 1963 to 2009 and Article 4 of the IAS Regulation. We state whether we have obtained all the information and explanations we consider necessary for the purposes of our audit, and whether the Parent Company balance sheet is in agreement with the books of account. We also report to you our opinion as to: whether the Parent Company has kept proper books of account; whether the Directors report is consistent with the financial statements; and whether at the balance sheet date there existed a financial situation which may require the Parent Company to convene an extraordinary general meeting of the Parent Company; such a financial situation may exist if the net assets of the Parent Company, as stated in the Parent Company balance sheet are not more than half of its called-up share capital. We also report to you if, in our opinion, any information specified by law or the Listing Rules of the Irish Stock Exchange regarding Directors remuneration and Directors transactions is not disclosed and, where practicable, include such information in our report. We are required by law to report to you our opinion as to whether the description in the annual corporate governance statement set out in the directors report of the main features of the internal control and risk management systems in relation to the process for preparing the Group financial statements is consistent with the Group financial statements. In addition, we review whether the Corporate Governance Statement reflects the companys compliance with the nine provisions of the 2008 Combined Code specified for our review by the Listing Rules of the Irish Stock Exchange, and we report if it does not. We are not required to consider whether the boards statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Groups corporate governance procedures or its risk and control procedures. We read the other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. The other information comprises only Message from the Chief Executive Officer, Chairmans Statement, Operating and Financial Review, Corporate Social Responsibility Report, Directors Report, Risk Report, Corporate Governance Report, unaudited part of the Directors Remuneration Report and Supplementary Information. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion: the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Groups affairs as at 31 December 2010 and of its profit and cash flows for the year then ended; the Parent Company financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union as applied in accordance with the provisions of the Companies Acts 1963 to 2009, of the state of the Parent Companys affairs as at 31 December 2010 and cash flows for the year then ended; and the financial statements have been properly prepared in accordance with the Companies Acts, 1963 to 2009 and Article 4 of the IAS Regulation. We have obtained all the information and explanations which we consider necessary for the purposes of our audit. In our opinion proper books of account have been kept by the Parent Company. The Parent Company balance sheet is in agreement with the books of account. In our opinion the information given in the Directors report is consistent with the financial statements and the description in the annual corporate governance statement of the main features of the internal control and risk management systems in relation to the process for preparing the Group financial statements is consistent with the Group financial statements. The net assets of the Parent Company, as stated in the Parent Company balance sheet are more than half of the amount of its called-up share capital and, in our opinion, on that basis there did not exist at 31 December 2010 a financial situation which under Section 40 (1) of the Companies (Amendment) Act, 1983 would require the convening of an extraordinary general meeting of the Parent Company. PRICEWATERHOUSECOOPERS Chartered Accountants and Registered Auditors Dublin, Ireland 21 February 2011

Financial Statements Financial Statements

Governance

Governance

Responsibility Responsibility

Performance Performance

Strategic Review Strategic Review

Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Groups and Parent Companys circumstances, consistently applied and adequately disclosed.

Notes to the Financial Statements

Dragon Oil plc Annual Report for the year ended 31 December 2010

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Overview

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6093 Financial Statements

Group Balance Sheet


As at 31 December

Note ASSETS Non-current assets Property, plant and equipment Intangible assets Current assets Inventories Trade and other receivables Term deposits Cash and cash equivalents Total assets EQUITY Capital and reserves attributable to the Companys equity Shareholders Share capital Share premium Capital redemption reserve Other reserve Retained earnings Total equity LIABILITIES Non-current liabilities Trade and other payables Deferred income tax liabilities Current liabilities Trade and other payables Current income tax liabilities Total liabilities Total equity and liabilities Approved by the Board on 21 February 2011

2010 US$000

2009 US$000

7 8

1,176,361 1,176,361

908,310 1,054 909,364 43,379 57,264 870,468 267,110 1,238,221 2,147,585

11 12 13 13

47,035 98,273 1,195,148 141,457 1,481,913 2,658,274

14 15 16 17

80,774 230,296 77,150 4,074 1,700,652 2,092,946

80,687 228,809 77,150 3,138 1,313,439 1,703,223

18 23

83,231 83,231

20,158 68,905 89,063 250,033 105,266 355,299 444,362 2,147,585

18 23

340,023 142,074 482,097 565,328 2,658,274

MOHAMMED AL GHURAIR Chairman

NIGEL McCUE Director

The notes on pages 68 to 93 are an integral part of these financial statements.

Group Income Statement


Year ended 31 December

Revenue Cost of sales Gross profit Administrative expenses Other income Operating profit Finance income Profit before income tax Income tax expense Profit attributable to equity holders of the Company Earnings per share attributable to equity holders of the Company Basic Diluted

19 20 20

780,409 (264,683) 515,726 (28,206) 203 487,723 26,952 514,675 (128,592) 386,083

623,480 (282,277) 341,203 (27,018) 260 314,445 30,553 344,998 (85,971) 259,027 50.30 50.20

21 23 24

74.94 74.69

Group Statement of Comprehensive Income


Year ended 31 December

2010 US$000 Profit attributable to equity holders of the Company Total comprehensive income for the year Approved by the Board on 21 February 2011 386,083 386,083

2009 US$000 259,027 259,027

The notes on pages 68 to 93 are an integral part of these financial statements.

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Governance

MOHAMMED AL GHURAIR Chairman

NIGEL McCUE Director

Responsibility Responsibility

Performance Performance

Strategic Review Strategic Review

Note

Group Balance Sheet

2010 US$000

2009 US$000

Group Income Statement

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Group Cash Flow Statement


Year ended 31 December

Notes Cash generated from operating activities Income tax paid Net cash generated from operating activities Cash flows from investing activities Additions to property, plant and equipment Additions to intangible assets Interest received on bank deposits Amounts placed on term deposits (with original maturities greater than three months) Net cash used in investing activities Cash flows from financing activities Proceeds from issue of share capital Cash generated from financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 13 14,15 7,18 8 21 13 25

2010 US$000 672,165 (77,458) 594,707 (424,103) (103) 26,952 (324,680) (721,934) 1,574 1,574 (125,653) 267,110 141,457

2009 US$000 593,287 (92,982) 500,305 (268,938) (107) 30,553 (443,801) (682,293) 47 47 (181,941) 449,051 267,110

The notes on pages 68 to 93 are an integral part of these financial statements.

Company Balance Sheet


As at 31 December

ASSETS Non-current assets Investments in subsidiary undertakings Current assets Loans to subsidiary undertakings Other receivables Cash and cash equivalents Total assets EQUITY Capital and reserves attributable to the Companys equity Shareholders Share capital Share premium Capital redemption reserve Other reserve Retained earnings/(Accumulated losses) Total equity LIABILITIES Current liabilities Other payables Total equity and liabilities Approved by the Board on 21 February 2011

9a 9b 12 13

8,415 456,103 367 1,431 457,901 466,316

6,349 364,656 452 2,297 367,405 373,754

14 15 16 17

80,774 230,296 77,150 4,074 73,593 465,887

80,687 228,809 77,150 3,138 (20,012) 369,772

18

429 466,316

3,982 373,754

MOHAMMED AL GHURAIR Chairman

NIGEL McCUE Director

The notes on pages 68 to 93 are an integral part of these financial statements.

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Note

Group Cash Flow Statement

2010 US$000

2009 US$000

Company Balance Sheet

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Company Cash Flow Statement


Year ended 31 December

Notes Cash used in operating activities Cash flows from investing activities Loans (advanced to)/repaid by Group companies Dividends received from a subsidiary undertaking Cash provided by investing activities Cash flows from financing activities Proceeds from issue of share capital Cash generated from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 13 14,15 25 9b

2010 US$000 (5,993) (91,447) 95,000 3,553 1,574 1,574 (866) 2,297 1,431

2009 US$000 (4,423) 6,008 6,008 47 47 1,632 665 2,297

The notes on pages 68 to 93 are an integral part of these financial statements.

