G R OW T H - Heritage Oil€¦ · province which includes the multi-TCF Triceratops and...

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C O N T E N T S

O V E R V I E WHighlights 2012 01Outlook 2013 01

A S S E T SAsset overview 02The Heritage business model 04

S T R A T E G YVision and strategic overview 06

F R A M E W O R KCorporate governance 08

R E S P E C TCorporate Social Responsibility 10

C H I E F E X E C U T I V E ’ S R E V I E W 1 2

O P E R A T I O N A L R E V I E W

Nigeria 16Russia 18Tanzania 19Papua New Guinea 20Malta 21Libya 22Pakistan 23Other developments 24

D I V E R S I F I E DFinancial review 26Risks 32Annual review glossary 35Advisers and financial calendar IBC

Heritage Oil Plc is an independent oil and gas exploration and production company with a Premium Listing on the London Stock Exchange (“LSE”) (symbol HOIL). The Company is a member of the FTSE 250 Index and has Exchangeable Shares listed on the Toronto Stock Exchange (“TSX”) (symbol HOC) and the LSE (symbol HOX).

Heritage is a versatile organisation, dedicated to creating and increasing shareholder value with a portfolio of quality assets managed by a highly experienced team with excellent technical, commercial and financial skills. The Company has producing assets in Nigeria and Russia and exploration assets in Tanzania, Papua New Guinea, Malta, Libya and Pakistan.

Corporate GovernanceThe Corporate Governance Report provides detailed information on all aspects of Heritage’s corporate governance.

Corporate Social ResponsibilityThe CSR Report provides detailed information concerning Heritage’s CSR strategy, policies, systems and performance.

Financial StatementsThe Financial Statements Report provides detailed information on Heritage’s financial position.

Annual ReviewThe Annual Review provides an overview of Heritage, its processes and a Business Review.

0 1H E R I T A G E O I L P L CAnnual Review 2 0 1 2

O P E R AT I O N A L – Acquired an interest in OML 30, Nigeria, through Shoreline Natural

Resources Limited (“Shoreline”), whose ownership interests are held by Heritage Oil SNR (Nigeria B.V.), a wholly owned subsidiary of Heritage and a local Nigerian partner, Shoreline Power Company (“Shoreline Power”)

– Acquisition provided a material change in proved and probable reserves for Heritage, which RPS Energy Consultants Ltd (“RPS”) independently estimate at 412 MMbbls, for interests in Nigeria and Russia, as at 31 March 2012

– Disposed of interests in the Miran asset, in the Kurdistan Region of Iraq (“Kurdistan”), for $450 million

– Extended acreage in Tanzania, adding to acreage Heritage believes could be geologically analogous to the Lake Albert Basin, providing the Company with a key advantage in assessing the blocks

– Commenced the work programme in Tanzania through the acquisition of 2D seismic on Rukwa and the acquisition of a very high resolution gravity survey on Kyela

– Farmed in to two licences in Papua New Guinea (“PNG”); Petroleum Prospecting Licence 319 (“PPL 319”) and Petroleum Retention Licence 13 (“PRL 13”), which are believed to be in an attractive geological fairway

F I N A N C I A L – Since the acquisition of an interest in OML 30, revenues net to Heritage of

$234.5 million have been generated – Shoreline made a cash payment of $52.5 million, in April 2013, to reduce the

bridge loan to $497.5 million – Heritage had cash at 31 December 2012 of c.$90 million, excluding amounts

relating to the tax dispute of c.$405 million and amounts used as part security in respect of OML 30 of $101 million

– Average gross production from OML 30 has been 20,350 bopd since the acquisition

– Production from the interest in OML 30, Nigeria, net to Heritage of 12,350 bopd for November and December 2012 and net production from Russia of 607 bopd for the year

– Further increases in production from OML 30, with key items of equipment having been identified and ordered

– Exploration activity to continue in Tanzania, following initial promising results and first drilling slated for 2014

– Extension of 2D seismic programme in PNG with the intention of progressing the Tuyuwopi structure to a drillable prospect in 2014

– Continue to look for further opportunities to create value

HIGHL IGH TS2 012

O U T LO O K2 013

All dollars are US dollars unless otherwise stated.

0 2Annual Review 2 0 1 2 H E R I T A G E O I L P L C

A SSE T OV ER V IE W

Heritage typically focuses on regions which may have been overlooked and where it can participate as an early entrant.

The Heritage asset portfolio provides a geographical and operational diversification. Material corporate transactions undertaken in 2012 have provided a balance to the portfolio with assets that include significant production and reserves. The joint venture company Shoreline Natural Resources Limited (“Shoreline”), created in partnership with Nigerian company Shoreline Power, has established an indigenous company which will provide a platform for further growth within the country. Through Shoreline, Heritage has acquired an interest in OML 30, a world class asset, which secures Heritage a step change in production and reserves. Entry into Nigeria was partially funded through the disposal of interests in Kurdistan, for which an attractive valuation was achieved. OML 30 lies onshore the Niger Delta in one of the most prolific oil provinces in the world and includes eight producing fields with oil and gas contained in numerous stacked reservoirs. Improving the gas lift is a key target in 2013 and could increase production by up to 20%. Average production from OML 30, net to Heritage for November and December 2012, was 12,350 bopd.

Heritage has held an interest in Russia since 2005 and has acquired 2D seismic, constructed pilot production facilities, commenced field production, drilled four wells and re-entered an existing well. A revised field development plan was submitted and this has been approved by the regulatory authorities at the end of December 2012.

In August 2011, Heritage acquired a controlling 51% interest in Sahara Oil Services Holdings Limited (“Sahara Oil”) which owns the entire share capital of Sahara Oil Services Limited (“Sahara”) in Libya. Through this acquisition Heritage believes it is well placed to play a significant role in the future development of the oil and gas industry in Libya.

Activity on the exploration portfolio will increase as work programmes continue in Tanzania, Malta and Papua New Guinea, which was added to the portfolio in April 2013. In Rukwa, seismic processing is continuing and infill 2D seismic may be acquired in conjunction with Kyela seismic acquisition scheduled for later this year.

2D seismic acquisition within licences PPL 319 and PRL 13 will be expanded and is targeting advancement of the Tuyuwopi structure and the Mudoli/Middletown lead. Further assessment will continue of the upside potential identified at the Iehi and Orie anticlines, in addition to the untested hanging wall of the Kuru field in PRL13. These prospects and leads are located in a known hydrocarbon province which includes the multi-TCF Triceratops and Elk/Antelope discoveries with infrastructure close by.

E X P LO R AT I O N P R O D U C T I O N

M A LTA

Area 2; 100% working interest & operator Area 7; 100% working interest & operator

Areas 2 and 7 lie in the south-eastern offshore region of Malta and show geologic similarities to areas offshore Libya and Tunisia which contain a number of producing fields.

Well planning continues which will enable the drilling of an identified prospect in Area 7 once Maltese government approval is granted.

N I G E R I A

OML 30; 45% equity interest through Shoreline

In November 2012, Heritage acquired a significant interest in OML 30 through Shoreline. OML 30 covers 1,097 square kilometres and includes eight producing fields.

RPS, in an independent evaluation, estimated that OML 30 contains proved and probable reserves of 347 MMbbls of oil net to the Group as at 31 March 2012.


L I B YA

51% equity interest in Sahara Oil

Heritage is exploring ways to assist the newly appointed interim government, under the General National Congress elected in July 2012, the national oil company and the state oil companies rehabilitate and re-shape Libya’s hydrocarbons sector.

R U S S I A

Zapadno Chumpasskoye; 95% equity interest

The licence covers an area of about 200 square kilometres and contains the Zapando Chumpasskoye Field, discovered in 1997.

RPS, in an independent evaluation, estimated that Zapadno Chumpasskoye contains proved and probable reserves of 65 MMbbls of oil net to the Group as at 31 March 2012.

TA N Z A N I A

Rukwa North; 100% working interest & operator Rukwa South; 100% working interest & operator Kyela; 100% working interest & operatorLatham; 29.9% working interest & operator

In 2011/2012 Heritage was awarded the Rukwa and Kyela licences and the work programmes have begun. In Rukwa, seismic processing is continuing and infill 2D seismic may be acquired in conjunction with Kyela seismic acquisition scheduled for later this year.

PA P U A N E W G U I N E A

PPL 319; 80% working interest and operatorPRL 13; 80% working interest and operator

Heritage entered this new region in April 2013 through the farm-in to, what management estimate to be, highly prospective acreage. 2D seismic has recently been acquired and this programme will be extended later this year.

PA K I S TA N

Sanjawi; 54% working interest & operatorZamzama North; 48% working interest & operator

The Sanjawi onshore exploration licence covers a gross area of 2,258 square kilometres. The Zamzama North licence covers an area of 1,229 square kilometres. The current seismic database used to map the Zamzama North licence comprises some 1,000 kilometres of good quality 2D seismic.


T HE HER I TAGE BUSINE SS M O DEL The Company possesses certain key attributes, discussed overleaf, that provide it with a competitive advantage. Key Performance Indicators (“KPIs”) are used by the Company as one measure of performance and relate to both the underlying business model and the delivery of strategy. In addition, the Company actively monitors certain risks attached to the business model and strategy which are detailed on pages 32 to 34.

Heritage’s business model balances the exploration and appraisal process with cash generating production assets which is supported through high standards of governance, regional knowledge and contacts and an e"ective Corporate Social Responsibility (“CSR”) policy framework.

Heritage’s vision is to be a leading exploration and production company. The business model creates the foundation upon which the Company can achieve this through its strategy.

G O V E R N A N C E

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CO RE BUSINE SS M O DEL

SU PP O R T ED T HRO U GH

K E Y PERF O R M A N CE IN D IC ATO RS

Production and development Once the area has been proven, appraised and confirmed commercially viable, the development team is responsible for providing information to enable the Company to best achieve revenue generation and cash flow by moving the hydrocarbons into production. A strong regard for the environment and respect for local communities is important.

Regional knowledge and contactsRelationships with national and regional governments are a key focus within the business. These relationships provide the Company with the ability to assess risk and provide a competitive edge versus its peers.

Lost Time Injury Frequency Rate (“LTIFR”) – Operationally a top priority is to keep people safe. This includes employees, contractors and local communities where we operate.

Sta" turnover – Retaining quality sta" is important to ensure the delivery of the strategy.

Production from continuing operations – Production is key to revenue and cash generation and Heritage aims to achieve levels in line with annual budgeting and market guidance.

Capital disciplineAn appropriate capital structure balancing the exploration and operational demands of the portfolio with financing requirements is required to ensure appropriate funding for long-term sustainable growth. This can include the monetisation of assets or accessing capital markets and is an ongoing process to ensure e#cient allocation of capital.

Further information can be found in the Financial Statements Report.

Corporate Social ResponsibilityAn e"ective CSR policy framework is a key element of long-term success. Managing relationships with stakeholders is viewed as important in developing and maintaining a reputation as a preferred partner. Further information can be found in the CSR Report.

Reserves and contingent resources additions – The core business model involves replenishing the exploration portfolio, ensuring the continued growth of the Company and the potential production profile.

Average realised price – In Russia, the realised price improves, in part, as production increases due to better price negotiation and there being a wider base of customers. Prices have not been hedged during the year.

Exploration and appraisalOur technical team is responsible for assessing new areas for exploration campaigns and ensuring that we have the ability to continually replenish our exploration portfolio. The team will identify core plays and prioritise exploration options across the portfolio. After reviewing the initial exploration programme, the team will propose an appraisal campaign to prove up the size of the discovery and whether it is deemed commercial.

Further information on the current asset portfolio can be found in this report on pages 16 to 23.

GovernanceHeritage seeks to achieve and maintain the highest standards and best practice reporting in all areas of governance.

Further information can be found in the Corporate Governance Report.

Heritage uses a number of financial and operating KPIs that are closely aligned with the underlying business model and its strategy for delivering long-term sustainable growth. These are some of the indicators by which the Company monitors performance. Several of these are linked to the primary business risks of the Company which are detailed on pages 32 to 34.

2012 2011 2010 2009

LTIFR1 0 0 0 0

Sta" turnover2 3% 2% 3% 3%

Production3 +1,825% +24% +65% –13%

Reserves and contingent resources additions4 +564% +0% +42% +103%

Average realised price5 +8% +45% +26% –35%

1 Lost Time Injury Frequency Rate per 10,000 hours worked. 2 Excludes sta" members in Uganda who transferred with the sale of the Ugandan Assets in 2010. 3 For 2012, pro forma production includes Heritage’s net share of average daily production from the Zapadno Chumpasskoye Field in Russia for the

full year, together with its net share of average daily production for OML 30 included for November and December 2012 only, following completion of the acquisition of an interest in OML 30 through Shoreline e"ective 1 November 2012. Heritage’s total net share of production in 2012 was 975,511 barrels.

4 Management estimates. 5 Realised price is a measure of the price achieved for output sold.


V IS IO N & S T R AT EGI C OV ER V IE W

S T R AT E G Y

Heritage’s vision is to be a leading exploration and production company and the Company aims to generate long-term shareholder value.

