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2009 operations and business review

Financial highlights

• First profit before tax (US$0.5 million) with normalised profits before tax of US$68 million (excluding unrealised hedging losses, share related charges, exchange rate losses, losses from associates and main market move costs);

• Realised oil price of US$59.3 per barrel and gas price of US$5.1 per mmscf (before royalties);
• Turnover (after royalties) of US$336 million;
• Cash flow from operations of US$278 million;
• Gross profit of US$106 million;
• Normalised net profit as above of US$51 million (see note 7);
• Net loss as reported of US$17 million;
• Capital additions in the year of US$150 million;
• Debt repayments of US$148 million, with outstanding principal reduced to US$267 million (US$ 281 million excluding amortised issue costs);
• Net cash position of US$54 million; and
• Zero gearing at year end (2008: 82%).

Financial strength and resources in place to deliver our work programme

The normalised profit was driven by turnover of US$336 million (2008: US$43 million) of which US$292 million was related to the Okoro field. We also made substantial progress with our cost reduction initiatives in 2009, driving down average field operating costs to US$11.6 per barrel compared with US$29.7 per barrel in 2008, though 2008 included higher costs per barrel related to the field start-up. Administrative expenses also fell to US$27 million in 2009, from US$32 million in 2008. These measures have significantly enhanced the normalised profitability of the business. Additionally, the finalisation of an insurance claim relating to the Cuda-1x well more than offset the write-offs in the year and led to a small exploration write-back for the year of US$1 million (compared with a US$38 million write-off in 2008).

We strengthened our balance sheet in 2009, ending the year with a net cash position of US$54 million, compared with a net debt position of US$287 million at the end of 2008. This was due to a net cash yield from operations of US$278 million (2008: US$27 million used) and US$313 million raised in net equity funds more than covering our net investment of US$209 million – which mostly comprised capital expenditure on Ebok and other oil and gas assets (US$198 million) and debt repayments of US$148 million.

Underpinned by a platform of production

During 2008 we proved our ability to develop and bring Okoro, a major upstream project, onstream. In 2009, we went one step further, demonstrating our operating and production management capabilities at producing assets in Nigeria and Côte d’Ivoire.

In Nigeria, we achieved an average gross production rate of 18,800 bopd and maintained a 99.6% process uptime. Field performance has exceeded our expectations pre field start-up. This is due to a combination of factors including better than forecast reservoir properties and good aquifer support. We have also identified at least two infill opportunities that we intend to pursue in 2010. Having history matched production data and revised our forecasts, together with the proposed infill drilling in 2010, independently certified 2P reserves have increased to 24.8 mmbbls.

In Côte d’Ivoire, gross production from upstream operations at CI-11 was 30 mmcfd and 1,230 bopd, whilst midstream NGL output at the Lion Gas Plant was 1,140 boepd. Our technical team has undertaken a re-mapping and re-interpretation exercise of CI-11, applying current understanding of regional Cretaceous depositional systems. This has allowed us to identify areas of the field where recovery efficiency is below what should be achievable, as yet unproduced pay zones and other undrilled parts of the structure that have upside potential. The next step is for us to finalise targets and plan an infill and rig-based workover campaign.

100% appraisal drilling success rate at Ebok

In February we completed the Ebok-4 appraisal well, confirming the Ebok field as a commercial development project. We subsequently secured the Transocean Adriatic lX jack-up drilling unit under a long-term contract to undertake further appraisal and development drilling. The rig arrived on location in November 2009 and we subsequently drilled the Ebok-5 and Ebok-6 wells back-to-back.

The Ebok-5 well encountered a 377ft gross column and established the presence of two new reservoirs in the West Fault Block. The Ebok-6 well encountered a 107ft gross column and established the presence of one new reservoir in the Southern Lobe.

In March 2010, we signed a contract for a second drilling rig, the GSF Highland VII, with Transocean. The rig has been secured for a period up to 210 days at an operating rate of US$84,000 per day.