Statement of Changes in Equity

Group Share capital US$000 80,685 2 2 80,687 14,15 14 87 87 80,774 Capital Share redemption premium reserve US$000 US$000 228,764 45 45 228,809 1,487 1,487 230,296 77,150 77,150 77,150 Other reserve US$000 1,689 1,801 (352) 1,449 3,138 2,066 (1,130) 936 4,074 Retained earnings US$000 1,054,060 259,027 352 352 1,313,439 386,083 1,130 1,130 1,700,652

Statement of Changes in Equity Company Cash Flow Statement

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Notes At 1 January 2009 Total comprehensive income for the year Shares issued during the year 14,15 Employee share option scheme: value of services provided 14 Transfer on exercise of share options Total transactions with owners At 31 December 2009 Total comprehensive income for the year Shares issued during the year Employee share option scheme: value of services provided Transfer on exercise/forfeiture of share options Total transactions with owners At 31 December 2010 Company

Total US$000 1,442,348 259,027 47 1,801 1,848 1,703,223 386,083 1,574 2,066 3,640 2,092,946

Notes At 1 January 2009 Total comprehensive loss for the year Shares issued during the year 14,15 Employee share option scheme: value of services provided 14 Transfer on exercise of share options Total transactions with owners At 31 December 2009 Total comprehensive income for the year Shares issued during the year Employee share option scheme: value of services provided Transfer on exercise/forfeiture of share options Total transactions with owners At 31 December 2010 14,15 14

Share capital US$000 80,685 2 2 80,687 87 87 80,774

Capital Share redemption premium reserve US$000 US$000 228,764 45 45 228,809 1,487 1,487 230,296 77,150 77,150 77,150

Retained earnings/ Other (Accumulated reserve losses) US$000 US$000 1,689 1,801 (352) 1,449 3,138 2,066 (1,130) 936 4,074 (12,478) (7,886) 352 352 (20,012) 92,475 1,130 1,130 73,593

Total US$000 375,810 (7,886) 47 1,801 1,848 369,772 92,475 1,574 2,066 3,640 465,887

The notes on pages 68 to 93 are an integral part of these financial statements.

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Notes to the Financial Statements

General information Dragon Oil plc (the Company) and its subsidiaries (together the Group) are engaged in upstream oil and gas exploration, development and production activities primarily in Turkmenistan under a Production Sharing Agreement (PSA). The production of crude oil is shared between the Group and the Government of Turkmenistan as determined in accordance with the fiscal terms as contained in the PSA. The Company is incorporated in Ireland and the address of its registered office is given on the inside back cover. The Group headquarters is based in Dubai, United Arab Emirates (UAE). The Companys ordinary shares have a primary listing on the Irish Stock Exchange and a premium listing on the London Stock Exchange. These financial statements have been approved for issue by the Board of Directors on 21 February 2011.

Summary of significant accounting policies The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated. Basis of preparation These financial statements of the Company have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS), International Financial Reporting Interpretations Committee (IFRIC) interpretations and those parts of the Irish Companies Acts, 1963 to 2009 applicable to companies reporting under IFRS and Article 4 of the International Accounting Standards (IAS) Regulation. The financial statements have been prepared under the historical cost convention except for the measurement at fair value of share options, derivative financial instruments and underlift receivables/overlift payables. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Groups accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 4. (a) New and amended standards adopted by the Group The following new standards and amendments to standards are mandatory for the first time for the financial year beginning 1 January 2010: IFRS3 (revised), Business combinations, and consequential amendments to IAS27, Consolidated and separate financial statements, IAS28, Investments in associates, and IAS31, Interests in joint ventures, are effective prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009. The revised standard continues to apply the acquisition method to business combinations but with some significant changes compared with IFRS3. For example, all payments to purchase a business are recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently remeasured through the statement of comprehensive income. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the non-controlling interests proportionate share of the acquirees net assets. All acquisition-related costs are expensed. The Group will apply IFRS3 (revised) to all business combinations from 1 January 2010.

2.1

IFRS5 (amendment), Non-current assets held for sale and discontinued operations. The amendment clarifies that IFRS5 specifies the disclosures required in respect of non-current assets (or disposal groups) classified as held for sale or discontinued operations. It also clarifies that the general requirement of IAS1 still apply, in particular paragraph 15 (to achieve a fair presentation) and paragraph 125 (sources of estimation uncertainty) of IAS1. IAS1 (amendment), Presentation of financial statements. The amendment clarifies that the potential settlement of a liability by the issue of equity is not relevant to its classification as current or non current. By amending the definition of current liability, the amendment permits a liability to be classified as non-current (provided that the entity has an unconditional right to defer settlement by transfer of cash or other assets for at least twelve months after the accounting period) notwithstanding the fact that the entity could be required by the counterparty to settle in shares at any time. IAS36 (amendment), Impairment of assets, effective 1 January 2010. The amendment clarifies that the largest cashgenerating unit (or group of units) to which goodwill should be allocated for the purposes of impairment testing is an operating segment, as defined by paragraph 5 of IFRS8, Operating segments (that is, before the aggregation of segments with similar economic characteristics). IFRIC9, Reassessment of embedded derivatives and IAS39, Financial instruments: Recognition and measurement, effective 1 July 2009. This amendment to IFRIC9 requires an entity to assess whether an embedded derivative should be separated from a host contract when the entity reclassifies a hybrid financial asset out of the fair value through profit or loss category. This assessment is to be made based on circumstances that existed on the later of the date the entity first became a party to the contract and the date of any contract amendments that significantly change the cash flows of the contract. If the entity is unable to make this assessment, the hybrid instrument must remain classified as at fair value through profit or loss in its entirety. IFRIC16, Hedges of a net investment in a foreign operation effective 1 July 2009. This amendment states that, in a hedge of a net investment in a foreign operation, qualifying hedging instruments may be held by any entity or entities within the Group, including the foreign operation itself, as long as the designation, documentation and effectiveness requirements of IAS39 that relate to a net investment hedge are satisfied. In particular, the Group should clearly document its hedging strategy because of the possibility of different designations at different levels of the Group. IAS38 (amendment), Intangible assets, effective 1 January 2010. The amendment clarifies guidance in measuring the fair value of an intangible asset acquired in a business combination and permits the grouping of intangible assets as a single asset if each asset has similar useful economic lives. IFRIC17, Distribution of non-cash assets to owners (effective on or after 1 July 2009). The interpretation was published in November 2008. This interpretation provides guidance on accounting for arrangements whereby an entity distributes non-cash assets to shareholders either as a distribution of reserves or as dividends. IFRS5 has also been amended to require that assets are classified as held for distribution only when they are available for distribution in their present condition and the distribution is highly probable. IFRIC18, Transfers of assets from customers, effective for transfer of assets received on or after 1 July 2009. This interpretation clarifies the requirements of IFRSs for agreements in which an entity receives from a customer an item of property, plant and equipment that the entity must then use either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services (such as a supply of electricity, gas or water). In some cases, the entity receives cash from a customer that must be used only to acquire or construct the item of property, plant, and equipment in order to connect the customer to a network or provide the customer with ongoing access to a supply of goods or services (or to do both).

Financial Statements Financial Statements

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Performance Performance

Strategic Review Strategic Review

2 2.1

Summary of significant accounting policies continued Basis of preparation continued (b) New and amended standards, and interpretations mandatory for the first time for the financial year beginning 1 January 2010 but not currently relevant to the Group IFRS2 (amendments), Group cash-settled share-based payment transactions, effective from 1 January 2010. In addition to incorporating IFRIC8, Scope of IFRS2, and IFRIC11, IFRS2 Group and treasury share transactions, the amendments expand on the guidance in IFRIC11 to address the classification of Group arrangements that were not covered by that interpretation.