Heritage sets out to achieve its aim of sustainable long-term shareholder value through a strategy that focuses on:

– high-impact international plays with the potential to discover significant hydrocarbon reserves;

– generating cash flow through production; and – managing the portfolio e"ectively, which can include the

acquisition of value creating opportunities.

This is done against the background of: – ensuring operations are safe and minimising Lost Time

Injuries (“LTIs”) for sta" and contractors; – engagement with local communities who may be a"ected

by our work; – building successful long-term relationships with local

governments, communities and stakeholders in the areas of operation; and

– high standards of corporate governance.

Heritage ensures this is done through: – a diversified Board, which avoids “group think”; and – employing and retaining a strong team across all

departments of the Group.

K E Y AT T R I B U T E S O F H E R I TAG EHeritage has a unique background with which it can deliver on its strategy because of the following key attributes:

– demonstrated success of first mover advantage in territories such as Uganda and Kurdistan;

– proven track record of monetising assets with the current management team having raised c.$2 billion;

– an appreciation of risk, both political and security; – management expertise with a team containing

experience of corporate finance, legal and industry specific skills;

– technical expertise with senior members of the team each with in excess of 30 years’ industry experience;

– a highly e"ective network of industry, political and institutional relationships;

– balanced portfolio of assets; and – strategic positioning of assets.


K E Y AT T R I B U T E S O F H E R I TAG E

ACQ U I R E A N D I N V E S T

VA LU E CRE AT I O N

S T R AT EG I C P OS I T I O N I N G

B A L A N C E D P O R T F O L I O

F I R S T M OV ER A DVA N TAG E

A PPR EC I AT I O N O F R I S K

S T R O N G R EL AT I O N S H I P S

M A N AG E M EN T E X PER T I S E

T EC H N I C A L E X PER T I S E


CO RP O R AT E GOV ERN A N CE

F R A M E W O R K

The Company aims to achieve best practice reporting on corporate governance.

With a Premium Listing on the LSE, the Company is subject to the Financial Conduct Authority’s Listing Rules and the requirement to explain how it has applied the main principles of the UK Corporate Governance Code (the “Code”).

H O W T H E B OA R D O P E R AT E SThe Board delegates certain responsibilities to committees in line with recommendations of the Code and to facilitate the achievement of business objectives of the Company. The Board as a whole is collectively responsible for the success of the Company and each Director must take decisions objectively in the interests of the Company. The Board’s principal role is to set strategy and the parameters within which the Group operates to further its objectives.

D E V E LO P M E N T S I N 2 012Executive remuneration and the development of our approach to managing risk were key priorities for our governance focus in 2012 and we made great progress. In terms of our remuneration policy the Board has approved amendments to the bonus plan which we believe will further align our remuneration with the delivery of our business strategy. Following feedback from shareholders and further internal review the Board has also approved changes to the contracts of the Executive Directors, reducing the notice periods and adopting more modest termination provisions in the event of a change of control of the Company in line with UK best practice.

LO O K I N G A H E A DRecent proposals in respect of reporting on executive remuneration will become e"ective for financial reporting which comes into force on 1 October 2013. The Remuneration Committee will be considering these requirements with the aim of providing greater transparency to shareholders. The Board will also be considering government proposals to amend narrative reporting requirements for company annual reports which will entail replacing the Business Review with a Strategic Report. We consider our reporting to be well developed already, however, we will continue to review our reporting to ensure it meets the new developments and best practice.

Furthermore there are amendments to the Code which come into e"ect for financial years beginning on or after October 2012 and we will seek to introduce these requirements in advance where possible.

We continue to support open and constructive dialogue with all of our shareholders on governance, strategy and executive remuneration and welcome any feedback.

For further information on corporate governance please see the Corporate Governance Report.


CO R P O R AT E S T R U C T U R E

S U P E R V I S I O NReview of performance against strategyReview of financial informationReview of e"ectiveness of internal controls and risk management

A U D I T C O M M I T T E E

R E M U N E R AT I O N C O M M I T T E E

N O M I N AT I O N C O M M I T T E E

R E S E R V E S C O M M I T T E E

A N T I -B R I B E R Y A N D C O R R U P T I O N C O M M I T T E E

C S R C O M M I T T E E

Monitors integrity of financial statements

Reviews accounting policies

Manages relationship with external auditor

Oversees external audit process

Considers auditor independence

Sets remuneration policy

Reviews and approves remuneration of Executive Directors

Makes recommendations on Board composition

Reviews succession planning

Reviews Board performance

Oversight responsibilities with respect to the Company’s oil and gas reserves evaluation process

Considers independence of the technical evaluator

Oversees anti-bribery programme and ethical policies and practices

Sets CSR Policy Framework

Reviews internal CSR programme

S T E WA R D S H I PApproval of strategyValues and standardsApproval of Group policies

B OA R DThe Board is supported by the work of its committees and delegates day-to-day

management of the Group to senior management

B OA R D CO M M I T T E E S

S E N I O R M A N AG E M E N T/ L E A D E R S H I P T E A M


CO RP O R AT E SO CI A L RE SP O NSIB IL I T Y

R E S P E C T

The business approach of Heritage is underpinned by CSR from the first stages of planning and being awarded a licence, through to exploration and production.

O U R C S R V I S I O N – to be a responsible and transparent business in all the

areas in which the Company operates, believing this is important to the operational aim of generating long-term growth for the Company;

– to create lasting legacies for local communities; – to operate to the highest international social,

environmental and safety standards; and – to maintain high standards of corporate governance.

CSR encompasses the Company’s management of relationships with stakeholders; shareholders, employees, contractors, partners and the local communities in which we work. In addition, it includes the impact the Company has on society and the environment.

C S R I N AC T I O NOur approach to CSR supports our business model and sets out essential core values that we believe make Heritage a good corporate citizen. The Company sets itself a high standard against which to measure itself and recognises the importance of being a partner of choice.

Heritage aims to make a positive contribution in all areas where it operates.

D E V E LO P M E N T S I N 2 012 – approximately $971,000 spent on CSR-related initiatives,

c.39% higher than 2011; – zero environmental incidents, fines or sanctions across

all operations; – zero fatalities and LTIs across all operations; – zero breaches in business conduct policies; – employment of local people remains high across all

operations; and – commenced adoption of Heritage’s CSR policies and

systems in the Shoreline joint venture.

For further information on CSR please see the CSR Report.

O U R C S R S T R AT E G Y

S E T P O L I C I E S

D E V I S E A N D M A I N TA I N S Y S T E M S

M E A S U R E A N D M O N I TO R P ER F O R M A N C E

C O M M U N I C AT E A N D R EP O R T TO S TA K EH O L D ER S

A P P LY S TA K EH O L D ER F EE D B AC K


Environment and sustainability

Health and safety

Employees

Community and human rights

Business conduct

Corporate governance

Aim to make a positive contribution to global sustainability and to protect the environment

A core element of all activities and a natural priority

Our ability to create shareholder value is linked with our ability to recruit and retain high calibre sta"

Active and enduring relationships are an essential and fundamental element of our business

We maintain robust policies with respect to all matters concerning our business conduct

As a Company with a Premium Listing, Heritage maintains high corporate governance standards

Heritage recognises specific responsibilities in each of six core areas of potential impact and opportunity, specific to the CSR aspects of our activities. Adherence to these CSR values are viewed as a key factor in securing the long-term operational success of the Company.

We aim to apply targets, across our identified areas of impact and opportunity, to focus employees and enable the Company and stakeholders to monitor performance.

O U R A R E A S O F I M PAC T A N D O P P O R T U N I T Y


CHIEF E X ECU T I V E’S RE V IE W

A T R A N S F O R M AT I O N A L Y E A R

A N T H O N Y B U C K I N G H A MC H I E F E X E C U T I V E O F F I C E R

2012 has been a momentous year in the evolution of Heritage. We have enhanced our portfolio through corporate activity, securing a step change in production, reserves and cash flow.

Our transformation during 2012 and into 2013 resulted from decisions to exit Kurdistan and Mali, and enter new regions of Nigeria and Papua New Guinea whilst extending our acreage in Tanzania. Our portfolio now includes significant producing assets and an enlarged exploration portfolio. This combination provides more balance with both geographic and operational diversification.

Since the acquisition of an interest in OML 30, total revenues, net to Heritage of $234.5 million have been generated and cash received in 2013 from Nigeria at an average realised price of $116.87/bbl. The crude is marketed by a subsidiary of Royal Dutch Shell plc and given the quality of the crude attracts a premium to Brent. This revenue generated excess cash flow which resulted in Shoreline making a payment of $52.5 million in April 2013 to reduce the bridge loan from $550 million to $497.5 million. We are currently in the process of refinancing this to a long-term five year loan.

Heritage has an exceptional multi-year record of creating value and monetising assets and has generated c.$2 billion in asset sales with the current executive management team. We have consistently identified assets which are underdeveloped or overlooked and we have utilised the expertise of the Board and our technical team to create a strategic asset position.

Against the ongoing backdrop of economic uncertainty, oil prices have remained high and the Company has secured assets with significant production potential which will generate high netback returns.


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30002000

50004000

10000

Heritage Oil Plc

Tullow Oil plc

Premier Oil plc

SOCO International plc

Afren Plc

Salamander Energy plc

Jan 99 Jan 03 Jan 13Jan 01 Jan 05 Jan 07 Jan 09 Jan 11

TSR versus peers since TSX listing, %

Source: Factset and Datastream as of 25 January 2013.

N E W A R E A SN I G E R I AIn November 2012, Heritage, through Shoreline, completed the acquisition of an interest in OML 30. Shoreline is a special purpose Nigerian company formed between a subsidiary of Heritage and a Nigerian partner, Shoreline Power, which acquired 45% of OML 30. This transaction established Heritage’s first significant participation in the Nigerian oil industry and creates a platform for future growth in the region.

Average production, net to Heritage, from OML 30 for November and December was 12,350 bopd. Since the acquisition on 1 November 2012, gross production for the licence has averaged c.20,350 bopd but has been as high as 42,825 bopd. This is in part due to a manifold in a gas lift compressions system failing and also to a strike by local workers. These two issues are being addressed and the manifold is expected to be repaired by the end of May. The majority of the fields are operating again after a series of successful meetings the operator held with local workers. The remaining fields are expected to be back in production shortly. Good progress has been made to increase production in the second half of the year, primarily through improved gas lift with new compressors being ordered.

With OML 30, and through Shoreline, we saw the opportunity to acquire a world class asset at low valuation multiples. The acquisition cost of $1.70 per barrel of proved and probable reserves (“2P”) versus the average for precedent transactions in the Niger Delta of $5.90 per barrel of 2P reserves represents a significant discount. It is the largest upstream onshore asset transaction in sub-Saharan Africa on a 2P basis and positions Shoreline as one of the largest indigenous oil companies in Nigeria.

Since 1961, over 200 wells have been drilled on the licence and the strong aquifer support has enabled the majority to become producers. Eight fields have been developed and there is a railway line to an export terminal on the coast. However, the licence has previously been ill maintained and underdeveloped with a sporadic drilling history, especially since 1980.

OML 30 is located onshore and comprises eight producing fields with associated infrastructure which includes a 45% interest in the 850,000 bpd capacity Trans Forcados pipeline running from the Eriemu Field, within the licence, to the Forcados River manifold. OML 30 is one of the largest onshore licences, by reserves, in Nigeria with gross proved and probable reserves of 1.1 billion barrels of oil, as estimated independently by RPS as at 31 March 2012. Consequently, this one licence alone contains more oil reserves than are held within many entire African countries.

The licence benefits from having all infrastructure already in place. There are nine flow stations with the capacity to handle 395,000 bpd, thereby handling several years of projected production growth. The facilities have been robustly designed and constructed, benefiting from following a standard design enabling equipment to be easily replaced if necessary. The licence includes an ownership interest in the Trans Forcados Pipeline which transports production from OML 30 and several other licences to an export terminal on the coast. The pipeline generates revenues which provides the licence owners with a profit from the tari" charged. Gross revenue from the Trans Forcados Pipeline is expected to total approximately $50 million in 2013. There has been no evidence of bunkering on the pipeline since the acquisition.

We identified the potential to both stabilise and increase production in the near term through the refurbishment of infrastructure and the re-starting of non-producing existing wells. In addition, existing wells will be worked over to improve completions and gas lift can be installed in a number of existing wells which do not have artificial lift. Longer term, there is the potential to increase gross production for the field to c.300,000 bopd through the drilling of new wells which is expected to begin in the second half of 2014.

To date, work on the licence has commenced with ordering four new gas lift compressors, the first of which will be delivered in June, installing diesel generators and installing new instrument air compressors. Over the course of this year further work will continue aimed at optimising existing facilities. Gas lift is the single method of artificial lift within OML 30 and six of the eight fields have gas lift installed, with installation at the two remaining fields planned in


CHIEF E X ECU T I V E’S RE V IE W CO N T IN U ED

2014–2015. Improving the gas lift system is the key target in 2013 and we believe could increase production by up to 20%.

