Annual Report 2011

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The amounts included below for the jointly controlled entities and associated companies represent 100% of the reported accounts. Income statement per 31 December 2011 TUSD Revenue Operating cost Net result Balance Sheet per 31 December 2011 TUSD Non-current assets Current assets Total assets Equity Non-current liabilities Current liabilities Total liabilities Ikdam Production SA 2,610 -4,946 -2,336 RF Energy consolidated 159,481 -149,348 10,133 Ikdam Production SA – 775 775 -13,934 14,213 496 775 RF Energy consolidated 122,381 39,428 161,809 97,015 47,220 17,574 161,809 NOTE 13 – OTHER SHARES AND PARTICIPATIONS Other shares and participation comprise: TUSD ShaMaran Petroleum Corp. Cofraland B.V. Maison de la géologie 31 December 2011 Number of shares 50,000,000 31 2 Share % 6.19 7.75 1.25 Book amount 17,380 391 4 17,775 31 December 2010 Book amount 68,205 404 4 68,613 In October 2009, Lundin Petroleum received 50 million shares of ShaMaran Petroleum Corp. (ShaMaran) in consideration for the sale of Lundin International BV (LIBV), a 100% owned subsidiary, which had commenced negotiations for Production Sharing Contracts (PSCs) for three separate exploration and development blocks in Kurdistan. The investment was booked at the fair value of the shares at the date of acquisition and under accounting rules, any subsequent movement in the fair value of the shares is being recorded in the consolidated statement of comprehensive income. The fair value of ShaMaran is calculated using the quoted share price at the Toronto Stock Exchange. As at 31 December 2011, the other shares and participations include TUSD 395.0 recognised at cost because their fair value cannot be measured reliably since there is no quoted share price and due to the uncertainty of the timing of the future cash flows from these companies. NOTE 14 – FINANCIAL RISKS, SENSITIVITY ANALYSIS AND DERIVATIVE INSTRUMENTS As an international oil and gas exploration and production company operating globally, Lundin Petroleum is exposed to financial risks such as fluctuations in currency rates, oil price, interest rates as well as credit financing. The Group seeks to control these risks through sound management practice and the use of internationally accepted financial instruments, such as oil price, interest rate and foreign exchange hedges. Lundin Petroleum uses financial instruments solely for the purpose of minimising risks in the Group’s business. Currency fluctuations Lundin Petroleum is a Swedish company which is operating globally and therefore attracts substantial foreign exchange exposure, both transactional as well as conversion from functional currency to presentation currency. The functional currency of Lundin Petroleum’s subsidiaries are Norwegian Kroner (NOK), Euro (EUR) and Russian Rouble (RUR), as well as US Dollar, making Lundin Petroleum sensitive to fluctuations of these currencies against the US Dollar, the presentation currency. As at 31 December 2011 and 2010, no foreign exchange forward contracts were entered into. Conversion exposure The following table summarises the effect that a change in these currencies against the US Dollar would have on operating result through the conversion of the income statements of the Group’s subsidiaries from functional currency to the presentation currency US Dollar for the year ended at 31 December 2011. Operating profit in the financial statements (MUSD) Shift of currency exchange rates to: EUR/USD NOK/USD RUR/USD Total effect on operating result (MUSD) 704.2 10% USD weakening 0.6532 5.0907 26.7035 68.0 704.2 10% USD strengthening 0.7904 6.1598 32.3112 -68.0 Price of oil and gas Price of oil and gas are affected by the normal economic drivers of supply and demand as well as the financial investors and market uncertainty. Factors that influence these include operational decisions, natural disasters, economic conditions, political instability or conflicts or actions by major oil exporting countries. Price fluctuations can affect Lundin Petroleum’s financial position. The table below summarises the effect that a change in the oil price would have had on the net result at 31 December 2011: Net result in the financial statements (MUSD) Change in oil price (USD/boe) Total effect on net result (MUSD) 155.2 -5 -18.9 155.2 5 18.9 Lundin Petroleum’s policy is to adopt a flexible approach towards oil price hedging, based on an assessment of the benefits of the hedge contract in specific circumstances. Based on analysis of the circumstances, Lundin Petroleum will assess the benefits of forward hedging monthly sales contracts for the purpose of establishing cash flow. If it believes that the hedging contract will provide an enhanced cash flow then it may choose to enter into an oil price hedge. For the year ended 31 December 2011, the Group did not enter into oil price hedging contracts. There are no oil price hedging contracts outstanding as at 31 December 2011. Interest rate risk Interest rate risk is the risk to the earnings due to uncertain future interest rates. Lundin Petroleum is exposed to interest rate risk through the credit facility (see also liquidity risk below). Lundin Petroleum will assess the benefits of interest rate hedging on borrowings on a continuous basis. If the hedging contract provides a reduction in the interest rate risk at a price that is deemed acceptable to the Group, then Lundin Petroleum may choose to enter into an interest hedge. The table below summarises the effect that an change in the interest rate for the credit facility would have had on the net result for the year ended 31 December 2011: Net result in the financial statements (MUSD) Possible shift (%) Total effect on net result (MUSD) 155.2 -10% 0.4 155.2 10% -0.4 The foreign currency risk to the Group’s income and equity from conversion exposure is not hedged. Transaction exposure Lundin Petroleum’s policy on currency rate hedging is, in case of currency exposure, to consider setting the rate of exchange for known costs in non-US Dollar currencies to US Dollars in advance so that future US Dollar cost levels can be forecasted with a reasonable degree of certainty. The Group will take into account the current rates of exchange and market expectations in comparison to historic trends and volatility in making the decision to hedge. In January 2008, the Group entered into an interest hedging contract fixing the LIBOR rate of interest at 3.75% p.a. on MUSD 200 of the Group’s USD borrowings for the period January 2008 to January 2012. Credit risk Lundin Petroleum’s policy is to limit credit risk by limiting the counter-parties to major banks and oil companies. Where it is determined that there is a credit risk for oil and gas 89

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