Notes to the Financial Statements

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2 2.1

Summary of significant accounting policies continued Basis of preparation continued (c) New standards, amendments and interpretations issued but not effective for the financial year beginning 1 January 2010 and not early adopted The Groups and parent entitys assessment of the impact of these new standards and interpretations is set out below. IFRS9, Financial instruments, issued in November 2009. This standard is the first step in the process to replace IAS39, Financial instruments: recognition and measurement. IFRS9 introduces new requirements for classifying and measuring financial assets and is likely to affect the Groups accounting for its financial assets. The standard is not applicable until 1 January 2013 but is available for early adoption. However, the standard has not yet been endorsed by the EU. The Group will apply IFRS9 from 1 January 2013, subject to EU endorsement. Revised IAS24 (revised), Related party disclosures, issued in November 2009. It supersedes IAS24, Related party disclosures, issued in 2003. IAS24 (revised) is mandatory for periods beginning on or after 1 January 2011. Earlier application, in whole or in part, is permitted. The revised standard clarifies and simplifies the definition of a related party and removes the requirement for government-related entities to disclose details of all transactions with the government and other government-related entities. The Group will apply the revised standard from 1 January 2011. When the revised standard is applied, the Group and the parent will need to disclose any transactions between its subsidiaries and its associates. The Group will apply IAS24 (revised) from 1 January 2011. Classification of rights issues (amendment to IAS32), issued in October 2009. The amendment applies to annual periods beginning on or after 1 February 2010. Earlier application is permitted. The amendment addresses the accounting for rights issues that are denominated in a currency other than the functional currency of the issuer. Provided certain conditions are met, such rights issues are now classified as equity regardless of the currency in which the exercise price is denominated. Previously, these issues had to be accounted for as derivative liabilities. The amendment applies retrospectively in accordance with IAS 8 Accounting policies, changes in accounting estimates and errors. The Group will apply the amended standard from 1 January 2011. Prepayments of a minimum funding requirement (amendments to IFRIC14). The amendments correct an unintended consequence of IFRIC14, IAS19 The limit on a defined benefit asset, minimum funding requirements and their interaction. Without the amendments, entities are not permitted to recognise as an asset some voluntary prepayments for minimum funding contributions. This was not intended when IFRIC14 was issued, and the amendments correct this. The amendments are effective for annual periods beginning 1 January 2011. Earlier application is permitted. The amendments should be applied retrospectively to the earliest comparative period presented. The Group will apply these amendments for the financial reporting period commencing on 1 January 2011 but it is not expected that these amendments will have any impact on the Group or the parent entitys financial statements. IFRIC19, Extinguishing financial liabilities with equity instruments, effective 1 July 2010. The interpretation clarifies the accounting by an entity when the terms of a financial liability are renegotiated and result in the entity issuing equity instruments to a creditor of the entity to extinguish all or part of the financial liability (debt for equity swap). It requires a gain or loss to be recognised in profit or loss, which is measured as the difference between the carrying amount of the financial liability and the fair value of the equity instruments issued. If the fair value of the equity instruments issued cannot be reliably measured, the equity instruments should be measured to reflect the fair value of the financial liability extinguished. The Group will apply the interpretation from 1 January 2011. It is not expected to have any impact on the Group or the parent entitys financial statements.

Investments in subsidiaries in the Company balance sheet are accounted at cost less provision for impairment. Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated on consolidation. Unrealised losses are also eliminated but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries are consistent with those adopted by the Group. 2.3 Segment reporting The Group is managed as a single business unit and the financial performance is reported in the internal reporting provided to the Chief Operating Decision-maker (CODM). The Board of Directors (BOD), who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the CODM that makes strategic decisions. The financial information reviewed by the CODM is based on the IFRS financial information for the Group. 2.4 Foreign currencies The financial statements are presented in US dollars (US$) rounded to the nearest thousand, which is the Companys functional and presentation currency. Functional currency is the currency of the primary economic environment in which the Company operates. The functional currency of all material subsidiaries is US$. Transactions in a foreign currency are initially recorded in the functional currency using the exchange rates prevailing at the date of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translations at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. Non-monetary assets and liabilities that are measured at historical cost in a foreign currency are translated using the rate of exchange as at the dates of the initial transactions. Non-monetary assets and liabilities measured at fair value in a foreign currency are translated using the rate of exchange at the date the fair value was determined. All foreign exchange gains and losses are taken to the income statement with the exception of exchange differences arising on monetary assets and liabilities that form part of the Groups net investment in subsidiaries. These are taken directly to equity until the disposal of the net investment at which time they are recognised in the income statement. 2.5 Property, plant and equipment (a) Development and production assets Development and production assets represent the cost of developing the commercial reserves discovered and bringing them into production, together with the Exploration and Evaluation (E&E) expenditures incurred in finding commercial reserves transferred from intangible E&E assets as outlined in Note 2.6. Costs of development and production assets also include licence acquisition costs, development drilling, infrastructure projects and a proportion of directly attributable administrative and overhead costs. (b) Other Property, plant and equipment, other than development and production assets, are stated at cost less accumulated depreciation. Depreciation is provided at rates calculated to write off the cost, less estimated residual value, of each asset on a straight-line basis over its expected useful life of four years.

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Strategic Review Strategic Review

2 2.2

Summary of significant accounting policies continued Consolidation The Group financial statements incorporate the financial statements of entities controlled by the Group. Control is achieved where the Group has the power to govern the financial and operating policies of an entity (a subsidiary) generally accompanying a shareholding of more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.

Notes to the Financial Statements

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2 2.6

Summary of significant accounting policies continued Exploration and evaluation (E&E) assets E&E costs are initially capitalised within Intangible assets. Such E&E costs may include costs of licence acquisition, technical services and studies, seismic acquisition, exploration drilling and testing. Pre-licence costs incurred prior to having obtained the legal rights to explore an area are expensed directly to the income statement as they are incurred. Intangible E&E assets related to each exploration licence/prospect are not amortised and are carried forward until the existence (or otherwise) of commercial reserves has been determined. If commercial reserves have been discovered, the related E&E assets are assessed for impairment and any loss is recognised in the income statement. The carrying value, after any impairment loss, of the relevant E&E assets is then reclassified as development and production assets within property, plant and equipment. Tangible assets acquired for use in E&E activities are classified as property, plant and equipment. However, to the extent that such a tangible asset is consumed in developing an intangible E&E asset, the amount reflecting that consumption is recorded as part of the cost of the intangible asset.

2.7

Depletion and impairment Depletion of development and production assets is computed using the unit-of-production method, with reference to the ratio of the production during the period and the commercial reserves of oil and gas taking into account development expenditures necessary to bring those reserves into production. Gas reserves are converted into barrels of oil equivalent (boe) based on the energy conversion rate for the purposes of determining the depletion charge. Changes in estimates of commercial reserves or future field development costs, affecting the unit-of-production calculations for depletion are accounted for prospectively. Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the assets carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an assets fair value less cost to sell and its value in use. For the purposes of assessing impairment, assets are Grouped as a single cash generating unit based on economic interdependency between fields, such as common infrastructure. Any material impairment loss is recognised in the income statement and separately disclosed. Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.

2.8

Financial assets and liabilities The Group classifies its financial assets as those at fair value through profit or loss and loans and receivables. The classification depends on the nature and purpose for which the financial assets were acquired, and is determined at initial recognition. Financial assets are derecognised when the right to receive cash flows from the assets have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Financial liabilities are derecognised when the obligation under the liability is discharged or cancelled or expires.

2.8.1 Financial assets (a) Derivative financial instruments The Group has previously used derivative financial instruments to manage its oil price exposure. Where applicable derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The resulting gains and losses are immediately recognised in the income statement.

(c) Cash and cash equivalents and term deposits Cash and cash equivalents comprise cash in hand and deposits held with banks with an original maturity of three months or less. Deposits with an original maturity of greater than three months but less than twelve months are classified as term deposits and presented separately. 2.8.2 Financial liabilities (a) Trade payables Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if the payment is due within one year or less; otherwise, they are classified as non-current liabilities. Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. (b) Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost. Any difference between the proceeds (net of transaction costs) and the repayment value is recognised in the income statement over the period of the borrowings using the effective interest method. 2.9 Inventories Inventories of crude oil, drilling and other supplies are included in current assets at the lower of cost and net realisable value. Cost is determined using the weighted average method and comprises direct purchase costs and cost of production. Net realisable value of crude oil is the estimated selling price in the ordinary course of business less applicable variable selling expenses. Full provision is made for obsolete drilling and other supplies.

2.11 Share capital and share premium account Ordinary shares are classified as equity. Share issue expenses are offset against the premium arising on the issue of ordinary share capital.

Financial Statements Financial Statements

Governance

2.10 Crude oil underlifts and overlifts Crude oil underlifts and overlifts arise on differences in quantities between the Groups entitlement production and the production either sold or held as inventory by the Group. Underlifts and overlifts of entitlement to crude oil production are measured at market value and recorded as a receivable and payable respectively. The movement within an accounting period is adjusted in revenue or cost of sales respectively, such that the gross profit is recognised on an entitlement basis.

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2 2.8

Summary of significant accounting policies continued Financial assets and liabilities continued (b) Trade receivables Trade receivables are amounts due from customers for the sale of crude oil performed in the ordinary course of business. Trade receivables are recognised initially at fair value and subsequently measured at amortised cost less provision for impairment using the effective interest method. A provision is established when there is objective evidence that the Group will not be able to collect amounts due. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the assets carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the income statement. When the possibility of collection is considered to be remote, balances are written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited in the income statement.