Shoreline has opened its technical and administrative head o#ce in Lagos, employing a team of 17 members of sta". A very good working relationship has been established with the Nigerian Petroleum Development Company (“NPDC”), the operators of OML 30, on joint technical and operational reviews of all the fields and facilities and the budget for 2013 has been approved. NPDC took over operatorship of OML 30 at the beginning of February 2013 after a three month transition period.

Shoreline has also commenced a series of programmes in OML 30 after meeting with local communities to ensure that the Company can implement the most e"ective social programmes for these communities, with a focus on education, training and healthcare.

Heritage’s partner, Shoreline Power, is a pan-African energy and infrastructure business with an existing network of strong and respected relationships within Nigeria. Coupled with the experience of Heritage’s technical team the two companies create, in Shoreline, a company that is well positioned as a platform for further growth within the country. Nigeria, with estimated proved reserves of 37.2 billion barrels, is the largest African producer with 2.5 MMbbls per day, according to the BP Statistical Review 2012, and has well-established infrastructure from over 50 years of oil production. The country is predicted to be one of the largest growing emerging economies with growth expected in the energy sector.

PA P U A N E W G U I N E AIn April 2013 we announced the expansion of our exploration portfolio with entry into. Heritage has agreed to acquire an 80% working interest in PPL 319 and PRL 13 from LNG Energy. In return for earning the working interests and operatorship, Heritage will fund the costs of the seismic acquisition and the cost of drilling an exploration well. We look forward to developing and accelerating the work programme as this acreage provides the opportunity to discover large gas reserves at a time when regional gas demand is growing rapidly. The licences are onshore and close to multiple producing fields and discoveries, including the multi-TCF Triceratops and Elk/Antelope discoveries. There is also a close proximity to current and under-construction infrastructure with the Kutubu oil export pipeline and the PNG Liquefied Natural Gas pipeline crossing the acreage.

TA N Z A N I AIn January 2012 Heritage was awarded the Kyela PSA which had never previously been targeted for hydrocarbon exploration. Our work programme commenced with the acquisition of a c.1,500 square kilometre very high resolution gravity survey indicating the presence of structural highs adjacent to a main depocentre. In January 2013 we completed a 100 kilometre reconnaissance seismic survey across the Kyela Block which has confirmed the structures previously indicated by the gravity data. The processing of this data will enable the positioning of targeted infill 2D seismic which is scheduled to be acquired later this year. During 2012 we reprocessed the legacy 2D seismic in Rukwa and acquired a further

c.600 kilometres of 2D seismic across the north eastern margin of the basin which is currently being processed. We continue to be excited with the potential in the Rukwa Rift Basin and Kyela which we believe to share certain geological similarities with the Albert Basin of Uganda, where we were the pioneering oil company to undertake active exploration for the first time in nearly 60 years. Following a technical review in 2012, all expenditures relating to Latham were written-o".

OT H E R A S S E T SR U S S I AProduction averaged 607 bopd over the year, a decrease of 10% over the year due to natural well decline and a temporary mechanical issue on well 363 which has been resolved. Based on positive results from the horizontal well drilled in August 2011, a revised field development plan was submitted for Zapadno Chumpasskoye, replacing vertical producers with horizontal wells. The change in well type should result in a significant reduction in the number of production wells required to develop the field and a corresponding reduction in drilling expenditure. Our revised development proposal was accepted by regulatory authorities at the end of December 2012.

L I B YA A N D M A LTAA new Libyan government was established in the second half of 2012 and as this and other government institutions become established, we are confident that a constructive dialogue with Malta will develop regarding the associated maritime boundary issues and hydrocarbon rights. Heritage is actively assisting o#cials in both countries to move forward with these discussions, ultimately to enable the exploration and development of Area 7 where a prospect has been identified and preparations continue to drill a well, subject to Maltese government approval.

CO R P O R AT E B O A R D C H A N G E SI am pleased to announce that we have strengthened our Board this year with two appointments; Carmen Rodriguez and Mark Erwin. Carmen, the first woman Director appointed to our Board, joined in March 2012, replacing Salim Macki who retired. Mark joined the Board in May 2012. We view both appointments as outstanding additions to our Board with considerable experience.

C A S HAs at 31 December 2012, Heritage had a cash position of approximately $90 million, excluding amounts related to the tax dispute of approximately $405 million, which is more than su#cient to cover planned work programmes into 2014.

P E T R O F R O N T I E R C O R P.Heritage continued to acquire common shares (“Shares”) of PetroFrontier Corp. (“PetroFrontier”) for investment purposes and currently holds 19.98% of the outstanding Shares of PetroFrontier. PetroFrontier is listed on the TSX Venture Exchange and is focused on a high-impact drilling programme in Australia targeting billions of barrels of resources.


B U Y B A C K P R O G R A M M EHeritage commenced a share buy back programme in April 2011. To date 34,602,442 Ordinary Shares have been bought back and are held in treasury. Shares were bought back in the year under the authority given at the 2011 Annual General Meeting (“AGM”). No such authority was sought at the 2012 AGM. Consequently, Heritage has 255,595,978 Ordinary Shares in issue (excluding treasury shares) as well as 2,361,018 exchangeable shares of no par value of Heritage Oil Corporation, each carrying one voting right in Heritage.

D I S P O S A LThe disposal of our interests in the Miran asset in Kurdistan was announced in August 2012. Shareholder approval was received in December 2012 and the transaction completed shortly thereafter. The sale for $450 million secured an attractive valuation for this asset which has a significant further capital expenditure requirement and these proceeds were used to partially fund our entry into Nigeria.

U G A N D AIn January 2010, Heritage announced the sale of Blocks 1 and 3A in Uganda by its wholly owned subsidiary, Heritage Oil & Gas Limited (“HOGL”), to Tullow Uganda Limited (“Tullow”) for $1.45 billion.

Subsequently, the Uganda Revenue Authority (“URA”) assessed that income tax was due on the capital gain arising on this disposal. Heritage’s position, based on comprehensive legal and tax advice, is that no tax is payable. In order to appeal the URA assessment, Heritage was required to deposit 30% of the disputed tax assessment with the URA. The remainder is retained in escrow in London.

HOGL continues to challenge both the URA in the Ugandan courts and, in accordance with the PSAs, the Ugandan government through international arbitration proceedings in London, which commenced in May 2011. The arbitration tribunal ruled in April 2013 that the determination of tax was outside its jurisdiction, but that there were two areas of HOGL’s claims which it will consider, in respect of contractual income tax stabilisation clause protection and breach of other contractual obligations.

The determination by the arbitral tribunal marks the end to the preliminary phase. The proceedings will now continue to deal with the merits phase of Heritage’s contractual claims against the Ugandan government and the underlying substantive Ugandan tax matters remain under appeal in the Ugandan courts.

In April 2011, Tullow made a payment to the URA and subsequently filed a claim in the High Court in England seeking compensation for alleged breach of contract as a result of HOGL’s and Heritage’s refusal to reimburse Tullow. In March 2013, an 11 day hearing took place in the Commercial Court in London. A first instance judgment is expected during the course of 2013.

CO R P O R AT E S O C I A L R E S P O N S I B I L I T YWe continue to mature our approach to CSR and engagement with stakeholders towards achieving a shared future, which is a key element supporting our core business model. We have developed, and continue to review, a policy framework disclosing our essential core values. I am delighted to report that we continue to maintain a strong track record for health and safety which is fundamental in being viewed as a preferred partner.

Community relations are a key factor for success in our new Nigerian operations where there are over 90 communities living on the licence. We are applying our core values, through Shoreline, in working with the communities within the OML 30 licence and are striving to improve their lives in the areas of health, education and environment. A comprehensive series of CSR programmes have already commenced in Nigeria.

During 2012, we spent a total of approximately $971,000 on CSR-related activities with community programmes focused on areas where we were operationally more active. We are looking forward to having a positive contribution to our new areas of activity.

O U T LO O KNigeria is the core focus for us in 2013 as we strive to increase production and work with the operator on forward programmes. We expect to continue to be very active across the exploration portfolio with activity increasing in Tanzania and seismic programmes being undertaken in PNG. This activity will continue into 2014 and is expected to set the basis for future growth for our Company.

As always, I am very grateful to our management team, employees and supportive Board for their dedication and contribution to the progress made by Heritage this past year. Finally, to our shareholders, thank you for your continued support and interest in Heritage.

A N T H O N Y B U C K I N GH A MC H I EF E X EC U T I V E O FF I C ER2 9 A PR I L 2 013

N I G E R I A

EriemuOweh

Olmoro-OlehOroni

Osioka

EvwreniUzere West

O M L 3 0

Warri

Forcados

Escraros

Kokori

Afiesre


O PER AT IO N A L RE V IE WNIGERI A

On 9 November 2012, Heritage announced that Shoreline, a special purpose private Nigerian company formed between a subsidiary of Heritage and a local Nigerian partner, Shoreline Power, successfully completed the acquisition of a 45% interest in OML 30, together with a 45% interest in other assets under the joint operating agreement for OML 30, for a total cash consideration of $850 million, net of costs. OML 30 is a world class asset with gross oil reserves of over 1.1 billion barrels and has all the infrastructure in place to produce up to 395,000 bpd.

Shoreline Power had an option to acquire 30% of Heritage’s interest in Shoreline which was exercised, in line with expectations, at the end of December 2012. Heritage will shortly receive the exercise price from Shoreline Power of over $100 million which, in accordance with the bridge facility from Standard Bank, will be used in part as security against the existing facility to Shoreline and also for general corporate purposes. Following completion of the option exercise and continuation of the existing profit share agreement, Heritage’s equity and economic interests in Shoreline will be 31.5% and 68.25%, respectively.

In November 2012, Heritage successfully completed the acquisition of a major interest in OML 30, Nigeria, through Shoreline.

OML 30 lies onshore within the Niger Delta in one of the most prolific oil and gas provinces in the world. The licence covers 1,097 square kilometres and includes eight producing fields with oil and gas contained in numerous stacked reservoirs. The fields are deltaic shallow marine shelf sands at intermediate depth level in growth fault structural setting. The fields each contain up to 40 stacked reservoirs and the reservoirs are underlain by substantial aquifers that provide nearly infinite pressure support. The oil is good quality 30° API and typically sells at a 3% premium to Brent.

Since 1961 over 200 wells have been drilled on the licence and the strong aquifer support has enabled the majority of these to become producers. There is the potential to both stabilise and increase production in the near term through refurbishing infrastructure and restarting non-producing existing wells. Additionally, existing wells will be worked over to further increase production. In the longer term, drilling which is slated to commence in the second half of 2014 will target additional reservoir intervals that will provide a further increase in production levels.

To date, work on the licence has commenced with the ordering of four new gas lift compressors, the first of which will be delivered in June, installation of diesel generators and new instrument air compressors. Over the course of this year further work will continue aimed at optimisation of existing facilities. Gas lift is the single method of artificial lift within OML 30 and six of the eight fields have gas lift installed, with the two remaining fields planned to have gas lift installed in 2014–2015.

OML 30 Oil pipeline Forcados pipeline Oil field


Improving the gas lift system is the key target in 2013 and could increase production by 20%.

The licence benefits from infrastructure being in place with nine flow stations that have the capacity to handle 395,000 bpd thereby handling several years of projected production growth. The facilities have been robustly designed and constructed, and benefit from a standard design so equipment can easily be replaced if required.

The acquisition included a 45% interest in the segment of the Trans Forcados pipeline between the Eriemu Manifold and the Forcados River Manifold, which is largely buried. The pipeline is used by several other operators and provides additional revenue for the pipeline owners through the tari" charged.

In November and December 2012, average production net to Heritage was 12,350 bopd. Since the acquisition of an interest in OML 30, total revenues net to Heritage of $234.5 million have been received from Nigeria at an average realised price of $116.87/bbl. Gross production for the licence has been as high as 42,825 bopd during this period.

The acquisition and partnership with Shoreline Power enhances Heritage’s profile in Nigeria and creates a platform for further growth in this prolific hydrocarbon region. Shoreline has become one of the leading indigenous companies producing in Nigeria, combining Shoreline Power’s energy and infrastructure operating expertise and respected network of relationships within Nigeria with Heritage’s strong technical team.

O M L 3 0 – S U M M A R Y O F R E S E R V E S1, 2

Gross Remaining ReservesHeritage Group Net

Entitlement Reserves

Gross ofRoyalty

(mmstb)

Net ofRoyalty

(mmstb)

Gross ofRoyalty

(mmstb)

Net ofRoyalty

(mmstb)

Proved Reserves (1P) 538 430 168 134Proved & Probable Reserves (2P) 1,114 891 347 277Proved & Probable & Possible Reserves (3P) 1,733 1,387 539 431

1 Post exercise of Shoreline Power option.2 As per RPS, as at 31 March 2012.

O M L 3 0 – P O S T TA X E VA L UAT I O N N E T TO H E R I TAG E

Base IncomeTax Scenario1

($ million)

Alternative Income Tax

Scenario2

($ million)

Post-tax NPV

(10%)Post-tax NPV

(10%)

Proved Reserves (1P) 1,189 1,410Proved & Probable Reserves (2P) 2,162 2,652Proved & Probable & Possible Reserves (3P) 3,129 3,820

1 Assumes the income tax applicable under current Nigerian law.2 Assumes the income tax under changes to Nigerian law which Heritage believes might occur.