Significant reserves additions driving long-term growth

As a consequence, total gross 2P Ebok reserves (independently certified) today stand at 107.5 mmbbls, approximately 330% greater than estimated when we entered the project. This reserves growth has resulted from much hard work and a detailed understanding the Afren team has developed of the regional subsurface. We are continually learning from our experiences, and will deploy the valuable insight gained from Ebok to progressively de-risk remaining potential across the entire Ebok/Okwok/OML 115 complex.

Ebok development on track

We have secured the necessary drilling, production, processing and storage infrastructure for the Ebok development and expect to deliver first oil in October 2010. Following the Ebok-5 appraisal success in particular, we have accelerated development of the West Fault Block alongside the Central Fault Blocks. Our development philosophy at Ebok is one of ongoing development and appraisal, it being a project we will continue to phase in additional production from other parts of the field in 2011 and beyond, offering progressive and sustainable growth to Afren.

Business development – shaping the future of Afren and creating value

A diverse portfolio and opportunity pipeline is essential for the sustained growth of our business. We are constantly seeking to grow the portfolio with the addition of high potential assets that are of sufficient scale to the business, appreciating that our materiality threshold has grown alongside our development. This activity continued in 2009 with the addition of the Okwok field and OPL 310 in Nigeria, and more recently the addition of OML 115 in Nigeria.

Located adjacent to and surrounding the Ebok field, Okwok and OML 115 offer an attractive mix of discovered oil reserves with substantial appraisal and exploration upside. In an area where we are advantaged through an advanced and proven understanding of the subsurface, the close proximity of Ebok will provide a pre-existing export solution and operational synergies for future field developments.

Located offshore south east Nigeria in the Benin Basin, OPL 310 lies adjacent to the Chevron operated and recently declared commercial Aje discovery. The block represents a high impact exploration opportunity, complementing our existing acreage positions in Ghana and Côte d’Ivoire along the prolific West African Upper Cretaceous fairway and Transform Margin.

We have upgraded our view of prospectivity of OPL 310 to gross resources of 521 mmboe, in line with NSAI’s independent assessment, from a previously estimated 329 mmboe.

Our people, the key to success

We believe that excellence is achieved through recognising the value of every individual member of staff. Our reputation is built on the commitment and talents of our employees, and we place great importance on recruiting and developing a diverse, highly skilled and passionate team.

As a firm believer in building and developing indigenous capability, we actively encourage and support training and development assignments and awareness programmes. The tremendous commitment and hard work of our employees has enabled our business to enjoy continued growth and success. The Board would like to thank them for their valuable support.

The Board

In June 2009, Guy Pas stepped down from the Board to pursue other interests. It has been an honour to work closely with Guy, who brought a wealth of experience and skilled leadership to the initial development of the Company.

Ennio Sganzerla was appointed to the Board as Non-executive Director in June 2009. Ennio has a wealth of international oil and gas experience, having fulfilled senior technical and management roles at ENI over a career of 35 years.

Toby Hayward was also appointed to the Board as Non-executive Director in June 2009. Toby is a qualified accountant and was previously Head of Oil and Gas Equity Capital Markets at Canaccord Adams, where he led a range of Initial Public Offerings (IPOs), including being responsible for Afren’s IPO in March 2005.

Darra Comyn was appointed to the Board as Group Finance Director in March 2010, and is responsible for leading and directing Afren’s group-wide finance function. Darra brings significant international experience as a finance practitioner, gained over 24 years in various senior positions including with Chevron Oil UK and Dragon Oil. Darra holds responsibility for the review and maintenance of internal financial control systems and processes, cost control, corporate planning, taxation and ensuring strict compliance to all corporate governance requirements.

Outlook

The Company’s focus in 2010 is clear: production start-up at Ebok, maintain optimal production performance at Okoro and CI-11 and undertake appraisal and exploration drilling on the core Ebok/Okwok/OML 115 areas and OPL 310.

From this position of strength we are ideally placed to meet our stated objectives. We now have significant operational momentum and a firmly established track record, the financial means and the right team in place. Put all this together and 2010 promises to be the most active year in Afren’s history. One where we will continue to enjoy progressive and sustainable growth.