Notes to the Financial Statements

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2 Summary of significant accounting policies continued 2.12 Current and deferred income tax The tax expense for the period comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case, the tax is also recognised in other comprehensive income or directly in equity respectively. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities or the expected value (weighted average probability) approach. Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and the carrying amounts in the Group financial statements. However, deferred income tax is not recognised if it arises from the initial recognition of goodwill, or from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same tax authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. 2.13 End of service benefits The provision for end of service benefits for all employees is made in accordance with local labour legislation in the relevant countries of operations. Under the laws of Turkmenistan, the Group contributes under the State Plan towards social insurance in respect of local employees, which is recorded in the income statement. Expatriates in Turkmenistan are governed by the terms of their employment contracts that do not provide for end of service benefits. End of service benefits are payable in accordance with the legislation to employees based in the UAE. The UAE labour laws provide for a lumpsum payout at termination. Some of the Groups employees were members of the Groups Provident Scheme (the Scheme) to which the Company contributed an agreed percentage of the members base salary. The Schemes assets were held in an independently administered fund. Members of the Scheme are guaranteed on termination, a lump sum payout at least equivalent to that mandated under UAE labour legislation. The charge in any year was recorded in the income statement and the related contribution transferred to the scheme. The Scheme was discontinued in June 2010 and all end of service benefits from this date are in accordance with UAE labour laws. Under the laws of the UAE, the Group contributes a proportion of the salary of UAE nationals towards the pension fund to the General Pension Authority, which is recorded in the income statement.

The grant by the Company of options over its equity instruments to the employees of subsidiary undertakings in the Group is treated as a capital contribution. The fair value of employee services received, measured by reference to the grant date fair value, is recognised over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding credit to its other reserve. 2.15 Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events and it is probable that the Group would be required to settle the obligation and the amount has been reliably estimated. Provisions are recorded at managements best estimate of expenditure required to settle the obligation at the balance sheet date. Provisions are not recognised for future operating losses. 2.16 Revenue recognition (a) Sales of crude oil Revenue represents sales of crude oil and related income and comprises the fair value of the consideration received or receivable for the sale of crude oil by the Group in the ordinary course of the business to customers. Revenue arising from the sale of crude oil is recognised when the significant risks and rewards of ownership have passed to the buyer and the amount of revenue can be reliably measured. Revenue excludes the share of crude oil attributable to the Agency and abandonment and decommissioning barrels under the terms of the PSA. (b) Crude oil underlifts The accounting policy with respect to crude oil underlifts is set out in Note 2.10. (c) Interest income Interest income is recognised on a time-proportion basis using the effective interest method. 2.17 Leases Agreements under which payments are made to lessors in return for the right to use an asset for a period are accounted for as leases. Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the income statement on a straight line basis over the period of the lease or if directly attributable, capitalised as a part of development and production assets. 2.18 Abandonment and decommissioning costs The PSA provides for a fixed proportion of the proceeds of the Groups oil production to be set aside in designated bank accounts, including an escrow account, to meet abandonment and decommissioning costs of wells, platforms and other facilities. All such costs will be met from these designated accounts.

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Modification and re-pricing of share options are accounted for as a modification of the original grant. The Company records the compensation cost for cancelled awards based on their original value calculated at the grant date over the vesting period and the incremental value of the reissued awards relative to the value of the cancelled awards. The incremental fair value is the difference between the fair value of the modified equity instrument and that of the original equity instrument, both estimated as at the date of the modification.

Strategic Review Strategic Review

2 Summary of significant accounting policies continued 2.14 Share-based payment plans The Group operates an equity-settled, share-based compensation plan, under which the Group receives services from employees as consideration for equity instruments (options) of the Company. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense with a corresponding increase directly in equity. The total amount to be expensed on a straight line basis over the vesting period is determined by reference to the fair value of the options granted. Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. At each balance sheet date, the entity revises its estimates of the number of options that are expected to vest. The Group recognises the impact of the revision of original estimates, if any, in the income statement, with a corresponding adjustment to equity.

Notes to the Financial Statements

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2 Summary of significant accounting policies continued 2.19 Dividend distribution Dividend distribution to the Companys Shareholders is recognised as a liability in the Groups and Companys financial statements in the period in which the dividends are approved by the Companys Shareholders. 3 3.1 Financial risk management Financial risk factors The Groups activities expose it to a variety of financial risks: market risk, credit risk and liquidity risk which can adversely affect the Groups expected future cash flows or the Groups assets and liabilities. These risks are evaluated by management on an ongoing basis to assess and manage critical exposures. The financial risk management programme includes the use of derivative financial instruments to manage these underlying risks. The Groups liquidity and market risks are managed as part of Groups treasury activities. Treasury operations are conducted within a framework of established policies and guidelines. (a) Market risk (i) Price risk Crude oil prices are subject to volatility due to market forces and a significant drop in crude oil prices can impact on the Groups cash flows, profitability and on its ability to fund its development plans and operations. Crude oil prices also impact the measurement of underlifts and overlifts. The Group actively reviews oil price risks and uses derivative products as appropriate to manage oil price exposures. There were no derivative financial instruments held during 2009 or 2010 or at the balance sheet date. At the balance sheet date, if the market price of crude oil had been US$10 per barrel higher/lower, the crude oil overlifts would have been higher/lower by US$1.6 million (2009: crude oil overlifts would have been higher/lower by US$2.3 million). (ii) Foreign exchange risk The Group does not have significant exposure to foreign exchange risk and has adequate policies and controls in place to ensure that exposures to currencies other than the Companys functional currency are adequately managed. (iii) Interest rate risk The Group has no borrowings and hence it is not exposed to interest expense rate risk. The Group has significant interest bearing term deposits and is not dependent on the interest income from such deposits for its operations. During the year ended 31 December 2010, if interest rates on the deposits had been 0.5% higher/lower, the interest income would have been higher/lower by US$4.8 million (2009: US$4 million). (b) Credit risk Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents, term deposits and trade and other receivables. The Group places cash surplus to its immediate requirements on deposit with various local and international banks having operations in the United Arab Emirates. The deposits are mainly held with reputable independently rated banks with a Moodys A rating with 2% (2009: 4%) of the deposits in banks with a Moodys minimum rating of Baa1. The credit quality of the amounts held in deposits is set out in Note 10b. Oil export routes from the Caspian Sea are limited and a large part of the Groups exports are to Baku, Azerbaijan and counterparty risks are minimised through crude oil sales contracts on secured credit terms. Management does not expect any losses from non-performance by these counterparties. The Group has one customer representing the trade receivable at the year end. There have been no instances of default in the past on the trade receivables from this customer and subsequent to the year-end, all amounts have been collected in full (Note 12).

The Group is currently financed entirely from Shareholders equity with no debt. The table below analyses the Groups financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Carrying Contractual amount cash flows US$000 US$000 31 December 2010 Trade and other payables 31 December 2009 Trade and other payables 3.2 340,023 270,191 340,023 270,191 Less than 1 year US$000 340,023 250,033 1 to 5 years US$000 20,158

The Board has announced a dividend policy to reflect the strong underlying financial and operating performance whilst recognizing the Groups commitment to growth opportunities through acquisitions and organic options. The Group had no debt during the year and therefore the gearing ratio has not been calculated. 3.3 Fair value estimation IFRS7 requires disclosure of fair value measurements by level of the following fair value measurement hierarchy: Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1); Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2); and Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3).

At 31 December 2010, the overlift payable was measured at fair value based on quoted market price of crude oil (Level 1). The Group did not have any other financial assets or liabilities that are measured at fair value as at 31 December 2010.

Financial Statements Financial Statements

Governance

Governance

Responsibility Responsibility

Capital risk management The Groups objectives when managing capital are to safeguard the Groups ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure.

Performance Performance

Strategic Review Strategic Review

3 3.1

Financial risk management continued Financial risk factors continued (c) Liquidity risk The Group is involved in oil and gas exploration, development and production that requires high capital expenditure for field development. The Group closely monitors and manages its liquidity risk by forecasting the Groups cash position on the basis of expected cash flows taking into account volatility in oil prices and significant increases in the costs. The Group seeks to ensure that it has an adequate ongoing capacity to safeguard its ability to continue as a going concern.