Z A PA D N OC H U M PA S S KOY EL I C E N C E W E S T E R N

S I B E R I A


O PER AT IO N A L RE V IE W CO N T IN U EDRUSSI A

The Zapadno Chumpasskoye licence is in the hydrocarbon-rich West Siberian province of Khanty-Mansiysk, approximately 100 kilometres from the city of Nizhnevartovsk and in the area of the region’s prolific Samotlor oilfield, which makes it accessible to existing infrastructure. The licence contains the Zapadno Chumpasskoye Field, discovered in 1997. A total of 13 wells have been drilled on the licence including four by the Group. The Chumpasskoye crude is light, sweet (42º API) oil, with moderate gas-to-oil ratios.

Since 2006, the Group has acquired 2D seismic data covering an area of 200 kilometres, constructed pilot production facilities, commenced field production, drilled four wells and re-entered existing well 226. Production facilities were commissioned and production commenced in May 2007. In 2009, an electric submersible pump was

installed on well 226 to arrest the natural well production decline and a water shut-o" operation was completed on well P4. Based on positive results from the horizontal well drilled in August 2011, a revised field development plan was submited for Zapadno Chumpasskoye replacing vertical producers with horizontal wells. The change in well type should result in a 50% reduction in the number of production wells required to develop the field and a corresponding reduction in drilling expenditure of approximately $200 million. The development proposal was approved by regulatory authorities at the end of December 2012.

Production averaged 607 bopd for the year, a decrease of 10% year-on-year due to natural well decline and a temporary mechanical issue which has since been resolved.

Since 2005, the Group has held a 95% equity interest in ChumpassNefteDobycha Limited, a Russian company whose sole asset is a 100% interest in the Zapadno Chumpasskoye licence.

I N D E P E N D E N T LY E S T I M AT E D R E S E R V E S AT T H E Z A PA D N O C H U M PA S S KOY E F I E L D 1

Net working andentitlement

reserves MMbbls

Net present value

($ million in money

of the day)

Proved 23 52

Probable Additional 42 284

Total Proved + Probable 65 336

Total Proved + Probable + Possible 163 976

1 A summary of RPS’s net working interest reserves and their Net Present Value, based on forecast prices and costs, discounted at 10%, as of 31 March 2012.

Heritage licence Oil pipeline Gas pipeline Oil producer Oil well

U N I T E D R E P U B L I C O F

T A N Z A N I A

Z A M B I A

K E N Y A

L A T H A M

R U K W A S O U T H

K Y E L A

R U K W A N O R T H

Mombasa

Tancan-1

Dodoma

Ivuna-1Galula-1

Dar es Salaam


TA NZ A NI A

R U K WAIn November 2011, Heritage announced the award of a PSA that covers virtually the entire Rukwa Rift Basin, split into two separate areas, Rukwa North and Rukwa South. Heritage is the operator with a 100% interest. A limited amount of exploration activity was undertaken in the region in the mid-1980s which resulted in the acquisition of c.2,300 kilometres of 2D seismic data and the drilling of two wells. Reprocessing of legacy 2D seismic data in Rukwa was completed in 2012 and the acquisition of c.600 kilometres of 2D seismic data completed in March 2013. Seismic processing is ongoing and it is planned to acquire infill 2D seismic, if needed, in conjunction with Kyela seismic acquisition.

K Y E L AIn January 2012, Heritage was awarded the Kyela PSA covering the entire northern onshore area of the Lake Nyasa (Livingstone) Basin that lies within Tanzanian territory. The Block has never previously been targeted for hydrocarbon exploration. Gravity data over the area suggests the presence of a sedimentary section of su#cient thickness to allow for the generation of oil. The work programme commenced with the acquisition of a c.1,500 square kilometre very high resolution gravity survey. This

indicated the presence of probable structural highs adjacent to a main depocentre, modeled as a potential hydrocarbon kitchen. A 100 kilometre reconnaissance seismic survey completed in January 2013 confirms the structures indicated by the gravity data. Seismic processing has been completed and interpretation is ongoing to enable the positioning of targeted infill 2D seismic, scheduled to be acquired later this year.

Satellite radar surveys indicate areas of wave-calming in Lake Rukwa and in Lake Nyasa that may be associated with oil seeps. In the event of an oil discovery, at either Rukwa or Kyela, economic scoping shows the commercial viability of either rail export to Dar es Salaam or export by pipeline depending on exploration success. Heritage recognises that the Rukwa and Kyela licences share certain geological similarities with the prolific Albert Basin of Uganda where Heritage had previous experience and significant success.

L AT H A M After a technical review during 2012, all expenditures with respect to Latham have been written-o".

Heritage has four Blocks in Tanzania, three of which are considered to be geologically analogous to the Lake Albert Basin in Uganda.

BlocksArea

(sq km)Date

awardedHeritage

equity Partners Operator

Rukwa North 10,175 November 2011 100% – Heritage

Rukwa South 8,745 November 2011 100% – Heritage

Kyela 1,934 January 2012 100% – Heritage

Latham 5,056 September 2006 29.9% Petrodel Heritage

Heritage licence Exploration well Oil and gas shows Gas field Railway

P A P U AN E W G U I N E A

KeremaKumul Marine Terminal

Popondetta

Lae

P P L 3 1 9

P R L 1 3


O PER AT IO N A L RE V IE W CO N T IN U EDPA PUA NE W GU INE A

P P L 319/ P R L 13In April 2013, Heritage announced the farm-in to exploration licence PPL 319 and retention licence PRL 13 to be appointed as operator with the right to obtain an 80% working interest. The contiguous licences are located onshore and have respective gross areas of approximately 2,025 and 160 square kilometres. The transaction completed in April 2013 following receipt of consent from the Papua New Guinea government and Heritage has been appointed operator. In return for earning the working interests and operatorship, Heritage will fund the costs of seismic acquisition and the cost of drilling an exploration well. In addition, Heritage has made a $4 million contribution to LNG Energy Ltd’s back costs on the licences.

The licences are located at the junction of the Papuan fold belt and the Miocene carbonate platform where there are multiple producing fields and discoveries including the multi-TCF Triceratops and Elk/Antelope discoveries.

The licences benefit from being close to current and under-construction infrastructure with the Kutubu oil export pipeline and the PNG Liquefied Natural Gas pipeline crossing the acreage. The licences also benefit from the Kikori River which provides a link to the open sea, thereby increasing transport options.

Assessment of the legacy dataset, which includes c.250 kilometres of 2D seismic data and high resolution magnetic and gravity surveys, has identified a potential local source kitchen with more than seven kilometres of section. This potential is being further evaluated through the recent acquisition of seismic data across the Tuyuwopi structure in PPL 319 which completed 31 March 2013. Heritage intends to enlarge this seismic programme by funding a minimum of 100 kilometres of 2D seismic data with the intention of progressing the Tuyuwopi structure to a drillable prospect in 2014 and to assess additional upside of the licences.

In 2013 Heritage expanded its portfolio into onshore PNG through the farm-in to two licences as operator with an 80% working interest.

Heritage licence Oil field Gas field Oil pipeline proposed Gas pipeline proposed Oil pipeline Gas pipeline

BlockApproximate area (sq km)

Date farm-in

Heritage equity Partners Operator

PPL 319 2,025 March 2013 80% LNG Energy Heritage

PRL 13 160 March 2013 80% LNG Energy Heritage

Tunis

Siracusa

Medina Bank-1

Sfax

Tripoli

T U N I S I A

L I B Y A

A R E A 2

A R E A 7

M A L T A


M A LTA

The Maltese licences cover almost 18,000 square kilometres and are situated approximately 80 kilometres (Area 2) and 140 kilometres (Area 7) o"shore, in water depths of up to approximately 300 metres. The two Areas are close to, and geologically similar to, a number of producing fields o"shore Libya and Tunisia.

With only one well previously drilled in Area 2, the Medina Bank-1 well in 1980 which did not reach its target, both licences are considered to be underexplored. Although drilled to a depth of 1,225 metres, the well failed to reach the objective horizons, estimated to be between 1,500 and 4,500 metres.

The interpretation of seismic data in Heritage’s extensive dataset of approximately 5,000 kilometres of 2D seismic, has confirmed the mapping of a highly attractive Lower Eocene carbonate reef play within a prospect in Area 7 and also allowed for the mapping, with greater certainty, of a deeper carbonate reef play within the Cretaceous section of the prospect. These primary targets are recognised as major hydrocarbon producing zones in the central part of the Mediterranean.

In addition, the Company has recognised the presence of a north-south trending shelf margin on the eastern part of the blocks where a number of attractive reef prospects have been mapped.

A drillable prospect has been identified and preparations are underway to drill a well in Area 7 subject to Maltese government approval.

In December 2007, the Group entered into a PSC with the Maltese government for a 100% interest in Areas 2 and 7 in the south-eastern o"shore region of Malta.

BlocksArea

(sq km)Date

awardedHeritage

equity

Area 2 9,190 December 2007 100%

Area 7 8,778 December 2007 100%

Heritage licence Exploration well Oil and gas shows Oil field Gas field

Tripoli

Sirte

Benghazi

A L G E R I A

N I G E R C H A D

E G Y P TL I B Y A


O PER AT IO N A L RE V IE W CO N T IN U EDL IBYA

Heritage has pursued its strategy of “first mover advantage” through pursuing participation in the restoration of the Libyan oil production sector which presents a dynamic and evolving environment.

Libya is considered to be a highly attractive oil province due to the low cost of oil recovery, high quality oil which is generally sweet with API gravity ranging between 32–44º, proximity to European markets and well developed infrastructure.

A wholly owned subsidiary of Heritage acquired a 51% equity interest and control of Sahara Oil which owns the entire share capital of Sahara, a Libyan registered company providing services to the oil industry, for cash consideration of $19.5 million.

Sahara Oil was established in April 2009 and has been granted long-term licences to provide full oil field services in Libya, including the ability to drill onshore and o"shore and hold both oil and gas licences. Our e"orts have the aim of playing a key role in the substantial rehabilitation work needed to resume, maintain and increase Libya’s hydrocarbon production in line with National Oil Company (“NOC”) and Oil Ministry targets.

Heritage established a base in Benghazi in the first half of 2011, having been in discussions with senior members of the National Transitional Council, the legitimate and recognised government of Libya at the time, as well as with its Executive Committee, the NOC and certain subsidiaries. The dialogue with these parties continues, with Heritage now also active in Tripoli and exploring ways to assist the newly appointed interim government, under the General National Congress elected in July 2012, the NOC and the state oil companies, rehabilitate and re-shape Libya’s hydrocarbons sector, placing it on a sustainable path that will meet the future needs of the country.

In August 2011, Heritage acquired a controlling 51% interest in Sahara Oil which holds the necessary long-term permits and licences to provide oil field services in Libya.

Oil field Gas field Oil pipeline Gas pipeline

Quetta

PeshawarIslamabad

Lahore

S A N J A W I

Z A M Z A M A N O R T H

IR A N

A F G H A N I S T A N

I N D I A

P A K I S T A N


PA K IS TA N

S A N J AW IHeritage has a 54% interest and is operator of the Sanjawi licence (number 3068-2) in Zone II (Baluchistan), which was awarded in November 2007, and which covers a gross area of 2,258 square kilometres. The Block is considered prospective due to an oil discovery to the west, a number of gas fields to the south-east and the presence of oil seeps in the licence. The licence area is dominated by a series of broad east-west trending surface features including the large Dabbar and Warkan Shah anticlines, the former being some 300 square kilometres in area.

Z A M Z A M A N O R T HIn December 2008, Heritage obtained a 48% interest in the Zamzama North licence (number 2667-8) and was appointed operator. The Zamzama North licence covers an area of 1,229 square kilometres and is located in the south of Pakistan, in the western part of the Sindh Province, approximately 200 kilometres north west of Hyderabad.

There is considerable infrastructure in the area as one of the main pipelines runs through the licence and any discovered hydrocarbons could be readily connected. The Zamzama Gas Field, a major gas field in production, lies immediately to the south of, and adjacent to, Zamzama North.

Using the current seismic database Heritage has mapped a number of structural prospects and leads and a drilling programme is under consideration. The database comprises some 1,000 kilometres of good quality 2D seismic data.

Heritage is operator of two Blocks in Pakistan.

