Annual Report 2010

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DIRECTORS’ REPORT Depletion costs Depletion costs amounted to MUSD 145.3 (MUSD 118.1) and are detailed in Note 3. Depletion per barrel is in line with forecast for the year. Norway contributed approximately 70 percent of the total depletion charge for the year at a rate of USD 15.33 per barrel. The depletion charge for the comparative period includes MUSD 11.3 in respect of the Oudna ﬁeld, Tunisia, which was fully depleted by the end of 2009. Exploration costs Exploration costs for the reporting period amounted to MUSD 127.5 (MUSD 134.8) 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 their recoverability. During 2010, Lundin Petroleum expensed MUSD 94.5 (MUSD 69.5) of exploration costs relating to Norway. In the ﬁrst quarter of 2010, Lundin Petroleum announced that the wells drilled in Blocks PL359 and PL476 in Norway were not commercial successes and as such, the costs associated with these wells of MUSD 22.6 were expensed. During the fourth quarter of 2010, Lundin Petroleum drilled two unsuccessful wells in Blocks PL400 and PL409 in Norway, the Barchan and the Norall prospects respectively, and expensed MUSD 58.0 relating to these two wells. Other Norwegian exploration costs of MUSD 13.9 were expensed relating mainly to licence relinquishments. During 2010, Lundin Petroleum drilled two unsuccessful wells in Block 06/94, Vietnam and expensed MUSD 31.9 (MUSD 7.2) being the costs of the wells and the associated seismic, study and licence costs. Gain on sale of assets Gain on sale of assets amounted to MUSD 66.1 (MUSD 4.6) for the reporting period. On 12 November 2010, Lundin Petroleum distributed its shares held in Etrion. The value of the distribution was based upon the market price of the Etrion share on the date of distribution resulting in a gain being reported in the consolidated ﬁnancial results of MUSD 57.7. On 29 December 2010, Lundin Petroleum completed the sale of the Salawati assets in Indonesia to RH Petrogas which resulted in a gain on disposal of MUSD 8.4. General, administrative and depreciation expenses General, administrative and depreciation expenses for the reporting period amounted to MUSD 42.0 (MUSD 28.8) and includes an amount of MUSD 11.7 (MUSD 9.9) relating to Etrion and MUSD 10.3 (MUSD 1.4) to non-cash charges in relation to the Group’s Long-term Incentive Plan (LTIP) scheme. Awards to employees under the Group’s LTIP scheme are valued using the Black & Scholes pricing model using the share price as at the balance sheet date. The cost is accrued over the vesting period of the awards in accordance with accounting rules. During 2010, the Lundin Petroleum share price increased by over 45 percent compared to the share price at the end of 2009 and accordingly, the cost associated with the LTIP was reﬂected during the reporting period. The value of the LTIP award as calculated using the Black & Scholes valuation is applied to the vested portion of all outstanding LTIP awards including that of prior periods and therefore the charge to the income statement in 2010 reﬂects the change in the provision. Financial income Financial income for the reporting period amounted to MUSD 21.0 (MUSD 82.0) and is detailed in Note 9. Foreign exchange gains amounted to MUSD 13.4 (MUSD 66.0) in the reporting period. The Euro weakened against both the US Dollar and the Norwegian Kroner during the reporting period giving rise to exchange gain movements on the intercompany loans receivable by a subsidiary using a functional currency of the Euro partially oﬀset by foreign exchange losses on the US Dollar external debt borrowed by a subsidiary using a functional currency of the Euro. Interest income for the reporting period amounted to MUSD 3.4 (MUSD 4.6). The interest income includes an amount of MUSD 0.5 relating to a loan to Etrion Corporation which was no longer eliminated on consolidation from November 2010 following the distribution of the shares held in Etrion and a further amount of MUSD 0.6 interest on a tax refund. Included in the prior reporting period is accrued interest on the Norwegian tax refund in respect of the 2008 exploration expenditure amounting to MUSD 2.3. Included in the comparative reporting period in gain on sale of shares was an amount of MUSD 10.2 relating to the sale of the shareholding in a company owning an interest in Dutch gas processing and transportation infrastructure. Guarantee fees for the reporting period amounted to MUSD 2.3 (MUSD 0.1) and includes a MUSD 2.0 (MUSD –) fee for supporting certain ﬁnancial obligations for ShaMaran Petroleum. Financial expenses Financial expenses for the reporting period amounted to MUSD 33.5 (MUSD 52.5) and are detailed in Note 10. Interest expenses for the reporting period amounted to MUSD 10.0 (MUSD 8.9) and relates mainly to interest on the Group’s bank loan facility and a charge of MUSD 3.6 (MUSD 0.1) relating to Etrion’s loan facilities. In accordance with the Group’s accounting policy, a part of the interest expense associated with the development of the Volund ﬁeld has been capitalised and following the commencement of production in 2010 from the ﬁeld, the interest is now charged to the income statement. In January 2008, the Group entered into an interest rate hedging contract to ﬁx the LIBOR rate of interest at 3.75 percent p.a. on MUSD 200 of the Group’s USD borrowings for the period from January 2008 until January 2012. An amount of MUSD 7.0 (MUSD 5.7) was charged to the income statement for the reporting period for settlements under the hedging contract. In November 2009, Etrion entered into various interest rate swap arrangements as part of external loan agreements. A change in the market value of these swap arrangements amounted to an expense of MUSD 3.9 (MUSD 0.5) for the reporting period. A provision for the costs of site restoration is recorded in the balance sheet at the discounted value of the estimated future cost. The eﬀect of the discount is unwound each year and charged to the income statement. An amount of MUSD 4.0 (MUSD 2.5) has been charged to the income statement for the reporting period. The increase versus the comparative period is due to increased liabilities following the inclusion of the Volund ﬁeld, Norway and other cost revisions reﬂected at the end of 2009. Included in other ﬁnancial expenses in the comparative period is an amount of MUSD 29.8 relating to the write down of the investment in Etrion following Etrion’s write down of its Venezuelan oil and gas assets. 61

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