Notes to the Financial Statements

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Critical accounting judgements and estimates The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities as well as contingent assets and liabilities at the date of the balance sheet, and the reported amounts of revenues and expenses during a reporting period. The resulting accounting estimates will, by definition, seldom equal the related actual results. The critical accounting judgements and estimates used in the preparation of financial statements that could result in material adjustments to the income statement and the carrying amounts of assets and liabilities are discussed below: Carrying value of development and production assets In arriving at the carrying value of the Groups development and production assets, significant assumptions in respect of the depletion charge have been made. These significant assumptions include estimates of oil and gas reserves, future oil and gas prices, finalisation of the gas sales agreement and future development costs including the cost of drilling, infrastructure facilities and other capital and operating costs. The Groups estimated long-term view of oil prices is US$70 per barrel and netback prices for gas is US$3.5 per Mscf, based on the current outlook. If the estimate of the long-term oil price had been US$20 per barrel higher at US$90 from 1 January 2010 and the netback price of gas had been US$1 per Mscf higher at US$4.50 from 1 July 2010, the reserves attributable to the Group would decrease, with a consequent increase in the depletion charge of US$13.4 million for the year. If the estimate of the long-term oil price had been US$20 per barrel lower at US$50 from 1 January 2010 and the netback price of gas had been US$1 per Mscf lower at US$2.50 from 1 July 2010, the reserves attributable to the Group would increase, with a consequent decrease in the depletion charge of US$21.9 million.

The depletion computation assumes the continued development of the field to extract the assessed oil and gas reserves and the required underlying capital expenditure to achieve the same. It also assumes that the PSA, which is valid up to 2025, will be extended on similar terms up to 2035 under an exclusive right to negotiate for an extension period of not less than ten years, provided for in the PSA. 5 The Company income statement In accordance with section 148(8) of the Companies Act, 1963 and section 7(1A) of the Companies (Amendment) Act, 1986, the Company is availing of the exemption from presenting its individual income statement to the annual general meeting and from filing it with the Companies Registration Office. The Companys profit for the financial year determined in accordance with IFRS is US$92.5 million (2009: loss of US$7.9 million). Segment information The Group is managed as a single business unit and its development and production assets are located in Turkmenistan in the Caspian region. The Group headquarters is based in Dubai, where a significant portion of cash at bank and term deposits of the Group are held. The exploration and evaluation assets represented the Groups interest in certain exploration blocks in Yemen. Revenue includes an amount of US$314.3 million (2009: US$586.6 million) arising from the sale of crude oil to one customer in Iran (2009: one customer), US$466 million (2009: US$59.5 million) arising from the sale of crude oil to two customers through Azerbaijan (2009: two customers) and US$0.1 million (2009: US$0.2 million) arising from other sales. In addition, the Group had a reversal of an underlift position in the prior year of US$22.8 million.

Property, plant and equipment Development and production assets US$000 Cost At 1 January 2009 Additions for the year At 31 December 2009 Additions for the year Amounts written off during the year At 31 December 2010 Depletion and depreciation At 1 January 2009 Charge for the year At 31 December 2009 Charge for the year At 31 December 2010 Net book amount At 31 December 2010 At 31 December 2009 1,182,442 317,091 1,499,533 459,606 1,959,139 406,122 188,435 594,557 188,378 782,935 1,176,204 904,976

Notes to the Financial Statements

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Other US$000 1,853 3,225 5,078 9 (3,088) 1,999 1,621 123 1,744 98 1,842 157 3,334

Total US$000 1,184,295 320,316 1,504,611 459,615 (3,088) 1,961,138 407,743 188,558 596,301 188,476 784,777 1,176,361 908,310

As discussed in Note 26(e), the recoverability of amounts recorded as development and production assets is dependent upon the satisfactory development of the field and extraction of the oil and gas reserves in Turkmenistan. 8 Intangible assets Exploration and evaluation assets US$000 At 1 January 2009 Additions for the year At 31 December 2009 Additions for the year Amounts written off during the year At 31 December 2010 947 107 1,054 103 (1,157)

Financial Statements Financial Statements

Governance

Governance

Responsibility Responsibility

Performance Performance

Strategic Review Strategic Review

Overview

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Investments in and loans to subsidiary undertakings Company (a) Investments in subsidiary undertakings US$000 Cost At 1 January 2009 Fair value of share options granted to employees of a subsidiary undertaking At 31 December 2009 Fair value of share options granted to employees of a subsidiary undertaking At 31 December 2010 Provision for impairment At 1 January 2009 and 31 December 2009 and 2010 Net book amount At 31 December 2010 At 31 December 2009 (b) Loans to subsidiary undertakings US$000 Cost At 1 January 2009 Repayments during the year At 31 December 2009 Advanced during the year At 31 December 2010 Provision for impairment At 1 January 2009 and 31 December 2009 and 2010 Net book amount At 31 December 2010 At 31 December 2009 The loans to subsidiary undertakings are non-interest bearing and are repayable on demand. 376,234 (6,008) 370,226 91,447 461,673 5,570 456,103 364,656 27,815 1,444 29,259 2,066 31,325 22,910 8,415 6,349

2010 US$000 Assets as per balance sheet Loans and receivables Trade and other receivables excluding prepayments and advances to suppliers Term deposits Cash and cash equivalents Liabilities as per balance sheet Liabilities at amortised cost Trade and other payables Company Assets as per balance sheet Loans and receivables Loans to subsidiary undertakings Other receivables Cash and cash equivalents Liabilities as per balance sheet Liabilities at amortised cost Trade and other payables

2009 US$000

92,324 1,195,148 141,457 1,428,929

41,078 870,468 267,110 1,178,656

340,023

270,191

456,103 367 1,431 457,901

364,656 452 2,297 367,405

10b Credit quality of financial assets The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings (if available) or to historical information about counterparties default rates. Trade receivables that are fully performing are due from an existing customer, for whom no credit rating is available. This customer has no history of defaults. Further details are provided in Note 12. The majority of the cash at bank and term deposits are held with counterparties with external credit ratings (Moodys), as set out below: 2010 US$000 Aa3 A1 A2 A3 Baa1 Non-rated Cash at bank and term deposits Cash in hand Cash and cash equivalents and term deposits 506,843 802,906 25,560 1,274 1,336,583 22 1,336,605 2009 US$000 179,401 913,777 42,678 1,697 1,137,553 25 1,137,578

Cash and cash equivalents of the Company are held with a bank with an external credit rating of A2 (Moodys) (2009: A2).

Financial Statements Financial Statements

Governance

Governance

Responsibility Responsibility

429

3,982

Performance Performance

Strategic Review Strategic Review

10a Financial instruments by category Group The accounting policies for financial instruments have been applied to the line items below:

Notes to the Financial Statements

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11

Inventories 2010 US$000 Crude oil Drilling and other supplies Provision for obsolete inventories 724 47,184 47,908 (873) 47,035 2009 US$000 11,848 32,475 44,323 (944) 43,379

The cost of crude oil recognised as an expense and included in cost of sales amounted to US$252.5 million (2009: US$246 million). 12 Trade and other receivables Group 2010 US$000 Trade receivable Other receivables Receivable from a related party Prepayments 90,873 3,819 71 3,510 98,273 The carrying value of the trade and other receivables approximate their fair values. The classification of trade receivables of the Group is as follows: Group 2010 US$000 Fully performing 90,873 2009 US$000 40,078 Company 2010 2009 US$000 US$000 2009 US$000 40,078 14,625 430 2,131 57,264 Company 2010 2009 US$000 US$000 303 64 367 365 87 452

At 31 December 2010, the Group faced a significant concentration of credit risk with one (2009: one) customer accounting for 100% (2009: 94%) of the trade receivables at that date. This customer, a state-owned oil and gas corporation, has an established record of promptly settling its financial commitments to the Group. At 31 December 2010, the Group had letters of credit amounting to US$87 million (2009: US$2 million) as collateral against the trade receivable. The other classes within trade and other receivables do not contain impaired assets. The maximum exposure to credit risk at the reporting date is the carrying value less collateral security of each class of receivables mentioned above.