BlocksArea

(sq km)Date

awardedHeritage

equity Partners Operator

Sanjawi 2,258 November 54% Hycarbex Heritage2007 American Energy

Sprint EnergyTrakker Energy

Zamzama North 1,229 December 48% Hycarbex Heritage2008 American Energy

Sprint EnergyTrakker Energy

Heritage licence Oil field Gas field Oil pipeline Gas pipeline


O PER AT IO N A L RE V IE W CO N T IN U EDOT HER D E V ELO PM EN TS

K U R D I S TA N Heritage was one of the initial companies to be awarded a Production Sharing Contract in Kurdistan in October 2007. Heritage has again demonstrated the ability to successfully explore, discover and monetise its acreage with the full divestment of the Miran asset for $450 million. Heritage decided to sell its Kurdistan interests as the valuation was considered attractive and the multi-billion dollar capital expenditure requirements associated with developing the Block given the lack of local infrastructure or local gas market would no longer be required and would not be a drain on the Group. The sale also meant that the planned rights issue to partially fund the acquisition of OML 30 was no longer required.

Furthermore, the elimination of funding obligations and significant appraisal and development capital requirements in respect of the Miran Block, together with the proceeds of the divestment, allow the Company to continue to acquire and invest in, and subsequently explore and develop, oil and gas opportunities throughout the world.

M A L IHeritage announced in March 2008 that the Government of Mali had approved Heritage’s farm-in on two exploration licences in the Gao Graben.

Heritage was the operator of Blocks 7 and 11 and acquired 1,077 kilometres of 2D seismic in 2011. The interpretation of all data within the acreage was completed.

Due to the security situation in the region, and following discussions with the government, Heritage has relinquished the assets in 2012 and has no further obligations in this respect.

U G A N DAOn 18 December 2009, Heritage announced that it and its wholly owned subsidiary Heritage Oil & Gas Limited (“HOGL”) had entered into a SPA with Eni for the sale of its interests in Uganda (the “Ugandan Assets”). On 17 January 2010, Tullow exercised its rights of pre-emption. The transaction was overwhelmingly approved by Heritage shareholders at the General Meeting on 25 January 2010.

On 27 July 2010, Heritage announced that HOGL had completed the disposal of the Ugandan Assets. Tullow paid cash of $1.45 billion, including $100 million from a contractual settlement, of which Heritage received and retained $1.045 billion.

The Ugandan Revenue Authority (“URA”) contends that income tax is due on the capital gain arising on the disposal and it raised assessments of $404,925,000 prior to completion of the disposal. Heritage’s position, based on comprehensive advice from leading legal and tax experts in Uganda, the United Kingdom and North America, is that no tax should be payable in Uganda on the disposal of the Ugandan Assets and that even if tax were payable, under the terms of the production sharing agreements with the Ugandan government relating to the Ugandan Assets (the “PSAs”) HOGL should be indemnified by the Ugandan government (under the contract stabilisation clause).

On closing, Heritage deposited $121,477,500 with the URA, representing 30% of the disputed tax assessment of $404,925,000. $121,477,500 has been classified as a deposit in the balance sheet at 31 December 2012. A further $283,447,000 has been retained in escrow with Standard Chartered Bank in London, pursuant to an agreement between HOGL, Tullow and Standard Chartered Bank pending resolution between the Ugandan government and HOGL of the tax dispute.

In August 2010, the URA issued a further income tax assessment of $30 million representing 30% of the additional contractual settlement amount of $100 million. HOGL has challenged the Ugandan tax assessments on the disposal of HOGL’s entire interest in the Ugandan Assets.

In November 2011 and December 2011, the Tax Appeals Tribunal in Uganda dismissed HOGL’s applications in relation to the two assessments amounting to $434,925,000. The rulings from the Tax Appeals Tribunal in Uganda are part of a domestic process and are not final and determinative. HOGL has appealed the rulings, which it believes are fatally flawed in many respects, through the Ugandan court system commencing with the High Court and subsequently the Court of Appeal and Supreme Court if necessary.


In May 2011, HOGL commenced international arbitration proceedings in London against the Ugandan government in accordance with the provisions of the PSAs. HOGL is seeking a decision requiring, among other things, the return or release of approximately $405 million, plus interest, in aggregate currently on deposit with the URA or in escrow with Standard Chartered Bank in London. HOGL made a number of claims in the arbitration proceedings that tax had been improperly imposed on it which the arbitration tribunal ruled on 3 April 2013 to be outside its jurisdiction. The tribunal ruled at the same time that there were two areas of HOGL’s claims which it will consider, in respect of contractual stabilisation clause protection and breach of other contractual obligations. Accordingly, the arbitration proceedings now concern HOGL’s claims that the Ugandan government wrongfully or unreasonably delayed consent to the sale by HOGL of the rights under the PSAs and that the Ugandan government should indemnify HOGL with respect to any tax liability which arose due to changes in law that materially reduced the economic benefits to be derived by HOGL from the PSAs.

The determination by the arbitral tribunal marks the end to the preliminary phase. The proceedings will now continue on to deal with the merits phase of Heritage’s contractual claims against the Ugandan government and the underlying substantive Ugandan tax matters remain under appeal in the Ugandan courts.

On 15 April 2011, Heritage and its wholly owned subsidiary HOGL received Particulars of Claim filed in the High Court of Justice in England by Tullow seeking $313,447,500 for alleged breach of contract as a result of HOGL’s and Heritage’s refusal to reimburse Tullow in relation to a payment made by Tullow of $313,447,500 on 7 April 2011 to the URA. Heritage and HOGL have filed their Defence and Counterclaim against Tullow seeking instead the release to HOGL of the $283,447,000 plus interest currently being held in escrow with Standard Chartered Bank in London. The case commenced to be heard in the High Court in March 2013 and a first instance decision is expected to be received later this year. Heritage and HOGL believe that the claim has no merit and are in the process of vigorously and robustly defending it.

Although disputes of this nature are inherently uncertain, the Directors believe that the monies on deposit and held in escrow will ultimately be recovered by Heritage.


FIN A N CI A L RE V IE W

D I V E R S I F I E D

PA U L AT H E R T O NC H I E F F I N A N C I A L O F F I C E R

S EL EC T ED O PER AT I O N A L A N D F I N A N C I A L DATA

2012 2011 Change

P R O F O R M A P R O D U C T I O N 1 bopd 12,957 673 1,825%

S A L E S V O L U M E 2 bopd 607 671 (10%)

AV E R AG E R E A L I S E D P R I C E $/bbl 39.7 36.9 8%

P E T R O L E U M R E V E N U E $ million 8.8 9.0 (2%)

LO S S F R O M C O N T I N U I N G O P E R AT I O N S A F T E R TA X $ million (182.3) (63.0) (189%)

G A I N / ( LO S S ) F R O M D I S C O N T I N U E D O P E R AT I O N S $ million 210.9 (3.9) n/a

N E T P R O F I T/ ( LO S S ) $ million 28.6 (66.9) n/a

TOTA L C A S H I N V E S T I N G A N D C A P I TA L E X P E N D I T U R E S $ million 910.0 134.9

Y E A R E N D C A S H B A L A N C E $ million 89.6 310.9

1 Pro forma production includes Heritage’s net share of average daily production from the Zapadno Chumpasskoye Field in Russia for the full year, together with its net share of average daily production for OML 30 included for November and December 2012 only, following completion of the acquisition of an interest in OML 30 through Shoreline e"ective 1 November 2012. Heritage’s total net share of production in 2012 was 975,511 barrels. OML 30 production was sold in January 2013 and included in inventory at 31 December 2012.

2 Sales volumes from the sale of crude from the Zapadno Chumpasskoye Field, Russia.


CO R P O R AT E P E R F O R M A N C EP R O D U C T I O N A N D S A L E S V O L U M E SPetroleum revenue was generated in 2012 from the Zapadno Chumpasskoye Field in Russia. Production from the Zapadno Chumpasskoye Field decreased from an average daily production of 673 bopd in 2011 to 607 bopd in 2012, primarily due to natural decline and a mechanical problem occurring on well 363 which has been repaired.

In November 2012, Heritage, through Shoreline Natural Resources Limited (“Shoreline”), completed the acquisition of a 45% interest in a producing oil mining licence in Nigeria (“OML 30”) together with a 45% interest in other assets owned under a joint operating agreement for OML 30 (the “Acquisition Assets”). Shoreline is a special purpose Nigerian company formed between a subsidiary of Heritage and a Nigerian partner, Shoreline Power Company Limited (“Shoreline Power”), which acquired the 45% of OML 30. Production from OML 30 is incorporated within the Group results with e"ect from 1 November 2012. Average daily production, net to Heritage’s economic interest, of 12,350 bopd was generated from OML 30 in Nigeria for November and December 2012.

The di"erence between the production volumes and sales volumes is due to the change in the oil inventory balance during the year.

R E V E N U EPetroleum revenue from the Zapadno Chumpasskoye Field in Russia decreased by $0.2 million (2%) to $8.8 million in 2012. This decrease comprised:

– $(0.8) million from a decrease in sales volumes from 671 bopd in 2011 to 607 bopd in 2012; and

– $0.6 million from an 8% increase in average commodity prices from $36.86/bbl in 2011 to $39.74/bbl in 2012.

There was no petroleum revenue recognised from OML 30 in Nigeria for 2012, as the first lifting was in January 2013. All 2012 production from OML 30 is therefore reflected as inventory at year end. The average commodity price achieved from sales of OML 30 crude in the first quarter of 2013 was $116.87/bbl.

O P E R AT I N G R E S U LT SExpensesPetroleum operating costs for the Zapadno Chumpasskoye Field in Russia increased by 3% to $3.0 million in 2012. Average operating cost per produced barrel of oil increased from $11.82/bbl in 2011 to $13.37/bbl in 2012, due primarily to higher well workover costs to repair a mechanical problem on well 363, together with higher fuel costs.

Net operating costs for OML 30 were $1.0 million. Petroleum operating costs for OML 30 in Nigeria for November and December 2012 were $10.0 million, but as 2012 production was held in inventory as at 31 December 2012, there is a transfer of operating expenses of $9.0 million to inventory. At 31 December 2012, Heritage’s net economic share of barrels held in inventory from OML 30 production was 753,380 barrels.

Production tax in Russia decreased from $4.9 million in 2011 to $4.7 million in 2012 as a result of lower production volumes, the impact of which was partially o"set by increased average commodity prices in 2012, as both production volumes and price are used in the calculation of the tax.

General and administrative expenses decreased from $19.9 million in 2011 to $18.7 million in 2012. This was due, principally, to a higher percentage of sta" being seconded directly to projects and those costs

are included in capital expenditure and other income statement accounts. General and administrative expenses are comprised of salaries of management, finance and administrative sta", consulting, legal and professional fees, transportation costs and other costs.

If share-based compensation expenses are excluded, net general and administrative expenses increased from $17.4 million in 2011 to $18.5 million in 2012. In 2012, the Group capitalised $5.5 million (2011 – $5.5 million) of general and administrative costs relating to exploration and development activities, including share-based compensation of $1.1 million (2011 – $1.1 million).

Depletion, depreciation and amortisation expenses increased by 144% to $6.4 million in 2012, primarily as a result of the inclusion of depletion for Heritage’s net interest in OML 30. Depletion for the Zapadno Chumpasskoye Field decreased in line with the lower production volumes.

Exploration expenditures expensed in the year, and not capitalised, decreased from $12.3 million in 2011 to $4.7 million in 2012. Exploration expenditures in 2012 related principally to activities in Africa as the Company looked to expand its portfolio in one of its core areas.

Expenses of acquisition in 2012 of $72.4 million (2011 – nil) related principally to costs incurred and accrued for legal and professional fees and include stamp duty of $10.5 million and transfer tax of $10.4 million arising from the purchase of the Acquisition Assets.

In 2012, the Group recognised an impairment of intangible exploration and evaluation assets of $34.3 million (2011 – $10.8 million). The impairment recognised in 2012 comprised two elements. Firstly, after a technical review and consideration of the security situation, management decided to relinquish the licences in Mali and fully write-o" all expenditure of $18.4 million. Secondly, after a technical review, management decided to write-o" expenditure of $15.9 million incurred with respect to the Latham licence area in Tanzania. The impairment recognised in 2011 of $10.8 million related to the Kimbiji licence in Tanzania.

In 2012, the Group recognised an impairment write-down of property, plant and equipment of $2.1 million (2011 – nil) relating to a reduction in the fair value of an aircraft due to unfavourable economic conditions.

Finance income/costsIn 2012, interest income was $3.2 million (2011 – $5.7 million). Cash and cash equivalents are typically held in interest bearing treasury accounts. This decrease in interest income is primarily due to a decrease in average cash and cash equivalents balances.

Other finance costs increased from $3.7 million in 2011 to $39.8 million in 2012, due primarily to financing fees and interest charges incurred for the bridge facilities and guarantee relating to the Acquisition Assets, interest charges incurred on the $294 million exchangeable loan provided by Genel (see the Kurdistan disposal section of the Financial Review and interest charges incurred on the loan provided in August 2012 of $30 million to refinance the acquisition of an aircraft. The impact of the new financing arrangements was partially o"set by lower convertible bond accretion expense following repayment of the convertible bond at term in February 2012.

