Annual Report 2009

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DIRECTORS’ REPORT Production cost and depletion in TUSD Cost of operations Tariff and transportation expenses Royalty and direct taxes Changes in inventory/overlift Other Total production costs Depletion Total 2009 231,089 31,149 40,987 -4,570 3,082 301,737 169,907 471,644 2008 253,933 32,590 80,738 -3,511 – 363,750 157,823 521,573 December 2009 is higher than the comparative period due to the higher production volumes produced in 2009. The overall depletion rate per barrel in the financial year ended 31 December 2009 is slightly above forecast and is mainly due to the better production performance in the United Kingdom at a higher than average depletion rate per barrel. Exploration costs Exploration costs for the financial year ended 31 December 2009 amounted to MSEK 1,051.0 (MSEK 901.7) and are detailed in Note 4. Exploration and appraisal costs are capitalised as they are incurred. When exploration drilling is unsuccessful the costs are immediately charged to the income statement as exploration costs. All capitalised exploration costs are reviewed on a regular basis and are expensed where there is uncertainty regarding the recoverability of the capitalised costs. During 2009, the costs associated with drilling the Paris Basin exploration wells Dordives 1-D and Vaxy-1 were expensed amounting to MSEK 21.7. During 2009, the costs associated with drilling the Tuong Vi-1X well on Block 6/94, Vietnam were expensed amounting to MSEK 60.1. For our Norwegian operations, four unsuccessful exploration wells were drilled on licences PL006c, PL304, PL363 and PL412. The costs associated with these wells amounting to a total of MSEK 506.3 were expensed in the financial year ended 31 December 2009. The costs of the Liyeke Marine-1 exploration well in Congo (Brazzaville) Block Marine XI were expensed in 2009 for an amount of MSEK 25.5. The unsuccessful exploration well, Petrovskaya-1, drilled on the Lagansky Block in Russia was expensed for an amount of MSEK 249.1 in the financial year ended 31 December 2009. Following the decision to withdraw from the block, capitalised costs for Cambodia Block E of MSEK 78.2 were expensed in 2009. Impairment costs Lundin Petroleum reviews the carrying values of all of its assets at least annually and if necessary, an impairment cost is recorded to the income statement. On 31 July 2006 Lundin Petroleum acquired 100 percent of the shares in Valkyries Petroleum Corp. (Valkyries) in an all share transaction. Lundin Petroleum recorded a purchase consideration of MSEK 5,067.6 being the value of the shares in Lundin Petroleum issued to complete the transaction and after accounting adjustments for deferred tax and minority interests, an amount of MSEK 7,683.5 was assigned to oil and gas properties. Lundin Petroleum has drilled three wells on the Lagansky Block and whilst two wells were unsuccessful, the Morskaya well has provided gross contingent resource on block of 233 MMboe of which 213 MMbbls is oil. Whilst the valuation of these resources is extremely subjective and a range of values can be derived and supported, Lundin Petroleum has assessed the value of discoveries to date and impaired the carrying value of the Lagansky Block, net of deferred tax and minority interest, to MSEK 2,798.2. This has resulted in an impairment charge to the income statement for the financial year ended 31 December 2009 of MSEK 3,741.3. The impairment charge of MSEK 613.7 recorded in 2008 related primarily to the impairment of the operated onshore Russian production properties. Production cost and depletion in USD per boe Cost of operations Tariff and transportation expenses Royalty and direct taxes Changes in inventory/overlift Other Total production costs Depletion Total cost per boe 2009 16.40 2.21 2.91 -0.32 0.22 21.42 12.06 33.48 2008 21.44 2.75 6.82 -0.30 – 30.71 13.33 44.04 Actual cost of operations for the financial year ended 31 December 2009 was 7 percent under forecast in US Dollar terms. This variance in USD terms was mainly attributable to favourable currency exchange rates compared to the forecast. This had the largest impact on the United Kingdom operations where cost of operations was slightly above forecast in GBP terms but was 8 percent lower than forecast in USD terms. The cost of operations per barrel for the financial year ended 31 December 2009 was significantly lower than for the comparable period of 2008 as a result of the Alvheim field contributing 36 percent of Lundin Petroleum’s production for the financial year ended 31 December 2009 compared to 20 percent for the comparable period of 2008 at a cost of operations of less than USD 5 per barrel. Royalty and direct taxes includes Russian Mineral Resource Extraction Tax (“MRET”) and Russian Export Duties. The rate of MRET varies in relation to world oil prices and is levied on the volume of Russian production. MRET averaged USD 10.23 (USD 18.04) per barrel for the financial year ended 31 December 2009. The rate of export duty on Russian oil is revised by the Russian Federation monthly and is dependant on the average price obtained for Urals Blend for the preceding one month period. The export duty is levied on the volume of oil exported from Russia and averaged USD 21.42 (USD 49.73) per barrel for the financial year ended 31 December 2009. The royalty and direct taxes have decreased compared to the comparative period following the fall in crude prices impacting the cost of Russian MRET and export duty which makes up the majority of the overall expense. As mentioned in the production section, there are both permanent and timing differences that result in sales volumes not being equal to production volumes during a period. Changes to the hydrocarbon inventory and under or overlift positions result from these timing differences. Depletion Depletion of oil and gas properties for the financial year ended 31 December 2009 amounted to MSEK 1,295.1 (MSEK 1,032.1) and is detailed in Note 3. The depletion charge for the financial year ended 31 50 Lundin Petroleum ANNUAL REPORT 2009

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