13

Cash and bank balances Group 2010 US$000 Cash at bank and in hand Deposits with an original maturity of three months or less Cash and cash equivalents Term deposits with an original maturity of over three months 134,191 7,266 141,457 1,195,148 1,336,605 2009 US$000 63,928 203,182 267,110 870,468 1,137,578 Company 2010 2009 US$000 US$000 1,431 1,431 1,431 2,297 2,297 2,297

Notes to the Financial Statements

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Amounts held on deposit with an original maturity of three months or less earned interest during the year at rates between 0.85% and 2.7% (2009: 0.85% and 6.4%) per annum. Term deposits of US$1,195.1 million (2009: US$870.5 million) earned interest during the year at rates between 0.21% and 5% (2009: 1% and 6.5%) per annum. Deposits and other balances are held with nine banks (2009: ten). Details of deposits and other balances with banks under common control of the Government of Dubai are disclosed in Note 27(a). The maximum exposure to credit risk at the reporting date is the carrying value of cash and cash equivalents and term deposits mentioned above. The carrying value of cash and cash equivalents and term deposits approximate their fair value. Company Balances are held with one bank (2009: one). 14 Share capital Number of shares (000) At 1 January 2009 Issue of shares: Share option scheme (i) At 31 December 2009 Issue of shares: Share option scheme (i) At 31 December 2010 514,973 16 514,989 639 515,628 Ordinary shares US$000 80,685 2 80,687 87 80,774

The total authorised number of ordinary shares is 700 million shares (2009: 700 million shares) with a par value of 0.10 per share (2009: 0.10 per share). All issued shares are fully paid.

Financial Statements Financial Statements

Governance

Governance

Responsibility Responsibility

Performance Performance

Group Cash and bank balances include an amount of US$174.4 million (2009: US$126.4 million) held on deposit for abandonment and decommissioning activities. The related liability is shown under trade and other payables (Note 18).

Strategic Review Strategic Review

Overview

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14

Share capital continued (i) Share option scheme Share options are granted to Directors and to selected employees of a subsidiary company under the 2002 and 2009 Share Option Schemes. Share options granted under the 2002 Share Option Scheme were conditional upon the completion of continuing service with the Group for a specified period. Share options granted under the 2009 Share Option Scheme were conditional upon the completion of continuing service and fulfilment of certain non-market performance conditions. The exercise price of the share options is in accordance with the approved Share Option Scheme. The details of the options granted are given below. Options (000) 3,160 1,840 540 460 1,000 6-Apr-09 6-Apr-09 6-Apr-09 6-Apr-09 6-Apr-09 100 400 1,210 153 180 Vested 7-Apr-12 1/3 annually 4-Apr-11 06-Apr-09, 04-Apr-10 & 04-Jan-11 14-Apr-13 1/3 annually Vesting conditions Vested Vested 4-Apr-11 1/3 annually

Date of grant Grants in 2004 Grants in 2006 31-Dec-04 14-Dec-06 4 Apr-08 4-Apr-08 Grants in 2008

Reissue 1 Reissue 2

Grants in 2009 13-Apr-10 13-Apr-10 Grants in 2010

2,043 840 650 1,490

The re-issued options in 2009 were granted after the cancellation of 666,665 options and are treated as a modification of the original awards granted on 4 April 2008. The weighted average incremental value of the modified options was 0.61 per option (2009: 0.61 per option). Movements in the number of share options outstanding and their related weighted average exercise prices are as follows: 2010 Weighted average exercise price Outstanding at 1 January Granted Forfeited Cancelled Exercised Outstanding at 31 December Exercisable at 31 December 1.6218 4.7825 3.0104 1.5887 2.8220 1.4443 Weighted average exercise price 2.3663 1.7700 2.0416 4.5100 1.7700 1.6218 1.4010 2009

Options (000) 3,063 1,490 (169) (639) 3,745 1,038

Options (000) 2,803 2,043 (1,100) (667) (16) 3,063 1,230

14

2010 Share price at grant date Exercise price Expected volatility Expected risk-free rate per annum Interval in years for measurement of volatility Dividend yield per annum 4.7625 4.7825 55% to 63% 1.46% to 2.51% 2.5, 3.5 and 4.5 1.6%

2009 2.22 1.77 75% to 61% 1.14% to 2.57% 1.5, 2.5, 3.5 and 4.5 Nil

The expected volatility estimates used in the valuation have been calculated based on the historical volatilities of the Companys share price over various historical periods, weighing the historical volatility over periods commensurate with the expected term of the options. The weighted average fair value of options granted during the year determined using the BlackScholes option pricing model was 1.23 per option (2009: 1.10). The weighted average share price at the dates of exercise for the options exercised during the year was 4.9214 (2009: 3.3683). Share options outstanding at the year end have the following expiry dates and exercise prices: Exercise price 0.6900 1.7084 1.7700 4.7825 Options 2010 000 285 493 1,547 1,420 3,745 2009 000 380 706 1,977 3,063

Expiry date 30 December 2014 13 December 2016 05 April 2019 11 April 2020

15

Share premium 2010 US$000 At 1 January Premium on shares issued during the year At 31 December 228,809 1,487 230,296 2009 US$000 228,764 45 228,809

17

Other reserve Other reserve comprises amounts expensed in the income statement in connection with awards made under the Companys share option scheme less any exercises or lapses of such awards.

Financial Statements Financial Statements

16

Capital redemption reserve The capital redemption reserve arises from a reorganisation of the Companys share capital in 2002. It is non-distributable.

Governance

Governance

During the year, a total fair value charge of US$2.1 million (2009: US$1.8 million) was recorded in staff costs (Note 22(b)) and a corresponding amount recorded in the other reserve (Note 17). Included in the total fair value charge is an incremental fair value charge of US$0.02 million (2009: US$0.07 million) in respect of the modified share options.

Responsibility Responsibility

Performance Performance

Strategic Review Strategic Review

Share capital continued The significant inputs to the BlackScholes option pricing model are:

Notes to the Financial Statements

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18

Trade and other payables Group 2010 US$000 Trade payables Accruals Crude oil overlift payable Abandonment and decommissioning liability Other creditors Less: Non-current portion 78,639 62,331 12,680 185,828 545 340,023 340,023 2009 US$000 71,652 40,161 16,907 138,730 2,741 270,191 (20,158) 250,033 Company 2010 2009 US$000 US$000 351 78 429 429 1,798 2,184 3,982 3,982

Trade payables and accruals include amounts of US$76.6 million (2009: US$68.8 million) and US$49.4 million (2009: US$21.7 million) respectively, relating to additions to property, plant and equipment development and production assets. The abandonment and decommissioning liability represents amounts relating to the sale of crude oil to cover abandonment and decommissioning liabilities under the terms of the PSA. The carrying value of trade and other payables approximate their fair values. 19 Revenue 2010 US$000 Sales of crude oil Crude oil underlifts 780,409 780,409 20 Cost of sales and administrative expenses 2010 US$000 Cost of sales Administrative expenses 264,683 28,206 292,889 Analysed as follows: Depletion and depreciation (Note 7) Field operating costs Staff costs Crude oil marketing costs Net foreign exchange losses Exploration and evaluation expenditure written off (Note 8) Crude oil overlifts Other costs 2009 US$000 282,277 27,018 309,295 2009 US$000 646,265 (22,785) 623,480

188,476 46,163 32,114 14,443 267 1,157 (4,227) 14,496 292,889

188,558 38,353 31,789 20,162 338 16,907 13,188 309,295

21

Finance income 2010 US$000 Interest on bank deposits 26,952 2009 US$000 30,553

22

2010 US$000 Staff costs Depletion and depreciation (Note 7) Operating lease expenses Auditors remuneration Group Statutory audit of Group accounts Other assurance services Tax advisory services Other non-audit services Auditors remuneration Company Statutory audit of parent individual accounts Other assurance services Tax advisory services 32,114 188,476 1,752 189 226 113 528 10 18 81 109 (b) Staff costs 2010 US$000 Wages and salaries Social security costs End of service benefits Employee share options value of services provided (Note 14) Less: Capitalised as part of development and production assets 33,669 1,011 717 2,066 37,463 (5,349) 32,114 2010 Number Average monthly number of persons employed by the Group during the year: Petroleum Operations Finance, administration and others 890 214 1,104 (c) Directors emoluments (included in staff costs) 2010 US$000 Fees for services as Directors Other emoluments 718 1,261 1,979 Details of the Directors remuneration are disclosed in the Directors remuneration report on page 58.