In 2012, the Group had foreign exchange losses of $0.1 million compared to $0.2 million in 2011. The loss arose from net foreign exchange gains and losses on revaluation of balances denominated in currencies di"erent from the functional currency.


FIN A N CI A L RE V IE W CO N T IN U ED

Heritage recognised an unrealised loss on investments of $7.7 million in 2012 (2011 – $20.3 million), which comprised of a decrease in market value of investments in shares of PetroFrontier Corp. (“PetroFrontier”). As at 31 December 2012, the Company had acquired 15,860,467 shares of PetroFrontier representing 19.98% of listed shares of the company. The investment in share capital of PetroFrontier is classified as available-for-sale and valued at fair value which is determined using market price at the end of the period. At 31 December 2012, the market price of PetroFrontier shares was Cdn$0.35 per share.

Heritage held 1,500,000 warrants in Afren plc (“Afren”) with an exercise price of £0.60 per warrant, which were received as partial consideration from the sale of Heritage Congo Limited in 2006. On 4 November 2011, the Afren warrants were exercised and the Company acquired 1,500,000 of the listed shares in Afren. The investment in Afren shares is classified as available-for-sale and valued at fair value which is determined using market price at the end of the period. The valuation at market price as at 31 December 2012 resulted in a gain of $1.1 million (2011 – $0.1 million) which was recognised in equity.

ACQ U I S I T I O N O F A N I N T E R E S T I N O M L 3 0On 29 June 2012, Shoreline entered into an agreement (the “Acquisition Agreement”) with The Shell Petroleum Development Company of Nigeria Limited (“Shell”), Total E&P Nigeria Limited (“Total”) and Nigerian Agip Oil Company Limited (“Agip”) (the “Vendors”) to acquire the Acquisition Assets for cash consideration of $850 million, net of costs (the “Acquisition”).

Shoreline is a private limited Nigerian company whose ownership interests are held by Heritage Oil SNR (Nigeria) B.V., a wholly owned subsidiary of Heritage, and a local Nigerian partner, Shoreline Power.

At an extraordinary general meeting (“EGM”) on 30 August 2012, the shareholders of the Company approved the Acquisition, and on 9 November 2012 Heritage announced the completion of the Acquisition, e"ective 1 November 2012.

The Acquisition Assets were acquired for cash consideration of $850,000,000, net of costs, of which: (i) a deposit of $85,000,000 was paid by Shoreline upon the signing of the Acquisition Agreement (with $5,000,000, being the portion of such deposit not exceeding 1% of the market capitalisation of the Company as at 29 June 2012, paid to the Vendors, and the remaining $80,000,000, paid into a dedicated escrow account); and (ii) the balance of the consideration, being $765,000,000 which was paid on completion.

The Acquisition was partially financed by a $550,000,000 secured bridge facility provided by The Standard Bank of South Africa (“Standard Bank Plc”) to Shoreline. The Company has placed $50,000,000 in an escrow account with Standard Bank Plc as security for the bridge facility. Standard Bank Plc also provided a $50,000,000 letter of credit (the “Letter of Credit”) to the Nigerian Petroleum Development Company (“NPDC”), to cover Shoreline’s working capital requirements under the joint operating agreement for OML 30. Heritage provided cash collateral of $51,000,000 to Standard Bank Plc to guarantee this Letter of Credit which also covers any interest which may be due under the Letter of Credit. Both the amount held in escrow and the guarantee for the Letter of Credit are classified as restricted cash in the balance sheet at 31 December 2012 (see note 2a).

Under the terms of the call option agreement between Heritage and Shoreline, as amended by an addendum 25 June 2012, (“Shoreline Option Agreement”), Shoreline Power had an option to increase its economic interest in Shoreline by purchasing 30% of the shares from Heritage. Shoreline Power exercised the option in December 2012 and payment is anticipated to be received in the second quarter of 2013. On completion Heritage’s economic share in Shoreline will reduce from 97.5% to 68.25%.

The Acquisition Assets meet the criteria of a business as set out in IFRS 3 Business Combinations (“IFRS 3”), as they represent an integrated set of activities and assets capable of being conducted and managed for purpose of providing a return, therefore the Acquisition has been accounted for in accordance with IFRS 3.

The fair value allocation of the Acquisition Assets is based upon an independent review. The Company used the data from the independent review to calculate the fair value of the assets taking proved and probable reserves. In accordance with IAS 12, a deferred tax liability has been recognised for the di"erence between the fair value allocated to property, plant and equipment and the value of the consideration that can be claimed as a capital allowance to o"set the future tax liability, calculated on a tax rate of 65.75% for the first five years and rising to 85% after five years. As only a portion of the purchase consideration is available to be claimed as a capital allowance and the tax rates are high, this has resulted in the recognition of a significant deferred tax liability. As a result of the impact of the deferred tax liability recognised, the purchase consideration is higher than the aggregate of the fair value of the identifiable assets and liabilities and therefore goodwill has been recognised. The fair value of the identifiable assets and liabilities is provisional and if new information is obtained within one year of the acquisition date the acquisition accounting may be revised.

The following table provides additional information with respect to the identifiable assets acquired and liabilities assumed at Heritage’s current e"ective 97.5% share of net assets of Shoreline:

1 November 2012

$’000

Property, plant and equipment 2,483,317Intangible assets – goodwill 351,370Deferred tax liabilities (1,983,189)Site restoration provision (22,748)

Net assets 828,750

The loss on acquisition at Heritage’s current e"ective 97.5% share of results of Shoreline has been derived as follows:

Year ended 31 December

2012$’000

Consideration paid (828,750)

Fair value of net assets acquired 828,750Less:Other expenses (72,351)

Expenses of acquisition (72,351)

Other expenses incurred on the Acquisition include costs of professional fees ($24.1 million), taxes arising on the Acquisition ($20.8 million), success fee ($10.6 million – see note 23) and other costs ($16.9 million).


R E S U LT S F R O M C O N T I N U I N G O P E R AT I O N SHeritage’s loss after tax from continuing operations in 2012 was $182.3 million, compared to $63.0 million in 2011. The adjusted loss from continuing operations in 2012 was $65.5 million compared to $29.4 million in 2011 if certain non-cash items (share-based compensation expense, impairment of intangible exploration and evaluation assets, property, plant and equipment impairment write-down, foreign exchange gains, unrealised gains/losses on revaluation of Afren warrants, unrealised loss on investment in PetroFrontier shares and one-o" acquisition costs) are excluded.

D I S P O S A L SKurdistanDuring 2012 the Group disposed of its entire business in the Kurdistan Region of Iraq (“Kurdistan”) which has therefore been classified as a discontinued operation. The disposal was completed in two distinct transactions. On 21 August 2012, the Group disposed of a 26% interest in the production sharing contract relating to the Miran Block (the “Miran PSC”) in Kurdistan and corresponding interest in the related joint operating agreement (the “Miran JOA”) to Genel Energy plc (“Genel”) in exchange for cash of $156 million (the “Sale”). On the same date, Genel provided a loan of $294 million to the Group (the “Loan”).

The Loan bore interest of 8% and had a fixed term ending on the date which is the earlier of: (i) 15 months after the date of the completion of the Acquisition; and (ii) 6 February 2014. The Loan had an option, following the election of either the Company or Genel and subsequent approval from the shareholders of the Company, to be repaid through the transfer to Genel of Heritage’s remaining 49% interest in the Miran PSC in Kurdistan and the corresponding interest in the Miran JOA. The Loan terms also provided for the interim funding by Genel of Heritage’s expenditure on its 49% interest in the Miran PSC by way of increases in the Loan with e"ect from 1 July 2012.

In December 2012, following Heritage’s election to repay the Loan in exchange for the transfer of a 49% interest in the Miran PSC to Genel, Heritage’s shareholders approved the repayment and the exchange became unconditional. Shareholder approval was received in December and the transaction completed shortly thereafter.


2012

$’0002011

$’000

Gain on disposal of discontinued operations 216,328 –

216,328 –

The following table provides additional information with respect to the Sale amounts included in the balance sheet at 12 December 2012.

12 December2012

$’000

AssetsNon-current assetsIntangible exploration and evaluation assets 225,101

Total assets 225,101

Liabilities

Non-current liabilitiesProvisions 1,095

Total liabilities 1,095

Net assets 224,006

The profit on disposal of discontinued operations has been derived as follows:


2012$’000

Consideration receivedSales proceeds 462,366Working capital adjustments 588

Total disposal consideration 462,954

Less:Carrying amount of net assets sold (224,006)Other expenses (22,620)

Gain on disposal of discontinued operations 216,328

The expenses incurred on disposition include costs of bank fees ($4.0 million), professional fees ($5.0 million) and sta" costs recharged and other costs ($13.6 million).

UgandaOn 18 December 2009, Heritage announced that it and its wholly owned subsidiary Heritage Oil & Gas Limited (“HOGL”), had entered into a Sale and Purchase Agreement (“SPA”), with ENI International B.V. (“Eni”) for the sale of HOGL’s 50% interests in Blocks 1 and 3A in Uganda (the “Ugandan Assets”). On 17 January 2010, Tullow Uganda Limited (“Tullow”) exercised its rights of pre-emption. The transaction was overwhelmingly approved by Heritage shareholders at the General Meeting on 25 January 2010.

On 27 July 2010, Heritage announced that HOGL had completed the disposal of the Ugandan Assets. Tullow paid cash of $1.45 billion, including $100 million from a contractual settlement, of which Heritage received and retained $1.045 billion.

The Ugandan Revenue Authority (“URA”) contends that income tax is due on the capital gain arising on the disposal and it raised assessments of $404,925,000 prior to completion of the disposal. Heritage’s position, based on comprehensive advice from leading legal and tax experts in Uganda, the United Kingdom and North America, is that no tax should be payable in Uganda on the disposal of the Ugandan Assets and that – even if tax were payable – under the terms of the production sharing agreements with the Ugandan government relating to the Ugandan Assets (the “PSAs”), HOGL should be indemnified by the Ugandan government (under the contract stabilisation clause).

On closing, Heritage deposited $121,477,500 with the URA, representing 30% of the disputed tax assessment of $404,925,000. $121,477,500 has been classified as a deposit in the balance sheet at 31 December 2012. A further $283,447,000 has been retained in escrow with Standard Chartered Bank in London, pursuant to an agreement between HOGL, Tullow and Standard Chartered Bank pending resolution between the Ugandan government and HOGL of the tax dispute. Including accrued interest, an amount of $286,915,000 (2011 – $284,479,000) is classified as restricted cash in the balance sheet at 31 December 2012.

In August 2010, the URA issued a further income tax assessment of $30 million representing 30% of the additional contractual settlement amount of $100 million. HOGL has challenged the Ugandan tax assessments on the disposal of HOGL’s entire interest in the Ugandan Assets.


FIN A N CI A L RE V IE W CO N T IN U ED

In November 2011 and December 2011, the Tax Appeals Tribunal in Uganda dismissed HOGL’s applications in relation to the two assessments amounting to $434,925,000. The rulings from the Tax Appeals Tribunal in Uganda are part of a domestic process and are not final and determinative. HOGL has appealed the rulings, which it believes are fatally flawed in many respects, through the Ugandan court system commencing with the High Court and subsequently the Court of Appeal and Supreme Court if necessary.

In May 2011, HOGL commenced international arbitration proceedings in London against the Ugandan government in accordance with provisions of the PSAs. HOGL is seeking a decision requiring, among other things, the return or release of approximately $405 million, plus interest, in aggregate currently on deposit with the URA or in escrow with Standard Chartered Bank in London. HOGL made a number of claims in the arbitration proceedings that tax had been improperly imposed on it which the arbitration tribunal ruled on 3 April 2013 to be outside its jurisdiction. The tribunal ruled at the same time that there were two areas of HOGL’s claims which it will consider, in respect of contractual stabilisation clause protection and breach of other contractual obligations. Accordingly, the arbitration proceedings now concern HOGL’s claims that the Ugandan government wrongfully or unreasonably delayed consent to the sale by HOGL of the rights under the PSAs and that the Ugandan government should indemnify HOGL with respect to any tax liability which arose due to changes in law that materially reduced the economic benefits to be derived by HOGL from the PSAs.

The determination by the arbitral tribunal marks the end of the preliminary phase. The proceedings will now continue to deal with the merits phase of Heritage’s contractual claims against the Ugandan government and the underlying substantive Ugandan tax matters remain under appeal in the Ugandan courts.

On 15 April 2011, Heritage and its wholly owned subsidiary HOGL, received Particulars of Claim filed in the High Court of Justice in England by Tullow seeking $313,447,500 for alleged breach of contract as a result of HOGL’s and Heritage’s refusal to reimburse Tullow in relation to a payment made by Tullow of $313,447,500 on 7 April 2011 to the URA. Heritage and HOGL have filed their Defence and Counterclaim against Tullow seeking instead the release to HOGL of the $283,447,000 plus interest currently being held in escrow with Standard Chartered Bank in London. The case commenced to be heard in the High Court in March 2013 and a first instance decision is expected to be received later this year. Heritage and HOGL believe that the claim has no merit and are in the process of vigorously and robustly defending it.

