Annual Report 2011

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DIRECTORS’ REPORT The sales figures for Indonesia include the contributions of the Salawati assets for the full year 2010. Sales quantities in a period can differ from production quantities as a result of permanent and timing differences. Timing differences can arise due to inventory, storage and pipeline balances effects. Permanent differences arise as a result of paying royalties in kind as well as the effects from production sharing agreements. Oil produced in Tunisia is only lifted when the Ikdam FPSO is near to full. An Oudna cargo was lifted in April 2011 and was the only Tunisian lifting during 2011. The oil produced in Russia is sold on either the Russian domestic market or exported into the international market. 37 percent (40 percent) of Russian sales for the reporting period were on the international market at an average price of USD 109.92 per barrel (USD 76.17 per barrel) with the remaining 63 percent (60 percent) of Russian sales being sold on the domestic market at an average price of USD 46.45 per barrel (USD 34.98 per barrel). Other operating income amounted to MUSD 11.8 (MUSD 13.4) for the reporting period and includes MUSD 5.8 (MUSD –) of income relating to a quality differential compensation adjustment payable from the Vilje field owners to the Alvheim and Volund field owners. All three fields produce to the Alvheim FPSO vessel and the oil is commingled to produce an Alvheim crude blend which is then sold. This adjustment for the comparative period amounted to MUSD 3.2 and was netted off against production costs. Also included in other operating income is tariff income from France and the Netherlands and income for maintaining strategic inventory levels in France. Other operating income for the comparative period includes MUSD 9.3 relating to Etrion’s solar business. Production costs Production costs for the reporting period amounted to MUSD 193.1 (MUSD 157.1) and are detailed in Note 2. The production and depletion costs per barrel of oil equivalent produced from continuing oil and gas operations are detailed in the table below. Production cost and depletion in USD per boe Cost of operations Tariff and transportation expenses Royalty and direct taxes Changes in inventory/lifting position Other Total production costs Depletion Total cost per boe per barrel for the reporting period was USD 8.43 per barrel which was below the original 2011 forecast of USD 8.60 per barrel. The tariff and transportation expenses for the reporting period amounted to MUSD 22.9 compared to MUSD 17.4 for the comparative period. The increase is mainly due to the increased production contribution from the Volund field, Norway, which pays a tariff to the Alvheim field owners and commenced production in April 2010. Lundin Petroleum has a 15 percent working interest in the Alvheim field and a 35 percent interest in the Volund field and the self-to-self element of the tariff is eliminated for accounting purposes leaving a net 20 percent cost for Volund in tariff and transportation expenses. Royalty and direct taxes includes Russian Mineral Resource Extraction Tax (MRET) and Russian Export Duties. The rate of MRET is levied on the volume of Russian production and varies in relation to the international market price of Urals blend and the Rouble exchange rate. MRET averaged USD 21.21 (USD 13.83) per barrel of Russian production for the reporting period. The rate of export duty on Russian oil is revised by the Russian Federation monthly and is dependent 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 57.52 (USD 37.59) per barrel for the reporting period. The royalty and direct taxes have increased compared to prior year following the rise in crude prices impacting the cost of Russian MRET and export duty. 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 and a net amount of MUSD 13.1 (MUSD -3.4) was charged to the income statement for the reporting period. The Norway fields, Alvheim and Volund, went from a net underlift position at the start of 2011 to a net overlift position as at 31 December 2011 resulting in a charge of MUSD 18.4 to production costs for the reporting period. This charge was partly offset by a build-up of hydrocarbon inventory from the Oudna field on the Ikdam FPSO, Tunisia, resulting in a MUSD 5.3 credit to production costs for the reporting period. Depletion costs Depletion costs for the reporting period amounted to MUSD 165.1 (MUSD 145.3) and are detailed in Note 3. The main increase from the comparative period is in Norway where the depletion cost expensed has increased by 28 percent in line with the increase in production. Norway contributed approximately 80 percent of the total depletion charge for the reporting period at a rate of USD 15.34 per barrel and this increases the overall rate from the comparative period. Exploration costs Exploration costs for the reporting period amounted to MUSD 140.0 (MUSD 127.5) 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 2011, Lundin Petroleum expensed MUSD 74.1 (MUSD 94.5) of exploration costs relating to Norway. In the third quarter of 2011, MUSD 52.2 of costs associated with the Earb South well in PL505 was expensed. Other Norwegian expensed exploration costs in the reporting period relate to the expensing of capitalised costs following technical reviews and include licence relinquishments. 2011 8.43 1.88 4.31 1.08 0.18 15.88 13.59 29.47 2010 8.63 1.57 3.74 -0.31 0.38 14.01 12.85 26.86 The total cost of operations for the reporting period was MUSD 102.5 compared to MUSD 97.2 for the comparative period. The reporting period includes costs of the Volund field, Norway and Singa field, Indonesia, for a full twelve month period whereas the Volund and Singa fields contributed costs partially in the comparative period having commenced production in the second quarter of 2010. In addition, in the reporting period there have been certain one-off costs associated with the unplanned shutdown of the Alvheim FPSO during the second quarter of 2011 and expenditures related to the FPSO used on the Oudna field. The increases are partly offset following the disposal of the Salawati assets, Indonesia in December 2010. The total cost of operations 68 Lundin Petroleum ANNUAL REPORT 2011

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