2009 US$000 31,789 188,558 1,705 172 170 56 393 791 9 41 50

2009 US$000 33,322 1,137 315 1,801 36,575 (4,786) 31,789 2009 Number 812 203 1,015

883 1,186 2,069

Financial Statements Financial Statements

Governance

2009 US$000

Governance

Responsibility Responsibility

Performance Performance

Strategic Review Strategic Review

Profit before income tax (a) Included in profit before income tax are the following:

Notes to the Financial Statements

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23

Current and deferred income tax 2010 US$000 Analysis of income tax expense: Current tax Amounts relating to current year Amounts relating to prior year Net deferred tax 2009 US$000

111,194 3,072 14,326 128,592

97,371 (11,400) 85,971

The tax on the Groups profit before income tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits in the primary jurisdiction in which the Group operates. 2010 US$000 Profit before income tax Tax calculated at domestic tax rates applicable to profits in the primary jurisdiction [25% (2009: 25%)] Tax effect of expenses not deductible Effect of different tax rates in countries in which the Group operates Current tax amounts relating to prior year Others 514,675 128,669 6,859 (6,636) 3,072 (3,372) 128,592 Analysis of the net deferred tax liability: Deferred tax liability to be settled after more than 12 months Deferred tax asset to be recovered within 12 months 2009 US$000 344,998 86,249 6,063 (7,580) 1,239 85,971

86,402 (3,171) 83,231

77,902 (8,997) 68,905

The effective tax rate was 24.98% (2009: 24.92%). At the year end, current income tax of US$142.1 million (2009: US$105.3 million) was payable. Deferred income tax assets and liabilities are offset since they relate to income taxes levied by the same taxation authority. The movement in deferred income tax liabilities and assets during the year is as follows: Deferred tax liabilities Production and development asset depletion US$000 At 1 January 2009 Charged/(credited) to the income statement At 31 December 2009 Charged to the income statement At 31 December 2010 77,694 208 77,902 8,500 86,402

Crude oil underlifts US$000 5,697 (5,697)

Total US$000 83,391 (5,489) 77,902 8,500 86,402

23

Crude oil overlifts US$000 At 1 January 2009 Credited to the income statement At 31 December 2009 Charged to the income statement At 31 December 2010 4,228 4,228 (1,057) 3,171

Others US$000 3,086 1,683 4,769 (4,769)

Total US$000 3,086 5,911 8,997 (5,826) 3,171

During 2008, the effective tax rate applicable to the Groups operations in Turkmenistan was increased by 5% to 25% by the Hydrocarbon Resources Law of 2008. The Group has continued to apply this rate in determining its tax liabilities as at 31 December 2010. The Group is in discussions with the authorities in Turkmenistan about the applicability of this rate to periods prior to 2008, but it does not believe that these prior periods are affected by this increase. A provision has been made in respect of the additional tax that could become payable if the increased tax rate were applied to prior periods based on the expected value (weighted average probability) approach. 24 Earnings per share 2010 US$000 Profit attributable to equity holders of the Company 386,083 Number 000 Weighted average number of shares: Basic Assumed conversion of potential dilutive share options Diluted Earnings per share attributable to equity holders of the Company: Basic Diluted 515,210 1,693 516,903 74.94 74.69 2009 US$000 259,027 Number 000 514,982 957 515,939 50.30 50.20

For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potential dilutive options over ordinary shares.

Financial Statements Financial Statements

Governance

Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year.

Governance

Responsibility Responsibility

Performance Performance

The Group has unutilised tax losses carried forward at 31 December 2010 from two entities amounting to US$54.2 million (2009: US$50.9 million). There is no time limit on the carry forward of such losses. A deferred income tax asset has not been recognised as the Group does not expect that future taxable profits will be available from these entities to utilise these losses.

Strategic Review Strategic Review

Current and deferred income tax continued Deferred tax assets

Notes to the Financial Statements

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25

Cash generated from/(used in) operating activities Note Group Profit before income tax Adjustments for: Depletion and depreciation Crude oil underlifts Crude oil overlifts Write-off of property, plant and equipment Employee share options value of services provided Write-off of intangible assets Interest on bank deposits Operating cash flow before changes in working capital Changes in working capital: Inventories Trade and other receivables Trade and other payables Cash generated from operating activities Company Profit/(loss) before income tax Adjustments for: Dividend income from a subsidiary undertaking Employee share options value of services provided Operating cash flow before changes in working capital Changes in working capital: Other receivables Other payables Cash used in operating activities 2010 US$000 514,675 7 19 18 7 14 8 21 188,476 (4,227) 3,088 2,066 1,157 (26,952) 678,283 11 12 18 (3,656) (41,009) 38,547 672,165 92,475 (95,000) (2,525) 12 18 85 (3,553) (5,993) 2009 US$000 344,998 188,558 22,785 16,907 1,801 (30,553) 544,496 13,206 (21,069) 56,654 593,287 (7,886) 357 (7,529) (231) 3,337 (4,423)

26

Commitments and contingent items (a) Capital commitments The capital commitments at the year end were as follows: Group 2010 US$000 Contracted for but not yet incurred 663,874 2009 US$000 372,441 Company 2010 2009 US$000 US$000

(b) Other financial commitments The Groups commitments under non-cancellable property operating leases were as follows: 2010 US$000 Due within one year Due between two to five years 166 470 636 2009 US$000 544 1,492 2,036

26

Letters of credit of US$20.5 million were in issue at 31 December 2010 (2009: US$2.7 million) towards the supply of equipment and services. At 31 December 2010, the Company had a continuing guarantee for US$30 million (2009: US$30 million) for undrawn trade finance facilities of subsidiary undertakings. (d) Taxation At 31 December 2010, there was a contingent liability with respect to taxation. Details of the contingent liability are outlined in Note 23. (e) Others The Groups operations in Turkmenistan, conducted through Dragon Oil (Turkmenistan) Ltd., are undertaken in accordance with the terms of the PSA, which became effective on 1 May 2000 between Dragon Oil (Turkmenistan) Ltd. and the Turkmenistan government. The agreement determines the rights and obligations of Dragon Oil (Turkmenistan) Ltd, inter alia, to carry out development activities through work plans and annual budgets. It also grants various tax, currency control and related concessions. However, there are no financial commitments, other than those disclosed above, arising from the terms of the PSA. However, the Groups operations in Turkmenistan are ultimately subject to the political, socio-economic and legal uncertainties arising from the Turkmenistan political and legal systems. 27 Related party transactions (a) The Companys largest shareholder is Emirates National Oil Company Limited (ENOC) LLC (ENOC). At the year end, two members of the Board, Mr Ahmad Sharaf (appointed 25 April 2007) and Mr Mohammed Al Ghurair (appointed 25 April 2007) are nominees of ENOC. 2010 US$000 Trading transactions: (i) Sale of crude oil company under common control (ii) Sale of services - company under common control (iii) Purchase of services companies under common control Other transactions: (i) Finance income companies under common control Year-end balances (i) Receivables companies under common control (ii) Term deposits companies under common control (iii) Cash and cash equivalents companies under common control (iv) Payables companies under common control 18,117 278 18,395 2,246 17,577 71 785,668 17,238 460 2009 US$000 340 340 2,206 14,071 430 611,427 140,948 43

Financial Statements Financial Statements

Related party transactions of the Company mainly relates to loans to subsidiary undertakings which are disclosed under Note 9(b).

Governance

Governance

Responsibility Responsibility

Performance Performance

Strategic Review Strategic Review

Commitments and contingent items continued (c) Letters of credit The following commitments were outstanding as at 31 December 2010:

Notes to the Financial Statements

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Notes to the Financial Statements continued

27

Related party transactions continued (b) Key management compensation 2010 US$000 Non-executive Directors fees Salaries and short-term benefits Short-term benefits End of service benefits Share-based payments 718 2,950 3,668 165 825 4,658 2009 US$000 883 2,615 3,498 61 842 4,401

Key management compensation comprises Non-executive Directors fees, salaries and short-term benefits, end of service benefits and share-based payments compensation. Comparative information presented above has been amended to accord to the current year presentation. 28 Group companies The Company is a subsidiary of ENOC, a company incorporated in the United Arab Emirates. ENOC is ultimately a wholly owned entity of the Government of Dubai. Principal Group investments The Company holds 100% of the equity capital of the following companies unless otherwise stated. Investments, which are not significant, are not included in this list. Country of incorporation or registration and operation Bermuda & Turkmenistan

Name Dragon Oil (Turkmenistan) Ltd Chancery Hall 52 Reid Street Hamilton, HM12 Bermuda D&M Drilling Ltd. 22 Grenville Street St Helier, Jersey Channel Islands Dragon Oil (Holdings) Ltd.* 4, V. Dimech Street Floriana, FRN 1504 Malta Dragon Resources (Holdings) plc* 17 Old Park Lane London W1K 1WT England

Principal activity Oil and gas production

Issued and fully paid share capital 80,000 ordinary shares of US$1 each

Jersey

Drilling operations

Nine ordinary shares of 1 each

Malta

Investment holding Company

2,000 ordinary shares of 1 each

England

Oil and gas production related activities

8,434,317 ordinary shares of 1 each

* Held by the Company. Held by a subsidiary undertaking of the Company.