Although disputes of this nature are inherently uncertain, the Directors believe that the monies on deposit and held in escrow will ultimately be recovered by Heritage.

The results of the Ugandan operations have been classified as discontinued operations. The loss on disposal of discontinued operations (comprising legal fees and costs relating to the litigation described above) for the years ended 31 December 2012 and 2011 is as follows:


2012

$’0002011

$’000

Loss on disposal of discontinued operations (5,407) (3,933)

(5,407) (3,933)

P R O F I T P E R S H A R EHeritage’s net profit in 2012 was $28.6 million, compared to a net loss of $66.9 million in 2011.

In 2012, the basic earnings and diluted earnings per share was $0.11, compared to the basic and diluted loss per share of $0.25 in 2011.

In 2012, the basic and diluted loss per share from continuing operations was $0.71 compared to $0.23 in 2011.

C A S H F LO W A N D C A P I TA L E X P E N D I T U R E SCash used in continuing operating activities was $181.1 million in 2012 compared to $34.6 million in 2011. Total cash capital expenditures in 2012 were $910.0 million, $775.1 million higher than in 2011. The following major work programmes and an acquisition were undertaken in 2012:

– acquired Acquisition Assets in Nigeria for $828.8 million; – drilling and testing of the Miran West-3 well completed in

May 2012; – initial work-over operations to prepare the Miran West-1 well,

Kurdistan, for completion took place during September 2012; – planning and development studies on the Miran Field and Front

End Engineering Design studies on a gas export pipeline took place in 2012; and

– in Tanzania the work programme commenced in the recently awarded Kyela and Rukwa licences with reprocessing of legacy 2D seismic data and acquisition of a high resolution gravity survey.

B U Y B A C K P R O G R A M M EAt the Annual General Meeting (“AGM”) held on 20 June 2011, a special resolution was passed by shareholders authorising the Company to make market purchases of its own shares up to the date of the next AGM. Any shares which have been so purchased may be held as treasury shares or cancelled immediately upon completion of the purchase. No such resolution was proposed at the AGM held on 21 June 2012. Purchased Ordinary Shares are held in treasury.

In July 2011, the Company announced that the share purchases would be made via a trading plan to allow the buy back programme to continue independently through close periods. The trading plan agreement was terminated by the Company in May 2012.

As at 31 December 2012, the Company held a total of 34,602,442 Ordinary Shares in treasury equal to 12% of the issued share capital as at 1 January 2013. The total acquisition cost of these shares was $126.9 million.

As at 31 December 2012, Heritage had 255,585,078 Ordinary Shares in issue (excluding treasury shares) as well as 2,371,918 exchangeable shares of no par value of Heritage Oil Corporation (“HOC”, the “Corporation”), each carrying one voting right in Heritage. The total number of voting rights in Heritage, excluding treasury shares as at 29 April 2013 was 257,956,996.

R E PAY M E N T O F C O N V E R T I B L E B O N D SIn February 2012, Heritage repaid $127.1 million to holders of the $165,000,000 8% convertible bonds (the “Bonds”), on maturity of the Bonds.

P E T R O F R O N T I E R S H A R E SAs at 31 December 2012, the Company had acquired 15,860,467 of the listed shares of PetroFrontier, representing 19.98% of the company. Total share acquisition costs amounted to $32.2 million.


F I N A N C I A L P O S I T I O NL I Q U I D I T YThere was a net decrease in cash and cash equivalents in 2012 of $221.2 million. At 31 December 2012, Heritage had a working capital deficit of $17.7 million, including cash and cash equivalents of $89.6 million. The deficit is a result of the current short term borrowing facility used in the acquisition of the Acquisition Assets, which will be replaced in 2013 by a long term facility (see note 2a). Like most oil and gas exploration companies, Heritage raises financing for its activities from time to time using a variety of sources. Sources of funding for future exploration and development programmes will be derived from inter alia disposal proceeds from the sale of assets, such as the sale of the Company’s interest in the Miran PSC in 2012 and Company’s Ugandan Assets in 2010 (see disposals section of the Financial Review), using its existing treasury resources, new credit facilities, reinvesting its funds from operations, farm-outs and, when considered appropriate, issuing debt and additional equity. Accordingly, the Group has a number of di"erent sources of finance available to it potentially.

C A P I TA L S T R U C T U R EHeritage’s financial strategy has been to fund its capital expenditure programmes and any potential acquisitions by selling non-core assets, reinvesting funds from operations, using existing treasury resources, finding new credit facilities and, when considered appropriate, either issuing unsecured convertible bonds or equity.

At 31 December 2012, Heritage had net debt of $472.1 million (31 December 2011 net cash – $171.4 million) (cash and cash equivalents less borrowings) and 33% gearing (31 December 2011 – nil) (net debt as a percentage of total capital, total capital is calculated as “equity” as shown in the consolidated balance sheet plus net debt).

C R E D I TO R S ’ PAY M E N T P O L I C YIt is the Company and Group’s general policy to settle all debts with creditors on a timely basis and in accordance with the terms of credit agreed with each supplier. Average creditor payment days in 2012 were approximately 45 days (2011 – 45 days).

P R I M A R Y R I S K S A N D U N C E R TA I N T I E S FA C I N G T H E B U S I N E S SHeritage’s business, financial standing and reputation may be impacted by various risks, not all of which are within its control. The Group identifies and monitors the key risks and uncertainties a"ecting the Group and runs its business in a way that minimises the impact of such risks where possible. The primary business risks include:

– Exploration and development expenditures and success rates – the Group has experienced management and technical teams with a track record of finding major hydrocarbon discoveries and has a diversified portfolio of exploration, appraisal, development and production assets. Considerable technical work is undertaken to reduce related areas of risk and maximise opportunities.

– Factors associated with operating in developing countries, political, fiscal and regulatory instability – the Group maintains close contact with governments in the areas where it operates and, where appropriate, invests in community projects. Considerable work is undertaken before commencing operations in any new territory.

– Title disputes – notwithstanding potential challenges in Malta, the Group believes that it has good title to its oil and gas properties. However, the Group cannot control or completely protect itself against the risk of title disputes or challenges and there can be no assurance that claims or challenges by third parties against the Group’s properties will not be asserted at a future date. Naturally, the Group strives to employ the best internal and advisory knowledge available to help to minimise this risk associated with its activities.

– Oil and gas sales volumes and prices – whilst not under the direct control of the Company, a material movement in commodity prices could impact on the Group. The Group did not hedge oil prices in 2012.

– Loss of key employees – remuneration packages are regularly reviewed to ensure key executives and senior management are properly remunerated. Long term incentive programmes have been established. Employees are encouraged to develop their potential and, where appropriate, to further their careers within the Group. This is one of the Group’s Key Performance Indicators and sta" turnover continues to remain at low levels.

– Foreign exchange exposure – generally, it is the Group’s policy to conduct and manage its business in US dollars, which is its reporting currency. Cash balances in Group subsidiaries are primarily held in US dollars but small amounts may be held in other currencies in order to meet immediate operating or administrative expenses or to comply with local currency regulations.

– Future funding – Shoreline’s purchase of the Acquisition Assets was in part funded by a $550 million bridge facility arranged by Standard Bank Plc which expires no later than 29 December 2013. At the time of the acquisition Standard Bank Plc agreed, subject to a number of substantive conditions, to refinance this into a long term loan. Discussions have progressed well with Standard Bank Plc and the other banks in the lending syndicate and terms for a five-year borrowing base loan initially of $550 million have been agreed subject inter alia to finalisation of documentation and credit committee approval. Heritage is confident that this refinancing will take place before the bridge facility expires on 29 December 2013 though there can be no certainty of this (see note 2a).

Further details on risks and how the Company mitigates them are disclosed in this report on pages 32 to 34.

I N T E R N A L CO N T R O LA system of internal control was designed and tailored to ensure key risks are addressed appropriately and to provide assurance regarding the reliability of financial reporting and preparation of financial statements. Risk and internal control are assessed continually. See the Corporate Governance Report on pages 15 and 31 for further details. One weakness identified in its financial procedures reporting concerns accounting for complex transactions and the Company ensures that it seeks third party advice to mitigate this weakness.

As part of the internal control systems, all transactions with related parties are identified, scrutinised and disclosed in the financial statements appropriately.

Heritage maintains insurance policies in accordance with industry standards. Heritage believes that the level of insurance it maintains is adequate, based on various factors such as the cost of the policies, industry standard practice and the risks associated with the exploration and development of oil and gas properties in the countries in which it operates. Heritage does not insure against political risk and, therefore, shareholders have full exposure to the risks and rewards of investing in its territories.

Heritage maintains detailed financial models which allow the Company to plan future operating and capital activities in an e#cient manner.

PAU L AT H ER TO NC H I EF F I N A N C I A L O F F I C ER2 9 A PR I L 2 013


R ISK S

Heritage’s business, financial standing and reputation may be impacted by various risks, not all of which are within its control. The Group identifies and monitors the key risks and uncertainties a!ecting the Group and runs the business in a way that minimises their impacts where possible.

As a global business with activities focused on the exploration, development and production of hydrocarbons, Heritage has to face a variety of risks and the management of these risks is an essential element of how the business is run. Accordingly, it is a Board level responsibility. The e"ective management of risk is essential for the Group to deliver its key strategic and operational objectives whilst also maintaining an excellent health and safety record. The Group’s overall strategy of risk management is to employ suitably skilled personnel, implement appropriate policies and procedures and maintain a diversified portfolio of assets.

Heritage continuously identifies potential risks that could a"ect the Group and the achievement of its business plans and strategic objectives. The identification, together with the mitigation of risks to an acceptable level, is of critical importance to the Group as it continues to grow and generate long-term shareholder value. Key risks are monitored on an ongoing basis by the Executive Directors and senior management with regular reports received on all aspects of the Group’s performance. The Executive Directors, with whom the authority remains, report to the Audit Committee on matters concerning risk.

HEALTH, SAFETY AND

ENVIRONMENT

NEWACQUISITIONS

UNFULFILLEDPSA

OBLIGATIONS

FISCALCHANGES

LOSS OF KEY EMPLOYEES

EXPLORATIONRISK

TITLE DISPUTES – MALTA

FOREXEXPOSURE

COMMODITYPRICES

POLITICAL/COUNTRY

SPECIFIC RISKS

FUTUREFUNDING

P R I M A R Y R I S K

OT H E R P OT E N T I A L R I S K S

L I K E L I H O O D O F O C C U R R E N C E

MA

GN

ITU

DE

OF

IM

PA

CT


A summary of the Group’s key ongoing risks, as currently identified, together with the measures taken to mitigate against these, is provided below. Primary risks faced by Heritage during 2012 and recently are highlighted.

D E S C R I P T I O N O F R I S K P OT E N T I A L I M PAC T M I T I G AT I O N

S T R AT E G I C R I S K S

Incorrect portfolio mix Company could become reliant on certain local geographical, political and cyclical market risks which may impact achievement of long-term objectives.

The Group maintains a diverse portfolio of assets across a range of geographies and life cycles in order to minimise exposure. In 2012 Heritage increased its exposure to producing assets.

Acquisitions and disposals E"ective portfolio management is key to achieving long-term sustainable growth.

The Group and its advisers have considerable experience in the business environment in which the Group operates. This experience is applied regularly and carefully to assess potential merger, acquisition and disposal opportunities. In 2012 Heritage acquired a major interest in OML 30, Nigeria, through Shoreline and disposed of its interest in Kurdistan. The current management team has raised over $2 billion in cash through disposals.

O P E R AT I O N A L R I S K S

Exploration and development expenditure and success rates

The failure to sustain exploration success can potentially impact investor confidence on generating long-term value.

The Group has experienced management and technical teams with a track record of finding major hydrocarbon discoveries and has a diversified portfolio of exploration, appraisal, development and production assets. Technical team has development and production experience. Considerable technical work is undertaken to reduce related areas of risk and maximise opportunities.

Factors associated with operating in developing countries, political and regulatory instability

Potential loss of licences or inability to operate which may impact on achieving long-term objectives.

The Group maintains close contact with governments in the areas where it operates and, where appropriate, invests in community projects. Considerable work is undertaken before commencing operations in any new territory.

Fiscal changes Adverse changes could impact on future revenue streams for the Group impacting on medium and long-term value.

The Group continually reviews fiscal regimes and enters into robust, transparent PSAs or licences.

Unfulfilled PSA obligations Failure to fulfil PSA obligations could lead to the loss of a licence.

The Group continually monitors compliance with licence obligations and maintains good working relations with governments and joint venture partners.

Title disputes Potential loss of licences or inability to operate which may impact on achieving long-term objectives.

Notwithstanding potential challenges in Malta, the Group believes it has good title to its oil and gas properties. However, the Group cannot control or protect itself completely against the risk of title disputes or challenges and there can be no assurance that claims or challenges by third parties against the Group’s properties will not be asserted at a future date. Naturally, the Group strives to employ the best internal and advisory knowledge available to help to minimise this risk associated with its activities.

Loss of key employees The loss of key sta" can potentially cause short and medium-term disruption to the business.

Remuneration packages are reviewed regularly to ensure key executives and senior management are properly remunerated. Long-term incentive programmes have been established. Employees are encouraged to develop their potential and, where appropriate, to further their careers within the Group. This is one of the Group’s KPIs and sta" turnover continues to remain at very low levels.

Environmental issues An environmental incident could lead to a loss of reputation and/ or revenue.

The Group undertakes operations to the highest international environmental standards of the oil industry. EIAs are prepared before any major capital expenditure is incurred. Heritage did not incur any significant environmental issues in 2012.


R ISK S CO N T IN U ED

D E S C R I P T I O N O F R I S K P OT E N T I A L I M PAC T M I T I G AT I O N

Health and safety A major event can impact employees, contractors and local communities leading to a potential loss of reputation and/or revenue.

The Group has devised a comprehensive policy framework as well as health and safety management and reporting systems. These are monitored and reviewed by our CSR Committee and senior management. The Group also works closely with local authorities where it operates to manage this aspect of our activities. This is a KPI for the Company and Heritage continued to operate with no fatalities or LTIs in 2012.

F I N A N C I A L R I S K S

Oil and gas sales volumes and prices

Commodity prices impact on the Company’s revenue stream and can a"ect investor sentiment.

Whilst not under the direct control of the Company, a large movement in commodity prices could have a material impact on the Group. The Group did not hedge oil prices in 2012.

Foreign exchange exposure Could adversely impact the Company’s results.

Generally, it is the Group’s policy to conduct and manage its business in US dollars, its reporting currency. Cash balances in Group subsidiaries are primarily held in US dollars, but small amounts may be held in other currencies in order to meet immediate operating or administrative expenses or to comply with local currency regulations.

Liquidity risk In the extreme this could impact the Group’s ability to continue as a going concern.

A formal budgeting and forecasting process is in place and cash forecasts identifying liquidity requirements of the Group are reviewed regularly to ensure compliance with approved funding plans.

Future funding Refinancing of the $550 million bridge facility, which expires no later than 29 December 2013, into a long-term loan doesn’t take place.

Discussions with the existing syndicate of bankers are ongoing and the Company is not aware of any reasons why the long-term financing will not be received. Furthermore, Heritage has a variety of di"erent sources of finance available to it, including approaching other financial institutions, obtaining new credit facilities, reinvesting its funds from operations, farm-outs and, when considered appropriate, issuing additional equity.

OT H E R R I S K S

Legal, regulatory and litigation Changes could a"ect the short, medium and long-term value of the Group.

The Group’s activities are subject to various laws and regulations around the world. Risks are mitigated by employing skilled and experienced sta" and advisers to conduct proactive assessment, contingency planning and, where necessary, the use of appropriate mitigation techniques.

Investor expectations A failure to meet shareholder expectations can lead to a loss of shareholder confidence and reduction in the share price.

The Company maintains a regular dialogue with the Group’s shareholder base and the general public. A Senior Independent Director has been appointed and the Company employs an investor relations specialist. The Board is aware of reporting responsibilities and, where necessary, takes advice to ensure that material information is released on a timely basis. It is the Company’s policy not to comment on market rumours or press speculation.

Corporate governance and business conduct

Failure to comply with corporate governance codes and practices could result in negative sentiment towards the Company.

The Group recognises the importance of maintaining strong corporate governance procedures and processes and continues to develop systems in this area. Generally this is managed by employing the skill, expertise and resources of the Group and its advisers. The Board reviews compliance with the Code and other regulatory guidelines regularly and enters into dialogue with major shareholders and institutions. The Board continually makes changes to its procedures in order to ensure adherence to codes and practices. More information is provided in the Corporate Governance Report.


$ US dollars unless otherwise stated A F R E N Afren plcA P I a specific gravity scale developed by the American Petroleum Institute for measuring the

relative density of various petroleum liquids, expressed in degreesB B L / B B L S barrel/barrelsB B L S / D O R B O P D barrels per day or barrels of oil per dayB C F billion cubic feetB O E barrels of oil equivalent1

B O E / D O R B O E P D barrels of oil equivalent per dayB O N D S $165,000,000 8.00% convertible bonds repaid 2012C D P Carbon Disclosure ProjectC O D E UK Corporate Governance CodeC O M B I N E D C O D E Combined Code of Corporate Governance published in 2008C O M PA N Y Heritage Oil PlcC O N D E N S AT E low density, high API hydrocarbon liquids that are present in natural gas fields where it

condenses out of the raw gas if the temperature is reduced to below the hydrocarbon dew point temperature of the raw gas

C O N T I N G E N T R E S O U R C E S those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations by application of development projects but which are not currently considered to be commercially recoverable due to one or more contingencies

C O N V E R S I O N R I G H T S conversion rights under the terms of the BondC S R Corporate Social ResponsibilityE I A Environmental Impact AssessmentE N I Eni International B.V.F C A Financial Conduct AuthorityF R C Financial Reporting CouncilG E N E L E N E R G Y Genel Energy plcG R O U P, H E R I TA G E the Company and all of its subsidiariesH O G L Heritage Oil and Gas LimitedH O C O R C O R P O R AT I O N Heritage Oil Corporation, incorporated in Canada and a wholly owned subsidiary of

the CompanyK P I Key Performance IndicatorL E A D potential drilling target that is less well defined than a prospect and requires further data

before being considered a prospect for drillingL N G E N E R G Y LNG Energy Ltd.L S E London Stock ExchangeLT I Lost Time InjuryLT I F R Lost Time Injury Frequency Rate per 10,000 hours workedLT I P Long Term Incentive PlanM metresM 3 cubic metresM B B L S thousand barrelsM M B B L S million barrelsM B O E thousands of barrels of oil equivalentM M B O E millions of barrels of oil equivalentM C F thousand cubic feetM C F/ D thousand cubic feet per dayM M B T U million british thermal unitsM M S C F million standard cubic feetM M S C F D million standard cubic feet per dayM M S T B million stock tank barrelsN /A not applicableN G O Non-Governmental OrganisationN TC National Transitional Council

A NN UA L RE V IE W GLOSS A RY

1 boes may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.


O M L 3 0P 1 0

Oil Mining Licence in Nigeria10% certainty

P 5 0 50% certaintyP 9 0 90% certaintyPA S S -T H R O U G H D I V I D E N D special dividend paid to BondholdersP E T R O D E L Petrodel Resources LimitedP E T R O F R O N T I E R PetroFrontier Corp.P E T R O L E U M any mineral, oil or relative hydrocarbon (including condensate and natural gas liquids) and

natural gas existing in its natural condition in strata (but not including coal or bituminous shale or other stratified deposits from which oil can be extracted by destructive distillation)

P N G Papua New GuineaP O S S I B L E R E S E R V E S those additional reserves which analysis and geoscience and engineering data suggest are

less likely to be recovered than Probable Reserves. The total quantities ultimately recovered from the project have a low probability to exceed the sum of Proved plus Probable plus Possible Reserves

P P L Petroleum Prospecting LicenceP R L Petroleum Retention LicenceP R O B A B L E R E S E R V E S those additional reserves that are less likely to be recovered than Proved Reserves but more

certain to be recovered than Possible Reserves. It is equally likely that actual remaining quantities recovered will be greater than or less than the sum of the estimated Proved plus Probable Reserves

P R O S P E C T potential drilling target that is well defined, usually by seismic dataP R O S P E C T I V E R E S O U R C E S those quantities of petroleum which are estimated, as of a given date, to be potentially

recoverable from undiscovered accumulationsP R O V E D R E S E R V E S those quantities of petroleum, which by analysis and geoscience, can be estimated with

reasonable certainty to be commercially recoverable. It is likely that the actual remaining quantities recovered will exceed the estimated Proved Reserves

P S A O R P S C production sharing agreement or production sharing contractR P S RPS Energy Consultants LimitedS A H A R A Sahara Oil Services LimitedS A H A R A O I L Sahara Oil Services Holdings LimitedS H O R E L I N ES H O R E L I N E P O W E RS PA

Shoreline Natural Resources LimitedShoreline Power Company LimitedSale and Purchase Agreement

TC F trillion cubic feetT S R Total Shareholder ReturnT S X Toronto Stock ExchangeT U L L O W Tullow Uganda LimitedU R A Uganda Revenue AuthorityU G A N D A N A S S E T S HOGL’s 50% interests in Blocks 1 and 3A in UgandaW T I West Texas Intermediate

A NN UA L RE V IE W GLOSS A RY CO N T IN U ED

CO N V E R S I O N TA B L EThe following table sets forth standard conversions from Standard Imperial Units to the International System of Units (or metric units).

To convert from To Multiply by

boe mcf 6mcf cubic metres 28.316cubic metres cubic feet 35.315bbls cubic metres 0.159cubic metres bbls oil 6.290feet metres 0.305metres feet 3.281miles kilometres 1.609kilometres miles 0.621acres hectares 0.405

H E R I T A G E O I L P L CAnnual Review 2 0 1 2

A DV ISERS A N D F IN A N CI A L C A L EN DA R

CO M PA N Y S E C R E TA R YWoodbourne Secretaries (Jersey) LimitedOrdnance House31 Pier RoadSt Helier JE4 8PW JerseyChannel Islands

R E G I S T E R E D O F F I C E O F T H E CO M PA N YOrdnance House31 Pier RoadSt Helier JE4 8PW Jersey Channel Islands

H E A D O F F I C E A N D D I R E C TO R S ’ B U S I N E S S A D D R E S SFourth Floor Windward HouseLa Route de la Liberation St Helier JE2 3BQ Jersey Channel Islands

U K O F F I C E O F T H E C O M PA N Y34 Park Street London W1K 2JD United Kingdom

B R O K E R A N D F I N A N C I A L A D V I S E R SJ.P. Morgan Securities Limited 25 Bank StreetCanary WharfLondon E14 5JPUnited Kingdom

E N G L I S H L E G A L A D V I S E R S TO T H E CO M PA N YMcCarthy TétraultRegistered Foreign Lawyers & Solicitors 125 Old Broad Street, 26th Floor London EC2N 1ARUnited Kingdom

J E R S E Y L E G A L A D V I S E R S TO T H E CO M PA N YMourant Ozannes22 Grenville StreetSt Helier JE4 8PX Jersey Channel Islands

C A N A D I A N L E G A L A D V I S E R S TO T H E CO M PA N YMcCarthy Tétrault LLPSuite 3300421–7th Avenue SWCalgary AlbertaT2P 4K9Canada

AU D I TO R S O F T H E CO M PA N YKPMG Audit Plc15 Canada SquareCanary WharfLondon E14 5GLUnited Kingdom

R E G I S T R A R S O F T H E CO M PA N YComputershare Investor Services (Jersey) Ltd Queensway HouseHilgrove StreetSt Helier JE1 1ES Jersey Channel Islands

P R I N C I PA L B A N K E R S O F T H E CO M PA N YStandard Bank (Europe) Barclays BankInvestecBank of Scotland (Europe)

I N D E P E N D E N T P E T R O L E U M E N G I N E E R I N G CO N S U LTA N T S TO T H E CO M PA N YRPS Energy Consultants Limited309 Reading RoadHenley-on-Thames Oxfordshire RG9 1EL United Kingdom

P R E S S AG E N T SFTI ConsultingHolborn Gate26 Southampton BuildingsLondon WC2A 1PBUnited Kingdom

F I N A N C I A L C A L E N DA RGroup results for the year to 31 December are announced in March/April. The Annual General Meeting is held during the second quarter. Half year results to 30 June are announced in August. Additionally, the Group will issue an Interim Management Statement between 10 weeks after the beginning and six weeks before the end of each half year period.

W E B S I T E www.heritageoilplc.com

F O R WA R D - LO O K I N G S TAT E M E N T SThe Business Review (contained on pages 12 to 31) contains forward-looking statements with respect to the financial condition, results and operations of the Group. By their nature, forward-looking statements involve a number of risks, uncertainties or assumptions that could cause actual results or events to di!er materially from those expressed or implied by the forward-looking statements.

These risks, uncertainties or assumptions could adversely a!ect the outcome and financial e!ects of the plans and events described herein. Forward-looking statements contained in the Business Review regarding past trends or activities should not be taken as a representation that these will continue in the future. Heritage undertakes no obligation to update the forward-looking statements contained in this review or any other forward-looking statements made.

H E R I T A G E O I L P L C

Fourth Floor, Windward HouseLa Route de la LiberationSt Helier JE2 3BQ JerseyChannel Islands

T: +44 (0) 1534 835 400 F: +44 (0) 1534 835 412

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