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Strategic Review Strategic Review

Subsequent event At a meeting held on 21 February 2011, the Board of Directors of the Company have proposed a final dividend of 14 US cents per share (2009: nil) be paid to the Shareholders in respect of the full year 2010. The total dividend to be paid is US$72.2 million (2009: nil). In accordance with the accounting policy under IFRS set out in note 2.19, this dividend has not been included as a liability in these financial statements. The proposed final dividend is subject to approval by Shareholders at the Annual General Meeting.

Notes to the Financial Statements

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Supplementary Information Movement in Oil and Condensate Reserves (unaudited)

PROVED AND PROBABLE COMMERCIAL RESERVES (unaudited)

Turkmenistan Working interest 2010 Oil and Commercial condensate reserves mmbbl As at 1 January Revisions Gas reserves Production As at 31 December 617 39 (17) 639 Gas bscf 1,559 1,559 Total petroleum mmboe 617 39 260 (17) 899 2009 Oil and Oil and condensate condensate mmbbl mmbbl 636 (2) (17) 617 282 38 (11) 309 Entitlement 2010 Gas bscf 636 636 Total petroleum mmboe 282 38 106 (11) 415 2009 Oil and condensate mmbbl 296 (4) (10) 282

Notes: 1. Dragon has a 100% working interest in the Cheleken Contract Area in Turkmenistan. 2. Commercial reserves are estimated quantities of proven and probable oil and gas reserves that available data demonstrates, with a specified degree of certainty, to be recoverable in future from known reservoirs that are considered commercially producible. The working interest of the proved and probable commercial reserves are based on a reserves report produced by an independent engineer. Reserves estimates are reviewed by the independent engineer based on significant new data or a material change with a review of the field undertaken generally every year. The Groups entitlement to the proved and probable commercial reserves are derived based on the terms of the PSA and certain assumptions made by the management in respect of estimates of oil and gas reserves, future oil and gas prices, future development costs including the cost of drilling, infrastructure facilities and other capital and operating costs. 3. Based on the results of the recent assessment by an independent energy consultant, the Group has upgraded its reserves to 639 million barrels of oil and condensate at the year-end and 1.6 TCF of gas reserves corresponding to 260 million boe. Recognition of gas reserves is based on a plan for development, a reasonable expectation of a market for the expected sales quantities of gas, availability of infrastructure in place or planned to be installed. 4. Revisions are attributed to the change in cost estimates and long-term price assumptions in accordance with the fiscal terms of the PSA. The revision in the oil and condensate reserves during the year includes a volume of 24.2 million barrels of condensate reserves to be recovered from the gas stream. The Group provides for depletion of tangible fixed assets on a net entitlements basis using proven and probable commercial oil and gas reserves, which reflects the terms of the PSA.

Five-Year Financial Summary

Group Income Statement Revenue Cost of sales Gross profit Administrative expenses, net of other income Other losses Operating profit Net finance income Profit before income tax Income tax expense Profit after tax Earnings per share Basic Diluted Group Balance Sheet Non-current assets Net current assets Non-current liabilities Equity attributable to the Companys equity Shareholders

2010 US$000 780,409 (264,683) 515,726 (28,003) 487,723 26,952 514,675 (128,592) 386,083 74.94c 74.69c 1,176,361 999,816 (83,231) 2,092,946

2009 US$000 623,480 (282,277) 341,203 (26,758) 314,445 30,553 344,998 (85,971) 259,027 50.30c 50.20c 909,364 882,922 (89,063) 1,703,223

2008 US$000 706,118 (193,220) 512,898 (18,138) (20,748) 474,012 25,050 499,062 (130,020) 369,042 71.81c 71.58c 777,499 748,526 (83,677) 1,442,348

2007 US$000 596,614 (198,659) 397,955 (17,611) (15,256) 365,088 19,172 384,260 (80,346) 303,914 59.50c 59.25c 640,046 476,738 (56,357) 1,060,427

2006 US$000 325,125 (97,985) 227,140 (5,825) 221,315 12,000 233,315 (46,443) 186,872 36.63c 36.49c 512,843 297,430 (56,002) 754,271

Notes to the Financial Statements

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Glossary/Definitions/Abbreviations
2C AGM boe bopd bscf CEO Certification of reserves CGC Combined Code CPF CSR Dragon Oil/the Group Dual completion DWT ENOC E&P EPS ERP EU FEED FOB GBP GBp GTP HR HR Consultants HSE IAS ICGA IFRS km Listing Rules LTIPs mmscfd Overlifts and underlifts Platform Proved reserves (1P) Proved and Probable reserves (2P) PSA TCF UAE UK US$ US cents US$m Workover Proved and probable contingent gas resources Annual General Meeting barrels of oil equivalent barrels of oil per day billion standard cubic feet Chief Executive Officer Reserves certification based on a seismic survey conducted by an independent reserves auditor Corporate Governance Code issued by the Financial Reporting Council in June 2010 The Combined Code on Corporate Governance issued by the Financial Reporting Council Central Processing Facility Corporate Social Responsibility Dragon Oil plc and its various subsidiary companies Two pay zones in the same well that produceindependent flow paths in the same well Dividend Withholding Tax Emirates National Oil Company Limited (ENOC) L.L.C. Exploration and Production Earnings per share Enterprise Resource Planning European Union Front End Engineering Design Free On Board Pound Sterling Pence Gas Treatment Plant Human Resources Mercer Human Resources Consulting, Hay Group and Towers Watson Health, Safety and Environment International Accounting Standards The new Irish Corporate Governance Annex to the Corporate Governance Code International Financial Reporting Standards kilometer The listing rules of the Irish Stock Exchange and the UK Listing Authority Long-Term Incentive Plans million standard cubic feet per day Crude oil overlifts and underlifts arise on differences in quantities between the Groups entitlement production and the production either sold or held as inventory Large structure used to house employees and machinery needed to drill wells in a reservoir to extract oil and gas for transportation to shore Reserves claimed to have at least a 90% certainty of recovery under existing economic and political conditions, and using existing technology Reserves based on median estimates, and claim a 50% confidence level of recovery Production Sharing Agreement is a contractual arrangement for exploration, development and production of hydrocarbon resources in the Cheleken Contract Area Trillion Cubic Feet United Arab Emirates The United Kingdom of Great Britain and Northern Ireland United States Dollars United States Cents United States Dollars million Well intervention involving invasive techniques, such as wireline, coiled tubing or snubbing

Advisors

Joint Corporate Broker Davy Davy House 49 Dawson St Dublin 2, Ireland Joint Corporate Broker Nomura International plc 1 Angel Lane London EC4R 3AB UK Auditors PricewaterhouseCoopers Chartered Accountants and Registered Auditors Wilton Place Dublin 2, Ireland Registrars Capita Corporate Registrars Unit 5 Manor Street Business Park Manor Street Dublin 7, Ireland

Bankers Standard Chartered Bank PO Box 999 Dubai, UAE Emirates Bank International PJSC PO Box 2923 Dubai, UAE

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Financial Communications Consultant Citigate Dewe & Rogerson 3 London Wall Buildings London EC2M 5SY UK

Solicitors Mason Hayes & Curran 6th floor, South Bank House Barrow Street Dublin 4, Ireland

Notes to the Financial Statements

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Notes

Dragon Oil plc Annual Report for the year ended 31 December 2010

This document has been produced on coated paper using 50% recovered pulp waste and 50% element chlorine free pulp from managed and certified forests and in a mill carrying ISO14001 certification.

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Registered office: Dragon Oil plc 6th floor, South Bank House Barrow Street Dublin 4 Ireland Tel: +353 1 614 5247 Fax: +353 1 614 5001 www.dragonoil.com Company registration number: 35228

Group headquarters: Dragon Oil ENOC House II, 3rd Floor Right Wing Sheikh Rashid Road P Box 34666 .O. Dubai, U.A.E. Tel: +971 4 3053600 Fax: +971 4 3356954 London office: St Andrews Building 17 Old Park Lane London W1K 1QT England Tel: +44 20 7647 7800 Fax: +44 20 7629 5543 Ashgabat office: Ata Govshudov Street 9/1 Ashgabat Turkmenistan Tel: +993 12 350 333 Fax: +993 12 350 756